UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K |
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021 or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____
Commission file number001-37973 |
NI HOLDINGS, INC. |
(Exact name of registrant as specified in its charter) |
NORTH DAKOTA | 81-2683619 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
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1101 First Avenue North Fargo, North Dakota | 58102 (Zip Code) | |
(Address of principal executive offices) |
(701) 298-4200
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |
Common Stock, $0.01 par value per share | NODK | Nasdaq Capital Market | |
Securities registered pursuant to Section 12(g) of |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes No☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes No☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes No☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of the Securities Act) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes No☐
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.☐
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
| ☐ |
| Accelerated filer | ☒ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by checkmark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issues its audit report. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).☐ Yes No☒
Based on the closing sales price of the Class A common stock on NASDAQ on June 30, 2021, the last business day of the Registrant’s second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $160 million. All executive officers and directors of the Registrant, and all shareholders holding more than 10% of the Registrant’s outstanding voting stock (other than institutional investors, such as registered investment companies, eligible to file beneficial ownership reports on Schedule 13G), have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the Registrant.
The number of the Registrant’s common shares outstanding on March 7, 2018February 28, 2022 was 22,352,844.21,196,523. No preferred shares are issued or outstanding.
Documents incorporated by Reference
Portions of the definitive proxy statement relating to the annual meeting of shareholders to be held May 22, 201824, 2022 are incorporated by reference into Part III of this report.
Page
Page | ||
1 | ||
2 | ||
Item 1.Business | 2 | |
Risk Factors | 18 | |
Unresolved Staff Comments | 27 | |
Item 2.Properties | 27 | |
Legal Proceedings | 27 | |
Mine Safety Disclosures | 27 | |
28 | ||
Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity | 28 | |
Item 6.[Reserved] | 31 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 32 | |
Quantitative and Qualitative | 50 | |
Financial Statements and Supplementary Data | 52 | |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 99 | |
Controls and Procedures | 99 | |
Other Information | 99 | |
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 99 | |
100 | ||
Directors, Executive Officers and Corporate Governance | 100 | |
Executive Compensation | 100 | |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder | 100 | |
Certain Relationships and Related Transactions, and Director Independence | 100 | |
Principal | 100 | |
101 | ||
Item 15.Exhibits and Financial Statement Schedules | 101 | |
Form 10-K Summary | 103 | |
Schedule I – Condensed financial information of registrant – NI Holdings, Inc. | 104 |
Unless the context otherwise requires, as used in this annual report on Form 10-K:
This documentreport contains, and management may make, certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Words such as “may”, “will”, “should”, “likely”, “anticipates”, “expects”, “intends”, “plans”, “projects”, “believes”, “views”, “estimates”, and similar expressions are used to identify these forward-looking statements. These statements include, among other things, the Company’s statements about:
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our anticipated operating and financial performance, business plans, and prospects;
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strategic reviews, capital allocation objectives, dividends, and share repurchases;
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plans for and prospects of acquisitions, dispositions, and other business development activities, and our ability to successfully capitalize on these opportunities;
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the impact of COVID-19 or a future pandemic and related economic conditions, including the potential impact on the Company's investments;
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our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our agent network;
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cyclical changes in the insurance industry, competition, and innovation and emerging technologies;
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expectations for impact of or changes to existing or new government regulations or laws;
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our ability to anticipate and respond to macroeconomic, geopolitical, health and industry trends, pandemics, acts of war, and other large-scale crises;
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developments in general economic conditions, domestic and global financial markets, interest rate, unemployment, or inflation, that could affect the performance of our insurance operations and/or investment portfolio; and
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our ability to effectively manage future growth, including additional necessary capital, systems, and personnel.
Given their nature, we cannot assure that any outcome expressed in these or other forward-looking statements which canwill be identified by the use of such words as “estimate”, “project”, “believe”, “could”, “may”, “intend”, “anticipate”, “plan”, “seek”, “expect”realized in whole or in part. Actual outcomes may vary materially from past results and similar expressions.those anticipated, estimated, implied, or projected. These forward-looking statements include:
The forward-looking statements are subject to numerousmay be affected by underlying assumptions that may prove inaccurate or incomplete, or by known or unknown risks and uncertainties, including among other things,those described in this section and in the factors discussed under the headingPart I, Item 1A., “Risk Factors” thatsection in this Form 10-K. The occurrence of any of the risks identified in the Part I, Item 1A., “Risk Factors” section in this Form 10-K, or other risks currently unknown, could affect the actual outcomehave a material adverse effect on our business, financial condition or results of future events.
All of these factors are difficultoperations, or we may be required to increase our accruals for contingencies. It is not possible to predict and manyor identify all such factors. Consequently, you should not consider such discussion to be a complete discussion of all potential risks or uncertainties.
Therefore, you are beyond our control. These important factors include those discussed under “Risk Factors” and those listed below:cautioned not to unduly rely on forward-looking statements, which speak only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities law. You are advised, however, to consult any further disclosures we make on related subjects.
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.
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Item 1. Business
All dollar amounts, except per share amounts, are in thousands.
Overview
NI Holdings, Inc. (“NI Holdings”, “the Company”, “we”, “us”, and “our”) 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 (“Nodak Mutual”) from thea mutual to stock form of organization and the creation of a mutual holding company. The conversion was consummatedcompleted on March 13, 2017. Immediately following the conversion, all of the outstanding shares of common stock of Nodak StockInsurance Company (“Nodak Insurance”, the successor to Nodak Mutual Insurance Company) were issued to Nodak Mutual Group, Inc., which then contributed the shares to NI Holdings in exchange for 55% of the outstanding shares of common stock of NI Holdings. Nodak StockInsurance then became a wholly ownedwholly-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 StockInsurance and its existing subsidiaries. Concurrent with the conversion, on March 13, 2017, the Company completed an initial public offering (“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 the underwriting discounts and offering expenses. The newly issued shares of NI Holdings were available for public trading on March 16, 2017.
These Consolidated Financial Statements include the financial position and results of operations of NI Holdings and seven other entities:
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Nodak Insurance – a wholly-owned subsidiary of NI Holdings;
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Nodak Agency, Inc. (“Nodak Agency”) – a wholly-owned subsidiary of Nodak Insurance;
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American West Insurance Company (“American West”) – a wholly-owned subsidiary of Nodak Insurance;
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Primero Insurance Company (“Primero”) – an indirect wholly-owned subsidiary of Nodak Insurance;
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Battle Creek Mutual Insurance Company (“Battle Creek”) – an affiliated company of Nodak Insurance;
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Direct Auto Insurance Company (“Direct Auto”) – a wholly-owned subsidiary of NI Holdings; and
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Westminster American Insurance Company (“Westminster”) – a wholly-owned subsidiary of NI Holdings.
A chart of the corporate structure as of December 31, 2021, and a more complete description of each of the NI Holdings subsidiaries, is included below.
NI HOLDINGS, INC. ORGANIZATIONAL CHART | ||||||||||||||||||||||||||||
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Nodak Mutual Group, Inc. | ||||||||||||||||||||||||||||
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≥ 55% | ||||||||||||||||||||||||||||
ownership | ||||||||||||||||||||||||||||
NI Holdings, Inc. | ||||||||||||||||||||||||||||
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100% | 100% | 100% | ||||||||||||||||||||||||||
ownership | ownership | ownership | ||||||||||||||||||||||||||
Direct Auto Insurance Company | Nodak Insurance Company | Westminster American Insurance Company | ||||||||||||||||||||||||||
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100% | 100% | 100% | ||||||||||||||||||||||||||
ownership | ownership | Affiliation | ownership | |||||||||||||||||||||||||
Nodak Agency, Inc. | American West Insurance Company | Battle Creek Mutual Insurance Company | Tri-State, Ltd | |||||||||||||||||||||||||
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100% | ||||||||||||||||||||||||||||
ownership | ||||||||||||||||||||||||||||
Primero Insurance Company | ||||||||||||||||||||||||||||
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The executive offices of NI Holdings and Nodak Insurance are located at 1101 First Avenue North, Fargo, North Dakota 58102, and the main office phone number is 701-298-4200. NI Holdings’ website address is www.niholdingsinc.com. The Company makes available, free of charge on its website, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after it electronically files such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). Information contained on such website is not incorporated by reference into this Annual Report on Form 10-K, and such information should not be considered to be part of this Annual Report on Form 10-K.
Subsidiary and Affiliate Companies
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 Company, Inc. (“AM Best”) on a group basis and hold a single combined financial strength rating, long-term issuer credit rating, and financial size category.
In connection with the pooling arrangement, the quota share reinsurance agreement that had been in place since 2011 between Battle Creek and Nodak Insurance was cancelled. As a result, a portion of the Company’s underwriting results are now allocated to the policyholders of Battle Creek rather than the shareholders of NI Holdings.
For the years ended December 31, 2021 and 2020, the pooling share percentages by insurance company were:
Pool Percentage | ||||
Nodak Insurance Company | 66.0 | % | ||
American West Insurance Company | 7.0 | % | ||
Primero Insurance Company | 3.0 | % | ||
Battle Creek Mutual Insurance Company | 2.0 | % | ||
Direct Auto Insurance Company | 13.0 | % | ||
Westminster American Insurance Company | 9.0 | % | ||
Total | 100.0 | % |
Nodak Insurance Company
Nodak Insurance is the largest domestic property and casualty insurance company in North Dakota, offering private passenger auto, homeowners, farmowners, commercial multi-peril, crop hail, and Federal multi-peril crop insurance coverages through its captive agents in the state.
Nodak Insurance was formed in 1946 to offer property and casualty insurance to members of the North Dakota Farm Bureau.Bureau (“NDFB”), and benefits from a strong marketing affiliation with that organization. Nodak Insurance’s bylaws provide that a person must be a member and remain a member of the North Dakota Farm BureauNDFB in order to become and remain a policyholder of Nodak Insurance. SuchNodak Insurance’s bylaws also require that four members of the Board of Directors of Nodak Insurance must be members of the Board of Directors of the North Dakota Farm Bureau Federation (“North Dakota Farm Bureau”).NDFB. Similarly, one-third of the members of the Board of Directors of Nodak Mutual Group must be persons designated by the North Dakota Farm Bureau.NDFB.
The North Dakota Farm BureauNDFB has granted Nodak Insurance a nonexclusive, nontransferable license to use the name “Farm Bureau” and the “FB” logo and associated trademarks to market Nodak Insurance products, including insurance products. Nodak Insurance has held this license since the insurance company’s inception in 1946, and the current version of the license agreement has been in place since 2002. The current license agreement between the North Dakota Farm BureauNDFB and Nodak Insurance renewed on October 1, 2017,2021, with an expiration date of September 30, 2018.2022. The agreement has historically been renewed annually by a vote of the Nodak Insurance Board of Directors. Under the current license agreement, Nodak Insurance is required to pay to the North Dakota Farm BureauNDFB an annual royalty payment equal to 1.3% of Nodak Insurance’s written premiums (excluding multi-peril crop insurance premiums), subject to a minimum annual payment of $900 and a maximum annual payment of $1,303.$1,444. The maximum royalty payment is adjusted annually based upon the June index month for the Consumer Price Index.
Nodak Insurance’s subsidiaries include American West Insurance Company (“American West”) and Primero Insurance Company (“Primero”). Battle Creek Mutual Insurance Company is an affiliate of Nodak Insurance. A chart of the corporate structure and a more complete description of each of the Nodak Insurance subsidiaries is included below. Nodak Insurance and Battle Creek have been assigned “A” ratings by A.M. Best Company, Inc. (“A.M. Best”), which is the third highest out of 15 possible ratings. American West is rated A- and Primero is unrated. The consolidated financial statements presented herein reflect the financial position and results of operations of NI Holdings, Nodak Insurance, American West, Battle Creek, and Primero. Each of the four insurance companies is subject to examination and comprehensive regulation by the insurance department of its state of domicile.
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NI HOLDINGS, INC. ORGANIZATIONAL CHART | ||||||||||||
Nodak Mutual Group, Inc. | ||||||||||||
≥ 55% | ||||||||||||
ownership | ||||||||||||
NI Holdings, Inc. | ||||||||||||
100% | ||||||||||||
ownership | ||||||||||||
Nodak 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 | ||||||||||||
Nodak Insurance writes multi-peril crop, crop hail, private passenger automobile, farmowners, homeowners, and commercial property and liability policies in North Dakota. Only members of the North Dakota Farm Bureau can purchase insurance coverage from Nodak Insurance. As of December 31, 2017,2021, Nodak Insurance distributed its insurance products through 72 exclusive agents appointed by Nodak Insurance.
The following tables provide selected amounts from the Company’s consolidated statements of operations and balance sheets. Additional informationNodak Agency, Inc.
Nodak Agency is presented throughout this annual report.
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Direct premiums written | $ | 195,238 | $ | 180,870 | $ | 172,775 | ||||||
Net premiums earned | 179,464 | 152,756 | 139,473 | |||||||||
Net income after non-controlling interest | 15,991 | 4,551 | 17,456 |
December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Total assets | $ | 376,988 | $ | 278,703 | $ | 258,624 | ||||||
Equity | 255,573 | 153,418 | 149,918 |
an inactive shell corporation.
The executive offices of NI Holdings and Nodak Insurance are located at 1101 1st Avenue North, Fargo, North Dakota 58102, and the main office phone numberTri-State, Ltd
Tri-State, Ltd is 701-298-4200. NI Holdings’ website address iswww.niholdingsinc.com. Information contained on such website is not incorporated by reference into this Annual Report on Form 10-K, and such information should not be considered to be part of this Annual Report on Form 10-K.an inactive shell corporation.
American West Insurance Company (“American West”)
American West is a property and casualty insurance company licensed to write insurance in eight states in the Midwest and Western regions of the United States, but currently issuesStates. American West began writing policies in South Dakota, Minnesota,2002 and North Dakota. American West currently issues multi-peril crop, crop hail,
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farmowners, private passengerprimarily writes personal auto, homeowners, and homeowners insurance primarilyfarm coverages in South Dakota. American West distributesalso writes personal auto coverage in North Dakota, as well as crop hail and Federal multi-peril crop insurance coverages in Minnesota and South Dakota. As of December 31, 2021, American West distributed its products through independent agents located in approximately 100122 offices.
Primero Insurance Company
Primero is a wholly-owned subsidiary of Tri-State, Ltd. Tri-State, Ltd. is an inactive shell corporation 100% owned by Nodak Insurance. Primero is a property and casualty insurance company writing non-standard automobile coverage in the states of Nevada, Arizona, North Dakota, and South Dakota. Primero was acquired by Nodak Insurance in 2014. As of December 31, 2021, Primero distributed its policies through independent agents in 341 contracted agencies in those four states.
Battle Creek Mutual Insurance Company (“Battle Creek”)
Battle Creek issues private passenger automobile,is a property and casualty insurance company writing personal auto, homeowners, and farmowners policiesfarm coverages solely in the state of Nebraska. As of December 31, 2021, Battle Creek distributesdistributed its policies through independent agents located in approximately 290280 offices. 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. Under a
Effective January 1, 2020, all of our insurance company subsidiaries entered into an intercompany reinsurance pooling agreement. In conjunction with this agreement, the previous 100% quota-share reinsurance agreement between Battle Creek cedes 100% of its net premiums to Nodak Insurance and Nodak Insurance fully reinsures allwas terminated on a cut-off basis as of Battle Creek’s risk under its insurance policies. In connection with entering into the affiliation agreement,January 1, 2020. Upon termination, Nodak Insurance purchased atransferred to Battle Creek all liabilities related to outstanding loss and loss adjustment expense reserves and all liabilities related to the adjusted unearned premium reserve. In exchange, an intercompany cash payment was made to compensate Battle Creek for the transfer of these liabilities.
The $3.0 million surplus note originally issued by Battle Creek. The surplus noteCreek and purchased by Nodak Insurance in connection with their affiliation agreement remains in place. It bears interest at an annual rate of 1.0% and matures on December 30, 2040. Battle Creek must obtain the prior approval of the Nebraska Director of Insurance before making any payment of interest or principal on the surplus note.
Pursuant to the affiliation agreement, so long as the surplus note remains outstanding, or the 100% quota-share reinsurance is in effect, Nodak Insurance is entitled to appoint two-thirds of the Board of Directors of Battle Creek. The affiliation agreement can be terminated by mutual written agreement of Battle Creek and Nodak Insurance or by either party if there is a material breach of the agreement by the other party and such breach is not cured within 15 days after written notice of such breach is given by the terminating party to the other party. If Battle Creek terminated the quota-share reinsurance agreement, it would not have sufficient capital to continue to operate.
PrimeroDirect Auto Insurance Company (“Primero”)
Primero writesDirect Auto is a property and casualty insurance company licensed in Illinois. Direct Auto began writing non-standard automobile insurancecoverage in Nevada, Arizona, North Dakota,2007, and South Dakota. Primero was acquired by Nodak Insurance in 2014. Primero distributesNI Holdings on August 31, 2018 via a stock purchase agreement. As of December 31, 2021, Direct Auto distributed its policies through independent agents located in approximately 325139 offices, concentrated primarily in the Chicago area.
Westminster American Insurance Company
Westminster is a property and casualty insurance company licensed in seventeen states and the District of Columbia. Westminster is headquartered in Owings Mills, Maryland and underwrites commercial multi-peril insurance in the states of Delaware, Georgia, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Virginia, West Virginia, and the District of Columbia. Westminster was acquired by NI Holdings on January 1, 2020 via a stock purchase agreement. As of December 31, 2021, Westminster distributed its policies through independent agents in 98 contracted agencies in those four states.nine states and the District of Columbia. The financial results of Westminster have been included in the Consolidated Financial Statements and the Company’s commercial segment following the acquisition date. See Part II, Item 8, Note 3 “Acquisition of Westminster American Insurance Company”.
General Information
Nodak Insurance markets and distributes its policies through its captive agents, while all other companies utilize the independent agent distribution channel. Additionally, all of the Company’s insurance subsidiary and affiliate companies are rated “A” Excellent by AM Best.
The same executive management team provides oversight and strategic direction for the entire organization. Nodak Insurance provides common product oversight, pricing practices, and underwriting standards, as well as underwriting and claims administration, to itself, American West, and Battle Creek. Primero, Direct Auto, and Westminster personnel manage the day-to-day operations of their respective companies.
The Consolidated Financial Statements of NI Holdings presented herein include the financial position and results of operations of NI Holdings, Direct Auto, Westminster (after the acquisition date of January 1, 2020), and Nodak Insurance, including Nodak Insurance’s subsidiaries American West and Primero, and its affiliate Battle Creek. Each of the six insurance companies is subject to examination and comprehensive regulation by the insurance department of its state of domicile.
