UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM |
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For the quarterly period ended March 31, 2021
For the transition period from ____ to _____
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Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: | ||
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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. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).☒
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.
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Large accelerated filer |
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Non-accelerated filer |
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Emerging growth company |
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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).
The number of shares of Registrant’s common stock outstanding on April 30, 2021 was
TABLE OF CONTENTS
CERTAIN IMPORTANT INFORMATION
Unless the context otherwise requires, as used in this quarterly report on Form 10-Q:
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“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;
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“Nodak Stock” refers to Nodak Insurance Company, the successor company to Nodak Mutual Insurance Company after the conversion;
•
“Nodak Mutual” refers to Nodak Mutual Insurance Company, the predecessor company to Nodak Stock prior to the conversion;
•
“Nodak Insurance” refers to Nodak Stock or Nodak Mutual interchangeably;
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“members” refers to the policyholders of Nodak Insurance, who are the named insureds under insurance policies issued by Nodak Insurance;
•
“Battle Creek” refers to Battle Creek Mutual Insurance Company. Battle Creek became affiliated with Nodak Insurance in 2011, and Nodak Insurance provides underwriting, claims management, policy administration, and other administrative services to Battle Creek. Battle Creek is controlled by Nodak Insurance as a result of an affiliation agreement between Battle Creek and Nodak Insurance, and is consolidated with Nodak Insurance for financial reporting purposes;
•
“Direct Auto” refers to Direct Auto Insurance Company. On August 31, 2018, NI Holdings completed the acquisition of 100% of the common stock of Direct Auto from the private shareholders of Direct Auto. Direct Auto became a consolidated subsidiary of NI Holdings on this date. Direct Auto is a property and casualty insurance company specializing in non-standard automobile insurance in the state of Illinois;
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“American West” refers to American West Insurance Company. American West is a wholly-owned subsidiary of Nodak Insurance;
•
“Primero” refers to Primero Insurance Company. Primero is an indirect, wholly-owned subsidiary of Nodak Insurance;
•
“Westminster” refers to Westminster American Insurance Company. On January 1, 2020, NI Holdings completed the acquisition of 100% of the common stock of Westminster from the private shareholder of Westminster. The financial results of Westminster have been included in the Consolidated Financial Statements herein since January 1, 2020. Westminster is a property and casualty insurance company specializing in commercial multi-peril insurance in the Mid-Atlantic states; and
•
“Nodak Agency” refers to Nodak Agency, Inc. Nodak Agency is a wholly-owned subsidiary of Nodak Insurance.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements, which can be identified by the use of such words as “estimate”, “project”, “believe”, “could”, “may”, “intend”, “anticipate”, “plan”, “seek”, “expect” and similar expressions. These forward-looking statements include:
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statements of goals, intentions, and expectations;
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statements regarding prospects and business strategy; and
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estimates of future costs, benefits, and results.
The forward-looking statements are subject to numerous assumptions, risks and uncertainties, including, among other things, the factors discussed under the heading “Risk Factors” in this Quarterly Report and our Annual Report on Form 10-K that could affect the actual outcome of future events.
All of these factors are difficult to predict and many are beyond our control. These important factors include those discussed under “Risk Factors” and those listed below:
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material changes to the federal crop insurance program;
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future economic conditions in the markets in which we compete that are less favorable than expected;
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the effect of legislative, judicial, economic, demographic, and regulatory events in the jurisdictions where we do business;
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our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our producer network;
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our ability to successfully integrate acquired businesses;
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financial market conditions, including, but not limited to, changes in interest rates and the stock markets causing a reduction of investment income or investment gains and a reduction in the value of our investment portfolio;
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heightened competition, including specifically the intensification of price competition, the entry of new competitors, and the development of new products by new or existing competitors, resulting in a reduction in the demand for our products;
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changes in general economic conditions, including inflation, unemployment, interest rates, and other factors;
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the impact of national or global events, including pandemics, military conflicts, and other wide-spread events;
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estimates and adequacy of loss reserves and trends in loss and loss adjustment expenses;
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changes in the coverage terms required by state laws with respect to minimum auto liability insurance, including higher minimum limits;
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our inability to obtain regulatory approval of, or to implement, premium rate increases;
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our ability to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us and to collect amounts that we believe we are entitled to under such reinsurance;
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the potential impact on our reported net income that could result from the adoption of future accounting standards issued by the Securities and Exchange Commission, the Financial Accounting Standards Board, or other standard-setting bodies;
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unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;
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the potential impact of fraud, operational errors, systems malfunctions, or cybersecurity incidents;
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adverse litigation or arbitration results; and
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adverse changes in applicable laws, regulations or rules governing insurance holding companies and insurance companies, and tax or accounting matters including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements, and changes that affect the cost of, or demand for our products.
Because forward-looking information is subject to various risks and uncertainties, actual results may differ materially from that expressed or implied by the forward-looking information.
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements
NI Holdings, Inc.
Unaudited Consolidated Balance Sheets
(dollar amounts in thousands, except par value)
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March 31, 2021 |
December 31, 2020 | |||||||
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Assets: | ||||||||
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Cash and cash equivalents |
$ |
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$ |
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Fixed income securities, at fair value |
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Equity securities, at fair value |
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Other investments |
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Total cash and investments |
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Premiums and agents' balances receivable |
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Deferred policy acquisition costs |
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Reinsurance premiums receivable |
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Reinsurance recoverables on losses |
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Accrued investment income |
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Property and equipment |
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Receivable from Federal Crop Insurance Corporation |
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Goodwill and other intangibles |
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Other assets |
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Total assets |
$ |
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$ |
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Liabilities: | ||||||||
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Unpaid losses and loss adjustment expenses |
$ |
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$ |
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Unearned premiums |
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Reinsurance premiums payable |
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Income tax payable |
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Deferred income taxes |
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Westminster consideration payable |
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Accrued expenses and other liabilities |
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Total liabilities |
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Commitments and contingencies |
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Shareholders’ equity: | ||||||||
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Common stock, $ issued: 2020 – |
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Preferred stock, without par value, authorized |
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Additional paid-in capital |
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Unearned employee stock ownership plan shares |
( |
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( |
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Retained earnings |
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Accumulated other comprehensive income, net of income taxes |
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Treasury stock, at cost, 2021 – |
( |
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( |
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Non-controlling interest |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
NI Holdings, Inc.
Unaudited Consolidated Statements of Operations
(dollar amounts in thousands, except per share amounts)
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Three Months Ended | ||||||||
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March 31, | ||||||||
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2021 |
2020 | |||||||
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Revenues: | ||||||||
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Net premiums earned |
$ |
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$ |
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Fee and other income |
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Net investment income |
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Net capital gain (loss) on investments |
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( |
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Total revenues |
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Expenses: | ||||||||
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Losses and loss adjustment expenses |
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Amortization of deferred policy acquisition costs |
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Other underwriting and general expenses |
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Total expenses |
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Income (loss) before income taxes |
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( |
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Income tax expense (benefit) |
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( |
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Net income (loss) |
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( |
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Net income attributable to non-controlling interest |
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Net income (loss) attributable to NI Holdings, Inc. |
$ |
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$ |
( |
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Earnings (loss) per common share: | ||||||||
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Basic |
$ |
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$ |
( |
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Diluted |
$ |
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$ |
( |
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Share data: | ||||||||
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Weighted average common shares outstanding used in basic per common share calculations |
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Plus: Dilutive securities |
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Weighted average common shares used in diluted per common share calculations |
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The accompanying notes are an integral part of these consolidated financial statements.
NI Holdings, Inc.
Unaudited Consolidated Statements of Comprehensive Income (Loss)
(dollar amounts in thousands)
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Three Months Ended March 31, 2021 |
Three Months Ended March 31, 2020 | |||||||||||||||||||||||
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Attributable to NI Holdings, Inc. |
Attributable to Non- Controlling Interest |
Total |
Attributable to NI Holdings, Inc. |
Attributable to Non- Controlling Interest |
Total | |||||||||||||||||||
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Net income (loss) |
$ |
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$ |
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$ |
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$ |
( |
) |
$ |
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$ |
( |
) | ||||||||
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Other comprehensive loss, before income taxes: | ||||||||||||||||||||||||
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Holding losses on investments |
( |
) |
( |
) |
( |
) |
( |
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( |
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( |
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Reclassification adjustment for net realized capital gain included in net income (loss) |
( |
) |
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( |
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( |
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( |
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( |
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Other comprehensive loss, before income taxes |
( |
) |
( |
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( |
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( |
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( |
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( |
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Income tax benefit related to items of other comprehensive loss |
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Other comprehensive loss, net of income taxes |
( |
) |
( |
) |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||||||
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Comprehensive income (loss) |
$ |
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$ |
( |
) |
$ |
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$ |
( |
) |
$ |
( |
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$ |
( |
) | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
NI Holdings, Inc.
Unaudited Consolidated Statements of Changes in Shareholders’ Equity
(dollar amounts in thousands)
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Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||
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Common Stock |
Additional Paid-in Capital |
Unearned Employee Stock Ownership Plan Shares |
Retained Earnings |
Accumulated Other Comprehensive Income, Net of Income Taxes |
Treasury Stock |
Non-Controlling Interest |
Total Shareholders’ Equity | |||||||||||||||||||||||||
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Balance, January 1, 2021 |
$ |
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$ |
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$ |
( |
) |
$ |
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$ |
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$ |
( |
) |
$ |
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$ |
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Net income |
- |
- |
- |
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- |
- |
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Other comprehensive loss, net of income taxes |
- |
- |
- |
- |
( |
) |
- |
( |
) |
( |
) | |||||||||||||||||||||
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Purchase of treasury stock |
- |
- |
- |
- |
- |
( |
) |
- |
( |
) | ||||||||||||||||||||||
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Share-based compensation |
- |
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- |
- |
- |
- |
- |
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Issuance of vested award shares |
- |
( |
) |
- |
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- |
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- |
( |
) | |||||||||||||||||||||
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Balance, March 31, 2021 |
$ |
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$ |
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$ |
( |
) |
$ |
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$ |
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$ |
( |
) |
$ |
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$ |
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Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||
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Common Stock |
Additional Paid-in Capital |
Unearned Employee Stock Ownership Plan Shares |
Retained Earnings |
Accumulated Other Comprehensive Income, Net of Income Taxes |
Treasury Stock |
Non-Controlling Interest |
Total Shareholders’ Equity | |||||||||||||||||||||||||
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Balance, January 1, 2020 |
$ |
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$ |
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$ |
( |
) |
$ |
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$ |
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$ |
( |
) |
$ |
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$ |
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Net income (loss) |
- |
- |
- |
( |
) |
- |
- |
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( |
) | ||||||||||||||||||||||
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Other comprehensive loss, net of income taxes |
- |
- |
- |
- |
( |
) |
- |
( |
) |
( |
) | |||||||||||||||||||||
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Purchase of treasury stock |
- |
- |
- |
- |
- |
( |
) |
- |
( |
) | ||||||||||||||||||||||
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Share-based compensation |
- |
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- |
- |
- |
- |
- |
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Issuance of vested award shares |
- |
( |
) |
- |
( |
) |
- |
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- |
( |
) | |||||||||||||||||||||
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Balance, March 31, 2020 |
$ |
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$ |
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$ |
( |
) |
$ |
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$ |
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$ |
( |
) |
$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements.
NI Holdings, Inc.
Unaudited Consolidated Statements of Cash Flows
(dollar amounts in thousands)
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Three Months Ended March 31, | ||||||||
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2021 |
2020 | |||||||
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Cash flows from operating activities: | ||||||||
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Net income (loss) |
$ |
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$ |
( |
) | ||
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Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||
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Net capital (gain) loss on investments |
( |
) |
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Deferred income tax expense (benefit) |
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( |
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Depreciation of property and equipment |
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Amortization of intangibles |
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Share-based compensation |
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Amortization of deferred policy acquisition costs |
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Deferral of policy acquisition costs |
( |
) |
( |
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Net amortization of premiums and discounts on investments |
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Loss on sale of property and equipment |
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Changes in operating assets and liabilities: | ||||||||
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Premiums and agents’ balances receivable |
( |
) |
( |
) | ||||
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Reinsurance premiums receivable / payable |
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Reinsurance recoverables on losses |
( |
) |
( |
) | ||||
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Accrued investment income |
( |
) |
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Receivable from Federal Crop Insurance Corporation |
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Income tax recoverable / payable |
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( |
) | ||||
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Other assets |
( |
) |
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Unpaid losses and loss adjustment expenses |
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( |
) | ||||
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Unearned premiums |
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Accrued expenses and other liabilities |
( |
) |
( |
) | ||||
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Net cash flows from operating activities |
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Cash flows from investing activities: | ||||||||
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Proceeds from maturities and sales of fixed income securities |
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Proceeds from sales of equity securities |
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Purchases of fixed income securities |
( |
) |
( |
) | ||||
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Purchases of equity securities |
( |
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( |
) | ||||
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Purchases of property and equipment |
( |
) |
( |
) | ||||
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Acquisition of Westminster American Insurance Company (cash consideration paid net of cash and cash equivalents acquired) |
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( |
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Proceeds from sale of other investments and other |
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Net cash flows from investing activities |
( |
) |
( |
) | ||||
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Cash flows from financing activities: | ||||||||
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Purchases of treasury stock |
( |
) |
( |
) | ||||
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Installment payment on Westminster consideration payable |
( |
) |
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Issuance of restricted stock awards |
( |
) |
( |
) | ||||
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Net cash flows from financing activities |
( |
) |
( |
) | ||||
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Net decrease in cash and cash equivalents |
( |
) |
( |
) | ||||
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ |
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$ |
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Non-cash item: Present value of installment payable issued in connection with acquisition of Westminster American Insurance Company |
$ |
|
$ |
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Federal and state income taxes paid |
$ |
|
$ |
| ||||
The accompanying notes are an integral part of these consolidated financial statements.
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
1.Organization
NI Holdings, Inc. (“NI Holdings”) is a North Dakota business corporation that is the stock holding company of Nodak Insurance Company and became such in connection with the conversion of Nodak Mutual Insurance Company from a mutual to stock form of organization and the creation of a mutual holding company. The conversion was consummated on March 13, 2017. Immediately following the conversion, all of the outstanding shares of common stock of Nodak Insurance Company (the successor to Nodak Mutual Insurance Company) were issued to Nodak Mutual Group, Inc., which then contributed the shares to NI Holdings in exchange for
These Consolidated Financial Statements of NI Holdings include the financial position and results of NI Holdings and seven other entities:
•
Nodak Insurance Company (“Nodak Insurance”, formerly Nodak Mutual Insurance Company prior to the conversion);
•
Nodak Agency, Inc. (“Nodak Agency”);
•
American West Insurance Company (“American West”);
•
Primero Insurance Company (“Primero”);
•
Battle Creek Mutual Insurance Company (“Battle Creek”, an affiliated company with Nodak Insurance);
•
Direct Auto Insurance Company (“Direct Auto”); and
•
Westminster American Insurance Company (“Westminster”).
Nodak Insurance is the largest domestic property and casualty insurance company in North Dakota. Nodak Insurance was incorporated on April 15, 1946 under the laws of North Dakota, and benefits from a strong marketing affiliation with the North Dakota Farm Bureau (“NDFB”). Nodak Insurance specializes in providing private passenger auto, homeowners, farmowners, commercial, crop hail, and Federal multi-peril crop insurance coverages.
Nodak Agency, a wholly-owned subsidiary of Nodak Insurance, is an inactive shell corporation.
American West, a wholly-owned subsidiary of Nodak Insurance, is a property and casualty insurance company licensed in eight states in the Midwest and Western regions of the United States. American West began writing policies in 2002 and primarily writes personal auto, homeowners, and farm coverages in South Dakota. American West also writes personal auto coverage in North Dakota, as well as crop hail and Federal multi-peril crop insurance coverages in Minnesota and South Dakota.
Primero is a wholly-owned subsidiary of Tri-State, Ltd. Tri-State, Ltd. is an inactive shell corporation
Battle Creek became affiliated with Nodak Insurance in 2011, and Nodak Insurance provides underwriting, claims management, policy administration, and other administrative services to Battle Creek. Battle Creek is controlled by Nodak Insurance via a surplus note. The terms of the surplus note allow Nodak Insurance to appoint two-thirds of the Battle Creek Board of Directors. Battle Creek is a property and casualty insurance company writing personal auto, homeowners, and farm coverages solely in the state of Nebraska.
Direct Auto, a wholly-owned subsidiary of NI Holdings, is a property and casualty company licensed in Illinois. Direct Auto began writing non-standard automobile coverage in 2007, and was acquired by NI Holdings on August 31, 2018 via a stock purchase agreement.
Westminster, a wholly-owned subsidiary of NI Holdings, is a property and casualty insurance company licensed in seventeen states and the District of Columbia. Westminster is headquartered in Owings Mills, Maryland and underwrites multi-peril commercial insurance in the states of Delaware, Georgia, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Virginia, West Virginia, and the District of Columbia. Westminster was acquired by NI Holdings on January 1, 2020 via a stock purchase agreement. The financial results of Westminster have been included in the Consolidated Financial Statements herein since January 1, 2020. See Note 4.
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
The same executive management team provides oversight and strategic direction for the entire organization. Nodak Insurance provides common product oversight, pricing practices, and underwriting standards, as well as underwriting and claims administration, to itself, American West, and Battle Creek. Primero, Direct Auto, and Westminster personnel manage the day-to-day operations of their respective companies. The insurance companies share a combined business plan to achieve market penetration and underwriting profitability objectives. Distinctions within the products of the insurance companies generally relate to the states in which the risk is located and specific risk profiles targeted within similar classes of business.
2.Basis of Presentation
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. 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. Operating results for the interim period ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ended December 31, 2021. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Our Consolidated Financial Statements include our accounts and those of our wholly-owned subsidiaries, as well as Battle Creek, an entity we control via contract. We have eliminated all significant inter-company accounts and transactions in consolidation. The terms “we”, “us”, “our”, or “the Company” as used herein refer to the consolidated entity.
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
3.Summary of Significant Accounting Policies
Use of Estimates:
In preparing our Consolidated Financial Statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.
We make estimates and assumptions that can have a significant effect on amounts and disclosures we report in our Consolidated Financial Statements. The most significant estimates relate to our reserves for unpaid losses and loss adjustment expenses, earned premiums for crop insurance, valuation of investments, determination of other-than-temporary impairments, valuation allowances for deferred income tax assets, deferred policy acquisition costs, and the valuations used to establish intangible assets acquired related to business combinations. While we believe our estimates are appropriate, the ultimate amounts may differ from the estimates provided. We regularly review our methods for making these estimates as well as the continuing appropriateness of the estimated amounts, and we reflect any adjustment we consider necessary in our current results of operations.
Variable-Interest Entities:
Any company deemed to be a variable interest entity (“VIE”) is required to be consolidated by the primary beneficiary of the VIE.
We assess our investments in other entities at inception to determine if any meet the qualifications of a VIE. We consider an investment in another company to be a VIE if (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) the characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb expected losses of the entity or the right to receive the expected residual returns of the entity), or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or the rights to receive the expected residual returns of the entity, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. Upon the occurrence of certain events, we would reassess our initial determination of whether the investment is a VIE.
We evaluate whether we are the primary beneficiary of each VIE and we consolidate the VIE if we have both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity. We consider the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights, and board representation of the respective parties in determining whether we qualify as the primary beneficiary. Our assessment of whether we are the primary beneficiary of a VIE is performed at least annually.
We control Battle Creek via a surplus note which provides us with the ability to appoint two-thirds of the Board of Directors of Battle Creek. Under the quota share reinsurance agreement that existed through December 31, 2019, Battle Creek’s operating results included only net investment income, bad debt expense, and income taxes. Effective January 1, 2020, the Company implemented an intercompany pooling reinsurance agreement, and Battle Creek’s operating results now include their participation in the underwriting results of the pool (2% during 2020 and 2021). See Note 13. 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 Consolidated Balance Sheet.
Cash and Cash Equivalents:
Cash and cash equivalents include certain investments in highly liquid debt instruments with original maturities of three months or less. Cost approximates fair value for these short-term investments.
Investments:
We have categorized our investment portfolio as “available-for-sale” and have reported the portfolio at fair value. Unrealized gains and losses on fixed income securities, net of income taxes, are reported in accumulated other comprehensive income. Changes in unrealized gains and losses on equity securities are reported as a component of net capital gain on investments in our operating results.
Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
value is estimated using quoted market prices for similar securities. Amortization of premium and accretion of discount are computed using an effective interest method. Net investment income includes interest and dividend income together with amortization of purchase premiums and discounts, and is net of investment management and custody fees. Realized gains and losses on investments are determined using the specific identification method and are included in net capital gain (loss) on investments, along with the change in unrealized gains and losses on equity securities.
We review our investments each quarter to determine whether a decline in fair value below the amortized cost basis is other than temporary. Accordingly, we assess whether we intend to sell or it is more likely than not that we will be required to sell a security before recovery of its amortized cost basis. For fixed income securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and, therefore, is not required to be recognized as losses in the Consolidated Statement of Operations, but is recognized in other comprehensive income (loss).
We classify each fair value measurement at the appropriate level in the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted market price in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). An asset’s or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation.
Level I – Quoted price in active markets for identical assets and liabilities.
Level II – Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. Level II inputs include quoted prices for similar assets or liabilities other than quoted in prices in Level I, quoted prices in markets that are not active, or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level III – Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the reporting entity’s own assumptions that market participants would use in pricing the asset or liability. Level III assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Fair Value of Other Financial Instruments:
Our other financial instruments, aside from investments, are cash and cash equivalents, premiums and agents’ balances receivable, and accrued expenses and accounts payable. The carrying amounts for cash and cash equivalents, premiums and agents’ balances receivable, and accrued expenses and accounts payable approximate their fair value based on their short-term nature. Other invested assets that do not have observable inputs and little or no market activity are carried on a cost basis, which is not materially different from fair value. All other invested assets have been assessed for impairment.