Market Overview
We market our property and casualtypersonal lines products in the upper Midwest states of North Dakota, South Dakota, Nebraska, and Minnesota. We also offer non-standard auto insurance in the states of Nevada, Arizona, North Dakota, South Dakota, and Illinois. We offer commercial multi-peril insurance in the states of New Jersey, Maryland, Pennsylvania, Virginia, Georgia, North Carolina, Delaware, South Dakota.Carolina, and West Virginia, North Dakota, South Dakota, and the District of Columbia. The following chart depictsshows our direct premiums written forduring the last two years and our relative market share within each of our key states during 2016.
2017 | 2016 | |||||||||||||
Direct Premiums Written | Direct Premiums Written | Market Size | Rank in State | |||||||||||
North Dakota | $ | 138,950 | $ | 135,133 | $ | 2,400,000 | 4th | |||||||
Nebraska | 33,358 | 26,302 | 4,500,000 | 36th | ||||||||||
South Dakota | 8,227 | 5,814 | 2,400,000 | 54th | ||||||||||
Minnesota | 5,945 | 5,076 | 11,200,000 | 108th | ||||||||||
Nevada | 6,390 | 7,086 | (1) | |||||||||||
Arizona | 2,368 | 1,459 | (1) | |||||||||||
Total direct premiums written | $ | 195,238 | $ | 180,870 | ||||||||||
(1) Our market share is not material in Nevada or Arizona, so market size and rank are not presented. |
the year ended December 31, 2020:
Year Ended December 31, 2021 | Year Ended December 31, 2020 | |||||||||||
Direct Premiums Written | Direct Premiums Written | Market Size | Rank in State | |||||||||
North Dakota | $ | 148,119 | $ | 143,516 | $ | 2,651,000 | 4th | |||||
Illinois | 51,350 | 43,004 | 27,432,000 | 74th | ||||||||
Nebraska | 43,247 | 41,843 | 5,427,000 | 31st | ||||||||
South Dakota | 23,047 | 20,790 | 2,609,000 | 33rd | ||||||||
Maryland | 13,548 | 10,522 | 12,968,000 | 83rd | ||||||||
Georgia | 13,085 | 5,836 | 24,002,000 | 152nd | ||||||||
New Jersey | 8,294 | 11,065 | 22,872,000 | 121st | ||||||||
Pennsylvania | 8,235 | 9,131 | 26,422,000 | 155th | ||||||||
Nevada | 8,132 | 8,350 | 6,395,000 | 82nd | ||||||||
North Carolina | 6,641 | 3,123 | 18,073,000 | 163rd | ||||||||
Virginia | 6,262 | 5,955 | 15,426,000 | 125th | ||||||||
District of Columbia | 4,055 | 3,810 | 2,127,000 | 59th | ||||||||
Minnesota | 3,350 | 3,624 | 12,804,000 | 133rd | ||||||||
South Carolina | 2,783 | 972 | 11,134,000 | 199th | ||||||||
Delaware | 1,502 | 1,653 | 2,918,000 | 99th | ||||||||
Arizona | 475 | 899 | 12,825,000 | 211th | ||||||||
West Virginia | 90 | 94 | 2,994,000 | 173rd | ||||||||
Total direct premiums written | $ | 342,215 | $ | 314,187 |
Market size information is not yet available for the year ended December 31, 2021.
Organic Growth Strategy
Given our market presence in each of our key states, weWe believe we have many opportunities to increase business inorganically grow our primary markets organically.business. Strategies we employ to achieve this growth include:
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continued emphasis on our relationship with the NDFB, a key advocacy group for agricultural and rural interests which enjoys a high profile and favorable reputation throughout North Dakota;
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using the cost advantage created by our low expense ratio compared to peers (32.1% expense ratio in 2021 compared to an average expense ratio of our peers of 34.1% in 2020) to selectively expand market share;
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leveraging our AM Best financial strength rating and financial size category to strategically grow organically include:Westminster’s commercial business;
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selective expansion of our non-standard auto business in Illinois and our other core upper Midwest markets;
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excellent claims service for all insureds; and
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selective expansion of our insurance products in states where we currently operate, as well as those states where we hold insurance licenses.
External Growth Strategy
We acquired Direct Auto in 2018 with capital raised through our IPO. The acquisition was the initial step in executing our growth strategy developed at the time of the IPO.
We also acquired Westminster in January 2020 with capital raised through our IPO. This acquisition expanded our commercial insurance business, geographically diversified our spread of insurance risks, and provided additional expense efficiencies.
Prior to the IPO, we successfully acquired Primero in 2014, and acquired control of Battle Creek in 2011.2011, and acquired American West was acquired in 2001. With the additional capital
Going forward, we raised through our initial public offering, we desireplan to make selectiveconsider other strategic investments and acquisitions that complementcan enhance our strategy. Areasbusinesses and achieve appropriate risk-adjusted returns over time.
Corporate Capital Strategy
Our philosophy is to deploy capital in a manner that provides long-term protection for our policyholders and creates long-term value for our shareholders. This philosophy is supported by a number of current interest include acquisitionunderlying strategies implemented across the organization that are focused on preservation of capital, including:
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prioritizing the use of data and modeling tools to help estimate the frequency and severity of risks within our insurance portfolio;
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maintaining a commercial writerconservatively managed investment portfolio that supports our insurance operations under a wide range of operating and geographic expansionmarket conditions;
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ensuring our reinsurance program is designed to provide sufficient protection against material insurance exposures including, but not limited to, catastrophes caused by weather-related events; and
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relying upon our Enterprise Risk Management framework to identify, quantify, and manage a broad range of existing product lines. The acquisitionrisks across the organization.
We view our capital position to consist of three layers, each of which has a commercial writer would help us to better balance our book of business among personal lines insurance, multi-peril crop insurance,specific size and commercial lines insurance where we currently write only a limited amount of business. Selective geographic expansion would help to diversify our weather-related risks and assist us in maintaining competitive expense levels.purpose:
•
The completionfirst layer of our initial public offering suppliedcapital, which we refer to as “regulatory capital”, is the additionalamount of capital needed to support substantial increasessatisfy state insurance regulatory requirements while supporting our growth objectives. This capital is held by each of our insurance company subsidiaries.
•
The second layer of capital is considered “contingency capital”. While our regulatory capital is, by definition, a cushion for absorbing financial consequences of adverse events, such as loss reserve development, litigation, weather catastrophes, and investment market corrections, we view that as a base and hold additional capital for even more extreme operating conditions. This capital is generally also held by each of our insurance company subsidiaries.
•
The third layer of capital is classified as “excess capital” and represents the excess of the sum of the first two layers. This capital is available for deployment by NI Holdings in premium volume, whichconjunction with our excess capital deployment priorities.
Our excess capital deployment priorities are to (1) invest in existing businesses where we expectsee opportunities for profitable growth, (2) make strategic investments and acquisitions that enhance our businesses and achieve appropriate risk-adjusted returns over time, and (3) return capital to result from the implementation of bothshareholders through share repurchases or shareholder dividends.
Insurance Products by Segment
The Company’s consolidated financial results include our organicPrivate Passenger Auto, Non-Standard Auto, Home and external growth strategies.
SegmentFarm, Commercial, Crop, and All Other reporting segments. Information
See regarding products and services offered in each segment is included below. Additionally, revenues, underwriting results, and identifiable assets and liabilities for each segment are shown in Part II, Item 8, Note 20 to the Consolidated“Segment Information”. The financial performance of each segment is discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Statements for the Company’s segment disclosures.Condition and Results of Operations”.
Products and Services
Private Passenger Auto
Nodak Insurance, Battle Creek, and American West each write private passenger auto insurance to provide protection against liability for bodily injury and property damage arising from automobile accidents and protection against loss from damage to automobiles owned by the insured. Private passenger auto accounted for $60,747 or 31.1%$77,277 (22.6%) of direct premiums written by the Company on a consolidated basis during 2017.2021.
Non-standard Auto
Primero and Direct Auto write non-standard auto insurance with a focus on minimum-limit auto liability coverage. Non-standard auto insurance accounted for $61,374 (17.9%) of direct premiums written by the Company on a consolidated basis during 2021.
Home and Farm
Nodak Insurance, Battle Creek, and American West each write homeowners and farmowners policies to provide coverage for damage to buildings, equipment, and contents for a variety of perils, including fire, lightning, wind, hail, and theft. These policies also cover liability arising from injury to other persons or their property while on the insured’s premises. Home and farm accounted for $66,615 or 34.1%$85,200 (24.9%) of direct premiums written by the Company on a consolidated basis during 2017.2021.
Non-standard Auto
Primero writes non-standard auto insurance with a focus on minimum-limit auto liability coverage. Primero’s direct premiums written on non-standard auto insurance during 2017 were $10,835, which accounted for 5.6% of the direct premiums written by the Company on a consolidated basis in 2017.
Crop Insurance
Crop hail and multi-peril crop insurance policies are also offered by Nodak Insurance, American West, and Battle Creek. Multi-peril crop insurance is a federal program that protects against crop yield losses from all types of natural causes including drought, excessive moisture, freeze, and disease. Crop hail insurance is a private insurance product designed to provide protection
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against losses to farmer’s crops due primarily to hail damage. Collectively, crop insurance accounted for $49,012 or 25.1%$43,540 (12.7%) of direct premiums written by the Company on a consolidated basis during 2021.
Commercial
Nodak Insurance, American West, and Westminster write commercial multi-peril policies. Collectively, commercial insurance accounted for $69,753 (20.4%) of the direct premiums written by the Company on a consolidated basis during 2017.2021.
All Other
In addition to the products described above, Nodak Insurance and American West write commercial multi-peril policies and excess liability coverages. Collectively, these other coverages accounted for $8,029, or 4.1%,$5,071 (1.5%) of the direct premiums written by the Company on a consolidated basis during 2017. Also in this2021. This segment isalso includes an assumed reinsurance blockbook of business, with $3,959$6,076 of assumed premiums written on a consolidated basis during 2017.2021.
Crop Insurance
Crop insurance is purchased by agricultural producers, including farmers, ranchers, and others to protect themselves against either the loss of their crops (yield) due to natural disasters, such as hail, drought, and floods, or the loss of revenue due to declines in the prices of agricultural products. The two general categories of crop insurance are generally referred to as “crop-yield insurance” and “crop-revenue insurance”. Crop-yield insurance protects against a reduction in the yield per acre from the historical average yield in a specified area, such as a county or National Oceanic and Atmospheric Administration weather grid, while crop-revenue insurance provides protection against declines in the price of the particular crop. Most of the multi-peril crop insurance policies written today combine both yield and revenue protection, with the revenue component providing the policyholder with the option to calculate price-based losses on the higher of the prevailing price when the crop is planted or the price at harvest.
Beginning in 1980, the U.S. Congress expanded the federal crop insurance program to cover more crops and regions of the country. More importantly, Congress permitted private sector insurers to market and administer federal insurance policies in exchange for an opportunity to earn a profit while bearing a portion of the insurance risk. Congress also authorized a premium subsidy for the farmers and ranchers. As a result, there was a rapid increase in the acres insured from approximately 26 million acres in 1980 to 100 million acres in 1990. The Federal Crop Insurance Reform Act of 1994 made participation in the crop insurance program mandatory for farmers to be eligible to participate in other government support programs and provided a minimum level of free catastrophic risk coverage for insured and noninsured crops.
In 2017, the federal crop insurance program covered approximately 23.2 million acres in North Dakota, 17.4 million acres in South Dakota, 17.6 million acres in Minnesota, and 311.6 million acres nationwide. In 2017, Nodak Insurance multi-peril crop insurance policies covered approximately 1.9 million acres in North Dakota. During the same period, American West crop insurance policies covered approximately 13,000 acres in South Dakota and approximately 145,000 acres in Minnesota. Nodak Insurance, through its Battle Creek affiliate, writes a very small amount of multi-peril crop insurance in Nebraska.
American Farm Bureau Insurance Services (“AFBIS”) underwrites all of the multi-peril crop and crop hail insurance policies written by Nodak Insurance, American West, and Battle Creek, as well as several other farm bureau-affiliatedstate Farm Bureau-affiliated insurers. AFBIS also processes and administers all claims made by policyholders under such policies. We reimburse AFBIS for its actual loss adjustment expense with respect to the policies issued by us and pay AFBIS a percentage of the premiums we receivedreceive with respect to such policies. Nodak Insurance is a shareholder of AFBIS, along withas is each of the other insurers for whom AFBIS provides such services. AFBIS targets a three percent return on capital and pays all remaining profits to Nodak Insurance and the other shareholders of AFBIS.its shareholders. Nodak Insurance did not receive any material distributions from AFBIS during the years ended December 31, 2014 through 2017.2021, 2020, or 2019.
Marketing and Distribution
Our marketing philosophy is to sell profitable business in our core states, using a focused, cost-effective distribution system. Nodak Insurance distributes its insurance products through exclusive agents in North Dakota, while American West, Battle Creek, Primero, Direct Auto, and PrimeroWestminster rely on independent producers.agents. We view these independent producersagents as important partners because they are in a position to recommend either our insurance products or those of a competitor to their customers. We consider our relationships with these producers to be good.
We review our producersagents with respect to both premium volume and profitability. Our producerscaptive agents for Nodak Insurance are monitored primarilyhired and trained by our three-person marketingsales staff who also have principal responsibility for recruiting and training exclusive agents in North Dakota, andwhile the independent producers inagents for our other states.companies are appointed by the underwriting or marketing staff for each respective company. We hold annual seminars for producersregular training sessions when we introduce new products or product changes, and conduct training programswe identify specific topics that provide both technical training aboutmay help our products and sales training to help themagents more effectively market our products.
For the year ended December 31, 2017,2021, no individual produceragent was responsible for more than 5% of the Company’s direct premiums written by our insurance companies.
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written.
ProducersAgents are compensated through a fixed base commission structure. Agents receive commission as a percentage of premiums (generally 5% to 15%) as their primary compensation from us. The Risk Management Agency of the United States Department of Agriculture (“RMA”) establishes the maximum commission that can be paid to producersagents with respect to crop insurance policies. Battle Creek and American West pay profit sharing commissions to their agencies based on various annual agency premium thresholds and the difference between the agency’s loss ratio and the loss ratio goal established by the insurance company. The commission is paid with respect to all property and casualty (non-crop) business earned within the calendar year. Nodak Insurance pays a profit sharingprofit-sharing commission to its agents only with respect to farmowners business originated by such agents. Westminster also pays profit-sharing commissions to its agencies based on annual premium thresholds and profitability.
Our marketing efforts are further supported by our claims philosophy, which is designed to provide prompt and efficient service and claims processing, resulting in a positive experience for producersagents and policyholders. We believe that these positive experiences result incontribute to achieving higher policyholder retention and new business opportunities when communicated by producers and policyholders to potential customers.growth over time. While we rely on our independent agents for distribution and customer support, underwriting and claim handling responsibilities are retained by us. Many of our agents have had direct relationships with us for a number of years.
Underwriting, Risk Assessment and Pricing
OurWe strive to be disciplined in our pricing by pursuing rate increases to maintain or improve our underwriting philosophy is aimed at consistently generating profits through sound risk selectionprofitability while still being able to attract and retain customers. We utilize pricing discipline. Throughreviews that we believe will help us price risks more accurately, improve policyholder retention, and support the production of profitable new business. These pricing reviews involve evaluating our management and underwriting staff, we regularly establish rates and rating classifications for our insureds based on lossclaims experience and loss adjustment expense (“LAE”) experience we have developed overtrends on a periodic basis to identify changes in the years.frequency and severity of our claims. We have various rating classifications based on location, typethen consider whether our premium rates are adequate relative to the level of business, and otherunderwriting risk factors.as well as the sufficiency of our underwriting guidelines.
The nature of our business requires that we remain sensitive to the marketplace and the pricing strategies of our competitors. Using the market information as our background,a reference point, we normallytypically set our prices based on our estimated future costs. From time to time, we may reduce our discounts or apply a premium surcharge to achieve an appropriate return. Pricing flexibility allows us to provide a fair rate commensurate with the assumed risk. If our pricing strategy cannot yield sufficient premium to cover our costs on a particular type of risk, we may determine not to underwrite that risk. It is our philosophy not to sacrifice profitability for premium growth.
Our competitive strategy in underwriting is to provide very high qualityhigh-quality service to our producersagents and insureds by responding quickly and effectively to information requests and policy submissions. We maintain information on all aspects of our business, which is regularly reviewed to determine both agency and policyholder profitability. Specific information regarding individual insureds is monitored to assist us in making decisions about policy renewals or modifications.
Our Nodak Insurance underwriting staff includes 19 employees with approximately 270 combined years of experience in property and casualty underwriting. They are located primarily at our home office in Fargo, North Dakota, which underwritesas well as our office in Battle Creek, Nebraska, and underwrite coverage issued by Nodak Insurance, American West and Battle Creek, includes 22 employeesCreek.
Primero and Direct Auto employ 8 underwriters in connection with over 360 combined yearstheir non-standard auto insurance businesses. Westminster has a staff of experience12 in propertythe underwriting area consisting of a Vice President, underwriters, and casualty underwriting. Primero employs an additional 3assistant underwriters in connection with its non-standard autocommercial insurance business. All of the underwriting for our crop insurance is underwritten by AFBIS, as described in an earlier section.above.
We strive to be disciplined in our pricing by pursuing rate increases to maintain or improve our underwriting profitability while still being able to attract and retain customers. We utilize pricing reviews that we believe will help us price risks more accurately, improve account retention, and support the production of profitable new business. Our pricing reviews involve evaluating our claims experience and loss trends on a periodic basis to identify changes in the frequency and severity of our claims. We then consider whether our premium rates are adequate relative to the level of underwriting risk as well as the sufficiency of our underwriting guidelines.
Claims and LitigationEnterprise Risk Management
Our claims management philosophy involves:
Our claims team supports our underwriting strategy by workingCompany is subject to providesignificant risks, including the normal risks of a timely, good faith claims handling response to our policyholders. Claims excellence is achieved by timely investigation and handling of claims, settlement of meritorious claims for equitable amounts, maintenance of adequate case reserves, and control of claims loss adjustment expenses.
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Claims on insurance policies are received directly from the insured or through our producers. Our claims department supports our producer relationship strategy by working to provide a consistently responsive level of claim service to our policyholders.
Our claims staff located in Fargo, North Dakota is comprised of 44 employees with over 760 years of combined experience in processing property and casualty insurance claims. Primerocompany. These risks are discussed in more detail in Part I, Item 1A, “Risk Factors”.
We consider an enterprise-wide risk management program to be an integral part of managing our business and a key element in our approach to corporate governance. Our Enterprise Risk Management Committee (the “ERMC”) is responsible for the alignment of operational risk management strategies as the coordination point for enterprise-level direction setting with regard to risk management issues. The multi-disciplinary ERMC regularly monitors risk reports and metrics regarding a variety of continuing and emerging risks that may adversely affect the Company, its policyholders, or other stakeholders. The Audit Committee of the Board of Directors oversees risk management and regularly receives reports from the ERMC.
Cybersecurity risk is an important and evolving focus for the Company. The increased sophistication and activities of unauthorized parties attempting to access our systems is an ever-present risk. Cybersecurity risks may also employs 12 claims personnel in connection with its non-standard auto insurance business. All claims made under our multi-peril crop and crop hail insurance policies are processed and administered by AFBIS.
Technologyarise from human error, fraud, or malice on the part of employees or third parties who have authorized access to the Company’s systems or information.
Our insurance operations rely on commercially available softwarecybersecurity strategy employs a variety of tactics to monitor and assess threat levels, remediate our exposures, and enhance our systems and applications security. The Company collaborates with a third-party cybersecurity advisor to provide the information managementperiodic penetration tests, system assessments, and recommendations based on industry best practices. The Company also requires monthly online security training to be completed by all employees. While we have experienced threats to our data and systems, platform that runs our accounting, policy underwritingto date, we have not experienced any known cyber-security breaches.
Reinsurance
We cede and issuance,assume certain premiums and claims processing functions. These systems permit uslosses to integrate the accounting and reporting functionsfrom various companies and associations under a variety of all of our insurance operations. We utilize offsite servers for our information systems with daily backup of data. We have adopted a disaster recovery plan, and other risk mitigation practices, tailored to meet our needs and geographic location.reinsurance agreements. We seek to invest continuouslylimit the maximum net loss that can arise from large risks or risks in new technologyconcentrated areas of exposure through use of these agreements, either on an automatic basis under general reinsurance contracts known as treaties or through facultative contracts on substantial individual risks.
Reinsurance contracts do not relieve us from our obligation to maximize our business opportunities while protecting our interestspolicyholders. 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 those of our clients.
Reinsurance
Reinsurance Ceded
We reinsure a portion of our exposure and pay toat the reinsurers a portion of the premiums received on all policies reinsured. Insurance policies written by us are reinsured with other insurance companies principally to:
Reinsurance does not legally discharge the insurance company issuing the policy from primary liability for the full amount due under the reinsured policies, even though the assuming reinsurer is obligated to reimburse the company issuing the policy to the extent of the coverage ceded.
A primary factorsame cost, as it has in the selectionpast. The Company may choose in the future to reevaluate the use of reinsurers from whom we purchase reinsurance is their financial strength. Our reinsurance arrangements are generally renegotiated annually. Forto increase or decrease the year ended December 31, 2017, NI Holdingsamounts of risk ceded to reinsurers $16,665 of written premiums, compared to $30,748 of written premiums for the year ended December 31, 2016 and $33,439 of written premiums for the year ended December 31, 2015. The decrease in premiums ceded in 2017 was primarily due to less sharing of multi-peril crop insurance premiums with the federal government and an increase to our catastrophe retention amount in the reinsurance program.
The chart below illustrates the reinsurance coverage under our excess of loss treaty for individual casualty risks:
Losses Incurred | Retained by Nodak Insurance | Ceded Under Reinsurance Treaty | ||||||
Up to $600 | 100.0 | % | 0.0 | % | ||||
$11,400 in excess of $600 | 0.0 | % | 100.0 | % |
The chart below illustrates the reinsurance coverage under our excess of loss treaty for individual property risks:
Losses Incurred | Retained by Nodak Insurance | Ceded Under Reinsurance Treaty | ||||||
Up to $500 | 100.0 | % | 0.0 | % | ||||
$19,500 in excess of $500 | 0.0 | % | 100.0 | % |
As a group, during the year ended December 31, 2017, Nodak Insurance, American West, and Battle Creek retained $10,000 of losses from catastrophic events and had reinsurance under various reinsurance agreements up to $74,600 in excess of their $10,000
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retained risk. For 2018, the catastrophe retention amount remained at $10,000. Prior to January 1, 2017, the group collectively retained the first $5,000 of weather related loss.
The insolvency or inability of any reinsurer to meet its obligations to us could have a material adverse effect on our results of operations or financial condition. NI Holdings’ reinsurance providers, the majority of whom are longstanding partners that understand our business, are all carefully selected with the help of our reinsurance brokers. We monitor the solvency of reinsurers through regular review of their financial statements and their A.M. Best ratings. All of our current reinsurance partners have at least an “A” rating from A.M. Best. According to A.M. Best, companies with a rating of “A-” or better “have an excellent ability to meet their ongoing obligations to policyholders.” We have experienced no significant difficulties collecting amounts due from reinsurers.
Reinsurance for multi-peril crop insurance is provided by the Federal Crop Insurance Corporation (“FCIC”). Insurers can assign each policy issued to either its “assigned risk” or “commercial” fund. The FCIC retains an increasing percentage of underwriting losses at successively higher loss ratios while ceding an increasing percentage of the premium at lower loss ratios. The commercial fund permits insurers to retain more of the underwriting gains and losses, while the assigned risk fund cedes up to 80% of the risk to the FCIC. The exact treatment of the commercial fund varies by state groups. In Group 1, which includes Illinois, Indiana, Iowa, Minnesota and Nebraska, the FCIC retains a larger share of the underwriting gains and a smaller portion of the underwriting losses when compared to all other states. Aggregate stop loss reinsurance is purchased for crop hail and multi-peril insurance. We purchase fifty percentage points of coverage above a 100% direct loss ratio for crop hail. We purchase forty-five percentage points of coverage for multi-peril crop above a 105% loss ratio after the FCIC reinsurance protection. This represents the worst loss exposure given the FCIC formula, thereby capping the multi-peril crop loss ratio at 105%For additional information, see Part II, Item 8, Note 7 “Reinsurance”.
The following table sets forth the largest amounts of loss and LAE recoverable by the Company from reinsurers as of December 31, 2017 and the current A.M. Best rating of each as of January 24, 2018.
Reinsurance Company | Loss & LAE Recoverable On Unpaid Claims | Percentage of Total Recoverable | A.M. Best Rating | |||||||
American Agricultural Insurance Company | $ | 407 | 9.9 | % | A | |||||
Aspen Insurance UK Limited | 404 | 9.8 | % | A | ||||||
Federal Crop Insurance Corporation | 133 | 3.2 | % | NR | ||||||
Hannover Rueck SE | 704 | 17.1 | % | A+ | ||||||
Maiden Reinsurance North America | 1,005 | 24.3 | % | A | ||||||
Partner Reinsurance Company Ltd | 539 | 13.1 | % | A | ||||||
QBE Reinsurance Corporation | 823 | 19.9 | % | A | ||||||
Scor Reinsurance Company | 113 | 2.7 | % | A+ | ||||||
Total reinsurance recoverables | $ | 4,128 | 100.0 | % | ||||||
Reinsurance Assumed
Nodak Insurance assumes 100% of the risk under policies written by Battle Creek. In addition, Nodak Insurance is required by statute to participate in certain residual market pools. This participation requires Nodak Insurance to assume business for property exposures that are not insured in the voluntary marketplace. Nodak Insurance participates in these residual markets pro rata on a market share basis.
Additionally, through American Agriculture Insurance Company (affiliated with the American Farm Bureau Federation), Nodak Insurance participates in both domestic and international property insurance pools. Annually, Nodak Insurance reviews the available pools and selects the pools in which it will participate. No multi-peril crop or crop hail insurance policies are included in such pools. Participation in such pools provides Nodak Insurance with the opportunity to diversify its risk while increasing its annual net premiums earned. In 2017, 2016 and 2015, Nodak Insurance assumed $3,959, $3,634, and $3,478, respectively, of premiums from such pools.
Beginning on January 1, 2016, Nodak Insurance assumed 100% of the crop hail premiums and losses from American West and Rural Mutual Insurance Company (a company affiliated with the Wisconsin Farm Bureau Federation). The business was then pooled with Nodak Insurance’s crop hail business and proportionately retroceded back to each participant. This crop hail pool allows Nodak Insurance and American West to diversify their crop insurance risk across an additional geographic region.
Unpaid LossLosses and Loss Adjustment Expense
NI Holdings isWe are required by applicable insurance laws and regulations to maintain reserves for unpaid losses and LAE.loss adjustment expenses (“LAE”). Our liability for unpaid losses and LAE consists of (1) case reserves, which are reserves for claims that have been reported to us, and (2)
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reserves for claims that have been incurred but not yet been reported and for the future development of case reserves (“IBNR”). The laws and regulations require that provision be made for the ultimate cost of those claims without regard to how long it takes to settle them or the time value of money. The determination of reserves involves actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of such claims. The liability for unpaid losses and LAE is set based on facts and circumstances then known, estimates of future trends in claims severity, and other variable factors such as inflation and changing judicial theories of liability.
Estimating the ultimate Our liability for unpaid losses and LAE is an inherently uncertain process. Therefore,not discounted.
For additional information, see Part II, Item 7, “Critical Accounting Policies” and Part II, Item 8, Note 9 “Unpaid Losses and Loss Adjustment Expenses”.
Investments
The majority of funds available for investments are deployed in a widely diversified portfolio of high quality, liquid, taxable U.S. government, tax-exempt, and taxable U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds. The Company regularly monitors the liability for unpaid losseseffective duration of its fixed maturity investments, and LAE does not represent an exact calculationthe Company’s investment purchases and sales are executed with the objective of that liability. Our reserving policy recognizes this uncertaintyhaving adequate funds available to satisfy its insurance and debt obligations. Generally, the expected principle and interest payments produced by maintaining reserves at a level providing for the possibility of adverse development relative to the estimation process.
When a claim is reported to us, our claims personnel establish a case reserve forCompany’s fixed maturity portfolio adequately funds the estimated amountrunoff of the ultimate payment toCompany’s insurance reserves. The substantial amount by which the extent it can be determined or estimated. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of our claims staff. In estimating the appropriate reserve, our claims staff considers the nature andfair value of the specific claim,fixed maturity portfolio exceeds the severityvalue of injury or damage,the net insurance liabilities, as well as the positive cash flow from newly sold policies and the policy provisions relatinglarge amount of high-quality liquid bonds, contributes to the type of loss,Company’s ability to the extent determinable at the time. Case reserves are adjusted by our claims staff as more information becomes available. It is our policyfund claim payments without having to settle each claim as expeditiously as possible.sell illiquid assets or access its credit facilities.
We maintain IBNR reserves to provide for already incurred claims that have not yet been reported and development on reported claims. The IBNR reserve is determined by estimating our ultimate net liability for both reported and IBNR claims, and then subtracting the case reserves and paid losses and LAE for reported claims.
Each quarter, NI Holdings computes its estimated ultimate liability using its methodologies and procedures. However, because the establishment of loss reserves is an inherently uncertain process, we cannot assure you that ultimate losses will not exceed the established loss reserves. Adjustments in aggregate reserves, if any, are reflected in the operating resultsCompany also invests a much smaller percentage of the period during which such adjustments are made.
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The following table provides a reconciliation of beginning and ending unpaid losses and LAE reserve balances of NI Holdings for the years ended December 31, 2017, 2016 and 2015.
Year ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Balance at beginning of year: | ||||||||||||
Liability for unpaid losses and loss adjustment expenses | $ | 59,632 | $ | 45,342 | $ | 50,518 | ||||||
Reinsurance recoverables on losses | 7,192 | 5,109 | 5,676 | |||||||||
Net balance at beginning of year | 52,440 | 40,233 | 44,842 | |||||||||
Incurred related to: | ||||||||||||
Current year | 132,812 | 123,264 | 92,764 | |||||||||
Prior years | (10,101 | ) | (4,756 | ) | (8,888 | ) | ||||||
Total incurred | 122,711 | 118,508 | 83,876 | |||||||||
Paid related to: | ||||||||||||
Current year | 104,769 | 90,772 | 70,290 | |||||||||
Prior years | 28,620 | 15,529 | 18,195 | |||||||||
Total paid | 133,389 | 106,301 | 88,485 | |||||||||
Balance at end of year: | ||||||||||||
Liability for unpaid losses and loss adjustment expenses | 45,890 | 59,632 | 45,342 | |||||||||
Reinsurance recoverables on losses | 4,128 | 7,192 | 5,109 | |||||||||
Net balance at end of year | $ | 41,762 | $ | 52,440 | $ | 40,233 |
The estimation process for determining the liability for unpaid losses and LAE inherently resultsportfolio in adjustments each year for claims incurred (but not paid) in preceding years. Negative amounts reported for claims incurred related to prior years are a result of claims being settled for amounts less than originally estimated (favorable development). Positive amounts reported for claims incurred related to prior years are a result of claims being settled for amounts greater than originally estimated (unfavorable or adverse development).
The following table shows the development of NI Holding’s liability for unpaid loss and LAE from 2007 through 2017. The top line of the table shows the liabilities at the balance sheet date, including losses incurred but not yet reported. The upper portion of the table shows the cumulative amounts subsequently paid as of successive years with respect to the liability. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimates change as more information becomes known about the frequency and severity of claims for individual years. The redundancy (deficiency) exists when the re-estimated liability for each reporting period is less (greater) than the prior liability estimate. The “cumulative redundancy (deficiency)” depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years.
Gross deficiencies and redundancies may be significantly more or less than net deficiencies and redundancies due to the nature and extent of applicable reinsurance.
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As of December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||
2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||||||||||||||||||||
Liability for unpaid loss and LAE, net of reinsurance recoverables | $ | 30,360 | $ | 29,698 | $ | 30,908 | $ | 28,266 | $ | 23,302 | $ | 25,466 | $ | 42,058 | $ | 44,842 | $ | 40,233 | $ | 52,440 | $ | 41,762 | ||||||||||||||||||||||
Cumulative amount of liability paid through | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 10,740 | 13,550 | 12,247 | 11,691 | 11,911 | 5,056 | 16,249 | 18,166 | 14,932 | 28,426 | — | |||||||||||||||||||||||||||||||||
Two years later | 13,553 | 17,278 | 16,323 | 12,362 | 9,053 | 8,654 | 20,899 | 20,802 | 20,612 | — | — | |||||||||||||||||||||||||||||||||
Three years later | 14,813 | 17,489 | 16,408 | 15,104 | 11,245 | 11,636 | 21,224 | 23,511 | — | — | — | |||||||||||||||||||||||||||||||||
Four years later | 15,399 | 17,619 | 17,552 | 15,536 | 13,195 | 11,631 | 22,993 | — | — | — | — | |||||||||||||||||||||||||||||||||
Five years later | 15,348 | 17,774 | 17,838 | 16,662 | 13,092 | 12,295 | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Six years later | 15,492 | 17,955 | 18,682 | 16,627 | 13,311 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Seven years later | 15,537 | 18,617 | 18,405 | 16,629 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Eight years later | 16,171 | 18,139 | 18,324 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Nine years later | 15,667 | 18,013 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Ten years later | 15,523 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Liability estimated after | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 24,082 | 22,989 | 26,363 | 24,049 | 18,691 | 22,337 | 34,074 | 35,926 | 34,880 | 42,145 | — | |||||||||||||||||||||||||||||||||
Two years later | 19,831 | 23,100 | 23,492 | 19,815 | 20,144 | 18,788 | 30,380 | 33,058 | 28,431 | — | — | |||||||||||||||||||||||||||||||||
Three years later | 17,835 | 21,931 | 20,763 | 20,518 | 17,678 | 16,620 | 28,871 | 28,526 | — | — | — | |||||||||||||||||||||||||||||||||
Four years later | 17,586 | 20,082 | 21,516 | 19,356 | 16,294 | 15,459 | 25,852 | — | — | — | — | |||||||||||||||||||||||||||||||||
Five years later | 16,989 | 20,031 | 20,724 | 18,403 | 15,184 | 13,864 | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Six years later | 16,927 | 19,531 | 19,836 | 17,841 | 14,443 | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Seven years later | 16,860 | 19,251 | 19,306 | 17,429 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Eight years later | 16,720 | 18,696 | 19,011 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Nine years later | 16,082 | 18,485 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Ten years later | 15,904 | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Cumulative total redundancy (deficiency) | ||||||||||||||||||||||||||||||||||||||||||||
Gross liability – end of year | 38,913 | 53,770 | 51,413 | 39,332 | 38,852 | 38,007 | 46,900 | 50,518 | 45,342 | 59,632 | 45,890 | |||||||||||||||||||||||||||||||||
Reinsurance recoverable | 8,553 | 24,072 | 20,505 | 11,066 | 15,550 | 12,541 | 4,842 | 5,676 | 5,109 | 7,192 | 4,128 | |||||||||||||||||||||||||||||||||
Net liability – end of year | 30,360 | 29,698 | 30,908 | 28,266 | 23,302 | 25,466 | 42,058 | 44,842 | 40,233 | 52,440 | 41,762 | |||||||||||||||||||||||||||||||||
Gross re-estimated liability – latest | 24,763 | 34,600 | 31,481 | 26,424 | 29,405 | 23,431 | 29,299 | 33,615 | 32,761 | 49,686 | — | |||||||||||||||||||||||||||||||||
Re-estimated reinsurance recoverables – latest | 8,859 | 16,115 | 12,470 | 8,995 | 14,962 | 9,567 | 3,447 | 5,089 | 4,330 | 7,542 | — | |||||||||||||||||||||||||||||||||
Net re-estimated liability - latest | 15,904 | 18,485 | 19,011 | 17,429 | 14,443 | 13,864 | 25,852 | 28,526 | 28,431 | 42,144 | — | |||||||||||||||||||||||||||||||||
Gross cumulative redundancy (deficiency) | 14,150 | 19,170 | 19,932 | 12,908 | 9,447 | 14,576 | 17,601 | 16,903 | 12,581 | 9,946 | — | |||||||||||||||||||||||||||||||||
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Investments
NI Holdings’ investments in fixed incomeprivate placement debt offerings and equity securities, are classified as availablewhich have the potential for salehigher returns but also involve varying degrees of risk, including less stable rates of return and are carried at fair value with unrealized gains and losses reflected as a component of equity, net of income taxes. The goal of the Company’s investment activities is to complement and support its overall mission. As such, the investment portfolio is structured to maximize after-tax investment income and price appreciation while maintaining the portfolio’s target risk profile.less liquidity.