Revenue Recognition:
We record premiums written at policy inception and recognize them as revenue on a pro rata basis over the policy term or, in the case of crop insurance, over the period of risk. The portion of premiums that could be earned in the future is deferred and reported as unearned premiums. When policies lapse, the Company reverses the unearned portion of the written premium and removes the applicable unearned premium. Policy-related fee income is recognized when collected.
The period of risk for our crop insurance program, which is comprised primarily of spring-planted crops, typically runs from April 1 (the approximate time when farmers can begin to work their fields) through December 15 (last date claims can be made for the most recent planting season). The crop insurance program provides indemnification for acreage that cannot be planted because of flood, drought, or other natural disaster (known as “prevented planting”). In cases where a valid prevented planting claim is made by an insured, the Company assumes that the risk period has ended as there will be no additional coverage under the policy, and the Company will immediately recognize the remaining unearned premium.
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
The Company uses the direct write-off method for recognizing bad debts. Accounts billed directly to the policyholder are provided grace payment and cancellation notice periods per state insurance regulations. Any earned but uncollected premiums are written off within 90 days after the effective date of policy cancellation.
Direct Auto also provides for agency billing for a portion of their agents. Accounts billed to agents are due within 60 days of the statement date. The balances are carried as agents’ balances receivable until it is determined the amount is not collectible from the agent. At that time, the balance is written off as uncollectible. The agent is responsible for all past due balances. As part of its agent appointment, Direct Auto requires a personal guarantee for all balances due to Direct Auto from the principal of the contracted agency.
Policy Acquisition Costs:
We defer our policy acquisition costs, consisting primarily of commissions, state premium taxes and certain other underwriting costs, reduced by ceding commissions, which vary with and relate directly to the production of business. We amortize these deferred policy acquisition costs over the period in which we earn the premiums. The method we follow in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses, and certain other costs we expect to incur as we earn the premium.
Property and Equipment:
We report property and equipment at cost less accumulated depreciation. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets.
Losses and Loss Adjustment Expenses:
Liabilities for unpaid losses and loss adjustment expenses are estimates at a given point in time of the amounts we expect to pay with respect to policyholder claims based on facts and circumstances then known. At the time of establishing our estimates, we recognize that our ultimate liability for losses and loss adjustment expenses will exceed or be less than such estimates. We base our estimates of liabilities for unpaid losses and loss adjustment expenses on assumptions as to future loss trends, expected claims severity, judicial theories of liability, and other factors. During the loss adjustment period, we may learn additional facts regarding certain claims, and, consequently, it often becomes necessary for us to refine and adjust our estimates of the liability. We reflect any adjustments to our liabilities for unpaid losses and loss adjustment expenses in our operating results in the period in which we determine the need for a change in the estimates.
We maintain liabilities for unpaid losses and loss adjustment expenses with respect to both reported and unreported claims. We establish these liabilities for the purpose of covering the ultimate costs of settling all losses, including investigation and litigation costs. We base the amount of our liability for reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim, and the insurance policy provisions relating to the type of loss our policyholder incurred. We determine the amount of our liability for unreported losses and loss adjustment expenses on the basis of historical information by line of insurance. Inflation is not explicitly selected in the loss reserve analysis. However, historical inflation is embedded in the estimated loss development factors. We closely monitor our liabilities and update them periodically using new information on reported claims and a variety of statistical techniques. We do not discount our liabilities for unpaid losses and loss adjustment expenses.
Reserve estimates can change over time because of unexpected changes in assumptions related to our external environment and, to a lesser extent, assumptions as to our internal operations. Assumptions related to our external environment include the absence of significant changes in tort law and the legal environment which may impact liability exposure, the trends in judicial interpretations of insurance coverage and policy provisions, and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodologies, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business written within a given line of business, and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent we determine that underlying factors impacting our assumptions have changed, we attempt to make appropriate adjustments for such changes in our reserves. Accordingly, our ultimate liability for unpaid losses and loss adjustment expenses will likely differ from the amount recorded.
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
Income Taxes:
With the exception of Battle Creek, which files a stand-alone federal income tax return, we currently file a consolidated federal income tax return which includes NI Holdings and its wholly-owned subsidiaries. Direct Auto and Westminster became part of the consolidated federal income tax return as of their acquisition dates.
Insurance companies typically pay state premium taxes rather than state income taxes. However, Direct Auto is subject to state income taxes in the state of Illinois, in addition to state premium taxes. Additionally, NI Holdings, on a stand-alone basis, pays state income taxes to the state of North Dakota for income or losses generated as a separate financial entity. While state premium taxes are included as a part of amortization of deferred policy acquisition costs, state income taxes are combined with federal income taxes within the financial reporting category labeled income tax expense (benefit).
The Company does not have any material uncertain tax positions. The Company’s policy is to recognize tax-related interest and penalties accrued related to unrecognized benefits as a component of income tax expense (benefit). The Company did not recognize any tax-related interest and penalties, nor did it have any tax-related interest or penalties accrued as of March 31, 2021 and December 31, 2020.
We account for deferred income taxes using the asset and liability method. The objective of the asset and liability method is to establish deferred income tax assets and liabilities for the temporary differences between the financial reporting basis and the income tax basis of our assets and liabilities at enacted tax rates expected to be in effect when we realize or settle such amounts.
We re-measure existing deferred income tax assets (including loss carryforwards) and liabilities when a change in tax rate occurs, and record an offset for the net amount of the change as a component of income tax expense from continuing operations in the period of enactment. We also record any change to a previously recorded valuation allowance as a result of re-measuring existing temporary differences and loss carryforwards to be reflected as a component of income tax expense (benefit) from continuing operations.
The Company has elected to reclassify any tax effects stranded in accumulated other comprehensive income as a result of a change in income tax rates to retained earnings.
Earnings Per Share:
Earnings per share are computed by dividing net income available to common shareholders for the period by the weighted average number of common shares outstanding for the same period. Unearned shares related to the Company’s Employee Stock Ownership Plan are not considered outstanding until they are released and allocated to plan participants. Unearned shares related to the Company’s Restricted Stock Units and Performance Share Units are not considered outstanding until they are earned by award participants. See Notes 14 and 20.
Credit Risk:
Our primary investment objective is to earn competitive returns by investing in a diversified portfolio of securities. Our portfolio of fixed income securities and, to a lesser extent, short-term investments, is subject to credit risk. We define this risk as the potential loss in fair value resulting from adverse changes in the borrower’s ability to repay the debt. We manage this risk by performing an analysis of prospective investments and through regular reviews of our portfolio by our management team and investment advisors. We also limit the amount of our total investment portfolio that we invest in any one security.
Property and liability insurance coverages are marketed through captive agents in North Dakota and through independent insurance agencies located throughout all other operating areas. All business, except for the majority of Direct Auto’s business, is billed directly to the policyholders.
We maintain cash balances primarily at one bank, which are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
Reinsurance:
The Company limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risks to other insurers or reinsurers, either on an automatic basis under general reinsurance contracts knows as “treaties” or by negotiation on substantial individual risks. Ceded reinsurance is treated as the risk and liability of the assuming companies.
Reinsurance contracts do not relieve the Company from its obligations to policyholders. In the event that all or any of the reinsuring companies might be unable to meet their obligations under existing reinsurance agreements, the Company would be liable for such defaulted amounts.
Goodwill and Other Intangibles:
Goodwill represents the excess of the purchase price over the underlying fair value of acquired entities. When completing acquisitions, we seek also to identify separately identifiable intangible assets that we have acquired. We assess goodwill and other intangibles with an indefinite useful life for impairment annually. We also assess goodwill and other intangibles for impairment upon the occurrence of certain events. In making our assessment, we consider a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and current market data. Inherent uncertainties exist with respect to these factors and to our judgment in applying them when we make our assessment. Impairment of goodwill and other intangibles could result from changes in economic and operating conditions in future periods. We did not record any impairments of goodwill or other intangibles during the three month periods ended March 31, 2021 and 2020.
Goodwill arising from the acquisition of Primero in 2014 represents the excess of the purchase price over the fair value of the net assets acquired. The purchase price in excess of the fair value of net assets acquired was negotiated at arms-length with an unrelated party and was based upon the strategic decision by Company management to expand both the geographic footprint and product lines of the Company. The nature of the business acquired was such that there were limited intangibles not reflected in the net assets acquired. The purchase price was paid with a combination of cash and cancellation of obligations owed to the acquired company by the sellers. The goodwill which arose from this transaction is included in the basis of the net assets acquired and is not deductible for income tax purposes.
Intangible assets arising from the acquisition of Direct Auto in 2018 represent the estimated fair values of certain intangible assets, including a favorable lease contract, a state insurance license, the value of the Direct Auto trade name, and the value of business acquired (“VOBA”). The state insurance license asset has an indefinite life, while the favorable lease contract, Direct Auto trade name, and VOBA assets will be amortized over eighteen months, five years, and twelve months, respectively, from the August 31, 2018 acquisition/valuation date.
Goodwill arising from the acquisition of Westminster in January 2020 represents the excess of the purchase price over the fair value of the net assets acquired. The purchase price in excess of the fair value of net assets acquired was negotiated at arms-length with an unrelated party and was based upon the strategic decision by Company management to expand both the geographic footprint and commercial business product line of the Company. Other intangible assets arising from the acquisition of Westminster represent the estimated fair values of certain intangible assets, including state insurance licenses, the value of Westminster’s distribution network, the value of the Westminster trade name, and the VOBA. The state insurance license asset has an indefinite life, while the distribution networks, Westminster trade name, and VOBA assets will be amortized over twenty years, ten years, and twelve months, respectively, from the January 1, 2020 acquisition/valuation date.
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
4.Acquisition of Westminster American Insurance Company
On January 1, 2020, the Company completed the acquisition of
Westminster remains headquartered in Owings Mills, Maryland, and continues to be led by its president and other key management in place at the time of the acquisition. The results of Westminster are included as part of the Company’s commercial business segment following the closing date.
We account for business acquisitions in accordance with the acquisition method of accounting, which requires, among other things, that most assets acquired, liabilities assumed, and contingent consideration be recognized at their fair values as of the acquisition date, which is the closing date for the Westminster transaction. During the measurement period, adjustments to provisional purchase price allocations are recognized if new information is obtained about the facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period ends as soon as it is determined that no more information is obtainable, but in no case shall the measurement period exceed one year from the acquisition date. The measurement period for the Westminster acquisition ended December 31, 2020.
The Company incurred acquisition-related costs of $
The Company paid $20,000 in cash consideration to the private shareholder of Westminster as of the closing date, with an additional $
|
Fair Value of Consideration: | ||||
|
Cash consideration transferred |
$ |
| ||
|
Present value of future cash consideration |
| |||
|
Total cash consideration |
$ |
| ||
|
| ||||
|
Fair Value of Identifiable Assets Acquired and Liabilities Assumed: | ||||
|
Identifiable net assets: | ||||
|
Cash and cash equivalents |
$ |
| ||
|
Fixed income securities |
| |||
|
Equity securities |
| |||
|
Other investments |
| |||
|
Premiums and agents' balances receivable |
| |||
|
Reinsurance recoverables on losses |
| |||
|
Accrued investment income |
| |||
|
Property and equipment |
| |||
|
Federal income tax recoverable |
| |||
|
State insurance licenses (included in goodwill and other intangibles) |
| |||
|
Distribution network (included in goodwill and other intangibles) |
| |||
|
Trade name (included in goodwill and other intangibles) |
| |||
|
Value of business acquired (included in goodwill and other intangibles) |
| |||
|
Other assets |
| |||
|
Unpaid losses and loss adjustment expenses |
( |
) | ||
|
Unearned premiums |
( |
) | ||
|
Deferred income taxes, net |
( |
) | ||
|
Reinsurance premiums payable |
( |
) | ||
|
Accrued expenses and other liabilities |
( |
) | ||
|
Total identifiable net assets |
$ |
| ||
|
| ||||
|
Goodwill |
$ |
| ||
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
The fair value of the assets acquired includes premiums and agents’ balances receivable of $8,507 and reinsurance recoverables on losses of $763. These are the gross amounts due from policyholders and reinsurers, respectively, none of which is anticipated to be uncollectible. The Company did not acquire any other material class of receivable as a result of the acquisition of Westminster.
The fair values of the acquired distribution network, state insurance licenses, Westminster trade name, and VOBA intangible assets were $6,700, $1,800, $500, and $4,750, respectively. The state insurance license intangible has an indefinite life, while the other intangible assets will be amortized over useful lives of up to
The first installment of the additional consideration was paid during the first quarter of 2021.
5.Recent Accounting Pronouncements
As an emerging growth company, we have elected to use the extended transition period for complying with any new or revised financial accounting standards from the Financial Accounting Standards Board (“FASB”) pursuant to Section 13(a) of the Exchange Act. The following discussion includes effective dates for both public business entities and emerging growth companies, as well as whether specific guidance may be adopted early.
Adopted
In January 2020, the Company adopted amended guidance from the FASB that shortened the amortization period of premiums on certain fixed income securities held at a premium to the earliest call date rather than through the maturity date of the callable security. The adoption of this guidance did not materially impact the Company’s financial position, results of operations, or cash flows.
In March 2020, the Company adopted modified disclosure requirements from the FASB relating to the fair value of assets and liabilities. The modifications primarily related to Level 3 fair value measurements. The Company does not currently carry any Level 3 assets or liabilities. As a result, there was no impact to the Company’s financial statement disclosures.
Not Yet Adopted
In February 2016, the FASB issued new guidance that requires lessees to recognize leases, including operating leases, on the lessee’s Consolidated Balance Sheet, unless a lease is considered a short-term lease. The new guidance also requires entities to make new judgments to identify leases. In July 2018, the FASB issued additional guidance to allow an optional transition method. An entity may apply the new leases guidance at the beginning of the earliest period presented in the financial statements, or at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The new guidance, which replaces the current lease guidance, is effective for annual and interim reporting periods beginning after December 15, 2018 for public business entities. For private companies and emerging growth companies, this guidance is effective for annual reporting periods beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted for all entities. We do not expect the adoption of this new guidance to have a significant impact on our financial position, results of operations, or cash flows. Upon adoption, the Company will recognize a right of use asset and operating lease liabilities on its Consolidated Balance Sheet. The cumulative adjustment to retained earnings is not expected to be significant.
In June 2016, the FASB issued a new standard that will require timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The guidance will require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Finally, the guidance amends the accounting for credit losses on available-for-sale fixed income securities and purchased financial assets with credit deterioration. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
2019 for filers with the Securities and Exchange Commission (“SEC”) excluding smaller reporting companies, and emerging growth companies that did not relinquish private company relief. For all other entities, this guidance is effective for annual reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted for all entities. Based on our evaluation, adoption of this new standard will not have a significant impact on our financial position, results of operations, and cash flows.
In December 2019, the FASB issued amended guidance to simplify the accounting for income taxes. The amended guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, for public business entities. For private companies and emerging growth companies, this amended guidance is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted, including adoption in an interim period. We are evaluating the impact this new guidance will have on our financial position, results of operations, and cash flows.
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
6.Investments
The amortized cost and estimated fair value of fixed income securities as of March 31, 2021 and December 31, 2020, were as follows:
|
March 31, 2021 | ||||||||||||||||
|
Cost or Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
|
Fixed income securities: | ||||||||||||||||
|
U.S. Government and agencies |
$ |
|
$ |
|
$ |
( |
) |
$ |
| |||||||
|
Obligations of states and political subdivisions |
|
|
( |
) |
| |||||||||||
|
Corporate securities |
|
|
( |
) |
| |||||||||||
|
Residential mortgage-backed securities |
|
|
( |
) |
| |||||||||||
|
Commercial mortgage-backed securities |
|
|
( |
) |
| |||||||||||
|
Asset-backed securities |
|
|
( |
) |
| |||||||||||
|
Total fixed income securities |
$ |
|
$ |
|
$ |
( |
) |
$ |
| |||||||
|
December 31, 2020 | ||||||||||||||||
|
Cost or Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
|
Fixed income securities: | ||||||||||||||||
|
U.S. Government and agencies |
$ |
|
$ |
|
$ |
( |
) |
$ |
| |||||||
|
Obligations of states and political subdivisions |
|
|
( |
) |
| |||||||||||
|
Corporate securities |
|
|
( |
) |
| |||||||||||
|
Residential mortgage-backed securities |
|
|
( |
) |
| |||||||||||
|
Commercial mortgage-backed securities |
|
|
( |
) |
| |||||||||||
|
Asset-backed securities |
|
|
( |
) |
| |||||||||||
|
Total fixed income securities |
$ |
|
$ |
|
$ |
( |
) |
$ |
| |||||||
The amortized cost and estimated fair value of fixed income securities by contractual maturity are shown below. Actual maturities could differ from contractual maturities because issuers of the securities may have the right to call or prepay certain obligations, which may or may not include call or prepayment penalties.
|
March 31, 2021 | ||||||||
|
Amortized Cost |
Fair Value | |||||||
|
Due to mature: | ||||||||
|
One year or less |
$ |
|
$ |
| ||||
|
After one year through five years |
|
| ||||||
|
After five years through ten years |
|
| ||||||
|
After ten years |
|
| ||||||
|
Mortgage / asset-backed securities |
|
| ||||||
|
Total fixed income securities |
$ |
|
$ |
| ||||
|
December 31, 2020 | ||||||||
|
Amortized Cost |
Fair Value | |||||||
|
Due to mature: | ||||||||
|
One year or less |
$ |
|
$ |
| ||||
|
After one year through five years |
|
| ||||||
|
After five years through ten years |
|
| ||||||
|
After ten years |
|
| ||||||
|
Mortgage / asset-backed securities |
|
| ||||||
|
Total fixed income securities |
$ |
|
$ |
| ||||
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
Fixed income securities with a fair value of $
The investment category and duration of the Company’s gross unrealized losses on fixed income securities were as follows:
|
March 31, 2021 | ||||||||||||||||||||||||
|
Less than 12 Months |
Greater than 12 months |
Total | ||||||||||||||||||||||
|
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses | |||||||||||||||||||
|
Fixed income securities: | ||||||||||||||||||||||||
|
U.S. Government and agencies |
$ |
|
$ |
( |
) |
$ |
|
$ |
|
$ |
|
$ |
( |
) | ||||||||||
|
Obligations of states and political subdivisions |
|
( |
) |
|
|
|
( |
) | ||||||||||||||||
|
Corporate securities |
|
( |
) |
|
( |
) |
|
( |
) | |||||||||||||||
|
Residential mortgage-backed securities |
|
( |
) |
|
|
|
( |
) | ||||||||||||||||
|
Commercial mortgage-backed securities |
|
( |
) |
|
|
|
( |
) | ||||||||||||||||
|
Asset-backed securities |
|
( |
) |
|
( |
) |
|
( |
) | |||||||||||||||
|
Total fixed income securities |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
$ |
( |
) | |||||||||
|
|
|
December 31, 2020 |
| |||||||||||||||||||||
|
|
|
Less than 12 Months |
|
|
Greater than 12 months |
|
|
Total |
| |||||||||||||||
|
|
|
Fair Value |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
Unrealized Losses |
|
|
Fair Value |
|
|
Unrealized Losses |
| ||||||
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agencies |
$ |
|
$ |
( |
) |
$ |
|
$ |
|
$ |
|
$ |
( |
) | ||||||||||
|
Obligations of states and political subdivisions |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Corporate securities |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) | |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
Asset-backed securities |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
Total fixed income securities |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
Investments with unrealized losses are categorized with a duration of greater than 12 months when all positions of a security have continually been in a loss position for at least 12 months.
We frequently review our investment portfolio for declines in fair value. Our process for identifying declines in the fair value of investments that are other than temporary involves consideration of several factors. These factors include (i) the time period in which there has been a significant decline in value, (ii) an analysis of the liquidity, business prospects, and overall financial condition of the issuer, (iii) the significance of the decline, and (iv) our intent and ability to hold the investment for a sufficient period of time for the value to recover. When our analysis of the above factors results in the conclusion that declines in fair values are other than temporary, the cost of the securities is written down to fair value and the previously unrealized loss is therefore reflected as a realized capital loss on investment.
The Company did not record any other-than-temporary impairments during the three month periods ended March 31, 2021 and 2020.
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
As of March 31, 2021, we held
Net investment income consisted of the following:
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Fixed income securities |
$ |
|
$ |
| ||||
|
Equity securities |
|
| ||||||
|
Real estate |
|
| ||||||
|
Cash and cash equivalents |
|
| ||||||
|
Total gross investment income |
|
| ||||||
|
Investment expenses |
|
| ||||||
|
Net investment income |
$ |
|
$ |
| ||||
Net capital gain (loss) on investments consisted of the following:
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Gross realized gains: | ||||||||
|
Fixed income securities |
$ |
|
$ |
| ||||
|
Equity securities |
|
| ||||||
|
Total gross realized gains |
|
| ||||||
|
| ||||||||
|
Gross realized losses, excluding other-than-temporary impairment losses: | ||||||||
|
Fixed income securities |
( |
) |
( |
) | ||||
|
Equity securities |
( |
) |
( |
) | ||||
|
Total gross realized losses, excluding other-than-temporary impairment losses |
( |
) |
( |
) | ||||
|
| ||||||||
|
Net realized gain on investments |
|
| ||||||
|
| ||||||||
|
Change in net unrealized gain on equity securities |
|
( |
) | |||||
|
Net capital gain (loss) on investments |
$ |
|
$ |
( |
) | |||
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
7.Fair Value Measurements
We maximize the use of observable inputs in our valuation techniques and apply unobservable inputs only to the extent that observable inputs are unavailable. The largest class of assets and liabilities carried at fair value by the Company at March 31, 2021 and December 31, 2020 were fixed income securities.