The Company’s overall investment objectives are (i) growth and preservation of capital, (ii) achieving favorable returns on invested assets through investment in high quality income producing assets, and (iii) assuring proper levels of liquidity to fund expected operating needs. See “Item 7A. Quantitative and Qualitative Information about Market Risk” for discussion about specific risks concerning investments.
In addition to any investments prohibited by the insurance laws and regulations of North Dakota and any other applicable states, NI Holdings’ investment policies prohibit the following investments and investing activities:
The Executive Committee of NI Holdings’ Board of Directors approvedreviews and approves the Company’s investment policy and reviews it periodically. The investment portfolio is managed by Conning, Inc. and Disciplined Growth Investors.
For additional information, see Part II, Item 7, “Critical Accounting Policies” and Part II, Item 8, Note 5 “Investments”.
Financial Strength
Ratings are an important factor in assessing the Company’s competitive position in the insurance industry. The following table sets forth information concerning NI Holdings’ investments.
December 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Cost or Amortized Cost | Fair Value | Cost or Amortized Cost | Fair Value | |||||||||||||
Fixed income securities: | ||||||||||||||||
U.S. Government and agencies | $ | 9,531 | $ | 9,649 | $ | 5,834 | $ | 6,050 | ||||||||
Obligations of states and political subdivisions | 81,741 | 82,595 | 68,915 | 69,396 | ||||||||||||
Corporate securities | 88,474 | 89,451 | 50,610 | 51,170 | ||||||||||||
Residential mortgage-backed securities | 28,557 | 28,524 | 22,750 | 22,637 | ||||||||||||
Commercial mortgage-backed securities | 11,228 | 11,170 | 8,033 | 8,096 | ||||||||||||
Asset-backed securities | 15,447 | 15,369 | 4,118 | 4,121 | ||||||||||||
Total fixed income securities | 234,978 | 236,758 | 160,260 | 161,470 | ||||||||||||
Equity securities | 29,028 | 47,561 | 11,511 | 25,917 | ||||||||||||
Total | $ | 264,006 | $ | 284,319 | $ | 171,771 | $ | 187,387 | ||||||||
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The amortized cost and estimated fair value of fixed income securities by contractual maturity are shown below as of December 31, 2017. Actual maturities could differ from contractual maturities because issuersan insurer’s ability to meet its financial obligations to policyholders. An insurer’s financial strength rating is one of the securities may have the right to call or prepay certain obligations, which may or may not include call or prepayment penalties.
December 31, 2017 | ||||||||
Amortized Cost | Fair Value | |||||||
Less than one year | $ | 12,761 | $ | 12,766 | ||||
One through five years | 86,830 | 87,642 | ||||||
Five through ten years | 69,586 | 70,680 | ||||||
Greater than ten years | 10,569 | 10,607 | ||||||
Mortgage/asset-backed securities | 55,232 | 55,063 | ||||||
Total debt securities | $ | 234,978 | $ | 236,758 |
At December 31, 2017, the average maturity of NI Holdings’ fixed income investment portfolio was 4.85 years and the average duration was 3.99 years. As a result, the fair value of investments may fluctuate significantly in response to changes in interest rates. In addition, NI Holdings may experience investment losses to the extent our liquidity needs require the disposition of fixed income securities in unfavorable interest rate environments.
NI Holdings uses quoted values and other data providedprimary factors evaluated by independent pricing services as inputs in its process for determining fair values of its investments. The pricing services cover substantially all of the securitiesthose in the portfoliomarket to purchase insurance. A poor rating indicates that there is an increased likelihood that the insurer could become insolvent and therefore not able to fulfill its obligations under the insurance policies it issues. This rating can also affect an insurer’s level of premium writings, the lines of business it can write, and, for which publicly quoted values are not available. The pricing services’ evaluations represent an exit price, which is a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale. The pricing is based on observable inputs either directly or indirectly, such as quoted prices in marketsinsurers like us that are active, quoted prices for similar securities atalso public registrants, the measurement date, or other inputs that are observable.
NI Holdings’ investment managers provide pricing information that they utilize, together with information obtained from independent pricing services, to determine the fairmarket value of its fixed income securities. After performing a detailed review
All of the information obtained from the pricing services, no adjustment was made to the values provided.
The following table sets forth our average cashCompany’s insurance subsidiary and invested assets, net investment income, and return on average cash and invested assets for the reported periods:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Average cash and invested assets | $ | 260,781 | $ | 202,735 | $ | 191,987 | ||||||
Net investment income | 5,031 | 3,644 | 3,571 | |||||||||
Return on average cash and invested assets | 1.9 | % | 1.8 | % | 1.9 | % |
A.M. Best Rating
A.M. Best rates insuranceaffiliate companies based on factors of concern to policyholders. The rating evaluates the claims paying ability of a company, and is not a recommendation on the merits of an investment in our common stock.
Nodak Insurance and Battle Creek are rated “A” Excellent by A.M.AM Best, which is the third highest out of 15 possible ratings. A.M.ratings, under a group rating due to the intercompany pooling reinsurance agreement. AM Best has affirmed a stable financial strength outlook to both Nodak Insurance and Battle Creek. American West is rated “A-” with a stable financial strength outlook, and Primero is unrated because the nature of its business is not ratings sensitive. In its evaluation of a company’s financial and operating performance, A.M. Best reviews:group.
If we are unable to maintain at least an “A-” rating from A.M. Best, it may impair our ability to compete effectively.
Competition
The property casualty and crop insurance markets are highly competitive. NI Holdings competesWe compete with stock insurance companies, mutual companies, and other underwriting organizations. Our largest competitors in North Dakota for private passenger auto and homeowners areinclude Progressive Casualty Insurance Company, State Farm Progressive,Mutual Insurance Company, American Family QBE,Insurance, Allstate Corporation, Farmers Union Mutual Insurance Company, and Auto-Owners.Auto-Owners Insurance. In South Dakota and Nebraska, we have small market shares and our competitors are the large national and regional companies as well as Farmers Mutual of Nebraska. In our non-standard auto markets, which are primarily Illinois, Nevada, and Arizona, our primary competitors are regional carriers.
Westminster’s primary competition comes from regional carriers including Harford Mutual Insurance Company, Greater New York Mutual, and Millers Capital. We also see competition from national companies like The Travelers Companies and Nationwide Mutual Insurance Company.
Based on 20162020 data, Nodak Insurance is the second largest writer of farmowners insurance in North Dakota. Our largest competitors areinclude Farmers Union Mutual Insurance Company, North Star Mutual Insurance Company, American Family Insurance, and American Family.Nationwide Mutual Insurance Company. In Nebraska and South Dakota, we have a small farmowners market share, which is dominated by the large national and regional carriers. Certain of these competitors have substantially greater financial, technical, and operating resources than we do and may be able to offer lower rates or higher commissions to their producers.
Total industry-reportedThe chart below shows the reported premiums written for multi-peril crop insurance in 2017 was $929,135 in North Dakota and $634,021 in Minnesota. In North Dakota, ourthrough the federal multi-peril crop insurance direct premiums written were $39,270, $38,708, and $39,914 forprogram during the years ended December 31, 2017, 2016 and 2015, respectively. In Minnesota, our multi-peril crop insurance direct premium written were $4,534, $3,504, and $2,652 for the years ended December 31, 2017, 2016 and 2015, respectively. NI Holdings2019 through 2021:
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Federal multi-peril crop premiums: | ||||||||||||
Nationwide | $ | 13,571,185 | $ | 9,956,185 | $ | 10,048,685 | ||||||
North Dakota | 1,083,565 | 861,567 | 845,902 | |||||||||
South Dakota | 839,310 | 597,283 | 654,266 | |||||||||
Minnesota | 834,242 | 575,232 | 584,093 | |||||||||
| ||||||||||||
Company multi-peril crop premiums: | ||||||||||||
North Dakota | 38,360 | 32,674 | 34,598 | |||||||||
South Dakota | 283 | 673 | 720 | |||||||||
Minnesota | 4,062 | 2,828 | 2,686 |
We also wrote less than $500$100 in multi-peril crop insurance in Nebraska and South Dakota for each of the last three years. The principal competitors in our markets for multi-peril crop insurance areinclude Chubb RCIS,Corporation, QBE Insurance Group, Rural Community Insurance Services, CGB Enterprises, and Great American.American Insurance Group.
The premium rates for multi-peril crop insurance are established by the RMA and, accordingly, we compete with other insurance companies on factors such as agency relationships, claim service, and market reputation in the crop insurance market. We believe that our relationship with the North Dakota Farm BureauNDFB and our leading market share are significant factors in maintaining our market share of the crop insurance business in North Dakota.
With respect to writing property and casualty insurance, we compete on a number of factors such as pricing, agency relationships, policy support, claim service, and market reputation. Like other writers of property and casualty insurance, our policy terms vary from state to state based on state regulations, competition, pricing, and other factors including the prescribed minimum liability limits in each state, as established by state law.state. We believe our company differentiates itself from many larger companies competing for this business by focusing on ease of doing business and providing excellent claims service with local, knowledgeable employees.
To compete successfully in the property and casualty insurance market, we rely on our ability to identify insureds that are most likely to produce an underwriting profit, operate with a disciplined underwriting approach, practice prudent claims management, reserve appropriately for unpaid claims, and provide quality service and competitive commissions to our independent and captive agents.
Regulation
Regulation
General
We are subject to extensive regulation, particularly at the state level. The method, extent, and substance of such regulation varies by state, but generally has its source in statutes and regulations that establish standards and requirements for conducting the business of insurance and that delegate regulatory authority to state insurance regulatory agencies. In general, such regulation is intended for the protection of those who purchase or use insurance products, not the companies that write the policies. These laws and regulations have a significant impact on our business and relate to a wide variety of matters including accounting methods, agent and company licensure, claims procedures, corporate governance, examinations, investing practices, policy forms, pricing, trade practices, reserve adequacy, and underwriting standards.
State insurance laws and regulations require our insurance company subsidiaries to file financial statements with state insurance departments everywhere they do business, and the operations of such companies and their respective accountsthey are subject to examination by thosethe departments they are domiciled in at any time. Our insurance company subsidiaries prepare statutorystatutory-basis financial statements in accordance with accounting practices and procedures prescribed or permitted by the state in which they are domiciled. North Dakota
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Our domiciliary states generally conformsconform to National Association of Insurance Commissioners (“NAIC”) accounting practices and procedures, so itsour examination reports and other filings generally are accepted by other states.
The NAIC provides guidance to the states with respect to standardized laws and regulations (including the accounting practices and procedures discussed above), which represent an effort to standardize insurance industry practices across state lines, oftentimes referred to as “Model Regulations”. It should be noted that these “model” laws are regulations that have no authority until the individual states pass them as part of the state legislative process, which may, or may not, be done as suggested, or with modifications.
Premium rate regulation varies greatly among jurisdictions and lines of insurance. In the states in which our insurance company subsidiaries write insurance, premium rates for the various lines of insurance are subject to either prior approval or limited review upon implementation. The premium rates for multi-peril crop insurance are established by the RMA. See “Item 1. Business — Crop Insurance.”For additional information, see Part I, Item 1, “Crop Insurance”.
Many jurisdictions have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example, states may limit an insurer’s ability to cancel or non-renew policies. Laws and regulations that limit cancellation and non-renewal may restrict our ability to exit unprofitable marketplaces in a timely manner.
Crop Insurance
The multi-peril crop insurance business is overseen by the federal government through the RMA. The RMA outlines policy language, establishes premium rates, and develops loss adjustment procedures for insurance programs under the federal crop insurance program. In addition, through the FCIC,Federal Crop Insurance Corporation (“FCIC”), the RMA provides premium subsidies to farmers and sets the commission percentages that can be paid to agents. All participating insurance carriers are subject to the same Standard Reinsurance Agreement (“SRA”), which outlines items such as reporting requirements and claims handling procedures, proportional and non-proportional reinsurance terms, and the level of administrative and operating reimbursement paid to insurers. The RMA also provides oversight to the approved insurance providers (“AIPs”). The AIPs are required to use the policies, premium rates, and loss adjustment procedures set by the RMA without modification and are required to issue a policy to any eligible applicant regardless of risk or profitability. The RMA conducts audits of AIPs with respect to claims and loss adjustment procedures.
ExaminationsAmerican Agricultural Insurance Company is the AIP through which we issue multi-peril crop insurance policies and is the holder of the SRA with the FCIC.
Examinations are conducted every three to five years by the Departments of Insurance where the insurance companies are domiciled. Nodak Insurance and American West were last examined by the North Dakota Insurance Department as of December 31, 2016. The final examination report for American West included a finding related to intercompany expense charges between the two companies, which offset in consolidation. The underlying cause of this finding has been resolved.
Battle Creek was last examined by the Nebraska Insurance Department as of December 31, 2016, and the last examination of Primero by the Nevada Insurance Department was as of December 31, 2016. Neither examination resulted in any adjustments to their financial positions, nor were there any substantive matters raised in the final examination reports.
NAIC Risk-Based Capital Requirements
North Dakota and most other states have adopted the NAIC system of risk-based capital requirements that require insurance companies to calculate and report information under a risk-based formula. These risk-based capital requirements attempt to measure statutory capital and surplus needs based on the risks in a company’s mix of products and investment portfolio. Under the formula, a company first determines its “authorized control level” risk-based capital. This authorized control level takes into account (i) the risk with respect to the insurer’s assets; (ii) the risk of adverse insurance experience with respect to the insurer’s liabilities and obligations; (iii) the interest rate risk with respect to the insurer’s business; and (iv) all other business risks and such other relevant risks as are set forth in the risk-based capital instructions. A company’s “total adjusted capital” is the sum of statutory capital and surplus and such other items as the risk-based capital instructions may provide. The formula is designed to allow state insurance regulators to identify weakly capitalized companies.
The requirements provide for four different levels of regulatory attention. The “company action level” is triggered if a company’s total adjusted capital is less than 2.0 times its authorized control level but greater than or equal to 1.5 times its authorized control level. At the company action level, the company must submit a comprehensive plan to the regulatory authority that discusses proposed corrective actions to improve the capital position. The “regulatory action level” is triggered if a company’s total adjusted capital is less than 1.5 times but greater than or equal to 1.0 times its authorized control level. At the regulatory action level, the regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be followed. The “authorized control level” is triggered if a company’s total adjusted capital is less than 1.0 times but greater than or equal to 0.7 times its authorized control level. At this level, the regulatory authority may take action it deems necessary, including placing the company under regulatory control. The “mandatory control level” is triggered if a company’s total adjusted capital is less than 0.7 times its authorized control level. At this level, the regulatory authority is mandated to place the company under its control. The capital levels of our insurance company subsidiariessubsidiary and affiliate companies all exceed the authorized control level and have never triggered any of these regulatory capital levels. We cannot guarantee, however, that the capital requirements applicable to such companies will not increase in the future.
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future, or that the underlying ratios will not erode.
NAIC Ratios
The NAIC has also has developed a set of 13 financial ratios referred to as the Insurance Regulatory Information System (“IRIS”). Based on statutorystatutory-basis financial statements filed with state insurance regulators, the NAIC annually calculates these IRIS ratios to assist state insurance regulators in monitoring the financial condition of insurance companies. The NAIC has established an acceptable range for each of the IRIS financial ratios. If four or more of its IRIS ratios fall outside the range deemed acceptable by the NAIC, an insurance company may receive inquiries from individual state insurance departments. During each of the years ended December 31, 20172021, 2020 and 2016,2019, none of our insurance company subsidiaries produced results outside the acceptable range for more than two of the IRIS tests.
Enterprise Risk Assessment
In 2012, the NAIC adopted various changes to its Model Regulations herein known as the(the “NAIC Amendments”). The NAIC Amendments, when adopted by the various states, are designed to respond to perceived gaps in the regulation of insurance holding company systems in the United States. The NAIC Amendments includesinclude a requirement that an insurance holding company system’s ultimate controlling person submit annually to its lead state insurance regulator an “enterprise risk report”. This enterprise risk report identifies the activities, circumstances, or events involving one or more affiliates of an insurer that, if not remedied properly, are likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole. While the NAIC Amendments have not been adoptedThe Company files a Form F Enterprise Report annually with each domiciliary state in whole by the North Dakota Insurance Department, North Dakota currently requires insurers domiciled in North Dakota to include an enterprise risk assessment in its annual report.support of this requirement. The NAIC Amendments also include provisions requiring a controlling person to submit prior notice to its domiciliary insurance regulator of its divestiture of control, having detailed minimum requirements for cost sharing and management agreements between an insurer and its affiliates, and expanding of the agreements between an insurer and its affiliates to be filed with its domiciliary insurance regulator.
In 2012, the NAIC also adopted the Own Risk Solvency Assessment (“ORSA”) Model Act. The ORSA Model Act, when adopted by the various states, will require an insurance holding company system’s chief risk officer to submit at least annually to its lead state insurance regulator a confidential report detailing its own internal solvency assessment. Such an assessment is to be tailored to the nature, scale, and complexity of an insurer. This assessment will include the material and relevant risks identified by the insurer associated with an insurer’s current business plan and the sufficiency of capital resources to support those risks. Although our insurance company subsidiaries are exempt from ORSA because of their size, NI Holdings intendswe intend to incorporate those elements of ORSA that it believes constitute “best practices” into its annual internal enterprise risk assessment.
Market Conduct Regulation
State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including provisions governing the form and content of disclosure to consumers, illustrations, advertising, sales practices, and complaint handling. State regulatory authorities generally enforce these provisions through periodic market conduct examinations.
Guaranty Fund Laws
All states have guaranty fund laws under which insurers doing business in the state can be assessed to fund policyholder liabilities of insolvent insurance companies. Under these laws, an insurer is subject to assessment depending upon its market share in the state of a given line of business. For the years ended December 31, 2017, 20162021, 2020 and 2015,2019, we paid noonly minimal assessments pursuant to state insurance guaranty association laws. We establish reserves relating to insurance companies that are subject to insolvency proceedings when it becomes probable that we will be subject to an assessment and the amount of such assessment can be estimated. We cannot predict the amount and timing of any future assessments under these laws. See “Item 7. Management’s Discussion and Analysis
Federal Regulation
The U.S. federal government generally hasdoes not directly regulatedregulate the insurance industry except for certain areas of the market, such as insurance for crops, flood, nuclear, and terrorism risks. However, the federal government has undertaken initiatives or considered legislation in several areas that may affect the insurance industry, including tort reform, corporate governance, and the taxation of reinsurance companies. The Dodd-Frank Act established the Federal Insurance Office, which is authorized to study, monitor, and report to Congress on the insurance industry and to recommend that the Financial Stability Oversight Council designate an insurer as an entity posing risks to the U.S. financial stability in the event of the insurer’s material financial distress or failure. In December 2013, the Federal Insurance Office issued a report on alternatives to modernize and improve the system of insurance regulation in the United States, including by increasing national uniformity through either a federal charter or effective action by the states. Changes to federal legislation and administrative policies in several areas, including changes in federal taxation, can also significantly affect the insurance industry and us. See “Item 1. Business — Crop Insurance.”
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We are also subject to the Fair and Accurate Credit Transactions Act of 2003 (“FACTA”) and the Health Insurance Portability and Accountability Act of 1996, (“HIPAA”), both of which require us to protect the privacy of our customers’ information, including health and credit information.
Privacy
We are subject to numerous U.S. federal and state laws governing the collection, disclosure, and protection of personal and confidential information of our clients or employees. These laws and regulations are increasing in complexity and number, change frequently, and may conflict. Congress, state legislatures, and regulatory authorities are expected to consider additional regulation relating to privacy and other aspects of customer information.
As mandated by the Gramm-Leach-Bliley Act (“GLBA”), states continue to promulgate and refinehave promulgated laws and regulations that require financial institutions, including insurance companies, to take steps to protect the privacy of certain consumer and customer information relatinginformation. The NAIC has adopted several provisions to products or services primarily for personal, family or household purposes. A recent NAIC initiative that affectedfacilitate the insurance industry wasimplementation of the adoption in 2000 ofGLBA, including the Privacy of Consumer Financial and Health Information Model Regulation which assisted states in promulgating regulations to comply with the Gramm-Leach-Bliley Act. In 2002, to further facilitate the implementation of the Gramm-Leach-Bliley Act, the NAIC adoptedand the Standards for Safeguarding Customer Information Model Regulation. Several states have now adopted similar provisions regarding the safeguarding of customer information. NI Holdings and its subsidiariesWe have each implemented procedures to comply with the Gramm-Leach-Bliley Act’sGLBA’s related privacy requirements.
In October 2017, the NAIC adopted the Insurance Data Security Model Law (“IDSML”), which requires insurers, insurance agents, and other entities required to be licensed under state insurance laws to develop and maintain a written information security program, conduct risk assessments, oversee the data security practices of third-party service providers, and other related requirements. It is not clear whether, and to what extent, legislatures or insurance regulators in the states in which we, or our subsidiaries, operate will enact the IDMSL. Such enactments and regulations could raise compliance costs and subject us to the risk of regulatory enforcement actions, penalties, and reputational harm. Any such events could potentially have an adverse impact on our business, financial condition, or results of operations.
Office of Foreign Asset Control
The Treasury Department’s Office of Foreign Asset Control (“OFAC”) maintains a list of “Specifically Designated Nationals and Blocked Persons” (“the SDN List”(the "SDN List"). The SDN List identifies persons and entities that the government believes are associated with terrorists, rogue nations, or drug traffickers. OFAC’s regulations prohibit insurers, among others, from doing business with persons or entities on the SDN List. If the insurer finds and confirms a match, the insurer must take steps to block or reject the transaction, notify the affected person, and file a report with OFAC.
Jumpstart Our Business Startups Act of 2012
We are an emerging growth company (“EGC”),EGC, as defined in the Jumpstart Our Business Startups Act of 2012 (“the JOBS(the “JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies,EGCs, such as reduced public company reporting, accounting, and corporate governance requirements. We currently intend to avail ourselves of the reduced disclosure obligations available under the JOBS Act.
Section 107 of the JOBS Act also provides thatHowever, beginning on December 31, 2022, we will no longer be an EGC can take advantageand will no longer have the ability to delay adoption of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying withthese new or revised accounting standards.standards, or to take advantage of reduced corporate governance disclosures.
We will remainDividends
As an EGC for upinsurance holding company with no independent operations or source of revenue, our capacity to five years followingpay dividends to our initial public offering (“IPO”),shareholders is based on the ability of our insurance company subsidiaries to pay dividends to us. The ability of our subsidiaries to pay dividends to us is regulated by the laws of their state of domicile. Under these laws, insurance companies must provide advance informational notice to the domicile state insurance regulatory authority prior to payment of any dividend or untildistribution to its shareholders. Prior approval from the earlieststate insurance regulatory authority must be obtained before payment of (i) the last day of the first fiscal year in which our annual gross revenue exceeds $1.07 billion, (ii) the date that we become a “large accelerated filer”an “extraordinary dividend” as defined in Rule 12b-2 under the Securities Exchange Actstate's insurance code. For additional information, see Part II, Item 7, “Management’s Discussion and Analysis of 1934, as amended (“the Exchange Act”)Financial Condition and Results of Operations - Liquidity and Capital Resources”, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.and Part II, Item 8, Note 21 “Statutory Net Income, Capital and Surplus, and Dividend Restrictions”.
Dividends
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 insurance company’s surplus as regards policyholders as of the preceding December 31, or (ii) the insurance 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. As of December 31, 2017, the amount available for payment of dividends by Nodak Insurance in 2018 without the prior approval of
the North Dakota Insurance Department is $15,654. “Extraordinary dividends” in excess of the foregoing limitations may only be paid with prior notice to, and approval of, the North Dakota Insurance Department. See “Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Dividend Policy.”
Holding Company Laws
Most states, including North Dakota, have enacted legislation that regulates insurance holding company systems. Each insurance company in a holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish certain information, including information concerning the operations of companies within the holding company group that may materially affect the operations, management, or financial condition of the insurers within the group. Pursuant to these laws, the North Dakota Insurance Department requires prior disclosure of material transactions involving an insurance company and its affiliates, and requires prior notice and/or approval of certain transactions, such as extraordinary dividends distributed by the insurance company.affiliates. Under these laws, the North Dakota Insurance Department will have the right to examine us at any time.
All transactions within our consolidated group affecting our insurance company subsidiaries must be fair and equitable. Notice of certain material transactions between NI Holdings and any person or entity in our holding company system will be required to be given to the North DakotaDepartment of Insurance Department.of the applicable domiciliary state. Certain transactions cannot be completed without the prior approval of the North Dakota Insurance Department.various Departments of Insurance.
Approval of the state insurance commissioner is required prior to any transaction affecting the control of an insurer domiciled in that state. In North Dakota, the acquisition of 10% or more of the outstanding voting securities of an insurer or its holding company is presumed to be a change in control. North Dakota law also prohibits any person or entity from (i) making a tender offer for, or a request or invitation for tenders of, or seeking to acquire or acquiring any voting security of a North Dakota insurer if, after the acquisition, the person or entity would be in control of the insurer, or (ii) effecting or attempting to effect an acquisition of control of or merger with a North Dakota insurer, unless the offer, request, invitation, acquisition, effectuation, or attempt has received the prior approval of the North Dakota Insurance Department.
Human Capital
EmployeesThe Company’s key human capital management objectives are to attract, retain, and develop talent to deliver on the Company’s strategy. To support these objectives, the Company’s human resources programs are designed to recruit and retain talented individuals; provide training and development within the Company and the insurance industry; reward and support employees through competitive pay and benefit programs; keep employees safe and healthy; and provide opportunities for community involvement.
We offer comprehensive compensation and benefits packages to our employees including a 401k Plan, Employee Stock Ownership Plan (“ESOP”), healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, and flexible work arrangements. We also offer stock-based compensation to certain management personnel as a way to attract and retain key talent. For additional information, see Part II, Item 8, Note 13 “Benefit Plans” and Note 19 “Stock-Based Compensation” for further discussion of our benefit plans and stock-based compensation.
As of December 31, 2017,2021, NI Holdings and its subsidiaries had 136207 total employees, of which 204 were full-time employees. None of these employees are covered by a collective bargaining agreement, and we believe that our employee relations are good.Employee turnover averaged 14.7% during 2021, compared to 17.3% during 2020.
Item 1A. Risk Factors
An investment in the Company’s common shares involves certain risks. The following is a discussion of the most significantmaterial risks and uncertainties that may affect the Company’s business, financial condition, and future results.
Insurance Risks Related to Our Business and Industry
Catastrophic or other significant natural or man-made losses may negatively affect our financial condition and operating results.
As a property and casualty insurer, we are subject to claims from catastrophes or other natural perils that may have a significant negative impact on our operating and financial results. We have experienced catastrophe losses and can be expected to experience catastrophe losses in the future. Catastrophe losses can be caused by various events, including snow storms, ice storms, freezing temperatures, tropical storms and hurricanes, earthquakes, tornadoes, wind, hail, fires, and other natural or man-made disasters. In addition, longer-term natural catastrophe trends may be changing, and new types of catastrophe losses may be developing due to climate change, a phenomenon that has been associated with extreme weather events linked to rising temperatures, and includes effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail and snow. The frequency, number, and severity of these losses are unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Our ability to effectively manage catastrophe risk is dependent, in part, on the reliance of various catastrophe models, which may produce unreliable output as a result of inaccurate or incomplete data, along with the inherent uncertainty of future frequency and severity of losses. The impact of changing climate conditions on the overall insurance industry may also materially affect the availability and cost of reinsurance to us. In addition, these changes could impact the creditworthiness of issuers of securities in which the Company invests, subjecting our investment portfolio to increased credit and interest rate risk, with the potential for reduced investment returns and/or material realized or unrealized losses.
Approximately 71.2%Despite our continued geographic expansion, we write a significant amount of NI Holdings’ consolidated direct premiums written in 2017 were writtenbusiness in North Dakota. Because NI Holdings’ business is concentrated in North Dakota,As a result, adverse developments from severe weather events such as hailstorms, flooding, or droughts affecting a large portion ofin North Dakota would have a disproportionately greater effect on NI Holdings’our financial condition and results of operations than if itsour business werewas less geographically concentrated. The incidence and severity of such events are inherently unpredictable. In recent years, changing climate conditions have increased the unpredictability, severity, and frequency of tornados and other storms.
We attempt to reduce our exposure to catastrophe losses through a disciplined underwriting and risk management approach that emphasizes long-term profitability over short-term gains in premiums or market share, continued geographical diversification of our operations, and the use of reinsurance. However, there can be no guarantee that our underwriting and risk management efforts will be successful in mitigating our exposure to catastrophe losses or the impact of such losses when they occur. In addition, while we maintain reinsurance coverage with a catastrophe excess of loss program, such coverage may be insufficient to cover our losses. Our reinsurance coverage includes a catastrophe excess of loss program, which in 2021 limited our catastrophe exposure to $10 million retention per event, with $117 million of reinsurance coverage placed in excess of this retention. In 2022, our catastrophe exposure was increased to $15 million retention per event, with $125 million of reinsurance coverage placed in excess of this retention. If we are not able to effectively mitigate our exposure to catastrophe losses, whether through our underwriting process and by obtainingor reinsurance coverage. However,coverage, in the event of such losses our business and results of operations could be adversely affected.
For additional information, see Part II, Item 8, Note 2 “Summary of Significant Accounting Policies” and Note 7 “Reinsurance.”
Changes in the legal, regulatory, and economic environments in which we operate could materially impact our financial results, including our loss reserves, operating expenses, and investment portfolio.
We maintain reserves to cover estimated unpaid losses and expenses necessary to settle claims. The reserves for losses and loss adjustment expenses (“LAE”) that we experience catastrophe losses,have established are estimates of amounts needed to pay reported and unreported claims and related expenses, based on facts and circumstances known to us at the time we cannot assure youestablished the reserves. Reserves are actuarially projected based on historical claims information, industry statistics, anticipated trends, and other factors. The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. While we believe that our unearned premiums, liabilitiesreserves for unpaid losses and LAE are appropriate, to the extent that such reserves prove to be inadequate or excessive in the future, we would adjust them and reinsurancerecognize the change in earnings in the period the reserves are adjusted. There can be no assurance that the estimates of such liabilities will be adequate to cover these risks. In addition, because accounting rules do not permit insurers to reserve for catastrophic events until they occur, claims from catastrophic events could cause substantial volatilitychange in our financial results forthe future and any fiscal quarter or year andsuch adjustment could have a material adverse effectimpact on our financial condition or results of operations. Our ability to write new business also could be adversely affected.
Our financial condition and results of operations also are affected periodically by losses caused by natural perils such as those described above that are not deemed a catastrophe. If a number of these events occur in a short time period, it may materially affect our financial condition and results of operations. For additional information, see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Losses and Loss Adjustment Expenses”, and Part II, Item 8, Note 9 “Unpaid Losses and Loss Adjustment Expenses.”
It is possible that, among other things, past or future steps taken by the federal government and the Federal Reserve to stimulate the U.S. economy, including actions taken in response to COVID-19 such as fiscal and monetary policy measures, and tax reform, could lead to higher inflation than we had anticipated, which generally leads to increased loss costs and other operating expenses. However, our relatively high concentration in short tail lines of business limits the potential impact of this exposure and allows us to price for those increases on a timely basis.
Potential higher interest rates oftentimes correlated to inflation could reduce the carrying value of our fixed maturity and short-term investments, negatively impacting the Company's book value in the short-term. Over the long-term, however, higher interest rates would provide an incremental benefit to our net investment income over time as excess cash and proceeds of maturing bonds are reinvested at higher rates. We manage our exposure to interest rate increases by monitoring the duration within our investment portfolio and maintaining maturities that minimize any forced sales within the portfolio. However, even with such monitoring efforts, we may be forced to sell securities at a loss, which would adversely affect our results of operations.
Any downgrade in our A.M. Best Company, Inc. rating could affect our ability to write new business or renew our existing business, which would lead to a decrease in revenue and net income.
Third-party rating agencies, such as A.M.AM Best, periodically assess and rate the claims-paying ability of insurers based on criteria established by the rating agencies. Ratings assigned by A.M.AM Best are an important factor influencing the competitive position of insurance companies. A.M.AM Best ratings, which are reviewed at least annually, represent independent opinions of financial strength and ability to meet obligations to policyholders and are not directed toward the protection of investors. Therefore, our A.M.AM Best rating should not be relied upon as a basis for an investment decision to purchase our common stock.
Nodak Insurance holdsAll of the Company’s insurance subsidiaries hold a financial strength rating of “A” (Excellent) by A.M.AM Best, the third highest rating out of 15 rating classifications. Nodak Insurance has held an “A” rating for the past six years. Our most recent rating by A.M.AM Best was issued on March 16, 2017. Battle Creek also holds an “A” rating and American West holds an “A-” rating.April 14, 2021. Financial strength ratings are used by producersagents, customers, lenders, and customersother insurance carriers as a means of assessing the financial strength and quality of insurers.insurance companies. If our financial position deteriorates, we may not maintain our favorable financial strength rating from A.M.AM Best. A downgrade of our rating could severely limit or prevent us from writing desirable business or from renewing our existing business. In addition, a downgrade could negatively affect our ability to implement our strategy because it could cause our current or potential producersagents to choose other more highly rated competitors or reduce our ability to obtain reinsurance. See “Item 1. Business — A.M. Best Rating.For additional information, see Part I, Item 1, “Business” and “Financial Strength.”
A significant percentage of NI Holdings’ written premiums and net profits are generated from its multi-peril crop insurance business, and the loss of such business as a result of a termination of or substantial changes to the Federal crop insurance program would have a material adverse effect on our revenues and net income.
In 2017, 2016 and 2015, NI Holdings’ net premiums written generated from its multi-peril crop insurance line of business were 22.6%, 23.6%, and 24.9%, respectively. Through the Federal Crop Insurance Corporation, the United States government subsidizes insurance companies by assuming an increasingly higher portion of losses incurred by farmers as a result of weather-related and other perils as well as commodity price fluctuations. The United States government also subsidizes the premium cost to farmers
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for multi-peril crop yield and revenue insurance. Without this risk assumption, losses incurred by insurance companies would be higher and without the premium subsidy, the number of farmers purchasing multi-peril crop insurance would decline significantly. Periodically, members of the United States Congress propose to reduce significantly the government’s involvement in the federal crop insurance program in an effort to reduce government spending. If legislation is adopted to reduce the amount of risk the government assumes, the amount of insurance premium subsidy provided to farmers or otherwise reduce the coverage provided under multi-peril crop insurance policies, losses would increase and purchases of multi-peril crop insurance could experience a significant decline nationwide and in our market area. Such changes could have a material adverse effect on our revenues and income.
Our results may fluctuate as a result of many factors, including cyclical changes in the insurance industry.industry, competition, and innovation and emerging technologies.
Results of companies in the insurance industry, and particularly theThe property and casualty insurance industry has historically have been subject to significant fluctuationscharacterized by soft markets (periods of relatively high levels of price competition, less restrictive underwriting practices, and uncertainties and have fluctuated in cyclical periods ofgenerally low premium rates and excess underwriting capacity resulting from increased competition (a so-called “soft market”),rates) followed by periodshard markets (periods of capital shortages resulting in a lack of insurance availability, relatively low levels of price competition, more selective underwriting of risks, and relatively high premium ratesrates). During soft markets, we may lose business to other carriers offering competitive insurance at lower rates. We may also choose to reduce our premiums or limit premium increases leading to a reduction in profit margins and revenues. Our industry is also influenced by general economic conditions, which could reduce overall premium volume for us and our competitors. Additionally, the industry could be impacted by changes in customer preferences, including customer demand for direct distribution channels, point-of-sale, or other non-traditional distribution channels. Consolidation within the industry also could influence future growth and profit potential.
We monitor the competitive marketplace on both a shortagegeographic and line of underwriting capacity resulting from decreased competition (a so-called “hard market”).business basis. The industry’s profitability canprivate passenger marketplace continues to be affected significantly by:a very competitive and challenging pricing environment. Rates for private passenger auto are competitive across the country. The non-standard auto market also remains competitive with more companies seeking to grow this line of business.
FluctuationsThe commercial property market has experienced significant hardening in underwriting capacity,recent years, allowing us to demand more premium while being more selective on individual risks. If we do not effectively respond to changes in market conditions, the Company may be adversely affected.
Innovation and competition, andemerging technologies are greatly impacting the impact on our business of the other factors identified above, could have a negative impact on our results of operations and financial condition. Based on our analysis of the underwriting capacity and price competition in the current market, we believe thatinsurance industry. If we are generally in a “firming market” phase ofunable to keep pace with the insurance industry cycle. If other insurers seek to expand the kinds or amounts of insurance coverage they offer, this could result in increased underwriting capacity and competition and declining pricing as some insurers seek to maintain market share at the expense of underwriting discipline.