Prices provided by independent pricing services and independent broker quotes can vary widely, even for the same security.
Our available-for-sale investments are comprised of a variety of different securities, which are classified into levels based on the valuation technique and inputs used in their valuation. The valuation of money market funds classified as cash equivalents and equity securities are generally based on Level I inputs, which use the market approach valuation technique. The valuation of fixed income securities generally incorporates significant Level II inputs using the market and income approach techniques. We may assign a lower level to inputs typically considered to be Level II based on our assessment of liquidity and relative level of uncertainty surrounding inputs. There were no assets or liabilities classified as Level III at March 31, 2021 or December 31, 2020.
The following tables set forth our assets which are measured on a recurring basis by the level within the fair value hierarchy in which fair value measurements fall:
|
March 31, 2021 | ||||||||||||||||
|
Total |
Level I |
Level II |
Level III | |||||||||||||
|
Fixed income securities: | ||||||||||||||||
|
U.S. Government and agencies |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
Obligations of states and political subdivisions |
|
|
|
| ||||||||||||
|
Corporate securities |
|
|
|
| ||||||||||||
|
Residential mortgage-backed securities |
|
|
|
| ||||||||||||
|
Commercial mortgage-backed securities |
|
|
|
| ||||||||||||
|
Asset-backed securities |
|
|
|
| ||||||||||||
|
Total fixed income securities |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Equity securities: | ||||||||||||||||
|
Basic materials |
|
|
|
| ||||||||||||
|
Communications |
|
|
|
| ||||||||||||
|
Consumer, cyclical |
|
|
|
| ||||||||||||
|
Consumer, non-cyclical |
|
|
|
| ||||||||||||
|
Energy |
|
|
|
| ||||||||||||
|
Financial |
|
|
|
| ||||||||||||
|
Industrial |
|
|
|
| ||||||||||||
|
Technology |
|
|
|
| ||||||||||||
|
Utility |
|
|
|
- | ||||||||||||
|
Total equity securities |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Cash and cash equivalents |
|
|
|
| ||||||||||||
|
Total assets at fair value |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
|
December 31, 2020 | ||||||||||||||||
|
Total |
Level I |
Level II |
Level III | |||||||||||||
|
Fixed income securities: | ||||||||||||||||
|
U.S. Government and agencies |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
|
Obligations of states and political subdivisions |
|
|
|
| ||||||||||||
|
Corporate securities |
|
|
|
| ||||||||||||
|
Residential mortgage-backed securities |
|
|
|
| ||||||||||||
|
Commercial mortgage-backed securities |
|
|
|
| ||||||||||||
|
Asset-backed securities |
|
|
|
| ||||||||||||
|
Total fixed income securities |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Equity securities: | ||||||||||||||||
|
Basic materials |
|
|
|
| ||||||||||||
|
Communications |
|
|
|
| ||||||||||||
|
Consumer, cyclical |
|
|
|
| ||||||||||||
|
Consumer, non-cyclical |
|
|
|
| ||||||||||||
|
Energy |
|
|
|
| ||||||||||||
|
Financial |
|
|
|
| ||||||||||||
|
Industrial |
|
|
|
| ||||||||||||
|
Technology |
|
|
|
| ||||||||||||
|
Utility |
|
|
- |
- | ||||||||||||
|
Total equity securities |
|
|
|
| ||||||||||||
|
| ||||||||||||||||
|
Cash and cash equivalents |
|
|
|
| ||||||||||||
|
Total assets at fair value |
$ |
|
$ |
|
$ |
|
$ |
| ||||||||
There were no liabilities measured at fair value on a recurring basis at March 31, 2021 or December 31, 2020.
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
8.Reinsurance
The Company will assume and cede certain premiums and losses to and from various companies and associations under various reinsurance agreements. The Company seeks to limit the maximum net loss that can arise from large risks or risks in concentrated areas of exposure through use of these agreements, either on an automatic basis under general reinsurance contracts known as treaties or by negotiation on substantial individual risks.
Reinsurance contracts do not relieve the Company from its obligation to policyholders. Additionally, failure of reinsurers to honor their obligations could result in significant losses to us. There can be no assurance that reinsurance will continue to be available to us at the same extent, and at the same cost, as it has in the past. The Company may choose in the future to reevaluate the use of reinsurance to increase or decrease the amounts of risk ceded to reinsurers.
As a group, during the three month period ended March 31, 2021, the Company retained the first $
The Company actively monitors and evaluates the financial condition of the reinsurers and develops estimates of the uncollectible amounts due from reinsurers. Such estimates are made based on periodic evaluation of balances due from reinsurers, judgments regarding reinsurers’ solvency, known disputes, reporting characteristics of the underlying reinsured business, historical experience, current economic conditions, and the state of reinsurer relations in general. Collection risk is mitigated from reinsurers by entering into reinsurance arrangements only with reinsurers that have strong credit ratings and statutory surplus above certain levels. The Company’s reinsurance recoverables on paid and unpaid losses were due from reinsurance companies with A.M. Best ratings of “A” or higher.
A reconciliation of direct to net premiums on both a written and an earned basis is as follows:
|
Three Months Ended March 31, 2021 | ||||||||
|
Premiums Written |
Premiums Earned | |||||||
|
Direct premium |
$ |
|
$ |
| ||||
|
Assumed premium |
|
| ||||||
|
Ceded premium |
( |
) |
( |
) | ||||
|
Net premiums |
$ |
|
$ |
| ||||
|
| ||||||||
|
Percentage of assumed earned premium to direct earned premium |
|
% | ||||||
|
Three Months Ended March 31, 2020 | ||||||||
|
Premiums Written |
Premiums Earned | |||||||
|
Direct premium |
$ |
|
$ |
| ||||
|
Assumed premium |
|
| ||||||
|
Ceded premium |
( |
) |
( |
) | ||||
|
Net premiums |
$ |
|
$ |
| ||||
|
| ||||||||
|
Percentage of assumed earned premium to direct earned premium |
| |||||||
A reconciliation of direct to net losses and loss adjustment expenses is as follows:
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Direct losses and loss adjustment expenses |
$ |
|
$ |
| ||||
|
Assumed losses and loss adjustment expenses |
|
| ||||||
|
Ceded losses and loss adjustment expenses |
( |
) |
( |
) | ||||
|
Net losses and loss adjustment expenses |
$ |
|
$ |
| ||||
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
If
9.Deferred Policy Acquisition Costs
Activity with regards to our deferred policy acquisition costs was as follows:
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Balance, beginning of period |
$ |
|
$ |
| ||||
|
Deferral of policy acquisition costs |
|
| ||||||
|
Amortization of deferred policy acquisition costs |
( |
) |
( |
) | ||||
|
Balance, end of period |
$ |
|
$ |
| ||||
10.Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Balance at beginning of period: | ||||||||
|
Liability for unpaid losses and loss adjustment expenses |
$ |
|
$ |
| ||||
|
Reinsurance recoverables on losses |
|
| ||||||
|
Net balance at beginning of period |
|
| ||||||
|
| ||||||||
|
Acquired unpaid losses and loss adjustment expenses related to: | ||||||||
|
Current year |
|
| ||||||
|
Prior years |
|
| ||||||
|
Total incurred |
|
| ||||||
|
| ||||||||
|
Incurred related to: | ||||||||
|
Current year |
|
| ||||||
|
Prior years |
|
| ||||||
|
Total incurred |
|
| ||||||
|
| ||||||||
|
Paid related to: | ||||||||
|
Current year |
|
| ||||||
|
Prior years |
|
| ||||||
|
Total paid |
|
| ||||||
|
| ||||||||
|
Balance at end of period: | ||||||||
|
Liability for unpaid losses and loss adjustment expenses |
|
| ||||||
|
Reinsurance recoverables on losses |
|
| ||||||
|
Net balance at end of period |
$ |
|
$ |
| ||||
During the three months ended March 31, 2021, the Company’s reported incurred losses and LAE included $2,523 of net unfavorable development on prior accident years, compared to $510 of net unfavorable development on prior accident years during the three months ended March 31, 2020. Increases and decreases are generally the result of ongoing analysis of loss development trends. As additional information becomes known regarding individual claims, original estimates are increased or decreased accordingly.
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
11.Property and Equipment
Property and equipment consisted of the following:
|
March 31, 2021 |
December 31, 2020 |
Estimated Useful Life | ||||||||
|
Cost: | ||||||||||
|
Real estate |
$ |
|
$ |
|
| |||||
|
Electronic data processing equipment |
|
|
| |||||||
|
Furniture and fixtures |
|
|
| |||||||
|
Automobiles |
|
|
| |||||||
|
Gross cost |
|
| ||||||||
|
| ||||||||||
|
Accumulated depreciation |
( |
) |
( |
) | ||||||
|
Total property and equipment, net |
$ |
|
$ |
| ||||||
Depreciation expense was $
12.Goodwill and Other Intangibles
Goodwill
The following table presents the carrying amount of the Company’s goodwill by segment:
|
March 31, 2021 |
December 31, 2020 | |||||||
|
Non-standard auto from acquisition of Primero |
$ |
|
$ |
| ||||
|
Commercial from acquisition of Westminster |
|
| ||||||
|
Total |
$ |
|
$ |
| ||||
Other Intangible Assets
The following table presents the carrying amount of the Company’s other intangible assets:
|
March 31, 2021 |
Gross Carrying Amount |
Accumulated Amortization |
Net | |||||||||
|
Subject to amortization: | ||||||||||||
|
Trade names |
$ |
|
$ |
|
$ |
| ||||||
|
Distribution network |
|
|
| |||||||||
|
Total subject to amortization |
|
|
| |||||||||
|
| ||||||||||||
|
Not subject to amortization – state insurance licenses |
|
|
| |||||||||
|
Total |
$ |
|
$ |
|
$ |
| ||||||
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
|
December 31, 2020 |
Gross Carrying Amount |
Accumulated Amortization |
Net | |||||||||
|
Subject to amortization: | ||||||||||||
|
Trade names |
$ |
|
$ |
|
$ |
| ||||||
|
Distribution network |
|
|
| |||||||||
|
Total subject to amortization |
|
|
| |||||||||
|
| ||||||||||||
|
Not subject to amortization – state insurance license |
|
|
| |||||||||
|
Total |
$ |
|
$ |
|
$ |
| ||||||
Amortization expense was $
Other intangible assets that have finite lives, including trade names and distribution networks, are amortized over their useful lives. As of March 31, 2021, the estimated amortization of other intangible assets with finite lives for the next five years in the period ended December 31, 2025, and thereafter is as follows:
|
Year ending December 31, |
Amount | |||
|
2021 |
$ |
| ||
|
2022 |
| |||
|
2023 |
| |||
|
2024 |
| |||
|
2025 |
| |||
|
Thereafter |
| |||
|
Total other intangible assets with finite lives |
$ |
| ||
13.Related Party Transactions
Intercompany Reinsurance Pooling Arrangement
Effective January 1, 2020, all of our insurance subsidiary and affiliate companies entered into an intercompany reinsurance pooling agreement. This agreement was finalized, approved, and implemented during the fourth quarter of 2020, retroactive to the January 1 effective date. Nodak Insurance is the lead company of the pool, and assumes the net premiums, net losses, and underwriting expenses from each of the other five companies. Nodak Insurance then retrocedes balances back to each company, while retaining its own share of the pool’s net underwriting results, based on individual pool percentages established in the respective pooling agreement. This arrangement allows each insurance company to rely upon the capacity of the pool’s total statutory capital and surplus. As a result, they are evaluated by A.M. Best on a group basis and hold a single combined financial strength rating, long-term issuer credit rating, and financial size category.
In connection with the pooling agreement, the quota share agreement between Battle Creek and Nodak Insurance was cancelled. As a result, the Company’s consolidated financial position and results of operations are impacted by the portion of Battle Creek’s underwriting results that are allocated to the policyholders of Battle Creek rather than the shareholders of NI Holdings.
For the three months ended March 31, 2021 and the year ended December 31, 2020, the pooling share percentages by insurance company subsidiary were:
|
Pool Percentage | ||||
|
Nodak Insurance Company |
|
% | ||
|
American West Insurance Company |
|
% | ||
|
Primero Insurance Company |
|
% | ||
|
Battle Creek Mutual Insurance Company |
|
% | ||
|
Direct Auto Insurance Company |
|
% | ||
|
Westminster American Insurance Company |
|
% | ||
|
Total |
|
% | ||
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
North Dakota Farm Bureau
We were organized by the NDFB to provide insurance protection for its members. We have a royalty agreement with the NDFB that recognizes the use of their trademark and provides royalties to the NDFB based on the premiums written on Nodak Insurance’s insurance policies. Royalties paid to the NDFB were $
Dividends
State insurance laws require our insurance subsidiaries to maintain certain minimum capital and surplus amounts on a statutory basis. Our insurance subsidiaries are subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval from their domiciliary insurance regulatory authorities. Our insurance subsidiaries are also subject to risk-based capital (“RBC”) requirements that may further affect their ability to pay dividends. Our insurance subsidiaries statutory capital and surplus at December 31, 2020 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin.
The amount available for payment of dividends from Nodak Insurance to NI Holdings during 2021 without the prior approval of the North Dakota Insurance Department is $
The amount available for payment of dividends from Direct Auto to NI Holdings during 2021 without the prior approval of the Illinois Department of Insurance is $
The amount available for payment of dividends from Westminster to NI Holdings during 2021 without the prior approval of the Maryland Insurance Administration is $
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
Battle Creek Mutual Insurance Company
The following tables illustrates the impact of including Battle Creek in our Consolidated Balance Sheets and Statements of Operations prior to intercompany eliminations:
|
March 31, 2021 |
December 31, 2020 | |||||||
|
Assets: | ||||||||
|
Cash and cash equivalents |
$ |
|
$ |
| ||||
|
Investments |
|
| ||||||
|
Premiums and agents’ balances receivable |
|
| ||||||
|
Deferred policy acquisition costs |
|
| ||||||
|
Pooling receivable (1) |
|
| ||||||
|
Reinsurance recoverables on losses (2) |
|
| ||||||
|
Accrued investment income |
|
| ||||||
|
Deferred income tax asset |
|
| ||||||
|
Property and equipment |
|
| ||||||
|
Other assets |
|
| ||||||
|
Total assets |
$ |
|
$ |
| ||||
|
| ||||||||
|
Liabilities: | ||||||||
|
Unpaid losses and loss adjustment expenses |
$ |
|
$ |
| ||||
|
Unearned premiums |
|
| ||||||
|
Notes payable (1) |
|
| ||||||
|
Reinsurance losses payable (2) |
|
| ||||||
|
Pooling payable (1) |
|
| ||||||
|
Accrued expenses and other liabilities |
|
| ||||||
|
Total liabilities |
|
| ||||||
|
| ||||||||
|
Equity: | ||||||||
|
Non-controlling interest |
|
| ||||||
|
Total equity |
|
| ||||||
|
| ||||||||
|
Total liabilities and equity |
$ |
|
$ |
| ||||
|
(1) |
| |
|
(2) |
|
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Revenues: | ||||||||
|
Net premiums earned |
$ |
|
$ |
| ||||
|
Fee and other income |
( |
) |
( |
) | ||||
|
Net investment income |
|
| ||||||
|
Net capital gain on investments |
|
| ||||||
|
Total revenues |
|
| ||||||
|
| ||||||||
|
Expenses: | ||||||||
|
Losses and loss adjustment expenses |
|
| ||||||
|
Amortization of deferred policy acquisition costs |
|
| ||||||
|
Other underwriting and general expenses |
|
| ||||||
|
Total expenses |
|
| ||||||
|
| ||||||||
|
Income before income taxes |
|
| ||||||
|
Income tax expense |
|
| ||||||
|
Net income |
$ |
|
$ |
| ||||
|
| ||||||||
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
14.Benefit Plans
The Company sponsors a money purchase plan that covers all eligible employees. Plan costs are funded annually as they are earned. The Company reported expenses related to the money purchase plan totaling $
The Company also sponsors a 401(k) plan with an automatic contribution to all eligible employees and a matching contribution for eligible employees of
Deferred Compensation Plan
The Board of Directors has authorized a non-qualified deferred compensation plan covering key executives of the Company (as designated by the Board of Directors). The Company’s policy is to fund the plan by amounts that represent the excess of the maximum contribution allowed by the Employee Retirement Income Security Act (“ERISA”) over the key executives’ allowable 401(k) contribution. The plan also allows employee-directed deferral of key executive’s compensation or incentive payments. The Company reported expenses related to this plan totaling $
Employee Stock Ownership Plan
The Company has established an Employee Stock Ownership Plan (the “ESOP”). The ESOP is intended to be an employee stock ownership plan within the meaning of Internal Revenue Code Section 4975(e)(7) and will invest solely in common stock of the Company.
In connection with our initial public offering in March 2017, Nodak Insurance loaned $
The shares purchased by the ESOP Trust in the offering are held in a suspense account as collateral for the ESOP loan. Nodak Insurance will make semi-annual cash contributions to the ESOP in amounts no smaller than the amounts required for the ESOP Trust to make its loan payments to Nodak Insurance. While the ESOP makes two loan payments per year, a pre-determined portion of the shares will be released from the suspense account and allocated to participant accounts at the end of the calendar year. This release and allocation will occur on an annual basis over the ten-year term of the ESOP loan. Nodak Insurance will have a lien on the shares of common stock of the Company held by the ESOP to secure repayment of the loan from the ESOP to Nodak Insurance. If the ESOP is terminated as a result of a change in control of the Company, the ESOP may be required to pay the costs of terminating the plan.
It is anticipated that the only assets held by the ESOP will be shares of the Company’s common stock. Participants in the ESOP cannot direct the investment of any assets allocated to their accounts. The initial ESOP participants are employees of Nodak Insurance. The employees of Primero, Direct Auto, and Westminster do not participate in the ESOP. American West and Battle Creek have no employees.
Each employee of Nodak Insurance will automatically become a participant in the ESOP if such employee is at least 21 years old, has completed a minimum of one thousand hours of service with Nodak Insurance, and has completed an Eligibility Computation Period. Employees are not permitted to make any contributions to the ESOP. Participants in the ESOP will receive annual reports from the Company showing the number of shares of common stock of the Company allocated to the participant’s account and the market value of those shares. The shares are allocated to participants based on compensation as provided for in the ESOP.
In connection with the initial public offering, the Company created a contra-equity account on the Company’s Consolidated Balance Sheet equal to the ESOP’s basis in the shares. The basis of those shares was set at $
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
The Company recognized compensation expense of $
Through March 31, 2021 and December 31, 2020, the Company had released and allocated
15.Line of Credit
Nodak Insurance has a $
16.Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act) was enacted, implementing numerous changes to tax law including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, and the creation of certain refundable employee retention credits. There has been no impact to the Company’s income taxes due to this legislation.
At March 31, 2021 and December 31, 2020, we had
At March 31, 2021 and December 31, 2020, the Company, other than Battle Creek and Westminster, had no income tax related carryovers for net operating losses, alternative minimum tax credits, or capital losses.
Battle Creek, which files its income tax returns on a stand-alone basis, had net operating loss carryovers of $
Westminster, which became part of the Company’s consolidated federal income tax return beginning in 2020, had net operating loss carryovers of $
17.Operating Leases
Our Primero subsidiary leases a facility in Spearfish, South Dakota under a non-cancellable operating lease expiring in 2023. Our Direct Auto subsidiary leases a facility in Chicago, Illinois under a non-cancellable operating lease expiring in 2029. Our Nodak Insurance subsidiary leases a facility in Fargo, North Dakota under a non-cancellable operating lease expiring in 2024. There were expenses of $
As of March 31, 2021, we have minimum future commitments under non-cancellable leases as follows:
|
Year ending December 31, |
Estimated Future Minimum Commitments | |||
|
2021 |
$ |
| ||
|
2022 |
| |||
|
2023 |
| |||
|
2024 |
| |||
|
2025 |
| |||
|
Thereafter |
| |||
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
18.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.
19.Common Stock
Changes in the number of common stock shares outstanding are as follows:
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Shares outstanding, beginning of period |
|
| ||||||
|
Treasury shares repurchased through stock repurchase authorization |
( |
) |
( |
) | ||||
|
Issuance of treasury shares for vesting of restricted stock units |
|
| ||||||
|
Shares outstanding, end of period |
|
| ||||||
On February 28, 2018, our Board of Directors approved an authorization for the repurchase of up to approximately $
On May 4, 2020, our Board of Directors approved an additional authorization for the repurchase of up to approximately $
The cost of this treasury stock is a reduction of shareholders’ equity within our Consolidated Balance Sheets.
20.Stock Based Compensation
At its 2020 Annual Shareholders’ Meeting, the NI Holdings, Inc. 2020 Stock and Incentive Plan (the “Plan”) was approved by shareholders. The purpose of the Plan is to promote the interests of the Company and its shareholders by aiding the Company in attracting and retaining employees, officers, consultants, independent contractors, advisors, and non-employee directors capable of assuring the future success of the Company, to offer such persons incentives to put forth maximum efforts for the success of the Company’s business and to afford such persons an opportunity to acquire an ownership interest in the Company, thereby aligning the interests of such persons with the Company’s shareholders.
The Plan provides for the grant of nonqualified stock options, incentive stock options, restricted stock units (“RSUs”), stock appreciation rights, dividend equivalents, and performance share units (“PSUs”) to employees, officers, consultants, advisors, non-employee directors, and independent contractors designated by the Compensation Committee of the Board of Directors (the “Compensation Committee”). Awards made under the Plan are based upon, among other things, a participant’s level of responsibility and performance within the Company.
The total aggregate number of shares of common stock that awards may be issued under all awards made under the Plan shall not exceed
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
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
The Company recognizes stock-based compensation costs based on the grant date fair value. The compensation costs are normally expensed over the vesting periods to each vesting date; however, the cost of RSUs granted to executives are expensed immediately if the executive has met certain retirement criteria and the RSUs become non-forfeitable. Estimated forfeitures are included in the determination of compensation costs. No forfeitures are currently estimated.
A summary of the Company’s outstanding and unearned restricted stock units is presented below:
|
RSUs |
Weighted-Average Grant-Date Fair Value Per Share | |||||||
|
Units outstanding and unearned at January 1, 2020 |
|
$ |
| |||||
|
RSUs granted during 2020 |
|
| ||||||
|
RSUs earned during 2020 |
( |
) |
| |||||
|
Units outstanding and unearned at December 31, 2020 |
|
$ |
| |||||
|
| ||||||||
|
RSUs granted during 2021 |
|
| ||||||
|
RSUs earned during 2021 |
( |
) |
| |||||
|
Units outstanding and unearned at March 31, 2021 |
|
$ |
| |||||
The following table shows the impact of RSU activity to the Company’s financial results:
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
RSU compensation expense |
$ |
|
$ |
| ||||
|
Income tax benefit |
( |
) |
( |
) | ||||
|
RSU compensation expense, net of income taxes |
$ |
|
$ |
| ||||
At March 31, 2021, there was $
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.
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
A summary of the Company’s outstanding performance share units is presented below:
|
PSUs |
Weighted-Average Grant-Date Fair Value Per Share | |||||||
|
Units outstanding at January 1, 2020 |
|
$ |
| |||||
|
PSUs granted during 2020 (at target) |
|
| ||||||
|
Units outstanding at December 31, 2020 |
|
$ |
| |||||
|
| ||||||||
|
PSUs granted during 2021 (at target) |
|
| ||||||
|
PSUs earned during 2021 |
( |
) |
| |||||
|
Performance adjustment (1) |
|
| ||||||
|
Forfeitures |
( |
) |
| |||||
|
Units outstanding at March 31, 2021 |
|
$ |
| |||||
(1)
The following table shows the impact of PSU activity to the Company’s financial results:
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
PSU compensation expense |
$ |
|
$ |
| ||||
|
Income tax benefit |
( |
) |
( |
) | ||||
|
PSU compensation expense, net of income taxes |
$ |
|
$ |
| ||||
The PSU grants above represent initial target awards and do not reflect potential increases or decreases resulting from financial performance objectives to be determined at the end of the performance period. The actual number of shares to be issued at the end of the performance period will range from 0% to 150% of the initial target awards.
At March 31, 2021, there was $
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
21.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 month periods ended March 31, 2021 and 2020. For presentation in these tables, “LAE” refers to loss adjustment expenses.
The ratios presented in these tables are non-GAAP financial measures under Securities and Exchange Commission rules and regulations. While these ratios are used widely in the property and casualty insurance industry, such non-GAAP ratios may not be comparable to similarly-named measures reported by other companies.
The loss and LAE ratio equals losses and loss adjustment expenses divided by net premiums earned. The expense ratio equals amortization of deferred policy acquisition costs and other underwriting and general expenses, divided by net premiums earned. The combined ratio equals losses and loss adjustment expenses, amortization of deferred policy acquisition costs, and other underwriting and general expenses, divided by net premiums earned.
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
|
Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||
|
Private Passenger Auto |
Non-Standard Auto |
Home and Farm |
Crop |
Commercial |
All Other |
Total | ||||||||||||||||||||||
|
Direct premiums earned |
$ |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
|
$ |
| |||||||||||||
|
Assumed premiums earned |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Ceded premiums earned |
( |
) |
( |
) |
( |
) |
63 |
( |
) |
( |
) |
( |
) | |||||||||||||||
|
Net premiums earned |
|
|
|
|
|
|
| |||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Direct losses and LAE |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Assumed losses and LAE |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Ceded losses and LAE |
( |
) |
|
( |
) |
( |
) |
( |
) |
|
( |
) | ||||||||||||||||
|
Net losses and LAE |
|
|
|
|
|
|
| |||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Gross margin |
|
|
|
( |
) |
|
|
| ||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Underwriting and general expenses |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Underwriting gain (loss) |
( |
) |
|
|
( |
) |
( |
) |
|
| ||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Fee and other income |
|
| ||||||||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||
|
Net investment income |
| |||||||||||||||||||||||||||
|
Net capital gain on investments |
| |||||||||||||||||||||||||||
|
Income before income taxes |
| |||||||||||||||||||||||||||
|
Income tax expense |
| |||||||||||||||||||||||||||
|
Net income |
| |||||||||||||||||||||||||||
|
Net income attributable to non-controlling interest |
| |||||||||||||||||||||||||||
|
Net income attributable to NI Holdings, Inc. |
| |||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Non-GAAP Ratios: | ||||||||||||||||||||||||||||
|
Loss and LAE ratio |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Expense ratio |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Combined ratio |
|
|
|
|
|
|
| |||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Balances at March 31, 2021: | ||||||||||||||||||||||||||||
|
Premiums and agents’ balances receivable |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
| ||||||||||||||
|
Deferred policy acquisition costs |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Reinsurance recoverables |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Receivable from Federal Crop Insurance Corporation |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Goodwill and other intangibles |
|
|
|
|
|
|
| |||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Unpaid losses and LAE |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Unearned premiums |
|
|
|
|
|
|
| |||||||||||||||||||||
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
|
Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||
|
Private Passenger Auto |
Non-Standard Auto |
Home and Farm |
Crop |
Commercial |
All Other |
Total | ||||||||||||||||||||||
|
Direct premiums earned |
$ |
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
$ |
|
$ |
| |||||||||||||
|
Assumed premiums earned |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Ceded premiums earned |
( |
) |
( |
) |
( |
) |
|
( |
) |
( |
) |
( |
) | |||||||||||||||
|
Net premiums earned |
|
|
|
|
|
|
| |||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Direct losses and LAE |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Assumed losses and LAE |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Ceded losses and LAE |
|
|
( |
) |
( |
) |
( |
) |
|
( |
) | |||||||||||||||||
|
Net losses and LAE |
|
|
|
|
|
|
| |||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Gross margin |
|
|
|
( |
) |
|
|
| ||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Underwriting and general expenses |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Underwriting gain (loss) |
|
|
|
( |
) |
|
|
| ||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Fee and other income |
|
| ||||||||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||
|
Net investment income |
| |||||||||||||||||||||||||||
|
Net capital loss on investments |
( |
) | ||||||||||||||||||||||||||
|
Loss before income taxes |
( |
) | ||||||||||||||||||||||||||
|
Income tax benefit |
( |
) | ||||||||||||||||||||||||||
|
Net loss |
( |
) | ||||||||||||||||||||||||||
|
Net income attributable to non-controlling interest |
| |||||||||||||||||||||||||||
|
Net loss attributable to NI Holdings, Inc. |
$ |
( |
) | |||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Non-GAAP Ratios: | ||||||||||||||||||||||||||||
|
Loss and LAE ratio |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Expense ratio |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Combined ratio |
|
|
|
|
|
|
| |||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Balances at March 31, 2020: | ||||||||||||||||||||||||||||
|
Premiums and agents’ balances receivable |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
| ||||||||||||||
|
Deferred policy acquisition costs |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Reinsurance recoverables |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Receivable from Federal Crop Insurance Corporation |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Goodwill and other intangibles |
|
|
|
|
|
|
| |||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Unpaid losses and LAE |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Unearned premiums |
|
|
|
|
|
|
| |||||||||||||||||||||
NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
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 above tables. The remaining fee and other income amounts are not allocated to any segment.
We do not assign or allocate all Consolidated Statement of Operations or Consolidated Balance Sheet line items to our operating segments. Those line items include investment income, net capital gain (loss) on investments, other income excluding non-standard auto insurance fees, and income taxes within the Consolidated Statement of Operations. For the Consolidated Balance Sheet, those items include cash and investments, property and equipment, other assets, accrued expenses, income taxes recoverable or payable, and shareholders’ equity.
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition than can be obtained from reading the Unaudited Consolidated Financial Statements alone. This discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.” Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q constitutes forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” and “Part II. Item 1A. Risk Factors” included elsewhere in this Quarterly Report. You should also review “Risk Factors” included in the Company’s Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described, or implied by, the forward-looking statements contained herein.
All dollar amounts included in Item 2 herein are in thousands.
Overview
NI Holdings is a North Dakota business corporation that is the stock holding company of Nodak Insurance and became such in connection with the conversion of Nodak Mutual from a mutual to stock form of organization and the creation of a mutual holding company. The conversion was consummated on March 13, 2017. Immediately following the conversion, all of the outstanding shares of common stock of Nodak Insurance were issued to Nodak Mutual Group, which then contributed the shares to NI Holdings in exchange for 55% of the outstanding shares of common stock of NI Holdings. Nodak Insurance then became a wholly-owned stock subsidiary of NI Holdings. Prior to completion of the conversion, NI Holdings conducted no business and had no assets or liabilities. As a result of the conversion, NI Holdings became the holding company for Nodak Insurance and its existing subsidiaries.
These consolidated financial statements of NI Holdings include the financial position and results of operations of NI Holdings and seven other entities:
•
Nodak Insurance – a wholly-owned subsidiary of NI Holdings;
•
Nodak Agency – a wholly-owned subsidiary of Nodak Insurance;
•
American West – a wholly-owned subsidiary of Nodak Insurance;
•
Primero – an indirect wholly-owned subsidiary of Nodak Insurance;
•
Battle Creek – an affiliated company of Nodak Insurance;
•
Direct Auto – a wholly-owned subsidiary of NI Holdings; and
•
Westminster – a wholly-owned subsidiary of NI Holdings.
Battle Creek is managed by Nodak Insurance under the terms of a surplus note issued by Battle Creek to Nodak Insurance.
Nodak Agency is an inactive shell corporation.
On August 31, 2018, NI Holdings completed the acquisition of 100% of the common stock of Direct Auto from private shareholders and Direct Auto became a consolidated subsidiary of the Company. The results of Direct Auto are included as part of the Company’s non-standard auto business segment following the closing date.
On January 1, 2020, NI Holdings completed the acquisition of 100% of the common stock of Westminster from the private shareholder of Westminster and Westminster became a consolidated subsidiary of the Company. The results of Westminster are included as part of the Company’s commercial business segment following the closing date.
Nodak Insurance offers property and casualty insurance, crop hail, and multi-peril crop insurance to members of the North Dakota Farm Bureau Federation through captive agents in North Dakota. American West and Battle Creek offer similar insurance coverage through independent agents in South Dakota and Minnesota, and Nebraska, respectively. Primero offers limited nonstandard auto insurance coverage in Arizona, Nevada, North Dakota, and South Dakota. Direct Auto offers limited nonstandard auto insurance coverage in Illinois. Westminster offers commercial multi-peril insurance in the Mid-Atlantic region of the United States. All of the Company’s insurance subsidiary and affiliate companies are rated “A” Excellent by A.M. Best, which is the third highest out of a possible 15 ratings.
A chart of the corporate structure follows:
|
NI HOLDINGS, INC. ORGANIZATIONAL CHART | ||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Nodak Mutual Group, Inc. | ||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
≥ 55% | ||||||||||||||||||||||||||||
|
ownership | ||||||||||||||||||||||||||||
|
NI Holdings, Inc. | ||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
100% |
100% |
100% | ||||||||||||||||||||||||||
|
ownership |
ownership |
ownership | ||||||||||||||||||||||||||
|
Direct Auto Insurance Company |
Nodak Insurance Company |
Westminster American Insurance Company | ||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
100% |
100% |
100% | ||||||||||||||||||||||||||
|
ownership |
ownership |
Affiliation |
ownership | |||||||||||||||||||||||||
|
Nodak Agency, Inc. |
American West Insurance Company |
Battle Creek Mutual Insurance Company |
Tri-State, Ltd | |||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
100% | ||||||||||||||||||||||||||||
|
ownership | ||||||||||||||||||||||||||||
|
Primero Insurance Company | ||||||||||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
The following tables provide selected amounts from the Company’s Unaudited Consolidated Statements of Operations and Balance Sheets. Additional information can be found later in this section.
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Direct premiums written |
$ |
72,420 |
$ |
62,972 | ||||
|
Net premiums earned |
63,135 |
58,772 | ||||||
|
Net income (loss) before non-controlling interest |
9,782 |
(3,555 |
) | |||||
|
March 31, 2021 |
December 31, 2020 | |||||||
|
Total assets |
$ |
621,385 |
$ |
617,603 | ||||
|
Shareholders’ equity |
352,590 |
348,872 | ||||||
Marketplace Conditions and Trends
Beginning in March 2020 and continuing throughout the year, the global pandemic associated with the novel coronavirus COVID-19 and related economic conditions impacted the Company’s results of operations. Decreased economic activity limited revenue growth in our personal lines of business during 2020. This was partially offset by reduced loss frequency in our private passenger and non-standard auto segments, primarily during the second and third quarters of 2020.
Vaccinations for COVID-19 are being rolled out at an increasing pace in the United States. The levels of case counts, hospitalizations, and deaths have decreased from 2020, resulting in fewer state health mandates and accelerating economic recovery in many sectors. Congress passed a $1.9 trillion stimulus bill in March 2021, which will result in the receipt of stimulus checks for millions of recipients. This represents the third check for many citizens in the last year. The Federal Reserve remains committed to its current monetary policy, which balances holding the federal funds rate near zero while monitoring increasing expectations around inflation rates. However, the travel and entertainment industries continue to be impacted, and the related economic challenges in the Las Vegas area have adversely impacted our non-standard auto segment by limiting our ability to effectively grow this business. Despite improved overall economic conditions in the United States, we expect to face continued risks associated with the pandemic over the remainder of the year, including unemployment and financial market volatility.
The property and casualty insurance industry is affected by recurring industry cycles known as “hard” and “soft” markets. A soft cycle is characterized by intense competition resulting in lower pricing in order to compete for business. A hard market, generally considered a beneficial industry trend, is characterized by reduced competition that results in higher pricing.
We monitor the marketplace both on a geographic and line of business basis. The private passenger marketplace continues to be a very competitive and challenging pricing environment, as a result of recent favorable results and increased competitive pressure in the market. The non-standard auto market also remains competitive with companies seeking to grow this line of business. Two large acquisitions took place in the non-standard auto segment during 2020, indicating that others in the marketplace are recognizing profitable opportunities associated with this segment. As opposed to most personal lines, the commercial multi-peril market in which we participate continues to harden, with accelerating positive rate changes in both liability and especially property during 2020 and into 2021.
Unlike property and casualty insurance, the total crop insurance premiums written each year vary mainly based on prevailing commodity prices for the type of crops insured, because the aggregate number of acres planted usually does not vary much from year to year. Because the premiums that are charged for crop insurance are established by the Risk Management Agency (“RMA”), which is a division of the United States Department of Agriculture, and the policy forms and terms are also established by the RMA, insurers do not compete on price or policy terms and conditions. Moreover, because participation in other federal farm programs by a farmer is conditioned upon participation in the federal crop insurance program, most farmers obtain crop insurance on their plantings each year.
Principal Revenue Items
The Company derives its revenue primarily from net premiums earned, net investment income, and net capital gain (loss) on investments.
Gross and net premiums written
Gross premiums written is equal to direct premiums written and assumed premiums before the effect of ceded reinsurance. Gross premiums written are recognized upon sale of new insurance contracts or renewal of existing contracts. Net premiums written is equal to gross premiums written less premiums ceded or paid to reinsurers (ceded premiums written).
Premiums earned
Premiums earned is the earned portion of net premiums written. Gross premiums written include all premiums recorded by an insurance company during a specified policy period. Insurance premiums on property and casualty policies are recognized in proportion to the underlying risk insured and are earned ratably over the duration of the policies or, in the case of crop insurance, over the period of risk to the Company. At the end of each accounting period, the portion of the premiums that is not yet earned is included in unearned premiums and is realized as revenue in subsequent periods over the remaining term of the policy or period of risk. NI Holdings’ property and casualty policies, other than some of our auto lines and the non-standard auto policies, typically have a term of twelve months. For example, for an annual policy that is written on July 1, 2020, one-half of the premiums would be earned in 2020 and the other half would be earned in 2021.
Due to the nature of the crop planting and harvesting cycle and the deadlines for filing and processing claims under the federal crop insurance program, insurance premiums for crop insurance are recognized and earned during the period of risk, which usually begins in spring and ends with harvest in the fall. In the case of prevented planting claims, the period of risk is shortened to the date a valid prevented planting claim is filed, as the Company believes the period of risk has ended. Under the federal crop insurance program, farmers must purchase crop insurance with respect to spring planted crops by March 15. By July 15, the farmer must report the number of acres he has planted in each crop. On September 1, the insurer bills the farmer for the insurance premium, which is due and payable by the farmer by October 1. If the farmer does not pay the premium by such date, the insurer must essentially provide a loan to the farmer in an amount equal to the premium at an annual interest rate of 15% because the insurer is required to pay the farmer’s portion of the premium to the Federal Crop Insurance Corporation (“FCIC”) by November 15, regardless of whether the farmer pays the premium to the insurer. Except for claims occurring in the spring (primarily for prevented planting and required replanting claims), claims are required to be filed with the FCIC by December 15. A different cycle exists for crops planted in the fall, such as winter wheat, but the vast majority of crop insurance written by NI Holdings covers crops planted in the spring.
Net investment income and net capital gain (loss) on investments
NI Holdings invests its surplus and the funds supporting its insurance liabilities (including unearned premiums and unpaid losses and loss adjustment expenses) in cash, cash equivalents, equity securities, and fixed income securities. Investment income includes interest and dividends earned on invested assets, and is reported net of investment-related expenses. Net capital gains and losses on investments are reported separately from net investment income. NI Holdings recognizes realized capital gains when investments are sold for an amount greater than their cost or amortized cost (in the case of fixed income securities) and recognizes realized capital losses when investments are written down as a result of an other-than-temporary impairment or sold for an amount less than their cost or amortized cost, as applicable. The Company recognizes changes in unrealized gains and losses on the Company’s investments in equity securities in net income as part of net capital gains and losses on investments. These gains and losses may be significant given the size of the equity securities holdings and the inherent volatility in equity securities prices.
The changes in unrealized gains and losses on fixed income securities are recorded in other comprehensive income, net of income taxes.
NI Holdings’ portfolio of investments is managed by Conning, Inc., Disciplined Growth Investors, and CIBC Personal Wealth Management. These investment managers have discretion to buy and sell securities in accordance with the investment policy approved by our Board of Directors.
Principal Expense Items
NI Holdings’ expenses consist primarily of losses and loss adjustment expenses (“LAE”), amortization of deferred policy acquisition costs, other underwriting and general expenses, and income taxes.
Losses and Loss Adjustment Expenses
Losses and LAE represent the largest expense item and include (1) claim payments made, (2) estimates for future claim payments and changes in those estimates from prior periods, and (3) costs associated with investigating, defending, and adjusting claims, including legal fees.
Amortization of deferred policy acquisition costs and other underwriting and general expenses
Expenses incurred to underwrite risks are referred to as policy acquisition costs. Policy acquisition costs consist of commission expenses, state premium taxes, and certain other underwriting expenses that vary with and are primarily related to the writing and acquisition of new and renewal business. These policy acquisition costs are deferred and amortized over the effective period of the related insurance policies. Other underwriting and general expenses consist of salaries, professional fees, office supplies, depreciation, and all other operating expenses not otherwise classified separately.
Income taxes
Current income taxes represent amounts paid to the federal government and certain states whose payment is based upon net income (subject to regulatory adjustments) generated by the Company. As noted above, it does not include state premium taxes that are based purely on the collection of policyholder premiums.
NI Holdings uses the asset and liability method of accounting for deferred income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the income tax bases of its assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred income tax asset will not be realized. The effect of a change in tax rates is recognized in the period of the enactment date. Total income taxes reflect both current income taxes and the change in the net deferred income tax asset or liability, excluding amounts attributed to accumulated other comprehensive income.
Non-GAAP Financial Measures
NI Holdings evaluates its insurance operations in the way it believes will be most meaningful and representative of its business results. Some of these measurements are “non-GAAP financial measures” under Securities and Exchange Commission rules and regulations. GAAP is the acronym for “accounting principles generally accepted in the United States of America”. While used widely in the property and casualty insurance industry, the non-GAAP financial measures that NI Holdings presents may not be comparable to similarly-named measures reported by other companies. The non-GAAP financial measures described in this section are the expense ratio, loss and LAE ratio, combined ratio, written premiums, ratio of net written premiums to statutory surplus, underwriting gain, and return on average equity.
NI Holdings measures growth by monitoring changes in gross premiums written and net premiums written. The Company measures underwriting profitability by examining its loss and LAE ratio, expense ratio, and combined ratio. It also measures profitability by examining underwriting gain (loss), net income (loss), and return on average equity.
Loss and LAE ratio
The loss and LAE ratio is the ratio (expressed as a percentage) of losses and LAE incurred to premiums earned. NI Holdings measures the loss and LAE ratio on an accident year and calendar year loss basis to measure underwriting profitability. An accident year loss ratio measures losses and LAE for insured events occurring in a particular year, regardless of when they are reported, as a percentage of premiums earned during that year. A calendar year loss ratio measures losses and LAE for insured events occurring during a particular year and the change in loss reserves from prior policy years as a percentage of premiums earned during that year.
Expense ratio
The expense ratio is the ratio (expressed as a percentage) of amortization of deferred policy acquisition costs and other underwriting and general expenses (attributable to insurance operations) to premiums earned, and measures our operational efficiency in producing, underwriting, and administering the Company’s insurance business.
Combined ratio
The Company’s combined ratio is the ratio (expressed as a percentage) of the sum of losses and LAE incurred and expenses to premiums earned, and measures its overall underwriting profit. Generally, if the combined ratio is below 100%, NI Holdings is making an underwriting profit. If the combined ratio is above 100%, it is not profitable without investment income and may not be profitable if investment income is insufficient.