Competition for potential acquisitions from other property and casualty insurers could increase the pricetechnological changes that NI Holdings will be required to pay in connection with future acquisitions.
Over-capacity in the property and casualty market has led other market participants to seek acquisitions in order to generate revenue growth. These market conditions may cause significant competition for acquisitions and increase the price for acquisitions. This competitive market could impede execution of NI Holdings’ external growth strategy.
Integration of existing businesses and future acquisitions may require a significant investment of management’s time and distract management from the day-to-day operations of NI Holdings’ business.
NI Holdings has spent considerable time and effort integrating Battle Creek and Primero in the areas of sales and marketing, operations, financial reporting, and employee benefits. Future acquisitions will require additional integration, particularly to realize the anticipated coordination designed to drive revenue growth and reduce costs. NI Holdings’ executive management staff is small, and there can be no assurance that acquisitions will be successfully executed and integrated.
Weour competitors implement, we may not be able to manageattract and maintain customers, adequately price risks, or operate as efficiently as our growth effectively.
We intend to grow our businesscompetitors. In addition, emerging technologies in the automotive industry such as autonomous vehicles, driver-assistance and accident-avoidance features, sensor technology, and other forms of automation may reduce the future which could require additional capital, systems development, and skilled personnel. We cannot assure you that we will be able to locate profitable business opportunities, meetneed for, or decrease the future pricing of, our capital needs, expand our systems and our internal controls effectively, allocate our human resources optimally, identify qualified employees or agents, or incorporate effectively the components of any businesses we may acquire in our effort to achieve growth. The failure to manage our growth effectively and maintain underwriting discipline could have a material adverse effect on our business, financial condition, and results of operations.auto insurance products.
We may not be able to grow our business if our insurance company subsidiaries cannot maintain and grow their agent relationships, or if consumers seek other distribution methods offered by our competitors.
Our ability to retain existing agents, and to attract new agents, is essential to the continued growth of our business. If independent agents find it easier to do business with our competitors, our agent base may erode and, as a result, be unable to retain existing business or generate sufficient new business. While we believe that we have good relationships with our independent agents, we cannot be certain that these agents will continue to sell our products instead of our competitors’ products.
While our products are sold through either independent or captive agents, our competitors may sell insurance through other delivery models, including the internet, direct marketing, or other emerging alternative distribution methods. To the extent that current and potential policyholders change their insurance shopping preferences, this may have an adverse effectsuccess depends primarily on our ability to grow, our financial position,underwrite risks effectively and our results of operations.
Our success depends on the ability ofprice our insurance company subsidiaries to underwrite risks accurately and to price our commercial and personal lines insurance products accordingly.appropriately.
The nature of the insurance business is such that pricing must be determined before the underlying costs are fully known. This requires significant reliance on estimates and assumptions in setting prices. If our insurance subsidiarieswe fail to assess accuratelyappropriately price the risks that they assume inwe insure or if our commercial and personal lines products, they may fail to charge adequate premium rates, which could affectclaims experience is more frequent or severe than our underlying risk assumptions, our profitability may be negatively affected. If we overestimate the risks we are exposed to, we may overprice our products, and have a material adverse effect on our financial condition, resultsnew business growth and retention of operations, or cash flows. Theirexisting business may be adversely affected. The ability to assess their policyholdereffectively underwrite risks and to price their products accuratelyappropriately is subject to a number of risks and uncertainties, including, but not limited to:including:
These risks•
availability of sufficient reliable data and uncertainties could cause our insurance subsidiariesability to underprice their policies, which would negatively affect their resultsproperly analyze available data;
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market and competitive conditions;
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regulatory or legislative changes;
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selection and application of operations,appropriate pricing techniques; and
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adverse changes in claims experience, such as distracted driving or to overprice their policies, which could reduce their competitiveness. Either such event could have a material adverse effect on their financial condition, results of operations, and cash flows.more aggressive tort environment.
Under the federal crop insurance program, each insurer is required to accept every application for multi-peril crop insurance that they receive, and the premiums and the policy terms are set by the RMA, which is the federal government agency administering the federal crop insurance program. Accordingly, no policy underwriting is necessary in connection with our multi-peril crop insurance line of business. We,Unlike the multi-peril crop business, we have the ability to underwrite and several otherprice crop insurers,hail insurance. We rely on AFBIS to underwrite our crop hail insurance line of business. Unlike the multi-peril crop business, however, we have the ability to decline to issue any crop hail insurance policy ifIf we believe the policy will expose us to too much risk in a particular geographic area or if we are unwilling to insure the crop, thatwe have the policy would cover.ability to decline to issue the policy.
Our ability to manage our exposure to underwriting risks depends on the availability and cost of reinsurance coverage.
We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize underwriting results, and to increase underwriting capacity. The availability and cost of reinsurance are subject to current market conditions and may vary significantly over time. Any decrease in the amount of reinsurance maintained will increase our risk of loss. We may be unable to maintain our desired reinsurance coverage or to obtain other reinsurance coverage in adequate amounts and/or favorable rates. If we acceptare unable to maintain appropriate reinsurance coverage, it may be difficult for us to manage our underwriting risks and operate our business profitably. For additional information, see Part II, Item 8, Note 7 “Reinsurance.”
If we cannot collect loss recoveries from our reinsurers in accordance with our reinsurance agreements, we may incur additional losses.
Although reinsurance creates a contractual liability for reinsurers to the application for crop hail insurance, however,extent the risk is transferred, it does not eliminate our liability to policyholders because we remain liable as the direct insurer on all reinsured risks. Our reinsurance program strategically spreads exposure among a group of highly-rated, geographically diverse, and well-capitalized reinsurers. All of our significant reinsurance partners are rated “A-” (Excellent) or better by AM Best. However, we remain subject to credit risk relating to our ability to collect these recoverables. Our reinsurance recoveries are also subject to the underlying losses meeting the qualifying conditions and specified limits within the respective contracts. Additionally, we are subject to the risk that reinsurers may dispute their obligations to pay our claims. Our inability to collect a material recovery from a reinsurer on a timely basis, or at all, could incur losses if AFBIS fails to adequately underwrite and price such coverage.
Ourhave material adverse effect on our liquidity, operating results, and financial condition may be affected bycondition. For additional information, see Part II, Item 8, Note 7 “Reinsurance.”
Business and Operational Risks
The impact of COVID-19 or a failurefuture pandemic, and related economic conditions, could materially affect our results of operations, financial position, and/or liquidity.
We face risks associated with pandemics, including the impact of reduced economic activity and unemployment, government actions, and capital markets disruption. These risks are unpredictable and difficult to quantify, and could vary significantly depending on the extent and duration of the pandemic and related economic conditions, along with potentially impacting each of our insurance subsidiariesbusiness segments and geographic markets differently.
Any future federal, state, and local government actions to establish adequate liabilities for unpaid lossesaddress the impact of a pandemic may adversely affect us. Regulatory restrictions or requirements could impact pricing, risk selection, and LAEour rights and obligations with respect to our policies and insureds, including our ability to cancel policies or our right to collect premiums. It is also possible that changes in economic conditions and steps taken by adverse developmentfederal, state, and local governments could require an increase in taxes at the federal, state, and local levels, which would adversely impact our results of prior year reserves.operations. Additionally, potential capital markets disruption could lead to our fixed income portfolio being adversely impacted by ratings downgrades, increased bankruptcies, declines in real estate valuations, and/or declines in fixed income yields, along with increased volatility in our equity portfolio.
NI Holdings maintains reserves to cover amounts it estimates will be needed to pay for unpaid losses and for the expenses necessary to settle insured claims. Estimating liabilities for unpaid losses and LAE is a difficult and complex process involving many variables and subjective judgments. The liability for unpaid losses and LAE is the largest liability of NI Holdings and represents the financial statement item most sensitive to estimation and judgment. In developing its estimates of unpaid losses and LAE, NI
HoldingsCompetition for potential acquisitions from other property and casualty insurers could increase the price that we will be required to pay in connection with future acquisitions.
Over-capacity in the property and casualty market has evaluatedled other market participants to seek acquisitions in order to generate revenue growth. These market conditions may cause significant competition for acquisitions and considered actuarial projection techniques based on its assessmentincrease the price for acquisitions. This competitive market could impede execution of factsour external growth strategy.
We may not be able to grow our business if we cannot retain and circumstances then known, historical loss experience data,expand our captive and estimatesindependent agent relationships, provide competitive products for these agents to sell, and/or if consumers seek other distribution methods offered by our competitors.
Our ability to retain existing agents, and to attract new agents, is essential to the continued growth of anticipated trends. This process assumes that past experience, adjusted forour business. Nodak Insurance utilizes captive agents who only sell our Company’s products. Outside of North Dakota, we write business through the effectsindependent agent distribution model. If we are not able to offer competitive products and a competitive compensation structure to our captive agents and/or if our independent agents find it easier to do business with our competitors, we may be unable to retain existing business or generate sufficient new business.
While our products are sold through either independent or captive agents, our competitors may sell insurance through other distribution models, including the internet, direct marketing, or other emerging forms of current developments, changes in operations, and anticipated trends, constitutes an appropriate basis for predicting future events. While NI Holdings believes that its liability for unpaid losses and LAE is appropriate, todistribution. To the extent that such reserves provecurrent and potential policyholders change their insurance shopping preferences, this may have an adverse effect on our ability to be inadequate or excessive in the future, we would adjust themgrow, our financial position, and incur a charge or credit to earnings, as the case may be, in the period the reserves are adjusted. Any such adjustmentour results of operations.
Future acquisitions could have a material impact ondisrupt our business and harm our financial condition andor results of operations. There can be no assurance
As part of our growth strategy, we will continue to evaluate opportunities to acquire other property and casualty insurers. Any potential future acquisitions involve a number of risks that the estimates of such liabilities will not change in the future. For additional information on our liability for unpaid losses and LAE, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
We rely on our systems and employees, and those of certain third-party vendors and service providers in conducting our operations, and certain failures, including internal or external fraud, operational errors, systems malfunctions, or cyber-security incidents, could materially adversely affect our business and operating results, including:
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problems integrating the acquired operations into our existing business;
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operating and underwriting results of the acquired operations not meeting our expectations;
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diversion of management’s time and attention from our existing business;
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higher than anticipated capital requirements;
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difficulties in retaining business relationships with agents and policyholders of the acquired company;
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risks associated with entering markets in which we lack extensive prior experience;
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tax issues associated with acquisitions;
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acquisition-related disputes, including disputes over contingent consideration and escrows;
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potential loss of key employees of the acquired company; and
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potential impairment of related goodwill and intangible assets.
We could be adversely affected by the loss of our existing management and/or other key employees.
The success of our business is dependent, to a large extent, on our ability to attract and retain key employees, in particular our senior officers and key management of our insurance subsidiaries. Our business may be adversely affected if labor market conditions make it difficult for us to retain or, if needed, replace our current key officers with individuals having equivalent qualifications and experience at compensation levels competitive for our industry. There is significant competition from within the property and casualty insurance industry and from businesses outside the industry for those in key management positions, as well as others possessing highly specialized knowledge in areas such as actuarial, accounting, information technology, and data and analytics. If we are not able to successfully attract, retain, and motivate our employees, our business, financial results, and reputation could be materially and adversely affected.
While we believe we offer competitive compensation arrangements with our key employees, there can be no guarantee that we will be able to retain our key employees. In addition, our employment and other agreements with our key officers do not include covenants not to compete or non-solicitation provisions because they are unenforceable under North Dakota law.
A failure in our operational systems or infrastructure, or those of our third-party service providers, including operational errors, could disrupt business, damage our reputation, and cause losses.
Our operations rely on the secure processing, storage, and transmission of confidential information, including in our computer systems and networks and those of third-party service providers. We rely heavily on our operating systems in connection with issuing policies, paying claims, and providing the information we need to conduct our business. We also rely on the operating systems of AFBIS in connection with various processes with respect to our crop lines of business. Our business depends on effective information security and systems, and we place significant reliance on the integrity and timeliness of the data our information systems process to run our business. A breakdown or disruption of any of these systems could materially adversely affect our ability to conduct our business and our results of operations.
We are exposed to many other types of operational risk, including the risk of fraud by employees and outsiders, clerical and recordkeeping errors, and computer or telecommunications systems malfunctions. Our business depends on our ability to process a large number of increasingly complex transactions. If any of our operational, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. Similarly, we depend on our employees. We could be materially adversely affected if one or more of our employees cause a significant operational breakdown or failure, either as a result of human error or intentional sabotage or fraudulent manipulation of our operations or systems.
Third parties with whomCyberattacks, security breaches, or similar events affecting the technologies and systems we do business, including vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns, failures, or capacity constraints of their own systems or employees. Any of these occurrences could diminish our abilityrely on to operate our business and to maintain and protect sensitive Company and customer data could disrupt our operations, harm our reputation, and result in material losses.
We have implemented administrative and technical controls, have taken actions to reduce the risk of cyber incidents and to protect our information technology and assets, and will continue to modify such procedures as circumstances warrant and negotiate appropriate terms in our agreements with third-party providers to protect our assets. However, such measures may be insufficient to prevent unauthorized access, computer viruses, malware or cause financialother malicious code or cyber-attack, business compromise attacks, catastrophic events, system failures and disruptions, employee errors or malfeasance, third party (including outsourced service providers) errors or malfeasance, loss potential liability to insureds, inability to secure insurance,of assets, and other events that could have security consequences. Such an event may result in data loss or loss of assets which could result in significant losses, reputational damage, or regulatory intervention, which could materially adversely affect us.
We rely heavilyother adverse effects on our operating systems in connection with issuing policies, paying claims, and providing the information we need to conduct our business. We also rely on the operating systems of AFBIS in connection with various processes with respect to our multi-peril crop line of business. We may be subject to disruptions of such operating systems arising from events that are wholly or partially beyond our control, which may include, for example, electrical or telecommunications outages, natural or man-made disasters, such as earthquakes, floods or tornados, or events arising from terrorist acts. Such disruptions may give rise to losses in service to insureds and loss or liability to us. In addition, there is the risk that our controls and procedures as well as our business continuity, disaster recovery, and data security systems prove to be inadequate. The computer systems and network systems others and we use could be vulnerable to unforeseen problems. These problems may arise in both our internally developed systems and the systems of third-party service providers. operations.
In addition, our computer systems and network infrastructure present security risks and could be susceptible to hacking, computer viruses, or data breaches. Any such failure could affect our operations and could materially adversely affect our results of operations by requiring us to expend significant resources to correct the defect, as well as by exposing us to litigation or losses not covered by insurance. Although we have business continuity plans and other safeguards in place, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems and those of third-party service providers that support our business.
Our operations rely on the secure processing, transmission, and storage of confidential information in our computer systems and networks. Our technologies, systems, and networks may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our insureds’ confidential, proprietary and other information, or otherwise disrupt our or our insureds’ or other third parties’ business operations, which in turn may result in legal claims, regulatory scrutiny and liability, reputational damage, the incurrence of costs to eliminate or mitigate further exposure, and the loss of customers. Although to date we haveare not experiencedaware of any materialinformation security breaches or losses relating to cyber-attacks, or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature and increasing frequency and sophistication of these threats and the outsourcing of some of our business operations. As a result, cyber-security and the continued development and enhancement of our controls, processes, and practices designed to protect our systems, computers, software, data, and networks from attack, damage, or unauthorized access remain a priority. As cyber-threatscyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
DisruptionsThe compromise of personal, confidential, or failures in the physical infrastructureproprietary information could also subject us to legal liability or operating systems that support our business and customers, or cyber-attacks or security breaches of the networks, systems, or devices that our customers use to access our products and services could result in customer attrition, regulatory action, including fines, penalties, or intervention, reputational damage, reimbursement or other compensation costs, and/or additionalunder evolving cyber-security, data protection, and privacy laws and regulations enacted by the U.S. federal and state governments. Such laws and regulations have become increasingly widespread and demanding in recent years and may result in increased compliance costs anyand risk of whichregulatory actions or penalties. If incurred, such regulatory actions or penalties could materially adversely affectharm our reputation. Any such events could have an adverse impact on our business, financial condition or results of operations.
Regulatory Risks
Our revenues and financial results may fluctuate with interest rates, investment results, and developments in the securities markets.
NI Holdings invests the premiums it receives from policyholders until cash is needed to pay insured claims or other expenses. Investment securities represent one of the largest categories of assets of NI Holdings. The fair value of its investment holdings is affected by general economic conditions, and changes in the financial and credit markets. NI Holdings relies on the investment income produced by its investment portfolio to contribute to its profitability. Changes in interest rates and credit quality may result in fluctuations in the income derived from, the valuation of, and in the case of declines in credit quality, payment defaults on our fixed income securities. In addition, deteriorating economic conditions could affect the valueA portion of our equity securities. Such conditions could give risewritten premiums and net profits are generated from multi-peril crop insurance business, and the loss of such business as a result of a termination of or substantial changes to significant realized and unrealized investment losses or the impairment of securities whose decreases in value are deemed other-than-temporary. These changesFederal crop insurance program could have a materialan adverse effect on our financial condition, resultsrevenues and net income.
In 2021, 2020 and 2019, our direct premiums written generated from the multi-peril crop insurance line of operations, or cash flows.business were 12.0%, 11.5%, and 13.3%, respectively, of total written premiums. Through the FCIC, the United States government subsidizes insurance companies by assuming an increasingly higher portion of losses incurred by farmers as a result of weather-related and other perils as well as commodity price fluctuations. The investment portfolioUnited States government also subsidizes the premium cost to farmers for multi-peril crop yield and revenue insurance. Without this risk assumption, losses incurred by insurance companies would be higher. Without the premium subsidy, the number of NI Holdings is also subjectfarmers purchasing multi-peril crop insurance would decline significantly. Periodically, members of the United States Congress propose to credit and cash flow risk, including risks associated with its investments in asset-backed and mortgage-backed securities. Becausesignificantly reduce the Company’s investment portfolio is the largest component of its assets and a multiple of its equity, adverse changes in economic conditions could result in other-than-temporary impairments that are material to our financial condition and operating results. Such economic changes could arise from overall changesgovernment’s involvement in the financial markets or specific changes to industries, companies, or municipalities in which we maintain investment holdings. See “Item 7. Quantitative and Qualitative Information about Market Risk.”
Any acquisitions we make could disrupt our business and harm our financial condition or results of operations.