Premiums written
Premiums written represent a measure of business volume most relevant on an annual basis for the Company’s business model. This measure includes the amount of premium purchased by policyholders as of the policy’s effective date, whereas premiums earned as presented in the Consolidated Statement of Operations matches the amount of premium to the period of risk for those insurance policies. The Company’s insurance policies are sold with a variety of effective periods, including annual, semi-annual, and monthly.
Net premiums written to statutory surplus ratio
The net premiums written to statutory surplus ratio represents the ratio of net premiums written to statutory surplus. This ratio is designed to measure the ability of the Company to absorb above-average losses and the Company’s financial strength. In general, a low premium to surplus ratio is considered a sign of financial strength because the Company has an adequate provision for adverse development of loss reserves within the Company’s current book of business and provides a capacity to write more business. Statutory surplus is determined using accounting principles prescribed or permitted by the insurance subsidiaries’ state of domicile and differs from GAAP equity.
Underwriting gain (loss)
Underwriting gain (loss) measures the pre-tax profitability of insurance operations. It is derived by subtracting losses and LAE, amortization of deferred policy acquisition costs, and other underwriting and general expenses from net premiums earned. Each of these items is presented as a caption in NI Holdings’ Consolidated Statements of Operations.
Net income (loss) and return on average equity
NI Holdings uses net income (loss) to measure its profit and uses return on average equity to measure its effectiveness in utilizing shareholders’ equity to generate net income. In determining return on average equity for a given period, net income (loss) is divided by the average of the beginning and ending shareholders’ equity for that period.
Critical Accounting Policies
General
The preparation of financial statements in accordance with GAAP requires both the use of estimates and judgment relative to the application of appropriate accounting policies. NI Holdings is required to make estimates and assumptions in certain circumstances that affect amounts reported in its Consolidated Financial Statements and related footnotes. NI Holdings evaluates these estimates and assumptions on an ongoing basis based on historical developments, market conditions, industry trends, and other information that it believes to be reasonable under the circumstances. There can be no assurance that actual results will conform to its estimates and assumptions and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. The Company believes the following policies are the most sensitive to estimates and judgments.
Unpaid Losses and Loss Adjustment Expenses
How reserves are established
With respect to its traditional property and casualty insurance products, the Company maintains reserves for the payment of claims (indemnity losses) and expenses related to adjusting those claims (LAE). The Company’s liability for unpaid losses and LAE consists of (1) case reserves, which are reserves for claims that have been reported to it, and (2) reserves for claims that have been incurred but have not yet been reported and for the future development of case reserves (“IBNR”).
LAE consist of two components – allocated loss adjustment expenses (“ALAE”) and unallocated loss adjustment expenses (“ULAE”). ALAE are defense and cost containment expenses, including legal fees, court costs, and investigation fees, which are linked to the settlement of specific individual claims or losses. ULAE are expenses that generally cannot be associated with a specific claim, including internal costs such as salaries and other overhead costs, and also represent estimates of future costs to administer claims.
When a claim is reported to NI Holdings, its claims personnel establish a case reserve for the estimated amount of the ultimate payment to the extent it can be determined or estimated. The amount of the loss reserve for the reported claim is based primarily upon an evaluation of coverage, liability, damages suffered, and any other information considered pertinent to estimating the exposure presented by the claim. Each claim is contested or settled individually based upon its merits, and some property and casualty claims may take years to resolve, especially in the unusual situation that legal action is involved. Case reserves are reviewed on a regular basis and are updated as new information becomes available.
When a catastrophe occurs, which in the Company’s case usually involves the weather perils of wind and hail, NI Holdings utilizes mapping technology through geographic coding of its property risks to overlay the path of the storm. This enables the Company to establish estimated damage amounts based on the wind speed and size of the hail for case or per claim loss amounts. This process allows the Company to determine within a reasonable time (5 – 7 days) an estimated number of claims and estimated losses from the storm. If the Company estimates the damages to be in excess of its retained catastrophe amount, reinsurers are notified immediately of a potential loss so that the Company can quickly recover reinsurance payments once the retention is exceeded.
In addition to case reserves, NI Holdings maintains estimates of reserves for losses and LAE incurred but not reported. These reserves include estimates for the future development of case reserves. Some claims may not be reported for several years. As a result, the liability for unpaid losses and LAE includes significant estimates for IBNR.
The Company estimates multi-peril crop insurance losses on a quarterly basis based upon historical loss patterns, current crop conditions, current weather patterns, and input from crop loss adjusters. These estimates have proven to be reasonably accurate indicators of the Company’s anticipated losses for this line of business.
NI Holdings utilizes an independent actuary to assist with the estimation of its liability for unpaid losses and LAE. This actuary prepares estimates by first deriving an actuarially based estimate of the ultimate cost of total losses and LAE incurred as of the financial statement date based on established actuarial methods described below. The Company then reduces the estimated ultimate loss and LAE by loss and LAE payments and case reserves carried as of the financial statement date. The actuarially determined estimate is based upon indications from one of the following actuarial methodologies or uses a weighted average of these results. The specific method used to estimate the ultimate losses varies depending on the judgment of the actuary as to what is the most appropriate method for the property and casualty business. The Company’s management reviews these estimates and supplements the actuarial analysis with information not fully incorporated into the actuarially based estimate, such as changes in the external business environment and internal company processes. NI Holdings may adjust the actuarial estimates based on this supplemental information in order to arrive at the amount recorded in the Consolidated Financial Statements.
NI Holdings accrues its ultimate liability for unpaid losses and LAE by using the following actuarial methodologies:
Bornhuetter-Ferguson Method — The Bornhuetter-Ferguson Method is a blended method that explicitly takes into account both actual loss development to date and expected future loss emergence. This method is applied on both a paid loss basis and an incurred loss basis. This method uses selected loss development patterns to calculate the expected percentage of losses unpaid (or unreported). The expected future loss component of the method is calculated by multiplying earned premium for the given exposure period by a selected a priori (i.e. deductive) loss ratio. The resulting dollars are then multiplied by the expected percentage of unpaid (or unreported) losses described above. This provides an estimate of future paid (or reported) losses that is then added to actual paid (or incurred) loss data to produce the estimated ultimate loss.
Paid and Case Incurred Loss Development Method — The Paid and Case Incurred Loss Development Method utilizes ratios of cumulative paid or case incurred losses or LAE at each age of development as a percent of the preceding development age. Selected ratios are then multiplied together to produce a set of loss development factors which when applied to the most current data value, by accident year, develop the estimated ultimate losses or LAE. Ultimate losses or LAE are then selected for each accident year from the various methods employed.
Ratio of Paid ALAE to Paid Loss Method — The Ratio of Paid ALAE to Paid Loss Method utilizes the ratio of paid ALAE to paid losses and is similar to the Paid and Case Incurred Method described above, except that the data projected are the ratios of paid ALAE to paid losses. The projected ultimate ratio is then multiplied by the selected ultimate losses, by accident year, to yield ultimate ALAE. ALAE reserves are calculated by subtracting paid losses from ultimate ALAE.
The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, inflation, legal trends, increases in the state-dictated minimum liability limits in the recent case of nonstandard auto insurance, and legislative changes, among others. The impact of many of these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Loss reserve estimation is also affected by the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim, and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process, including the application of various individual experiences and expertise to multiple sets of data and analyses. NI Holdings continually refines its estimates of unpaid losses and LAE in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. NI Holdings considers all significant facts and circumstances known at the time the liabilities for unpaid losses and LAE are established.
There is an inherent amount of uncertainty in the establishment of liabilities for unpaid losses and LAE. This uncertainty is greatest in the current and most recent accident years due to the relative newness of the claims being reported and the relatively small percentage of these claims that have been reported, investigated, and adjusted by the Company’s claims staff. Therefore, the reserves carried in these more recent accident years are generally more conservative than those carried for older accident years. As the Company has the opportunity to investigate and adjust the reported claims, both the case and IBNR reserves are adjusted to more closely reflect the ultimate expected loss.
Other factors that have or can have an impact on the Company’s case and IBNR reserves include but are not limited to those described below.
Changes in liability law and public attitudes regarding damage awards
Laws governing liability claims and judicial interpretations thereof can change over time, which can expand the scope of coverage anticipated by insurers when initially establishing reserves for claims. In addition, public attitudes regarding damage awards can result in judges and juries granting higher recoveries for damages than expected by claims personnel when claims are presented. In addition, these changes can result in both increased claim frequency and severity as both plaintiffs and their legal counsel perceive the opportunity for higher damage awards. Reserves established for claims that occurred in prior years would not have anticipated these legal changes and, therefore, could prove to be inadequate for the ultimate losses paid by the Company, causing the Company to experience adverse development and higher loss payments in future years.
Change in claims handling and/or setting case reserves
Changes in Company personnel and/or the approach to how claims are reported, adjusted, and reserved may affect the reserves established by the Company. As discussed above, the setting of IBNR reserves is not an exact science and involves the expert judgment of an actuary. One actuary’s reserve opinion may differ slightly from another actuary’s opinion. This is the primary reason why the IBNR reserve estimate is customarily reported as a range by a company’s actuary, which provides a company with an acceptable “range” to use in establishing its best estimate for IBNR reserves.
Economic inflation
A sudden and extreme increase in the economic inflation rate could have a significant impact on the Company’s case and IBNR reserves. When establishing case reserves, claims personnel generally establish an amount that in their opinion will provide a conservative amount to settle the loss. If the time to settle the claim extends over a period of years, the initial reserve may not anticipate an economic inflation rate that is significantly higher than the current inflation rate. This can also apply to IBNR reserves. Should the economic inflation rate increase significantly, it is likely that the Company may not anticipate the need to adjust the IBNR reserves accordingly, which could lead to the Company being deficient in its IBNR reserves.
Increases or decreases in claim severity for reasons other than inflation
Factors exist that can drive the cost to settle claims for reasons other than standard inflation. For example, demand surge caused by a very large catastrophe (as in the case of Hurricane Katrina) has an impact on not only the availability and cost of building materials such as roofing and other materials, but also on the availability and cost of labor. Other factors such as increased vehicle traffic in an area not designed to handle the increased congestion and increased speed limits on busy roads are examples of changes that could cause claim severity to increase beyond what the Company’s historic reserves would reflect. In addition, unexpected increases in the labor costs and healthcare costs that underlie insured risks, changes in costs of building materials, or changes in commodity prices for insured crops may cause fluctuations in the ultimate development of the case reserves. During 2018, the state of Nevada mandated the incorporation of higher minimum liabilities for nonstandard auto insurance policies written in the state. Similar mandates became effective in July 2020 in the state of Arizona. While it is certain that these actions increase the average claim cost experienced in the state, the actual amount is subject to judgement until further claim experience is obtained.
Actual settlement experience different from historical data trends
When establishing IBNR reserves, the Company’s actuary takes into account many of the factors discussed above. One of the more important factors that is considered when setting reserves is the past or historical claim settlement experience. Our actuary considers factors such as the number of files entering litigation, payment patterns, length of time it takes Company claims personnel to settle the claims, and average payment amounts when estimating reserve amounts. Should future settlement patterns change due to the legal environment, Company claims handling philosophy, or personnel, it may have an impact on the future claims payments, which could cause existing reserves to either be redundant (excessive) or deficient (below) compared to the actual loss amount.
Change in Reporting Lag
As discussed above, NI Holdings and its actuary utilize historical patterns to provide an accurate estimate of what will take place in the future. Should we experience an unexpected delay in reporting time (claims are slower to be reported than in the past), our actuary or we may underestimate the anticipated number of future claims, which could cause the ultimate loss we may experience to be underestimated. A lag in reporting may be caused by changes in how claims are reported (online vs. through company personnel), the type of business or lines of business the Company is writing, the Company’s distribution system (direct writer, independent agent, or captive agent), and the geographic area where the Company chooses to insure risk.
Due to the inherent uncertainty underlying loss reserve estimates, final resolution of the estimated liability for unpaid losses and LAE may be higher or lower than the related loss reserves at the reporting date. Therefore, actual paid losses, as claims are settled in the future, may be materially higher or lower in amount than current loss reserves. The Company reflects adjustments to the liability for unpaid losses and LAE in the results of operations during the period in which the estimates are changed.
Actuarial Loss Reserves
NI Holdings’ liabilities for unpaid losses and LAE are summarized below:
|
March 31, 2021 |
December 31, 2020 | |||||||
|
Case reserves |
$ |
96,085 |
$ |
89,903 | ||||
|
IBNR reserves |
15,437 |
15,847 | ||||||
|
Liability for unpaid losses and LAE |
$ |
111,522 |
$ |
105,750 | ||||
|
Reinsurance recoverables on losses |
9,270 |
8,710 | ||||||
|
Net unpaid losses and LAE |
$ |
102,252 |
$ |
97,040 | ||||
The following table provides case and IBNR reserves for unpaid losses and LAE by segment.
|
March 31, 2021 | ||||||||||||
|
Case Reserves |
IBNR Reserves |
Total Reserves | ||||||||||
|
Private passenger auto |
$ |
16,347 |
$ |
6,156 |
$ |
22,503 | ||||||
|
Non-standard auto |
49,854 |
(9,565 |
) |
40,289 | ||||||||
|
Home and farm |
8,439 |
4,218 |
12,657 | |||||||||
|
Crop |
81 |
15 |
96 | |||||||||
|
Commercial |
16,457 |
8,990 |
25,447 | |||||||||
|
All other |
4,907 |
5,623 |
10,530 | |||||||||
|
Liability for unpaid losses and LAE |
$ |
96,085 |
$ |
15,437 |
$ |
111,522 | ||||||
|
Reinsurance recoverables on losses |
5,762 |
3,508 |
9,270 | |||||||||
|
Net unpaid losses and LAE |
$ |
90,323 |
$ |
11,929 |
$ |
102,252 | ||||||
|
December 31, 2020 | ||||||||||||
|
Case Reserves |
IBNR Reserves |
Total Reserves | ||||||||||
|
Private passenger auto |
$ |
14,984 |
$ |
5,327 |
$ |
20,311 | ||||||
|
Non-standard auto |
50,702 |
(7,366 |
) |
43,336 | ||||||||
|
Home and farm |
7,705 |
4,032 |
11,737 | |||||||||
|
Crop |
756 |
15 |
771 | |||||||||
|
Commercial |
10,749 |
8,340 |
19,089 | |||||||||
|
All other |
5,007 |
5,499 |
10,506 | |||||||||
|
Liability for unpaid losses and LAE |
$ |
89,903 |
$ |
15,847 |
$ |
105,750 | ||||||
|
Reinsurance recoverables on losses |
5,102 |
3,608 |
8,710 | |||||||||
|
Net unpaid losses and LAE |
$ |
84,801 |
$ |
12,239 |
$ |
97,040 | ||||||
Sensitivity of Major Assumptions Underlying the Liabilities for Unpaid Losses and Loss Adjustment Expenses
Management has identified the impact on earnings of various factors used in establishing loss reserves so that users of the Company’s financial statements can better understand how development on prior years’ reserves might impact the Company’s results of operations.
Total Reserves
As of March 31, 2021, the impact of a 1% change in our estimate for unpaid losses and LAE, net of reinsurance recoverables, on our net income, after federal income taxes of 21%, would be approximately $808.
Inflation
Inflation is not explicitly selected in the loss reserve analysis. However, historical inflation is embedded in the estimated loss development factors. The following table displays the impact on net income, after federal income taxes of 21%, resulting from various changes from the inflation factor implicitly embedded in the estimated payment pattern as of December 31, 2020, which is deemed consistent with March 31, 2021. A change in inflation may or may not fully impact loss payments in the future because some of the underlying expenses have already been paid. The table below assumes that any change in inflation will be fully reflected in future loss payments. This variance in future IBNR emergence could occur in one year or over multiple years, depending when the change is recognized.
|
Change in Inflation |
Impact on After-Tax Earnings | |||
|
-1% |
$ |
(1,392 |
) | |
|
1% |
1,429 | |||
|
3% |
4,402 | |||
|
5% |
7,540 | |||
Inflation includes actual inflation as well as social inflation which includes future emergence of new classes of losses or types of losses, change in judicial awards, and any other changes beyond assumed levels that impact the cost of claims.
Case Reserves
When a claim is reported, claims personnel establish a case reserve for the estimated amount of the ultimate payment to the extent it can be determined or estimated. It is possible that the level of adequacy in the case reserve may differ from historical levels and/or the claims reporting pattern may change. The following table displays the impact on net income, after federal income taxes of 21%, resulting from various changes to the level of case reserves as of December 31, 2020, which is deemed consistent with March 31, 2021. This variance in future IBNR emergence could occur in one year or over multiple years, depending when the change is recognized.
|
Change in Case Reserves |
Impact on After-Tax Earnings | |||
|
-10% |
$ |
7,102 | ||
|
-5% |
3,551 | |||
|
-2% |
1,420 | |||
|
+2% |
(1,420 |
) | ||
|
+5% |
(3,551 |
) | ||
|
+10% |
(7,102 |
) | ||
Investments
NI Holdings’ fixed income securities and equity securities are classified as available-for-sale and carried at estimated fair value as determined by management based upon quoted market prices or a recognized pricing service at the reporting date for those or similar investments. Changes in unrealized investment gains or losses on the fixed income securities, net of applicable income taxes, are reflected directly in shareholders’ equity as a component of other comprehensive income (loss) and, accordingly, have no effect on net income (loss). Changes in unrealized investment gains or losses on equity securities are recorded in net income (loss). Investment income is recognized when earned, and realized capital gains and losses on investments are recognized when investments are sold, or an other-than-temporary impairment (“OTTI”) is recognized.
NI Holdings evaluates fixed income securities for OTTI at least on a quarterly basis. NI Holdings assesses whether OTTI is present when the fair value of a security is less than its amortized cost. OTTI is considered to have occurred with respect to fixed income securities if (1) an entity intends to sell the security, (2) it is more likely than not an entity will be required to sell the security before recovery of its amortized cost basis, or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. When assessing whether the cost or amortized cost basis of the security will be recovered, the Company compares the present value of the expected cash flows likely to be collected, based on an evaluation of all available information relevant to the collectability of the security, to the cost or amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the cost of amortized cost basis is referred to as the “credit loss”. If there is a credit loss, the impairment is considered to be other-than-temporary. If NI Holdings identifies that an OTTI loss has occurred, it then determines whether it intends to sell the security, or if it is more likely than not that the Company will be required to sell the security prior to recovering the cost or amortized cost basis less any current-period credit losses. If NI Holdings determines that it does not intend to sell, and it is not more likely than not that it will be required to sell the security, the amount of the impairment loss related to the credit loss will be recorded in earnings, and the remaining portion of the OTTI loss will be recognized in other comprehensive income (loss), net of income taxes. If NI Holdings determines that it intends to sell the security, or that it is more likely than not that it will be required to sell the security prior to recovering its cost or amortized cost basis less any current-period credit losses, the full amount of the OTTI will be recognized in earnings.
Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates that generally translate, respectively, into decreases and increases in fair values of fixed income securities. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions.
For the three months ended March 31, 2021, NI Holdings’ investment portfolio experienced a decrease in net unrealized gains of $5,248.
|
March 31, 2021 |
December 31, 2020 |
Change | ||||||||||
|
Fixed income securities: | ||||||||||||
|
Gross unrealized gains |
$ |
11,699 |
$ |
16,801 |
$ |
(5,102 |
) | |||||
|
Gross unrealized losses |
(2,351 |
) |
(296 |
) |
(2,055 |
) | ||||||
|
Net fixed income unrealized gains |
9,348 |
16,505 |
(7,157 |
) | ||||||||
|
| ||||||||||||
|
Equity securities: | ||||||||||||
|
Gross unrealized gains |
30,566 |
29,139 |
1,427 | |||||||||
|
Gross unrealized losses |
(908 |
) |
(1,390 |
) |
482 | |||||||
|
Net equity unrealized gains |
29,658 |
27,749 |
1,909 | |||||||||
|
| ||||||||||||
|
Net unrealized gains |
$ |
39,006 |
$ |
44,254 |
$ |
(5,248 |
) | |||||
The fixed income portion of the portfolio experienced a decrease in net unrealized gains of $7,157 during the three months ended March 31, 2021. This decrease was primarily the result of a steepening yield curve, with 10-year and 30-year U.S. Treasury yields increasing during the quarter. Rates on the short end of the yield curve remain anchored by expectations for a continued accommodative monetary policy stance by the Fed, with 2-year U.S. Treasury yields increasing only slightly during the quarter. The net decrease is reflected directly in shareholders’ equity as a component of accumulated other comprehensive income.
The equity portion of the portfolio experienced an increase in net unrealized gains of $1,909 during the three months ended March 31, 2021, which is attributed to the continuing recovery in the equity markets. Equity market results show expectations of a return to normalcy as travel and leisure sectors have recently risen while stocks benefitting from work-from-home have declined. The net increase is included in net capital gains (losses) on investments on the Company’s Consolidated Statements of Operations.
NI Holdings has evaluated each security and taken into account the severity and duration of any impairment, the current rating on the security (if any), and the outlook for the issuer according to independent analysts. The Company’s fixed income portfolio is managed by Conning Asset Management, who specializes in the handling of insurance company investment portfolios and participates in this evaluation.
For the three months ended March 31, 2021, NI Holdings did not recognize any OTTIs of its investment securities. For the year ended December 31, 2020, NI Holdings did not recognize any OTTIs of its investment securities. Adverse investment market conditions, in addition to poor operating results of underlying investments, could result in impairment charges in the future.
For more information on the Company’s investments, see Note 6 to the Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q.
Fair Value Measurements
NI Holdings uses fair value measurements to record fair value adjustments to certain assets to determine fair value disclosures. Investment securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, NI Holdings may be required to record at fair value other assets 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).
NI Holdings bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon the estimates of NI Holdings or other third-parties, and are often calculated based on the characteristics of the asset, the economic and competitive environment, and other such factors. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts which NI Holdings could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-end and have not been re-evaluated or updated for purposes of our financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end. Additionally, changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations.
NI Holdings uses quoted values and other data provided by an independent pricing service in its process for determining fair values of its investments. The evaluations of such pricing services represent an exit price and a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale. This pricing service provides NI Holdings with one quote per instrument. For fixed income securities that have quoted prices in active markets, market quotations are provided. For fixed income securities that do not trade on a daily basis, the independent pricing service prepares estimates of fair value using a wide array of observable inputs including relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The observable market inputs that the Company’s independent pricing service utilizes may include (listed in order of priority for use) benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and other reference data on markets, industry, and the economy. Additionally, the independent pricing service uses an option-adjusted spread model to develop prepayment and interest rate scenarios. The pricing service did not use broker quotes in determining fair values of the Company’s investments at March 31, 2021 or December 31, 2020.
Should the independent pricing service be unable to provide a fair value estimate, NI Holdings would attempt to obtain a non-binding fair value estimate from a number of broker-dealers and would review this estimate in conjunction with a fair value estimate reported by an independent business news service or other sources. In instances where only one broker-dealer provides a fair value for a fixed income security, NI Holdings would use that estimate. In instances where NI Holdings would be able to obtain fair value estimates from more than one broker-dealer, the Company would review the range of estimates and select the most appropriate value based on the facts and circumstances. Should neither the independent pricing service nor a broker-dealer provide a fair value estimate, NI Holdings would develop a fair value estimate based on cash flow analyses and other valuation techniques that utilize certain unobservable inputs. Accordingly, NI Holdings classifies such a security as a Level III investment.
The fair value estimates of NI Holdings’ investments provided by the independent pricing service at each period-end were utilized, among other resources, in reaching a conclusion as to the fair value of its investments.
Management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures. Management reviews all securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency across securities in common sectors, durations, and credit ratings. This review will also include all fixed income securities rated lower than “A” by Moody’s or Standard & Poor’s. If, after this review, management does not believe the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the pricing service. In its review, management did not identify any such discrepancies, and no adjustments were made to the estimates provided by the pricing service, for the three month period ended March 31, 2021 or the year ended December 31, 2020. The classification within the fair value hierarchy is then confirmed based on the final conclusions from the pricing review.
For more information on the Company’s fair value measurements, see Note 7 to the Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q.
Deferred Policy Acquisition Costs and Value of Business Acquired
Certain direct policy acquisition costs consisting of commissions, state premium taxes, and other direct underwriting expenses that vary with and are primarily related to the production of business are deferred and amortized over the effective period of the related insurance policies as the underlying policy premiums are earned.
As in the case of previous acquisitions, no deferred policy acquisition costs (“DAC”) were recorded in the acquisition of Westminster in accordance with purchase accounting guidance. Rather, a separate intangible asset representing the value of business acquired (“VOBA”) was valued at $4,750 and established at the closing date. This VOBA intangible asset was amortized into expense as the acquired unearned premiums are reported into income, in the same way as DAC, and was fully amortized at December 31, 2020. Policy acquisition costs relating to new business written by Westminster were deferred following the closing date. The release of the VOBA asset and the establishment of new DAC generally offset each other over the twelve months following the acquisition of Westminster.
At March 31, 2021 and December 31, 2020, deferred policy acquisition costs and the related liability for unearned premiums were as follows:
|
March 31, 2021 |
December 31, 2020 | |||||||
|
Deferred policy acquisition costs |
$ |
26,575 |
$ |
23,968 | ||||
|
Liability for unearned premiums |
123,458 |
119,363 | ||||||
The method followed in computing DAC limits the amount of deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and LAE, and certain other costs expected to be incurred as the premium is earned. Future changes in estimates, the most significant of which is expected losses and LAE, may require adjustments to DAC. If the estimation of net realizable value indicates that DAC are not recoverable, they would be written off or a premium deficiency reserve would be established.
Income Taxes
Current income taxes represent amounts paid to the federal government and certain states whose payment is based upon net income (subject to regulatory adjustments) generated by the Company. NI Holdings uses the asset and liability method of accounting for deferred income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the income tax bases of our assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred income tax asset will not be realized. Total income taxes reflect both current income taxes and the change in the net deferred income tax asset or liability, excluding amounts attributed to accumulated other comprehensive income.
NI Holdings had gross deferred income tax assets of $8,842 at March 31, 2021 and $8,603 at December 31, 2020, arising primarily from unearned premiums, loss reserve discounting, and net operating loss carryforwards. A valuation allowance is required to be established for any portion of the deferred income tax asset for which the Company believes it is more likely than not that it will not be realized. A valuation allowance of $931 was maintained at March 31, 2021 and December 31, 2020.
NI Holdings had gross deferred income tax liabilities of $15,762 at March 31, 2021 and $16,429 at December 31, 2020, arising primarily from deferred policy acquisition costs, net unrealized capital gains on investments, and other intangible assets.
NI Holdings exercises significant judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments require NI Holdings to make projections of future taxable income. The judgments and estimates the Company makes in determining its deferred income tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require the Company to record a valuation allowance against its deferred income tax assets.
As of March 31, 2021, NI Holdings had no material unrecognized income tax benefits or accrued interest and penalties. Federal income tax years 2014 through 2019 are open for examination.
Results of Operations
NI Holdings’ results of operations are influenced by factors affecting the property and casualty insurance and crop insurance industries in general. The operating results of the United States property and casualty industry and crop insurance industry are subject to significant variations due to competition, weather, catastrophic events, changes in regulation, general economic conditions, rising medical expenses, judicial trends, fluctuations in interest rates, and other changes in the investment environment.
NI Holdings premium levels and underwriting results have been, and continue to be, influenced by market conditions. Pricing in the property and casualty insurance industry historically has been cyclical. During a soft market cycle, price competition is more significant than during a hard market cycle and makes it difficult to attract and retain properly priced business. During a hard market cycle, it is more likely that insurers will be able to increase their rates or profit margins. A hard market typically has a positive effect on premium growth. The markets that NI Holdings serve are diversified, which requires management to regularly monitor the Company’s performance and competitive position by line of business and geographic market to schedule appropriate rate actions.
Premiums in the multi-peril crop insurance business are primarily influenced by the number of acres, commodity prices, and types of crops insured because the rates are established by the RMA rather than individual insurance carriers. The expected loss experience of the MPCI business for the calendar year may also significantly affect the reported net earned premiums and losses due to the risk-sharing arrangement with the federal government. Multi-peril crop insurance premiums are generally written in the second quarter, and earned ratably over the period of risk, which extends into the fourth quarter. However, as was the case in 2020, if the Company experiences a higher than average number of claims early in the risk period, recognition of earned premiums may be accelerated due to the shortened risk period.
Premiums in the crop hail insurance business are also generally written in the second quarter, but earned over a shorter period of risk than multi-peril crop insurance.
Premiums in the personal lines of business (private passenger auto and home and farm) are generally written and earned throughout the year based on their coverage periods. Losses on this business are also incurred throughout the year, but usually are more frequent and/or severe during periods of weather-related activity in the second and third quarters.
Premiums in the commercial lines of business are generally written and earned throughout the year. Losses on this business are also incurred throughout the year, but generally are more frequent during the first and second quarters.
For more information on the Company’s results of operations by segment, see Note 21 to the Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q.
Three Months ended March 31, 2021 and 2020
The consolidated net income for NI Holdings was $9,782 for the three months ended March 31, 2021, compared to net loss of $3,555 for the three months ended March 31, 2020. The major components of NI Holdings’ operating revenues and net income for the two periods were as follows:
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Revenues: | ||||||||
|
Net premiums earned |
$ |
63,135 |
$ |
58,772 | ||||
|
Fee and other income |
317 |
362 | ||||||
|
Net investment income |
1,536 |
1,971 | ||||||
|
Net capital gain (loss) on investments |
5,811 |
(14,919 |
) | |||||
|
Total revenues |
$ |
70,799 |
$ |
46,186 | ||||
|
| ||||||||
|
Components of net income (loss): | ||||||||
|
Net premiums earned |
$ |
63,135 |
$ |
58,772 | ||||
|
Losses and loss adjustment expenses |
36,889 |
30,422 | ||||||
|
Amortization of deferred policy acquisition costs and other underwriting and general expenses |
21,238 |
20,159 | ||||||
|
Underwriting gain |
5,008 |
8,191 | ||||||
|
Fee and other income |
317 |
362 | ||||||
|
Net investment income |
1,536 |
1,971 | ||||||
|
Net capital gain (loss) on investments |
5,811 |
(14,919 |
) | |||||
|
Income (loss) before income taxes |
12,672 |
(4,395 |
) | |||||
|
Income taxes |
2,890 |
(840 |
) | |||||
|
Net income (loss) |
$ |
9,782 |
$ |
(3,555 |
) | |||
Beginning in March 2020, the global pandemic associated with COVID-19 and related economic conditions began to impact the Company’s results. The immediate financial impact to the Company was volatility in our investment portfolio and significant declines in fair value on the Company’s equity investments, attributable to the disruption in global financial markets. The Company’s underwriting results, especially in the non-standard auto segment, were impacted during the second and third quarters of 2020 as a result of reduced economic activity.
Vaccinations for COVID-19 are being rolled out at an increasing pace in the United States. The levels of case counts, hospitalizations, and deaths decreased from 2020, resulting in fewer state health mandates and accelerating economic recovery in many sectors. Congress passed a $1.9 trillion stimulus bill in March 2021, which will result in the receipt of stimulus checks for millions of recipients. This represents the third check for many citizens in the last year. The Federal Reserve remains committed to its current monetary policy, which balances holding the federal funds rate near zero while monitoring increasing expectations around inflation rates. However, the travel and entertainment industries continue to be impacted, and the related economic challenges in the Las Vegas area have adversely impacted our non-standard auto business by limiting our ability to effectively grow this business. Despite improved overall economic conditions in the United States, we expect to face continued risks associated with the pandemic over the remainder of the year, including unemployment and financial market volatility.
Net Premiums Earned
NI Holdings’ net premiums earned for the three months ended March 31, 2021 increased $4,363, or 7.4%, compared to the three months ended March 31, 2020.
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Net premiums earned: | ||||||||
|
Private passenger auto |
$ |
17,498 |
$ |
17,299 | ||||
|
Non-standard auto |
13,258 |
13,151 | ||||||
|
Home and farm |
17,454 |
17,621 | ||||||
|
Crop |
47 |
179 | ||||||
|
Commercial |
12,338 |
7,853 | ||||||
|
All other |
2,540 |
2,669 | ||||||
|
Total net premiums earned |
$ |
63,135 |
$ |
58,772 | ||||
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Net premiums earned: | ||||||||
|
Direct premium |
$ |
68,743 |
$ |
62,393 | ||||
|
Assumed premium |
1,448 |
1,600 | ||||||
|
Ceded premium |
(7,056 |
) |
(5,221 |
) | ||||
|
Total net premiums earned |
$ |
63,135 |
$ |
58,772 | ||||
Direct premiums earned for the first quarter of 2021 increased $6,350, or 10.2%, from the first quarter of 2020. This increase was primarily driven by growth in our Westminster commercial business.
Assumed premiums earned, which represents our participation in the assumed domestic and international business in our all other segment, decreased slightly. Ceded premiums earned increased $1,835, reflecting an increase in our overall reinsurance coverage limits and the growth in our business.
Direct premiums written for the three months ended March 31, 2021 were $72,420, compared to $62,972 a year ago. This increase was driven by growth in both our Westminster commercial business and non-standard auto business. Personal lines of business (private passenger auto, home and farm) also grew due to continued growth in South Dakota and modest growth in North Dakota, while premiums in Nebraska were flat. We anticipate that commercial written premium growth will remain strong over the remainder of 2021, while continued growth in the non-standard auto business is more unpredictable due to the factors associated with the pandemic and related economic implications.
Losses and LAE
NI Holdings’ net losses and LAE for the three months ended March 31, 2021 increased $6,467, or 21.3%, compared to the three months ended March 31, 2020. As a result, the Company’s loss and LAE ratio also increased.
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Net losses and LAE: | ||||||||
|
Private passenger auto |
$ |
12,254 |
$ |
11,129 | ||||
|
Non-standard auto |
4,800 |
5,940 | ||||||
|
Home and farm |
7,632 |
6,538 | ||||||
|
Crop |
561 |
2,367 |
) | |||||
|
Commercial |
10,399 |
3,715 | ||||||
|
All other |
1,243 |
733 | ||||||
|
Total net losses and LAE |
$ |
36,889 |
$ |
30,422 | ||||
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Net losses and LAE: | ||||||||
|
Direct losses and LAE |
$ |
37,578 |
$ |
33,892 | ||||
|
Assumed losses and LAE |
948 |
308 | ||||||
|
Ceded losses and LAE |
(1,637 |
) |
(3,778 |
) | ||||
|
Total net losses and LAE |
$ |
36,889 |
$ |
30,422 | ||||
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Loss and LAE ratio: | ||||||||
|
Private passenger auto |
70.0% |
64.3% | ||||||
|
Non-standard auto |
36.2% |
45.2% | ||||||
|
Home and farm |
43.7% |
37.1% | ||||||
|
Crop |
n/a |
n/a | ||||||
|
Commercial |
84.3% |
47.3% | ||||||
|
All other |
48.9% |
27.5% | ||||||
|
Total loss and LAE ratio |
58.4% |
51.8% | ||||||
The Company’s loss and LAE experience increased year-over-year across most segments of the Company.
Losses increased modestly year-over-year in private passenger auto, while non-standard auto reported better than normal loss experience. In home and farm, losses and LAE increased modestly due to more weather activity in 2021.
The commercial segment experienced a higher than expected first quarter 2021 loss ratio due to an elevated number of fires and slip-and-fall claims due to the winter weather on the east coast. Most of these losses fell beneath the reinsurance retention limit, resulting in a decrease in ceded losses and LAE.
The first quarter 2020 results for our crop business included unfavorable loss development of $2,367 on a net basis from the 2019 crop season. For the first quarter of 2021, the crop segment includes $561 of net unfavorable loss development due primarily to late development within a moisture index component of the federal crop program.
During the three months ended March 31, 2021, reported losses and LAE included $2,523 of net unfavorable development on prior accident years, compared to $510 of net unfavorable development on prior accident years during the three months ended March 31, 2020. Net favorable development is the result of prior years’ claims settling for less than originally estimated, while net unfavorable development is the result of prior years’ claims settling for more than originally estimated. Adjustments to our original estimates resulting from claims are not made until the period in which there is reasonable evidence that an adjustment to the reserve is appropriate.
Amortization of Deferred Policy Acquisition Costs and Other Underwriting and General Expenses
Total underwriting and general expenses, including amortization of deferred policy acquisition costs, increased $1,079, or 5.4%, during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Underlying expenses |
$ |
23,845 |
$ |
23,924 | ||||
|
Deferral of policy acquisition costs |
(16,194 |
) |
(13,152 |
) | ||||
|
Other underwriting and general expenses |
7,651 |
10,772 | ||||||
|
Amortization of deferred policy acquisition costs |
13,587 |
9,387 | ||||||
|
Total reported expenses |
$ |
21,238 |
$ |
20,159 | ||||
Underlying expenses were $79 lower in the three months ended March 31, 2021 compared to a year ago. Acquisition costs related to the increase in direct written premiums were offset by reduced consulting fees and amortization of other intangibles.
Expense deferrals were $3,042 higher in the three months ended March 31, 2021 compared to 2020, while amortization of those costs was $4,200 higher in 2021. The increase in amortization is partly attributable to the increase in commercial business sold throughout 2020.
The expense ratio of 33.6% for the three months ended March 31, 2020 was 0.7 percentage points lower than the expense ratio in the first quarter of 2020, as premium growth outpaced expenses.
Underwriting Gain (Loss)
Underwriting gain (loss) measures the pretax profitability of a company’s insurance business. It is derived by subtracting losses and LAE, amortization of deferred policy acquisition costs, and other underwriting and general expenses from net premiums earned.
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Underwriting gain (loss): | ||||||||
|
Private passenger auto |
$ |
(115 |
) |
$ |
1,360 | |||
|
Non-standard auto |
4,044 |
2,014 | ||||||
|
Home and farm |
4,211 |
6,194 | ||||||
|
Crop |
(1,050 |
) |
(2,890 |
) | ||||
|
Commercial |
(2,676 |
) |
209 | |||||
|
All other |
594 |
1,304 | ||||||
|
Total underwriting gain |
$ |
5,008 |
$ |
8,191 | ||||
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Combined ratio: | ||||||||
|
Private passenger auto |
100.7% |
92.1% | ||||||
|
Non-standard auto |
69.5% |
84.7% | ||||||
|
Home and farm |
75.9% |
64.8% | ||||||
|
Crop |
n/a |
n/a | ||||||
|
Commercial |
121.7% |
97.3% | ||||||
|
All other |
76.6% |
51.1% | ||||||
|
Total combined ratio |
92.1% |
86.1% | ||||||
The gain from underwriting operations for the three months ended March 31, 2021 decreased $3,183 when compared to 2020.
The combined ratio for the private passenger auto segment increased 8.6 percentage points year-over-year. Losses and LAE experience increased due to a higher frequency of losses. Non-standard auto’s combined ratio decreased due to improved loss experience.
The combined ratio for the home and farm segment deteriorated as North Dakota’s loss experience returned to more normal levels after a very favorable winter in 2020. For the commercial segment, Westminster’s loss experience included an elevated number of fire losses as well as slip-and-fall claims due to ice and snow during the first quarter of 2021.
For the crop segment, the underwriting results improved due to less unfavorable loss reserve development compared to a year ago. The combined ratios are not meaningful for first quarter in the crop segment due to the lack of earned premiums.
Fee and Other Income
NI Holdings had fee and other income of $317 for the three months ended March 31, 2021, compared to $362 for the three months ended March 31, 2020. Fee income attributable to the non-standard auto segment is a key component in measuring its profitability. Fee income on this business increased slightly to $332 for the three months ended March 31, 2021 from $329 for the three months ended March 31, 2020.
Net Investment Income
The following table sets forth our average cash and invested assets, net investment income, and return on average cash and invested assets for the reported periods:
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Average cash and invested assets |
$ |
494,914 |
$ |
418,452 | ||||
|
| ||||||||
|
Gross investment income |
$ |
2,433 |
$ |
2,800 | ||||
|
Investment expenses |
897 |
829 | ||||||
|
Net investment income |
$ |
1,536 |
$ |
1,971 | ||||
|
| ||||||||
|
Gross return on average cash and invested assets |
2.0% |
2.7% | ||||||
|
Net return on average cash and invested assets |
1.2% |
1.9% | ||||||
Investment income, net of investment expense, decreased $435 for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. This decrease is attributable to the temporary amount of invested assets placed in cash and short term equivalents during the current period, due to the movement of funds between insurance subsidiaries while implementing the intercompany reinsurance pooling agreement, as well as lower reinvestment rates. The weighted average gross yield on invested assets decreased to 2.0% in 2021 from 2.7% in 2020.
As of March 31, 2021, our overall book yield for our combined fixed income and equity portfolio was 2.4%. The average duration was 4.2 years at March 31, 2021.
The decline in the Company’s investment yields is driven by a combination of factors, including a persistent low reinvestment rate environment, ongoing maturities of existing holdings with high embedded yields, and significant cash inflows to the investment portfolio from the Company’s business operations. The dividend yield of the Company’s equity portfolio also declined given the ongoing rally in U.S. equity markets.
Net Capital Gain (Loss) on Investments
NI Holdings had realized capital gains on investment of $3,902 for the three months ended March 31, 2021, compared to gains of $1,015 for the three months ended March 31, 2020.
NI Holdings reported a net gain of $1,909 attributed to the change in unrealized appreciation of its equity securities for the three months ended March 31, 2021, compared to a net loss of $15,934 for the three months ended March 31, 2020.
NI Holdings has evaluated each fixed income security in a loss position and taken into account the severity and duration of any potential impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. The Company recorded no OTTIs in the three months ended March 31, 2021 and 2020.
The Company’s fixed income securities and equity securities are classified as available for sale because we will, from time to time, make sales of securities that are not impaired, consistent with our investment goals and policies. At March 31, 2021, the Company had net unrealized gains on fixed income securities of $9,348 and net unrealized gains on equity securities of $29,658. At December 31, 2020, the Company had net unrealized gains on fixed income securities of $16,505 and net unrealized gains on equity securities of $27,749.
Strong U.S. retail sales and durable goods reports led to a sharp increase in first quarter Gross Domestic Product growth estimates. The steepening yield curve has received much attention during the first quarter. However, rates for two years and shorter remain anchored. Equity market results show expectations of a return to normalcy as travel and leisure sectors have recently risen while stocks benefitting from work-from-home have declined. Core inflation numbers are expected to move above 2% due to comparisons with weak prices during the initial lockdown in first quarter 2020. This is likely to be transitory as many believe there is too much slack in the economy to envision a scenario of substantially higher inflation this year.
Income (Loss) before Income Taxes
For the three months ended March 31, 2021, NI Holdings had pre-tax income of $12,672 compared to pre-tax loss of $4,395 for the three months ended March 31, 2020. The increase in pre-tax results was largely attributable to the $17,843 fluctuation in the change in net unrealized gains in our equity portfolio between the first quarter of 2021 and 2020, partially offset by the decrease in first quarter 2021 underwriting results.
Income Tax Expense (Benefit)
NI Holdings recorded income tax expense of $2,890 for the three months ended March 31, 2021, compared to income tax benefit of $840 for the three months ended March 31, 2020. A portion of income taxes relates to state income taxes primarily for the state of Illinois. Our effective tax rate for the first quarter of 2021 was 22.8% compared to an effective tax rate of 19.1% for the first quarter of 2020.