As part of our growth strategy, we will continue to evaluate opportunities to acquire other property and casualty insurers and insurance-related fee income businesses. Acquisitions that we may make or implement in the future entail a number of risks that could materially adversely affect our business and operating results, including:
We could be adversely affected by the loss of our existing management or key employees.
The success of our business is dependent, to a large extent, on our ability to attract and retain key employees, in particular our senior officers. Our business may be adversely affected if labor market conditions make it difficult for us to replace our current key officers with individuals having equivalent qualifications and experience at compensation levels competitive for our industry. Our key officers include:
These key officers have extensive experience in the property and casualty andfederal crop insurance industry. Our employment and other agreements with our key officers do not include covenants notprogram in an effort to compete or non-solicitation provisions because they are unenforceable under North Dakota law.
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Our abilityreduce government spending. If legislation is adopted to manage our exposure to underwriting risks depends on the availability and cost of reinsurance coverage.
Reinsurance is the practice of transferring part of an insurance company’s liability and premium under an insurance policy to another insurance company. NI Holdings uses reinsurance arrangements to limit and managereduce the amount of risk it retains, to stabilize its underwriting results, and to increase its underwriting capacity. The availability and cost of reinsurance are subject to current market conditions and may vary significantly over time. Any decrease inthe government assumes, the amount of reinsurance maintained will increase our risk of loss. We may be unableinsurance premium subsidy provided to maintain our desired reinsurancefarmers or otherwise reduce the coverage or to obtain other reinsurance coverage in adequate amounts and at favorable rates. If we are unable to renew the current coverage maintained by NI Holdings or obtain new coverage, it may be difficult for us to manage our underwriting risks and operate our business profitably.
If our reinsurers do not pay our claims in accordance with our reinsurance agreements, we may incur losses.
We are subject to loss and credit risk with respect to the reinsurers with whom NI Holdings deals because buying reinsurance does not relieve us of our liability to policyholders. If such reinsurers were not capable of fulfilling their financial obligations to us, ourprovided under multi-peril crop insurance policies, losses would increase. NI Holdings secures reinsurance coverage fromincrease and purchases of multi-peril crop insurance could experience a number of reinsurers. The lowest A.M. Best rating issued to any of such reinsurers is “A” (Excellent), which is the third highest of fifteen ratings. See “Item 1. Business — Reinsurance.”
If we fail to comply with insurance industry regulations, or if those regulations become more burdensome, we may not be able to operate profitably.
Nodak Insurancesignificant decline nationwide and American West are currently regulated by the North Dakota Insurance Department. Battle Creek is regulated by the Nebraska Insurance Department, and Primero is regulated by the Nevada Insurance Department. All four companies are also subject to regulation, to a more limited extent, by the insurance departments of other states in which they do business. The failure to comply with the laws and regulations of each jurisdictionour market area. Such changes could subject NI Holdings to sanctions and fines, including the cancelation or suspension of its license. Because approximately 71.2% of our 2017 consolidated direct premiums written originate from business written in North Dakota, the cancellation or suspension of our license in North Dakota, as a result of any failure to comply with the applicable insurance laws and regulations, would result in the most severe impacthave an adverse effect on our financial conditionrevenues and results of operations.income.
Most insurance regulations are designed to protect the interests of policyholders rather than shareholders and other investors. These regulations relate to, among other things:
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State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to financial condition, holding company issues, and other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives. The last examination of both Nodak Insurance and American West by the North Dakota Insurance Department was as of December 31, 2016. The last examination of Battle Creek by the Nebraska Insurance Department was as of December 31, 2016, and the last examination by the Nevada Insurance Department of Primero was as of December 31, 2016.
In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of regulations. Further, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by regulatory authorities could adversely affect our ability to operate our business.
We could be adversely affected by any interruption to our ability to conduct business at our current location.
Our business operations could be substantially interrupted by flooding, snow, ice, and other weather-related incidents, or from fire, power loss, telecommunications failures, terrorism, or other such events. In such an event, we may not have sufficient redundant facilities to cover a loss or failure in all aspects of our business operations and to restart our business operations in a timely manner. Any damage caused by such a failure or loss may cause interruptions in our business operations that may adversely affect our service levels and business. See “Item 1. Business — Technology.”
Assessments and premium surcharges for state guaranty funds and other mandatory pooling arrangements may reduce our profitability.
Most states require insurance companies authorized to do business in their state to participate in guaranty funds, which require the insurance companies to bear a portion of the unfunded obligations of impaired, insolvent, or failed insurance companies. These obligations are funded by assessments, which are expected to continue in the future. State guaranty associations levy assessments, up to prescribed limits, on all insurance companies doing business in the state based on their proportionate share of premiums written in the lines of business in which the impaired, insolvent, or failed insurance companies are engaged. Accordingly, the assessments levied on us may increase as we increase our written premiums. See “Item 1. Business — Regulation.For additional information, see Part I, Item 1, “Business” and “Regulation.”
In addition, as a condition to conducting business in some states, insurance companies are required to participate in residual market programs to provide insurance to those who cannot procure coverage from an insurance carrier on a negotiated basis. Insurance companies generally can fulfill their residual market obligations by, among other things, participating in a reinsurance pool where the results of all policies provided through the pool are shared by the participating insurance companies. Although we price our insurance to account for our potential obligations under these pooling arrangements, we may not be able to accurately estimate our liability for these obligations. Accordingly, mandatory pooling arrangements may cause a decrease in our profits. As we write policies in new states that have mandatory pooling arrangements, we will be required to participate in additional pooling arrangements. Further, the impairment, insolvency, or failure of other insurance companies in these pooling arrangements would likely increase the liability for other members in the pool. The effect of assessments and premium surcharges or increases in such assessments or surcharges could reduce our profitability in any given period or limit our ability to grow our business. See “Item 7. Management’s Discussion
We are subject to insurance industry laws and Analysisregulations, as well as claims and legal proceedings, which if determined unfavorably, could have a material adverse effect on our profitability.
We are subject to extensive supervision and regulation by the states in which we operate. The failure to comply with these regulations could subject the Company to sanctions and fines, including the cancellation or suspension of Financial Condition and Results of Operations.”
Future changes in financial accounting standards or practices may adversely affect our reported results of operations.
Financial accounting standards in the United States are constantly under review and may be changed from time to time. We would be required to apply these changes when adopted. Once implemented, these changeslicenses, which could materially affectsignificantly impact our financial condition and results of operations and/oroperations. State insurance departments also conduct periodic examinations of the way in which suchaffairs of insurance companies and require the filing of annual and other reports relating to financial condition, holding company issues, and resultsother matters.
In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of operations are reported.
Similarly, we are subject to taxationregulations. Further, changes in the United States and a numberlevel of state jurisdictions. Ratesregulation of taxation, definitions of income, exclusions from income, and other tax policies are subject to change over time. Accounting standards would require that we recognize the effects ofinsurance industry or changes in tax rates and laws on deferred income tax balances in the period in which the legislation is enacted.
Enactment of significant income tax laws mayor regulations themselves or interpretations by regulatory authorities could adversely affect our reported resultsability to operate our business. Federal laws and regulations, and the influence of operations.
On December 22, 2017, the Tax Cutsinternational laws and Jobs Act, or TCJA, was signed into law, significantly reforming the U.S. Internal Revenue Code. The TCJA, among other things, includes changes to U.S. federal income tax rates, imposes significant additional limitationsregulations, may have adverse effects on the deductibility of interest, allows for increased expensing of capital expenditures, puts into effect the migrationour business, potentially including a change from a “worldwide”state-based system of taxationregulation to a territorial system and modifies or repeals many business deductions and credits. We continue to examineof federal regulation, the impact the TCJA may have on our business. We will continue to evaluate the effectrepeal of the TCJA onMcCarran Ferguson Act, and/or measures under the Dodd-Frank Act that establish the Federal Insurance Office and provide for a determination that a non-bank financial company presents systemic risk and therefore should be subject to heightened supervision by the Federal Reserve Board. It is not known how this federal office will coordinate and interact with the NAIC and state insurance regulators. Adoption or implementation of any of these measures may restrict our projectionability to conduct our insurance business, govern our corporate affairs, or effectively manage our cost of cash flows and our net operating results. The estimated impact of the TCJA is based on our management’s current knowledge anddoing business.
assumptionsWe also face a risk of litigation in the ordinary course of operating our businesses including the risk of class action lawsuits. We may become subject to class actions and recognized impacts could be materially different from current estimates based onindividual suits alleging breach of fiduciary or other duties, including our actual resultsobligations to indemnify directors and officers in connection with certain legal matters. We are also subject to litigation arising out of our further analysisgeneral business activities such as contractual and employment relationships and claims regarding the infringement of the new law. Our net deferred income tax assets and liabilities have been revalued at the newly enacted U.S. corporate rate, and the impact has been recognizedintellectual property of others. Plaintiffs in our income tax expense in the current year based upon our understanding of the legislation at this time. Under certain circumstances, we have up to one year from enactment to make changes to our deferred income tax assets and liabilities based upon clarification to the legislation. The impact of the TCJA on holders of common shares is uncertain and could be adverse. This Form 10-K does not discuss any such tax legislation or the manner in which it might affect purchasers of common shares. We urge our stockholders, including purchasers of common shares, to consult with their own legal and tax advisors with respect to such legislation and the potential tax consequences of investing in common shares.
We face uncertainties related to the effectiveness of internal controls, particularly with regard to our operating subsidiaries’ financial reporting controls and information technology security.
It should be noted that any system of internal controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any internal control system is based in part upon certain assumptions about the likelihood of future events. Because of theseclass action and other inherent limitationslawsuits against us may seek large or indeterminate amounts of internal control systems, there can be no assurance that any design will achieve its stated goal under all potential future conditions, regardlessdamages, including punitive and treble damages, which may remain unknown for substantial periods of how remote. Deficiencies or weaknesses that are not yet identified could emerge, and the identification and correction of these deficiencies or weaknesses could have a material impact on our results of operations.time.
We will be required to publicly report on deficiencies or weaknesses in our internal controls that meet a materiality standard. Management may, at a point in time, categorize a deficiency or weakness as immaterial or minor and therefore not be required to publicly report such deficiency or weakness. Such determination, however, does not preclude a change in circumstances such that the deficiency or weakness could, at a later time, become a reportable condition that could have a material impact on our results of operations.
Risks Related to Our Common Stock
Our return on equity may be low compared to other insurance companies. A low return could lower the trading price of our common stock.
Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of an insurance company to its peers. Our return on equity is expected to be reduced due to the large amount of capital that we raised in our IPO that has yet to be deployed, expenses we will incur in pursuing our growth strategies, the costs of being a public company, and added expenses associated with our employee stock ownership plan (“ESOP”) and equity incentive plans. Until we can increase our earned premiums and net income, we expect our return on equity to be below the median return on equity for publicly traded insurance companies, which may negatively affect the value of our common stock.
Additional expenses from new stock-based benefit plans willmay adversely affect our profitability.
OurDuring 2020, our shareholders have approved the adoption of an equity incentive plan (“the Plan”our 2020 Stock and Incentive Plan (the “Plan”). Under the Plan, we may award participants restricted shares of our common stock, options to purchase shares of our common stock, or other forms of awards. Restricted stock awards will be made at no cost to the participants. The maximum number of shares of common stock that may be issued is set forth in the approved Plan. In addition, as part of our initial public offering in 2017, the Company established its ESOP. The ESOP is intended to be an employee stock ownership plan within the meaning of Internal Revenue Code Section 4975(e)(7) and invests solely in common stock of the Company.
TheIn addition, any additional compensation expense resulting from the ESOP and the Plan willmay adversely affect our profitability. We cannot determine the actual future amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices require that they be based on the fair market value of the shares of common stock at specific points in the future; however, we expect them to be material. We will recognize expenses for our ESOP when shares are committed to be released to participants’ accounts and will recognize expenses for restricted stock awards and stock options over the vesting period of awards made to recipients. See our consolidated financial statementsPart II, Item 8, Note 13 “Benefit Plans” and Note 19 “Stock-Based Compensation” for the actual amount of expenses to date.
Nodak Mutual Group’s majority control of our common stock will enable it to exercise voting control over most matters put to a vote of shareholders and will prevent shareholders from forcing a sale or a second-step conversion transaction you may find advantageous.shareholders.
Nodak Mutual Group owns a majority of our outstanding common stock and, through its Board of Directors, is able to exercise voting control over most matters put to a vote of shareholders. The votes cast by Nodak Mutual Group may not be in your personalthe best interests as a shareholder.of all shareholders. For example, Nodak Mutual Group may exercise its voting control to defeat a shareholder nominee for election to the Board of Directors of NI Holdings. Moreover, Nodak Mutual Group’s ability to elect the Board of Directors of NI Holdings restricts the ability of the minority shareholders of NI Holdings to effect a change of control of management. Some
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management or engage in certain transactions. For example, some shareholders may desire a sale or merger transaction, since shareholders typically receive a premium for their shares, or a second-step conversion transaction, since fully converted institutions tend to trade at higher multiples than mutual holding companies.
In addition, certain provisions of our Articles of Incorporation, such as the existence of a classified Board of Directors, the prohibition of cumulative voting for the election of directors, and the prohibition on any person or group acquiring and having the right to vote in excess of 10% of our outstanding stock without the prior approval of the Board of Directors will make removal of the Company’s management difficult.
Our status as an insurance holding company with no direct operations could adversely affect our ability to fund operations, conductexecute future share repurchases, or meet ourpotential future shareholder dividend and/or debt obligations.
We are an insurance holding company. A significant source of funds available to us for the payment of operating expenses, share repurchases, and debt-related amountspotential future dividends to shareholders and/or debt servicing are net proceeds from our initial public offering retained at the holding company, management fees, and dividends from our subsidiaries. The payment of dividends by Nodak Insurance, Direct Auto, and Westminster to NI Holdings will be restricted by North Dakota’s insurance law. American WestIf we are unable to obtain dividends from our subsidiaries as needed to fund our operations, our business and Primero historically have not paid dividends to Nodak Insurance.financial results could be adversely affected.
Statutory provisions and provisions of our Articles of Incorporation and Bylaws may discourage takeover attempts of NI Holdings that youshareholders may believe are in yourtheir best interests or that might result in a substantial profit to you.interests.
We are subject to provisions of North Dakota corporate and insurance law that hinder a change of control. North Dakota law requires the North Dakota Insurance Department’s prior approval of a change of control of an insurance holding company. Under North Dakota law, the acquisition of 10% or more of the outstanding voting stock of an insurer or its holding company is presumed to be a change in control. Approval by the North Dakota Insurance Department may be withheld even if the transaction would be in the shareholders’ best interest if the North Dakota Insurance Department determines that the transaction would be detrimental to policyholders.
Our Articles of Incorporation and Bylaws also contain provisions that may discourage a change in control. These provisions include:
These provisions may serve to entrench management and may discourage a takeover attempt that youshareholders may consider to be in yourtheir best interest or in which youthey would receive a substantial premium over the current market price. These provisions may make it extremely difficult for any one person, entity, or group of affiliated persons or entities to acquire voting control of NI Holdings, with the result that it may be extremely difficult to bring about a change in the Board of Directors or management. Some of these provisions also may perpetuate present management because of the additional time required to cause a change in the control of the Board of Directors. Other provisions make it difficult for shareholders owning less than a majority of the voting stock to be able to elect even a single director.
Ownership of a majority of our stock by Nodak Mutual Group will make removal of the management difficult.
Nodak Mutual Group owns greater than 55% of our outstanding common stock. Therefore, it has the power to take actions that nonaffiliated shareholders may deem to be contrary to the shareholders’ best interests. In addition, certain provisions of our Articles of Incorporation, such as the existence of a classified Board of Directors, the prohibition of cumulative voting for the election
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of directors, and the prohibition on any person or group acquiring and having the right to vote in excess of 10% of our outstanding stock without the prior approval of the Board of Directors will make removal of NI Holdings’ management difficult.
If our subsidiaries are not sufficiently profitable, our ability to pay dividends will be limited.
We are a separate entity with no operations of our own other than holding the stock of Nodak Insurance and our other subsidiaries. We depend primarily on dividends paid by Nodak Insurance and the proceeds from our IPO that were not contributed to Nodak Insurance to carry out our business plan, including future acquisitions, and to provide funds for the payment of dividends. To date, Nodak Insurance has not paid any dividends. We will receive dividends from Nodak Insurance only after all of Nodak Insurance’s obligations and regulatory requirements with the North Dakota Insurance Department have been satisfied. 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 insurance company’s surplus as regards policyholders as of the precedingBeginning December 31, or (ii) the insurance 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. If Nodak Insurance and our other subsidiaries are not sufficiently profitable, our ability to pay dividends to you in the future2022, we will be limited.
We are an “emerging growth company” and have elected to comply with reducedface expanded public company reporting requirements.requirements as a result of losing EGC status.
We arewill no longer qualify as an EGC as defined by the JOBS Act. ForAct as long as we continueof December 31, 2022. Effective with the 2022 Annual Report on Form 10-K to be an EGC,filed in 2023, we may choosewill no longer have the ability to take advantage of exemptions from various public company reporting requirements. These exemptions include, but are not limited to,requirements, including (i) not being required to comply withexemption from the auditor attestation requirements of Section 404 of SOX,the Sarbanes-Oxley Act of 2002 (“SOX”), (ii) reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements, and registration statements, and (iii) exemptions from the requirements of holding a nonbindingnon-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In this Annual Report on Form 10-K, we have elected to take advantage of certain of the reduced disclosure obligations regarding financial statements and executive compensation.
In addition, Section 107(b) of the JOBS Act also provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Exchange Act for complying with new or revised accounting standards. In other words, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosinghave chosen to “opt in” to such extended transition period election under Section 107(b). Therefore, we are electinghave elected to delay adoption of certain new or revised accounting standards, and as a result, we maycould choose to not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growthnon-EGC companies. As a result of such election, our financial statements may not be comparable to the financial statements of other public companies. However, beginning December 31, 2022, we will no longer have the ability to delay adoption of these new or revised accounting standards. See Part II, Note 8, Note 4 to our Consolidated Financial Statements“Recent Accounting Pronouncements” for more information regarding new or revised accounting standards.
Our adoption of Section 404(b) of SOX will require our external auditor to attest to, and report on, our management’s assessment of internal controls. A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met. If our controls are not designed appropriately or operating effectively, it could lead to financial loss, unanticipated risk exposure (including underwriting, credit, and investment risk), errors in financial reporting, litigation, regulatory proceedings, or damage to our reputation.