Net Income (Loss)
For the three months ended March 31, 2021, NI Holdings had net income before non-controlling interest of $9,782 compared to net loss of $3,555 for the three months ended March 31, 2020. This increase in net income was primarily attributable to the fluctuation in the change in net unrealized gains in our equity portfolio between the first quarter of 2021 and 2020, partially offset by the decrease in first quarter 2021 underwriting results.
Return on Average Equity
For the three months ended March 31, 2021, NI Holdings had annualized return on average equity, after non-controlling interest, of 11.2% compared to annualized return on average equity, after non-controlling interest, of -4.7% for the three months ended March 31, 2020. Average equity is calculated as the average between beginning and ending equity excluding non-controlling interest for the period.
Financial Position
The major components of NI Holdings’ financial position are as follows:
|
March 31, 2021 |
December 31, 2020 | |||||||
|
Assets: | ||||||||
|
Cash and investments |
$ |
495,465 |
$ |
494,363 | ||||
|
Premiums and agents’ balances receivable |
49,325 |
48,523 | ||||||
|
Deferred policy acquisition costs |
26,575 |
23,968 | ||||||
|
Receivable from Federal Crop Insurance Corporation |
5,182 |
6,646 | ||||||
|
Property and equipment |
9,843 |
9,899 | ||||||
|
Goodwill and other intangibles |
18,076 |
18,194 | ||||||
|
Other assets |
16,919 |
16,010 | ||||||
|
Total assets |
$ |
621,385 |
$ |
617,603 | ||||
|
| ||||||||
|
Liabilities: | ||||||||
|
Unpaid losses and loss adjustment expenses |
$ |
111,522 |
$ |
105,750 | ||||
|
Unearned premiums |
123,458 |
119,363 | ||||||
|
Westminster consideration payable |
12,720 |
19,287 | ||||||
|
Other liabilities |
21,095 |
24,331 | ||||||
|
Total liabilities |
268,795 |
268,731 | ||||||
|
| ||||||||
|
Shareholders’ equity |
352,590 |
348,872 | ||||||
|
Total liabilities and shareholders’ equity |
$ |
621,385 |
$ |
617,603 | ||||
At March 31, 2021, NI Holdings’ total assets increased by $3,782, or 0.6%, from December 31, 2020.
At March 31, 2021, total liabilities increased by $64 from December 31, 2020. Unpaid losses and loss adjustment expenses increased due to higher loss experience during the first quarter of 2021. Unearned premiums increased due to an increase in direct written premiums. The first installment of $6,667 was paid to the former shareholder of Westminster. Other liabilities decreased due to payment of employee and agent bonuses.
Total shareholders’ equity increased by $3,718, or 1.1%, during the three months ended March 31, 2021. The increase in equity reflects a consolidated net income of $9,782 for the three-month period, share repurchases of $596, and lower fair values of our fixed income securities.
Liquidity and Capital Resources
NI Holdings generates sufficient funds from its operations and maintains a high degree of liquidity in its investment portfolio to meet the demands of claim settlements and operating expenses. The primary sources of funds are premium collections, investment earnings, and maturing investments. In 2017, we raised $93,145 in net proceeds from our initial public offering (“IPO”), which we planned to use for strategic acquisitions.
In 2018, we used $17,000 for the acquisition of Direct Auto. On January 1, 2020, we acquired Westminster for $40,000. We paid $20,000 at the time of closing. The terms of the acquisition agreement included payment of the remaining $20,000, subject to certain adjustments, in three equal installments on each of the first and second anniversaries of the closing, and on the first business day of the month preceding the third anniversary of the closing. The first installment was paid during the first quarter of 2021.
We currently anticipate that cash generated from our operations and available from our investment portfolio, along with the remaining IPO net proceeds, will be sufficient to fund our operations.
The Company’s philosophy is to provide sufficient cash flows from operations to meet its obligations in order to minimize the forced sales of investments. The Company maintains a portion of its investment portfolio in relatively short-term and highly liquid assets to ensure the availability of funds.
The change in cash and cash equivalents for the three months ended March 31, 2021 and 2020 were as follows:
|
Three Months Ended March 31, | ||||||||
|
2021 |
2020 | |||||||
|
Net cash flows from operating activities |
$ |
10,794 |
$ |
3,616 | ||||
|
Net cash flows from investing activities |
(51,439 |
) |
(7,578 |
) | ||||
|
Net cash flows from financing activities |
(7,749 |
) |
(1,533 |
) | ||||
|
Net decrease in cash and cash equivalents |
$ |
(48,394 |
) |
$ |
(5,495 |
) | ||
For the three months ended March 31, 2021, net cash provided by operating activities totaled $10,794 compared to $3,616 a year ago. This increase was driven by consolidated net income of $9,782 for the three months ended March 31, 2021 compared to consolidated net loss of $3,555 for the same period a year ago. An increase in amortization of deferred acquisition costs and an increase in unpaid losses and LAE, offset by a net decrease in unrealized gains on equity investments, also contributed to the increase when evaluating net cash from operating activities.
For the three months ended March 31, 2021, net cash used by investing activities totaled $51,439 compared to $7,578 a year ago. In the first quarter of 2021, the Company invested excess cash generated from operations and the implementation of the intercompany pooling reinsurance agreement into longer term investments.
For the three months ended March 31, 2021, net cash used by financing activities totaled $7,749 compared to $1,533 a year ago. The Company paid the first installment of $6,667 of the additional consideration for Westminster during the first quarter of 2021. The Company repurchased shares of its own common stock for $596 during the first quarter of 2021, compared to $1,502 during 2020.
As a standalone entity, and outside of the net proceeds from the IPO, NI Holdings’ principal source of long-term liquidity will be dividend payments from its directly-owned subsidiaries.
Nodak Insurance is restricted by the insurance laws of North Dakota as to the amount of dividends or other distributions it may pay to NI Holdings. North Dakota law sets the maximum amount of dividends that may be paid by Nodak Insurance during any twelve-month period after notice to, but without prior approval of, the North Dakota Insurance Department. This amount cannot exceed the lesser of (i) 10% of the Company’s surplus as regards policyholders as of the preceding December 31, or (ii) the Company’s statutory net income for the preceding calendar year (excluding realized capital gains), less any prior dividends paid during such twelve-month period. In addition, any insurance company other than a life insurance company may carry forward net income from the preceding two calendar years, not including realized capital gains, less any dividends actually paid during those two calendar years. Dividends in excess of this amount are considered “extraordinary” and are subject to the approval of the North Dakota Insurance Department.
The amount available for payment of dividends from Nodak Insurance to us during 2021 without the prior approval of the North Dakota Insurance Department is approximately $21,628 based upon the policyholders’ surplus of Nodak Insurance at December 31, 2020. Prior to its payment of any extraordinary dividend, Nodak Insurance will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North Dakota Insurance Department has the power to limit or prohibit dividend payments if 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 three months ended March 31, 2021. The Nodak Insurance Board of Directors declared and paid a $6,000 dividend to NI Holdings during the year ended December 31, 2020.
Direct Auto is restricted by the insurance laws of Illinois as to the amount of dividends or other distributions it may pay to NI Holdings. Illinois law sets the maximum amount of dividends that may be paid by Direct Auto during any twelve-month period after notice to, but without prior approval of, the Illinois Department of Insurance. This amount cannot exceed the greater of (i) 10% of the Company’s surplus as regards policyholders as of the preceding December 31, or (ii) the Company’s statutory net income for the preceding calendar year (excluding realized capital gains). Dividends in excess of this amount are considered “extraordinary” and are subject to the approval of the Illinois Department of Insurance.
The amount available for payment of dividends from Direct Auto to NI Holdings during 2021 without the prior approval of the Illinois Department of Insurance is $3,582 based upon the policyholders’ surplus of Direct Auto at December 31, 2020. Prior to its payment of any dividend, Direct Auto will be required to provide notice of the dividend to the Illinois Department of Insurance. This notice must be provided to the Illinois Department of Insurance within five business days following declaration of any dividend and no less than 30 days prior to the payment of an extraordinary dividend or 10 days prior to the payment of an ordinary dividend. The Illinois Department of Insurance has the power to limit or prohibit dividend payments if Direct Auto is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Direct Auto during the three months ended March 31, 2021 or the year ended December 31, 2020.
The amount available for payment of dividends from Westminster to NI Holdings during 2021 without the prior approval of the Maryland Insurance Administration is $505 based upon the statutory net investment income of Westminster for the year ended December 31, 2020 and the three preceding years. Prior to its payment of any dividend, Westminster will be required to provide notice of the dividend to the Maryland Insurance Administration. This notice must be provided to the Maryland Insurance Administration within five business days following declaration of any dividend and no less than 30 days prior to the payment of an extraordinary dividend or 10 days prior to the payment of an ordinary dividend. The Maryland Insurance Administration has the power to limit or prohibit dividend payments if Westminster is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Westminster during the three months ended March 31, 2021 or the year ended December 31, 2020.
Off-Balance Sheet Arrangements
NI Holdings has no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital reserves.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 5 to the Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q.
Item 3. - Quantitative and Qualitative Disclosures about Market Risk
The Company’s assessment of market risk as of March 31, 2021 indicates there have been no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC.
Item 4. - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-15(b)) as of March 31, 2021. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective.
Changes in Internal Controls
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2021, to which this report relates that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II. – OTHER INFORMATION
Item 1. - Legal Proceedings
We are party to litigation in the normal course of business. Based upon information presently available to us, we do not consider any litigation to be material. However, given the uncertainties attendant to litigation, we cannot assure you that our results of operations and financial condition will not be materially adversely affected by any litigation.
Item 1A. - Risk Factors
There have been no material changes in our assessment of our risk factors from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds
The Company has not sold any unregistered securities within the past three years.
On January 17, 2017, the SEC declared effective our registration statement on Form S-1 registering our common stock. On March 13, 2017, the Company completed the IPO of 10,350,000 shares of common stock at a price of $10.00 per share. The Company received net proceeds of $93,145 from the offering, after deducting underwriting discounts and offering expenses. Griffin Financial Group, LLC acted as our placement agent in connection with the IPO.
Direct Auto was acquired on August 31, 2018 with $17,000 of the net proceeds from the IPO.
Westminster was acquired on January 1, 2020 for a purchase price of $40,000, subject to certain adjustments. The Company paid $20,000 from the net proceeds from the IPO at time of closing. The terms of the acquisition agreement included payment of the remaining $20,000, subject to certain adjustments, in three equal installments on each of the first and second anniversaries of the closing, and on the first business day of the month preceding the third anniversary of the closing. The first installment was paid during the first quarter of 2021. The Company anticipates using the net proceeds from the IPO to satisfy these obligations.
From time to time, the Company may also repurchase its own stock. These repurchases may be used to satisfy its obligations under the equity incentive plans or may be done for other reasons. To date, the Company has used the net proceeds from the IPO to fund these buyback programs.
There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on January 17, 2017.
On February 28, 2018, our Board of Directors approved an authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock. We completed the repurchase of 191,265 shares of our common stock for $2,966 during 2018, and an additional 116,034 shares for $2,006 during 2019. During the six months ended June 30, 2020, we completed the repurchase of 402,056 shares of our common stock for $4,996 to close out this authorization.
On May 4, 2020, our Board of Directors approved an additional authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock. During the year ended December 31, 2020, we completed the repurchase of 454,443 shares of our common stock for $7,238 under this new authorization. During the three months ended March 31, 2021, we repurchased an additional 32,326 shares of our common stock for $596.
|
Period in 2021 |
Total Number of Shares Purchased |
Average Price Paid Per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) (in thousands) | ||||||||||||
|
January 1-31, 2021 |
10,879 |
$ |
16.82 |
10,879 |
$ |
2,579 | ||||||||||
|
February 1-28, 2021 |
1,140 |
17.02 |
1,140 |
2,559 | ||||||||||||
|
March 1-31, 2021 |
20,307 |
19.35 |
20,307 |
2,166 | ||||||||||||
|
Total |
32,326 |
$ |
18.42 |
32,326 |
$ |
2,166 | ||||||||||
(1)
Shares purchased pursuant to the May 4, 2020 publicly announced share repurchase authorization of up to approximately $10,000 of the Company’s outstanding common stock.
Item 3. - Defaults upon Senior Securities
Not Applicable
Item 4. - Mine Safety Disclosures
Not Applicable
Item 5. - Other Information
None
Item 6. - Exhibits
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 May 5, 2021.
|
NI HOLDINGS, INC. | |
|
| |
|
/s/ Michael J. Alexander | |
|
Michael J. Alexander | |
|
President and Chief Executive Officer (Principal Executive Officer) | |
|
| |
|
| |
|
/s/ Brian R. Doom | |
|
Brian R. Doom | |
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
65
Exhibit 10.1
NI HOLDINGS, INC.
Time Based Restricted Stock Unit Agreement for Executives
| Name of Participant: [___________] | Date of Grant: |
| No. of Units Covered: [___________] | Vesting Commencement Date: [___________] |
| Vesting Dates: |
THIS RESTRICTED STOCK UNIT AGREEMENT (this “Agreement”) governs the Stock Unit Award granted by NI HOLDINGS, INC., a North Dakota corporation (the “Company”) to the above named individual (the “Participant”), in accordance with and subject to the provisions of the Company’s 2020 Stock and Incentive Plan (the “Plan”). A copy of the Plan has been made available to the Participant. Unless the context indicates otherwise, capitalized terms that are not defined in this Agreement shall have the meaning set forth in the Plan.
1. Grant of Restricted Stock Units.
(a) In accordance with the Plan, and effective as of the Date of Grant specified above, the Company has granted to the Participant the number of Stock Units specified at the beginning of this Agreement (collectively, the “Restricted Stock Units,” and each a “Restricted Stock Unit.”). Each Restricted Unit represents the right to receive a share of Common Stock (a “Share”) and dividend equivalent amounts corresponding to the Share, subject to the terms and conditions of this Agreement and the Plan.
(b) The Restricted Stock Units granted to the Participant shall be credited to an account in the Participant’s name. This account shall be a record of book keeping entries only and shall be utilized solely as a device for the measurement and determination of the number of Shares to be issued to or in respect of the Participant pursuant to this Agreement. Restricted Stock Units may not be transferred by the Participant without the Committee’s prior written consent other than by will or the laws of descent and distribution.
2. Vesting of the Shares.
(a) The Participant’s interest in the Restricted Stock Units shall vest and become non-forfeitable on each of the vesting dates set forth above (each a “Vesting Date”) if the Participant remains in continuous service with the Company or an Affiliate from the Vesting Commencement Date through each applicable Vesting Date. Except as provided in paragraphs 2(b) through (e) below, if the Participant’s service with the Company or an Affiliate is terminated prior to a Vesting Date, any Restricted Stock Units that remain unvested as of the date of such termination shall be forfeited.
(b) If the Participant remains in continuous service with the Company or an Affiliate from the Vesting Commencement Date until the date the Participant’s service is terminated due to Disability or death that occurs before the last Vesting Date, then any Restricted Stock Units that remain unvested will vest in full and become non-forfeitable as of the date of such termination.
(c) If the Participant remains in continuous service with the Company or an Affiliate from the Vesting Commencement Date until the Participant’s Retirement Age, then any Restricted Stock Units that remain unvested upon attainment of Retirement Age will not be forfeited upon the Participant’s subsequent cessation of service for any reason other than Cause; but rather, such Units shall remain outstanding and continue to “vest” after cessation of service and become payable upon each applicable Vesting Date
(d) If the Participant remains in continuous service with the Company or an Affiliate from the Vesting Commencement Date until the Participant incurs an Involuntary Termination Due to Position Elimination or Reorganization that occurs before the last Vesting Date, then any Restricted Stock Units that remain unvested will vest in a pro rata number of the Restricted Stock Units. The pro rata number of Restricted Stock Units that vest shall be determined by multiplying the unvested Restricted Stock Units corresponding to a particular Vesting Date by a fraction, the numerator of which is the number of full and partial calendar months of the Participant’s service with the Company or an Affiliate from the first day of the Vesting Commencement Date to the date of termination, and the denominator of which is the number of full calendar months from the Vesting Commencement Date to the Vesting Date. A partial month of service shall count as a full month.
(e) If the Participant remains in continuous service with the Company or an Affiliate from the Vesting Commencement Date until a Change in Control that occurs before the last Vesting Date, and the Participant’s Restricted Stock Units are neither assumed nor substituted or replaced with similar rights (or cash equivalent value thereof), then any Restricted Stock Units that remain unvested will vest in full and become non-forfeitable upon the Change in Control. If the Participant’s Restricted Stock Units are assumed (or substituted or replaced with an award of equivalent value), then, in addition to the circumstances described in paragraphs (a) through (d) above, if the Participant is involuntarily terminated without Cause or resigns for Good Reason within twenty four (24) months following the Change in Control but prior to a Vesting Date, any Restricted Stock Units (or replacement award) that remains unvested will vest in full and become non-forfeitable as of the date of such termination.
3. Issuance and Settlement.
(a) After any Restricted Stock Units vest in accordance with Section 2, the Company shall cause to be issued to the Participant, or to the Participant’s designated beneficiary or estate in the event of the Participant’s death, one Share in payment and settlement of each vested Restricted Stock Unit, subject to applicable required tax withholding. The Committee shall cause the Shares issuable in connection with the vesting of any such Restricted Stock Units to be issued as soon as practicable after vesting, but in all events no
67
later than 30 days after vesting, and the Participant shall have no power to affect the timing of such issuance. Such issuance shall be evidenced by a stock certificate or appropriate entry on the books of the Company or a duly authorized transfer agent of the Company and shall be in complete settlement and satisfaction of such vested Restricted Stock Units.
(b) Notwithstanding the foregoing, if the Participant has attained or will attain Retirement Age prior to the last Vesting Date under this Agreement, such Units shall be treated as “deferred compensation” subject to section 409A of the Internal Revenue Code (the “Code”). In such case, the following special provisions shall apply to the payment of the underlying Shares:
(i) if any Restricted Stock Units vest and become payable on account of a Change in Control, the Restricted Stock Units shall not become payable (even though non forfeitable) unless the Change in Control constitutes a “change in control event” as defined in Treasury Regulations promulgated under section 409A of the Code; and
(ii) if any Restricted Stock Units vest and become payable on account of the Participant’s (A) Involuntary Termination Due to Position Elimination or Reorganization or (B) involuntary termination without Cause or resignation for Good Reason on or after a Change in Control, the Restricted Stock Units shall not become payable (even though non forfeitable) unless the termination constitutes a “separation from service” as defined in Treasury Regulations promulgated under section 409A of the Code. In addition, if the Participant is a Specified Employee, payment on account of separation from service hereunder shall be made as of the date that is six months following the Participant’s separation from service (or, if earlier, upon the Participant’s death).
(c) The Participant may elect to satisfy any applicable required tax arising in relation to the Restricted Stock Units by (i) delivering cash (including check, draft, money order or wire transfer made payable to the order of the Company) or (ii) having the Company withhold a portion of the Shares otherwise to be delivered having a Fair Market Value equal to the amount of such tax liability (subject to any limitations required under applicable financial accounting standards to avoid liability accounting for the Award). In the case of clause (ii), the Company will not deliver to the Participant any fractional Shares (or equivalent cash value) remaining after reduction for taxes; rather, any remaining fractional Shares will be cancelled without payment.
4. Shareholder Rights. The Restricted Stock Units do not entitle the Participant to any rights of a shareholder of the Company. Notwithstanding the foregoing, the Participant shall accumulate an unvested right to payment of cash dividend equivalents on the Shares underlying Restricted Stock Units if cash dividends are declared by the Company on the Shares on or after the Date of Grant. Such dividend equivalents will be in an amount of cash per Restricted Stock Unit equal to the cash dividend paid with respect to one Share, subject to applicable required tax withholding. The Participant shall be entitled solely to payment of accumulated dividend equivalents with respect to the number of Restricted Stock Units equal to the number of Shares that become issuable to the Participant pursuant to this Agreement. Dividend equivalents will be paid to the Participant as soon as administratively possible following the date that the Shares are issued to the Participant. The Participant shall not be entitled to dividend equivalents with respect to dividends declared prior to the Date of Grant. All dividend equivalents accumulated with respect to forfeited Restricted Stock Units shall also be irrevocably forfeited. As of the date of issuance of Shares underlying Restricted Stock Units, the Participant shall have all of the rights of a shareholder of the Company with respect to any Shares issued pursuant hereto.
5. Definitions. For purposes of this Agreement, the following shall have the following meanings:
(a) “Cause” means (i) the Participant’s willful conduct that is demonstrably and materially injurious to the Company or an Affiliate, monetarily or otherwise; (ii) the Participant’s material breach of written agreement between the Participant and the Company; (iii) the Participant’s breach of the Participant’s fiduciary duties to the Company or an Affiliate; (iv) the Participant’s conviction of any crime (or entering a plea of guilty or nolo contendre to any crime) constituting a felony; or (v) the Participant’s entering into an agreement or consent decree or being the subject of any regulatory order that in any of such cases prohibits the Participant from serving as an officer or director of a company that has publicly traded securities. A termination of the Participant shall not be for “Cause” unless the decision to terminate the Participant is set forth in a resolution of the Board to that effect and which specifies the particulars thereof and that is approved by a majority of the members of the Board (exclusive of the Participant if the Participant is a member of the Board) adopted at a meeting called and held for such purpose (after reasonable notice to the Participant and an opportunity for the Participant to be heard before the Board). No act or failure to act by the Participant will be deemed “willful” if it was done or omitted to be done by the Participant in good faith or with a reasonable belief on the part of the Participant that the action or omission was in the best interests of the Company or an Affiliate. Any act or failure to act by the Participant based upon authority given pursuant to a resolution duly adopted by the Board or based on the advice of counsel to the Company shall be conclusively presumed to be done or omitted to be done by the Participant in good faith and in the best interest of the Company and its Affiliates.
(b) “Change in Control” means:
(i) the approval of the shareholders of the Company, and consummation, of (A) any consolidation, merger or statutory share exchange of the Company with any person in which the surviving entity would not have as its directors at least a majority of the Incumbent Board and as a result of which those persons who were shareholders of the Company immediately prior to such transaction would not hold, immediately after such transaction, at least 50% of the Voting Power of the Company then outstanding or the combined voting power of the surviving entity’s then outstanding voting securities; (B) any sale, lease, exchange or other transfer in one transaction or series of related transactions substantially all of the assets of the Company; or (C) the adoption of any plan or proposal for the complete or partial liquidation or dissolution of the Company. For purposes of this Section 5(a), “Voting Power” when used with reference to the Company shall mean the voting power of all classes and series of capital stock of the Company now or hereafter authorized; or
(ii) the individuals who, as of the date of this Agreement, are members of the Board of Directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board (provided, however, that if the election or
68
nomination for election by the Company’s shareholders of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered to be a member of the Incumbent Board).
(c) “Disability” means the Participant has been determined, by a physician selected by the Company and reasonably acceptable to the Participant, to be unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months.
(d) “Good Reason” means, without the express written consent of the Participant (i) a change in the Participant’s position with the Company or an Affiliate which results in a material diminution of the Participant’s authority, duties or responsibilities; (ii) a material reduction by the Company or an Affiliate in the annual rate of the Participant’s base salary; or (iii) a change in the location of the Participant’s principal office to a different place that is more than fifty miles from the Participant’s principal office immediately prior to such change. A reduction in the Participant’s rate of annual base pay shall be material if the rate of annual base salary on any date is less than ninety percent (90%) of the Participant’s highest rate of annual base pay as in effect on any date in the preceding thirty-six (36) months. Notwithstanding the two preceding sentences, a change in the Participant’s duties or responsibilities shall not constitute Good Reason, and the Participant shall not have Good Reason to resign, solely because the Company does not have common shares or other securities that are publicly traded. A resignation by the Participant shall not be with “Good Reason” unless the Participant gives the Company written notice specifying the event or condition that the Participant asserts constitutes Good Reason, the notice is given no more than ninety days after the occurrence of the event or initial existence of the condition that the Participant asserts constitutes Good Reason and the Company has failed to remedy or cure the event or condition during the thirty day period after such written notice is given to the Company.
(e) “Involuntary Termination Due to Position Elimination or Reorganization” means an involuntary termination of the Participant’s service with the Company or its Affiliates due to a job elimination, reduction in force, business restructuring or other circumstances the Committee deems appropriate, in its sole discretion, as qualifying as an Involuntary Termination Due to Position Elimination or Reorganization.
(f) “Retirement Age” means the Participant has both attained age sixty (60) and accumulated at least seventy (70) points. The Participant’s points shall equal the sum of the participant’s age (in years) plus completed full years of employment with the Company and its Affiliates.
6. No Right to Continued Employment or Service. This Agreement and the grant of the Stock Unit Award do not give the Participant any rights with respect to continued employment by or other service with the Company or an Affiliate. This Agreement and the grant of the Stock Unit Award shall not interfere with the right of the Company or an Affiliate to terminate the Participant’s employment or other service.
7. Change in Capital Structure. In accordance with the terms of the Plan, the terms of this Agreement and the number and kind of Shares shall be adjusted as the Board determines to be equitably required in the event the Company effects one or more stock dividends, stock split ups, subdivisions or consolidations of shares or other similar changes in capitalization.
8. Governing Law; Venue. The laws of the State of North Dakota shall govern all matters arising out of or relating to this Agreement including, without limitation, its validity, interpretation, construction and performance but without giving effect to the conflict of laws principles that may require the application of the laws of another jurisdiction. Any party bringing a legal action or proceeding against any other party arising out of or relating to this Agreement may bring the legal action or proceeding in the United States District Court for the District of North Dakota or in any court of the State of North Dakota sitting in Fargo, North Dakota. Each party waives, to the fullest extent permitted by law (i) any objection it may now or later have to the laying of venue of any legal action or proceeding arising out of or relating to this Agreement brought in a court described in the preceding sentence and (ii) any claim that any legal action or proceeding brought in any such court has been brought in an inconvenient forum.
9. Conflicts. In the event of any conflict between the provisions of the Plan as in effect on the Date of Grant and this Agreement, the provisions of the Plan shall govern. All references herein to the Plan shall mean the Plan as in effect on the Date of Grant.
10. Participant Bound by Plan. The Participant hereby acknowledges that a copy of the Plan has been made available to the Participant and the Participant agrees to be bound by all of the terms and provisions of the Plan.
11. Binding Effect. Subject to the limitations stated above and in the Plan, this Agreement shall be binding upon the Participant and the Participant’s successors in interest and the Company and any successors of the Company.
12. Recoupment. The Participant acknowledges and agrees that the Participant’s rights in the Restricted Stock Units, the Shares and any dividends, dividend equivalents or other distributions paid or payable with respect to the Restricted Stock Units and the Shares are subject to recoupment or repayment if, and to the extent that, such action is required under applicable law or any Company recoupment or “clawback” policy.
IN WITNESS WHEREOF, the Company and the Participant have executed this Restricted Stock Unit Agreement as of the date first set forth above.
| NI HOLDINGS, INC. | [NAME OF PARTICIPANT] |
| By: | |
| Name: | |
| Title: |
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Exhibit 10.2
HOLDINGS, INC.
Growth in Book Value Per Share Performance Share Unit Agreement
Name of Participant: [___________]
Target No. of Performance Share Units Covered:
[___________]
Maximum No. of Performance Share Units Covered:
[___________] Date of Grant:
[___________]
THIS PERFORMANCE SHARE UNIT AGREEMENT (this “Agreement”) governs the Stock Unit Award granted by NI HOLDINGS, INC., a North Dakota corporation (the “Company”) to the above named individual (the “Participant”), in accordance with and subject to the provisions of the Company’s 2020 Stock and Incentive Plan (the “Plan”). A copy of the Plan has been made available to the Participant. Unless the context indicates otherwise, capitalized terms that are not defined in this Agreement shall have the meaning set forth in the Plan.
1. Grant of Performance Share Units.
(a) In accordance with the Plan, and effective as of the Date of Grant specified above, the Company has granted to the Participant the number of Performance Share Units specified at the beginning of this Agreement (collectively, the “Performance Share Units,” and each a “Performance Share Unit.”). Each Performance Share Unit represents the right to receive a share of Common Stock (a “Share”) and dividend equivalent amounts corresponding to the Share, subject to the terms and conditions of this Agreement and the Plan.
(b) The Performance Share Units granted to the Participant shall be credited to an account in the Participant’s name. This account shall be a record of bookkeeping entries only and shall be utilized solely as a device for the measurement and determination of the number of Shares to be issued to or in respect of the Participant pursuant to this Agreement. Performance Share Units may not be transferred by the Participant without the Committee’s prior written consent other than by will or the laws of descent and distribution.
2. Earned and Vested Performance Share Units.
(a) Except as provided in paragraphs 2(b) through 2(e) below, if the Participant remains in continuous service with the Company or an Affiliate from the Date of Grant until the last day of the Measurement Period, the Participant shall earn the number of Performance Share Units determined by taking the percentage earned in the table shown in Exhibit 1, and multiplying the percentage times the target number of Performance Share Units specified at the beginning of this Agreement. The number of Performance Share Units that will be earned pursuant to this Section 2 will be determined by reference to the Company Growth in Book Value per Share for the Measurement Period in Exhibit 1.
(b) As soon as practicable after the end of the Measurement Period, but in all events no later than March 15, 2024 (the “Determination Date”), the Committee shall certify the number of Performance Share Units (if any) that are earned and vested pursuant to the terms and conditions hereof, and the Company shall cause the Shares issuable in connection with the vesting of any such Performance Share Units to be issued in accordance with Section 3; provided, however, that if the Measurement Period ends on account of the Participant’s death or a Change in Control, the Committee’s determination and certification shall not be necessary.
(c) If the Participant dies while in service with the Company or an Affiliate prior to the last day of the Measurement Period, then the target number of Performance Share Units shall vest and become immediately payable.
(d) If the Participant remains in continuous service with the Company or an Affiliate from the Date of Grant until the date of a Qualifying Termination that occurs before the last day of the Measurement Period, then (i) the Performance Share Units will remain outstanding until the last day of the Measurement Period, (ii) the number of earned Performance Share Units shall be determined in accordance with Section 2(a) (except, if the Measurement Period ends due to a Change in Control, the target number of Performance Share Units shall be earned) and (iii) the Participant will have a fully vested and non-forfeitable interest in a pro rata number of the earned Performance Share Units as of the last day of the Measurement Period. The pro rata number of earned Performance Share Units that vest shall be determined by multiplying the total number of earned Performance Share Units by a fraction, the numerator of which is the number of full and partial calendar months of the Participant’s service with the Company or an Affiliate from the first day of the Measurement Period to the date of a Qualifying Termination and the denominator of which is the number of full calendar months in the Measurement Period. A partial month of service shall count as a full month.
(e) If the Participant remains in continuous service with the Company or an Affiliate from the Date of Grant until a Change in Control that occurs before the last day of the Measurement Period, then the target number of Performance Share Units shall be earned and converted into time based Restricted Stock Units. If the Participant’s Restricted Stock Units are assumed (or substituted or replaced with an award of equivalent value), then the converted Restricted Stock Units shall become fully vested if the Participant remains in continuous service with the Company or an Affiliate until December 31, 2023 or dies while in service or terminates on account of Disability or Involuntary Termination Due to Position Elimination or Reorganization. If the Participant resigns at or after Retirement Age, the Restricted Stock units shall continue to vest and become payable as of December 31, 2023. In addition, if the
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Participant is involuntarily terminated without Cause or resigns for Good Reason within twenty four (24) months following the Change in Control but prior to December 31, 2023, any Restricted Stock Units (or replacement award) that remains unvested will vest in full and become non-forfeitable as of the date of such termination. Notwithstanding the foregoing, if the Participant’s Restricted Stock Units are neither assumed nor substituted or replaced with similar rights (or cash equivalent value thereof), then any unvested Restricted Stock Units will vest in full and become non-forfeitable upon the Change in Control.
(f) Any Performance Share Units that do not vest pursuant to this Agreement shall be forfeited without consideration therefor.
3. Issuance and Settlement.
(a) After any Performance Share Units vest in accordance with Section 2, the Company shall cause to be issued to the Participant, or to the Participant’s designated beneficiary or estate in the event of the Participant’s death, one Share in payment and settlement of each vested Performance Share Unit, subject to applicable required tax withholding. The Committee shall cause the Shares issuable in connection with the vesting of any such Performance Share Units to be issued as of the Determination Date (except, in cases where there is no determination, Shares shall be issued within sixty (60) days of vesting), and the Participant shall have no power to affect the timing of such issuance. Such issuance shall be evidenced by a stock certificate or appropriate entry on the books of the Company or a duly authorized transfer agent of the Company and shall be in complete settlement and satisfaction of such vested Performance Share Units.
(b) Notwithstanding the foregoing, if the Participant has attained or will attain Retirement Age prior to the last day of the Measurement Period under this Agreement, such Units shall be treated as “deferred compensation” subject to section 409A of the Internal Revenue Code (the “Code”). In such case, the following special provisions shall apply to the payment of the underlying Shares:
(i) if any Performance Share Units vest and become payable on account of a Change in Control, the Performance Share Units shall not become payable (even though non forfeitable) unless the Change in Control constitutes a “change in control event” as defined in Treasury Regulations promulgated under section 409A of the Code; and
(ii) if any Performance Share Units vest and become payable on account of the Participant’s (A) Involuntary Termination Due to Position Elimination or Reorganization or (B) involuntary termination without Cause or resignation for Good Reason on or after a Change in Control, the Performance Share Units shall not become payable (even though non forfeitable) unless the termination constitutes a “separation from service” as defined in Treasury Regulations promulgated under section 409A of the Code. In addition, if the Participant is a Specified Employee, payment on account of separation from service hereunder shall be made as of the date that is six months following the Participant’s separation from service (or, if earlier, upon the Participant’s death).
(c) The Participant may elect to satisfy any applicable required tax arising in relation to the Performance Share Units by (i) delivering cash (including check, draft, money order or wire transfer made payable to the order of the Company) or (ii) having the Company withhold a portion of the Shares otherwise to be delivered having a Fair Market Value equal to the amount of such tax liability (subject to any limitations required under applicable financial accounting standards to avoid liability accounting for the Award). In the case of clause (ii), the Company will not deliver to the Participant any fractional Shares (or equivalent cash value) remaining after reduction for taxes; rather, any remaining fractional Shares will be cancelled without payment.
4. Shareholder Rights. The Performance Share Units do not entitle the Participant to any rights of a shareholder of the Company. Notwithstanding the foregoing, the Participant shall accumulate an unvested right to payment of cash dividend equivalents on the Shares underlying Performance Share Units if cash dividends are declared by the Company on the Shares on or after the Date of Grant. Such dividend equivalents will be in an amount of cash per Performance Share Unit equal to the cash dividend paid with respect to one Share, subject to applicable required tax withholding. The Participant shall be entitled solely to payment of accumulated dividend equivalents with respect to the number of Performance Share Units equal to the number of Shares that become issuable to the Participant pursuant to this Agreement. Dividend equivalents will be paid to the Participant as soon as administratively possible following the date that the Shares are issued to the Participant. The Participant shall not be entitled to dividend equivalents with respect to dividends declared prior to the Date of Grant. All dividend equivalents accumulated with respect to forfeited Performance Share Units shall also be irrevocably forfeited. As of the date of issuance of Shares underlying Performance Share Units, the Participant shall have all of the rights of a shareholder of the Company with respect to any Shares issued pursuant hereto.
5. Definitions. For purposes of this Agreement, the following shall have the following meanings:
(a) “Cause” means (i) the Participant’s willful conduct that is demonstrably and materially injurious to the Company or an Affiliate, monetarily or otherwise; (ii) the Participant’s material breach of written agreement between the Participant and the Company; (iii) the Participant’s breach of the Participant’s fiduciary duties to the Company or an Affiliate; (iv) the Participant’s conviction of any crime (or entering a plea of guilty or nolo contendere to any crime) constituting a felony; or (v) the Participant’s entering into an agreement or consent decree or being the subject of any regulatory order that in any of such cases prohibits the Participant from serving as an officer or director of a company that has publicly traded securities. A termination of the Participant shall not be for “Cause” unless the decision to terminate the Participant is set forth in a resolution of the Board to that effect and which specifies the particulars thereof and that is approved by a majority of the members of the Board (exclusive of the Participant if the Participant is a member of the Board) adopted at a meeting called and held for such purpose (after reasonable notice to the Participant and an opportunity for the Participant to be heard before the Board). No act or failure to act by the Participant will be deemed “willful” if it was done or omitted to be done by the Participant in good faith or with a reasonable belief on the part of the Participant that the action or omission was in the best interests of the Company or an Affiliate. Any act or failure to act by the Participant based upon authority given pursuant to a resolution duly adopted by the Board or based on the advice of counsel to the Company shall be conclusively presumed to be done or omitted to be done by the Participant in good faith and in the best interest of the Company and its Affiliates.
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(b) “Change in Control” means:
(i) the approval of the shareholders of the Company, and consummation, of (A) any consolidation, merger or statutory share exchange of the Company with any person in which the surviving entity would not have as its directors at least a majority of the Incumbent Board and as a result of which those persons who were shareholders of the Company immediately prior to such transaction would not hold, immediately after such transaction, at least 50% of the Voting Power of the Company then outstanding or the combined voting power of the surviving entity’s then outstanding voting securities; (B) any sale, lease, exchange or other transfer in one transaction or series of related transactions substantially all of the assets of the Company; or (C) the adoption of any plan or proposal for the complete or partial liquidation or dissolution of the Company. For purposes of this Section 5(a), “Voting Power” when used with reference to the Company shall mean the voting power of all classes and series of capital stock of the Company now or hereafter authorized; or
(ii) the individuals who, as of the date of this Agreement, are members of the Board of Directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board (provided, however, that if the election or nomination for election by the Company’s shareholders of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered to be a member of the Incumbent Board).
(c) “Growth in Book Value” shall have the meaning ascribed that term in Exhibit 1 attached hereto.
(d) “Disability” means the Participant has been determined, by a physician selected by the Company and reasonably acceptable to the Participant, to be unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months.
(e) “Good Reason” means, without the express written consent of the Participant (i) a change in the Participant’s position with the Company or an Affiliate which results in a material diminution of the Participant’s authority, duties or responsibilities; (ii) a material reduction by the Company or an Affiliate in the annual rate of the Participant’s base salary; or (iii) a change in the location of the Participant’s principal office to a different place that is more than fifty miles from the Participant’s principal office immediately prior to such change. A reduction in the Participant’s rate of annual base pay shall be material if the rate of annual base salary on any date is less than ninety percent (90%) of the Participant’s highest rate of annual base pay as in effect on any date in the preceding thirty-six (36) months. Notwithstanding the two preceding sentences, a change in the Participant’s duties or responsibilities shall not constitute Good Reason, and the Participant shall not have Good Reason to resign, solely because the Company does not have common shares or other securities that are publicly traded. A resignation by the Participant shall not be with “Good Reason” unless the Participant gives the Company written notice specifying the event or condition that the Participant asserts constitutes Good Reason, the notice is given no more than ninety days after the occurrence of the event or initial existence of the condition that the Participant asserts constitutes Good Reason and the Company has failed to remedy or cure the event or condition during the thirty day period after such written notice is given to the Company.
(f) “Involuntary Termination Due to Position Elimination or Reorganization” means an involuntary termination of the Participant’s service with the Company or its Affiliates due to a job elimination, reduction in force, business restructuring or other circumstances the Committee deems appropriate, in its sole discretion, as qualifying as an Involuntary Termination Due to Position Elimination or Reorganization.
(g) “Measurement Period” means the period beginning on January 1, 2021 and ending on the earliest of (i) December 31, 2023; (ii) the date of the Participant’s death while in service with the Company or an Affiliate; or (iii) the date of a Change in Control.
(h) “Qualifying Termination” means a termination of the Participant’s service on account of (i) Disability, (ii) Retirement or (iii) Involuntary Termination Due to Position Elimination or Reorganization.
(i) “Retirement” means the Participant voluntarily resigns from service with the Company and all Affiliates after having both attained age sixty (60) and accumulated at least seventy (70) points (“Retirement Age”). The Participant’s points shall equal the sum of the participant’s age (in years) plus completed full years of employment with the Company and its Affiliates.
6. No Right to Continued Employment or Service. This Agreement and the grant of the Stock Unit Award do not give the Participant any rights with respect to continued employment by or other service with the Company or an Affiliate. This Agreement and the grant of the Stock Unit Award shall not interfere with the right of the Company or an Affiliate to terminate the Participant’s employment.
7. Change in Capital Structure. In accordance with the terms of the Plan, the terms of this Agreement and the number and kind of Shares shall be adjusted as the Board determines to be equitably required in the event the Company effects one or more stock dividends, stock split ups, subdivisions or consolidations of shares or other similar changes in capitalization.
8. Governing Law; Venue. The laws of the State of North Dakota shall govern all matters arising out of or relating to this Agreement including, without limitation, its validity, interpretation, construction and performance but without giving effect to the conflict of laws principles that may require the application of the laws of another jurisdiction. Any party bringing a legal action or proceeding against any other party arising out of or relating to this Agreement may bring the legal action or proceeding in the United States District Court for the District of North Dakota or in any court of the State of North Dakota sitting in Fargo, North Dakota. Each party waives, to the fullest extent permitted by law (i) any objection it may now or later have to the laying of venue of any legal action or proceeding arising out of or relating to this Agreement brought in a court described in the preceding sentence and (ii) any claim that any legal action or proceeding brought in any such court has been brought in an inconvenient forum.
9. Conflicts. In the event of any conflict between the provisions of the Plan as in effect on the Date of Grant and this Agreement, the provisions of the Plan shall govern. All references herein to the Plan shall mean the Plan as in effect on the Date of Grant.
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10. Participant Bound by Plan. The Participant hereby acknowledges that a copy of the Plan has been made available to the Participant and the Participant agrees to be bound by all of the terms and provisions of the Plan.
11. Binding Effect. Subject to the limitations stated above and in the Plan, this Agreement shall be binding upon the Participant and the Participant’s successors in interest and the Company and any successors of the Company.
12. Recoupment. The Participant acknowledges and agrees that the Participant’s rights in the Performance Share Units, Shares and any dividends, dividend equivalents or other distributions paid or payable with respect to the Performance Share Units or Shares are subject to recoupment or repayment if, and to the extent that, such action is required under applicable law or any Company recoupment or “clawback” policy.
IN WITNESS WHEREOF, the Company and the Participant have executed this Performance Share Unit Agreement as of the date first set forth above.
| NI HOLDINGS, INC. | [NAME OF PARTICIPANT] |
| By: | |
| Name: | |
| Title: |
Exhibit 31.1
CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Michael J. Alexander, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of NI Holdings, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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May 5, 2021 |
/s/ Michael J. Alexander |
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Michael J. Alexander |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Exhibit 31.2
CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Brian R. Doom, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of NI Holdings, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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May 5, 2021 |
/s/ Brian R. Doom |
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Brian R. Doom |
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Chief Financial Officer |
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(Principal Financial Officer) |
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Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of NI Holdings, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Michael J. Alexander, President and Chief Executive Officer, and Brian R. Doom, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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May 5, 2021 |
/s/ Michael J. Alexander |
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Michael J. Alexander |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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|
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May 5, 2021 |
/s/ Brian R. Doom |
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Brian R. Doom |
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Chief Financial Officer |
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(Principal Financial Officer) |
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