General Risks
Our investment portfolio is subject to credit and interest rate risk, and therefore our revenues and financial results may fluctuate with interest rates, investment results, equity market fluctuations, and developments in the capital markets.
The Company relies on the investment income produced by its investment portfolio to contribute to its profitability. Changes in interest rates and credit quality may result in fluctuations in the income derived from, the valuation of, and in the case of declines in credit quality, payment defaults on our fixed income securities. Such conditions could give rise to significant realized and unrealized investment losses or the impairment of securities whose decreases in value are deemed other-than-temporary.
We could be an EGC for upalso invest a portion of our assets in equity securities, which are subject to five years, which such fifth anniversary will occurgreater volatility in 2022. However, if certain events occur priortheir investment returns than fixed maturity investments. Unlike fixed income securities, the changes in the fair value of our equity securities are recognized in net income. General economic conditions and stock market volatility, changes in applicable tax laws, and many other factors beyond our control can adversely affect the value of our non-fixed maturity investments and the realization of net investment income, changes to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion,unrealized gains or we issue more than $1.0 billion of non-convertible debtlosses, and/or result in any three-year period, we would cease to be an EGC prior to the end of such five-year period. We have taken advantage of certain of the reduced disclosure obligations regarding executive compensation in this Annual Report on Form 10-K and may elect to take advantage of other reduced burdens in future filings.realized investment losses. As a result the information thatof these factors, we provide to holders of our common stock may be different than you might receive from other public reporting companies in which you hold equity interests. We cannot predict if investors will find our common stock less attractive as a result of our reliancerealize reduced returns on these exemptions. If some investors findinvestments, incur losses on sales of these investments, and be required to write down the value of these investments, which could reduce our common stock less attractive as anet investment income and result in realized investment losses. In addition, the changes to the fair value of any choice we makeequity securities that are recognized in net income will result in greater volatility to net income than investments in fixed income securities.
Any significant or long-running negative changes in the fixed income or equity markets could have a material adverse effect on our financial condition, results of operations, or cash flows. The Company’s investment portfolio is also subject to reduce disclosure,credit and cash flow risk, including risks associated with its investments in asset-backed and mortgage-backed securities. Because the Company’s investment portfolio is the largest component of its assets and a multiple of its shareholders’ equity, adverse changes in economic conditions could result in other-than-temporary impairments that are material to our financial condition and operating results. Such economic changes could arise from overall changes in the financial markets or specific changes to industries, companies, or municipalities in which we maintain investment holdings. See Part II, Item 7, “Quantitative and Qualitative Disclosures About Market Risk.”
We may not be able to manage our growth effectively.
We intend to grow our business in the future, which could require additional capital, systems development, and skilled personnel. However, there are inherent risks associated with this strategy, including the risks of unsuccessfully identifying profitable business opportunities, managing capital requirements, expanding systems and internal controls, maintaining innovative products and technologies, allocating human capital resources, identifying qualified employees and/or agents, and integrating future acquisitions. The failure to manage our growth effectively could have a material adverse effect on our business, financial condition, and results of operations.
We could be adversely affected by a future unexpected business interruption involving our office buildings, operational systems and infrastructure, key external vendors, and/or workforce.
Our business operations could be substantially interrupted by flooding, snow, ice, wind, and other weather-related incidents, or from fire, pandemics, power loss, telecommunications failures, terrorism, or other such events. Despite successfully operating in a remote environment during the COVID-19 pandemic, our business continuity plans may benot sufficiently remediate all risks associated with another future significant business interruption. Any damage caused by such a less active trading market forfailure or loss may cause interruptions in our common stockbusiness operations that may adversely affect our service levels and the price for our common stock may be more volatile.business.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our headquarters is located at 1101 First Avenue North, Fargo, North Dakota, which is also the headquarters of Nodak Insurance. Nodak Insurance owns this building and leases a portion of the building to the North Dakota Farm BureauNDFB and to AFBIS.
Battle Creek owns the building in which its offices are located at 603 South Preece Street, Battle Creek, Nebraska.
On December 30, 2021, Primero ownsentered into a new lease at 9950 West Cheyenne Ave, Las Vegas, Nevada, and sold its owned portion of the building at 2640 South Jones Blvd, Suite 2, Las Vegas, Nevada andon January 5, 2022. Tri-State Ltd. leases the building at 506 5th Street, Spearfish, South Dakota. Primero employees
Direct Auto leases office space at these two locations administer8700 West Bryn Mawr Avenue, Chicago, Illinois under a lease that expires on August 31, 2029.
Westminster owns a portion of the non-standard auto business. building in which its offices are located at 8890 McDonogh Road, Suite 310, Owings Mills, Maryland.
We believe that the offices currently occupied by each of our subsidiaries are sufficient for their needs and any expected internal growth in the near future.
Item 3. 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 inherent uncertainties attendant toof litigation, we cannot assure you that our results of operations and financial condition will not be materially adversely affected by any litigation.
Item 4. Mine Safety Disclosures
Not Applicable.applicable.
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
Market Information
The Company’s common shares trade on the NASDAQ Capital Market under the symbol “NODK”. As of March 2, 2018,February 28, 2022, there were 693approximately 575 shareholders of record for the Company’s common stock. The closing price of our common stock on the NASDAQ on March 2, 2018 was $16.44.
The following table sets forth the high and low intraday sales prices per share of the Company’s common shares as reported by the NASDAQ for the periods indicated:
Year Ended December 31, 2017 | High | Low | ||||||
First quarter (since March 16, 2017)(1) | $ | 15.00 | $ | 14.00 | ||||
Second quarter | 18.80 | 14.82 | ||||||
Third quarter | 18.20 | 15.81 | ||||||
Fourth quarter | 18.62 | 16.09 |
(1) Our common stock did not trade publicly prior to March 16, 2017.
Stock Performance Graph
The following graph sets forthshows the cumulative total shareholder return (stock price increase plus dividends) on our common stock from March 16, 2017 (the first date of the initial public offeringthat shares of our common stock)stock were available for trading) through December 31, 2017,2021, along with the corresponding returns for the Russell 2000 Index (as the broad stock market index) and the SNLDow Jones US Insurance P&C Insurance Index (as the published industry index). The graph assumes that the value of the investment in the common stock and each index was $100 on March 16, 2017 and that all dividends were reinvested.
Dividend Policy
Our Board of Directors continues to evaluate a potential policy of paying regular cash dividends, but has not decided on the amounts that may be paid, the frequency of any payment, or when theany payments may occur.begin. Therefore, the timing and the amount of cash dividends that may be paid to shareholders in the future is uncertain. In addition, the Board of Directors may declare and pay periodic special cash dividends in addition to, or in lieu of, regular cash dividends. In determining whether to declare or pay any dividends, whether regular or special, the Board of Directors will take into account our financial condition and results of operations, income tax considerations, capital requirements, industry standards, and economic conditions. The regulatory restrictions that affect the payment of dividends by Nodak Insurance to us as discussed below will also be considered. We cannot guarantee that we will pay dividends or that, if paid, we will not reduce or eliminate dividends in the future.
If we pay dividends to our shareholders, we also will be required to pay dividends to Nodak Mutual Group, unless Nodak Mutual Group elects to waive the receipt of dividends. Because Nodak Mutual Group has no current plans to utilize any cash dividends that it may receive from us, we anticipate that it will waive its right to receive substantially all of the dividends that are paid to it by us or immediately return substantially all of such funds to us as an equity contribution. BecauseHowever, because the Board of Directors of Nodak Mutual Group includes persons who are not members of our Board of Directors, we cannot provide any assurance however, that they will take such action with respect to everyany cash dividend that we may declare. If we are unable to obtain a commitment from the Board of Directors of Nodak Mutual Group that it will waive its right to receive any cash dividend that we intend to declare or that it will return the funds from such dividend to the Company as an equity contribution, our Board of Directors may decide not to declare a cash dividend.
We willare not becurrently subject to regulatory restrictions on the payment of dividends. Our abilitydividends to payour shareholders. However, any future dividends however, may depend, in part, uponbe restricted to those received from our receipt of dividends from Nodak Insurance because we initially will have no source ofinsurance subsidiaries, as our income other thanis limited to earnings from the investment of the net proceedsinvested capital remaining from our IPO that we retain.initial IPO. North Dakota law limits the amount of dividends and other distributions that Nodak Insurance, Direct Auto, and Westminster may pay to us.
North Dakota law sets For information regarding the maximum amountregulatory restrictions on dividends our insurance subsidiaries can pay, refer to Part II, Item 7, “Management’s Discussion and Analysis of dividends that may be paid by Nodak Insurance during any twelve-month period after notice to, but without prior approvalFinancial Condition and Results of the North Dakota Insurance Department. This amount cannot exceed the lesser of (i) 10% of the insurance company’s surplus as regards policyholders as of the preceding December 31, or (ii) the insurance company’s statutory net income for the preceding calendar year (excluding realized capital gains)Operations”, 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. As of December 31, 2017, the amount available for payment of dividends by Nodak Insurance to us in 2018 without the prior approval of the North Dakota Insurance Department is $15,654. We cannot assure you that the North Dakota Insurance Department would approve the declaration or payment by Nodak Insurance of any dividends in excess of such amount to us. See “Item 1. Business — Regulation.”“Liquidity and Capital Resources”, and Part II, Item 8, Note 21 “Statutory Net Income, Capital and Surplus, and Dividend Restrictions”.
Even if we receive any dividends from Nodak Insurance, Direct Auto, or Westminster, we may not declare any dividends to our shareholders because of ourdue to working capital requirements. We are not subject to regulatory restrictions on the payment of dividends to shareholders, but we are subject to the requirements of the North Dakota Business Corporation Act. This law generally permits dividends or distributions to be paid, as long as, after makingto the dividend or distribution,extent we will be ablestill have the ability to pay our debts in the ordinary course of business and
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after making the dividend or distribution payments. This law requires our total assets willto exceed our total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of holders of stock with senior liquidation rights if we were to be dissolved at the time the dividend or distribution is paid.
Unregistered Securities
The Company has not sold any unregistered securities within the past three years.
Use of Proceeds from Initial Public Offering
On January 17, 2017, the SEC declared effective our registration statement on Form S-1 registering our common stock.stock was declared effective by the SEC. On March 13, 2017, the Company completed the initial public offeringIPO 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 the underwriting discounts and offering expenses. Griffin Financial Group, LLC acted as our placement agent in connection with the initial public offering.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 two installments were paid in January 2021 and January 2022. The Company anticipates using the net proceeds from the IPO to satisfy this obligation in December 2022.
From time to time, the Company may also repurchase its own stock. These repurchases may be used to satisfy its obligations under the equity incentive plans or may be done for other reasons. To date, the Company has used net proceeds from the IPO to fund these buyback programs. For more information, see Part II, Item 5, “Issuer Stock Purchases”.
There has been no material change in the planned use of proceeds from our initial public offeringIPO as described in our final prospectus filed with the SEC on January 17, 2017.
Issuer Stock Purchases
The Company had no common shares outstanding during 2016 and 2015.prior to March 13, 2017.
During 2017, our Board of Directors approved an authorization for the repurchase of up to $8 million$8,000 of the Company’s outstanding common stock. We purchased 446,671 shares of our common stock for $8,037 during the three months ended June 30, 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 authorization. During the nine months ended September 30, 2021, we repurchased an additional 144,110 shares of our common stock for $2,762 to close out this authorization.
On August 11, 2021, our Board of Directors approved an additional authorization for the repurchase of up to approximately $5,000 of the Company’s outstanding common stock. During the six months ended December 31, 2021, we completed the repurchase of 81,095 shares of our common stock for $1,554 under this new authorization.
In total during the year ended December 31, 2021, we completed the repurchase of 225,205 shares of our common stock for $4,316. The repurchases made in the three months ended December 31, 2021 are shown below:
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 Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1) (in thousands) | ||||||||||||
October 1 – 31, 2021 | 19,329 | $ | 19.40 | 19,329 | $ | 4,176 | ||||||||||
November 1 – 30, 2021 | 17,899 | 19.81 | 17,899 | 3,821 | ||||||||||||
December 1 – 31, 2021 | 19,584 | 19.15 | 19,584 | 3,446 | ||||||||||||
Total | 56,812 | $ | 19.44 | 56,812 | $ | 3,446 | ||||||||||
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(1) | Shares purchased pursuant to the August 11, 2021 publicly announced share repurchase authorization of up to approximately $5,000 of the Company’s outstanding common stock. |
33Item 6. [Reserved]
Item |
You should read the selected financial data set forth below in conjunction with our historical consolidated financial statements and related notes and with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.Operations
NI Holdings evaluates its operations by monitoring certain key measures of growth and profitability. In addition to GAAP measures, NI Holdings utilizes certain non-GAAP financial measures that it believes are valuable in managing its business and for providing comparisons to its peers.
These historical results are not necessarily indicative of future results, and the results for any interim period are not necessarily indicative of the results that may be expected for a full year.
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NI Holdings, Inc.
Three-Year Summary of Selected Financial Data
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Sales: | ||||||||||||
Direct premiums written | $ | 195,238 | $ | 180,870 | $ | 172,775 | ||||||
Net premiums written | 185,281 | 156,713 | 143,065 | |||||||||
Revenues: | ||||||||||||
Net premiums earned | $ | 179,464 | $ | 152,756 | $ | 139,473 | ||||||
Fee and other income | 1,648 | 1,666 | 1,854 | |||||||||
Net investment income | 5,031 | 3,644 | 3,571 | |||||||||
Net realized capital gain on investments | 2,997 | 5,681 | 823 | |||||||||
Total revenue | 189,140 | 163,747 | 145,721 | |||||||||
Components of net income: | ||||||||||||
Net premiums earned | $ | 179,464 | $ | 152,756 | $ | 139,473 | ||||||
Losses and loss adjustment expenses | 122,711 | 118,508 | 83,876 | |||||||||
Amortization of deferred policy acquisition costs and other underwriting and general expenses | 44,423 | 39,122 | 35,972 | |||||||||
Underwriting gain (loss) | 12,330 | (4,874 | ) | 19,625 | ||||||||
Fee and other income | 1,648 | 1,666 | 1,854 | |||||||||
Net investment income | 5,031 | 3,644 | 3,571 | |||||||||
Net realized capital gain on investments | 2,997 | 5,681 | 823 | |||||||||
Income before income taxes | 22,006 | 6,117 | 25,873 | |||||||||
Income taxes | 6,394 | 1,479 | 8,288 | |||||||||
Net income | $ | 15,612 | $ | 4,638 | $ | 17,585 | ||||||
Earnings per share: | ||||||||||||
Basic | $ | 0.71 | $ | n/a | $ | n/a | ||||||
Diluted | $ | 0.71 | $ | n/a | $ | n/a | ||||||
Share data: | ||||||||||||
Weighted average shares outstanding used in basic per share calculations | 22,512,401 | n/a | n/a | |||||||||
Plus: Dilutive securities | 228 | n/a | n/a | |||||||||
Weighted average shares used in diluted per share calculations | 22,512,629 | n/a | n/a | |||||||||
December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Assets: | ||||||||||||
Cash and investments | $ | 313,885 | $ | 207,677 | $ | 197,793 | ||||||
Premiums and agents’ balances receivable | 25,632 | 21,986 | 20,039 | |||||||||
Deferred policy acquisition costs | 8,859 | 8,942 | 8,444 | |||||||||
Other assets | 28,612 | 40,098 | 32,348 | |||||||||
Total assets | $ | 376,988 | $ | 278,703 | $ | 258,624 | ||||||
Liabilities: | ||||||||||||
Unpaid losses and loss adjustment expenses | $ | 45,890 | $ | 59,632 | $ | 45,342 | ||||||
Unearned premiums | 63,262 | 57,445 | 53,487 | |||||||||
Other liabilities | 12,263 | 8,208 | 9,877 | |||||||||
Total liabilities | 121,415 | 125,285 | 108,706 | |||||||||
Equity | 255,573 | 153,418 | 149,918 | |||||||||
Total liabilities and equity | $ | 376,988 | $ | 278,703 | $ | 258,624 | ||||||
Per share data: | �� | |||||||||||
Total book value per basic share | $ | 11.44 | $ | n/a | $ | n/a | ||||||
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The following discussion is intended to provide a more comprehensive review of the Company’sour operating results and financial condition than can be obtained from reading the Consolidated Financial Statements alone. The discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in “Item 8. FinancialPart II, Item 8, “Financial Statements and Supplementary Data.” Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K constitutes forward-looking information that involves risks and uncertainties. Please see “Forward-Looking Information”Statements” and “Item 1A. Risk Factors” for more information. You should reviewPart I, Item 1A, “Risk Factors” 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.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this document can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 10, 2021.
All dollar amounts, except per share amounts, are in thousands.
Marketplace Conditions and Trends
Overview
NI Holdings isThe private passenger auto marketplace was impacted by increased loss severity throughout the year, as driving habits and miles driven returned to pre-pandemic levels. Loss severity trends also continued to increase due to numerous factors, including the impacts that supply chain issues, inflation, and technological advancements have had on the automobile market. As 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 conversionresult, elevated loss experience was consummated on March 13, 2017. Immediately following the conversion, allcommon across much of the outstanding shares of common stock of Nodak Insurance Company were issued to Nodak Mutual Group, which then contributed the shares to NI Holdingsindustry during 2021.
The non-standard auto market also remains competitive with many companies seeking growth in exchange for 55% of the outstanding shares of common stock of NI Holdings. Nodak Insurance Company then became a wholly owned stock subsidiary of NI Holdings. Prior to completion of the conversion, NI Holdings conducted no business and had no assets or liabilities. Asthis line as a result of the conversion, NI Holdings becamechallenging private passenger auto market and the holding company for Nodak Insurance Company and its existing subsidiaries.
Nodak Insurance offers property and casualtyopportunity to cross-sell additional insurance crop hail, and multi-peril cropproducts, such as homeowners or renters insurance, to members of the North Dakota Farm Bureau through captive agents in North Dakota. American West and Battle Creek offer similar insurance coverage through independent agents in South Dakota and Minnesota, and Nebraska, respectively. Primero offers limited nonstandardgrowing non-standard auto insurance coverage in Arizona, Nevada, North Dakota, and South Dakota. Nodak Insurance and Battle Creek are rated by “A” by A.M. Best, which ismarket.
As opposed to most personal lines, the third highest out of a possible 15 ratings. American West is rated “A-” and Primero is unrated.
American West is a wholly-owned subsidiary of Nodak Insurance, and Primero is an indirect wholly-owned subsidiary of Nodak Insurance. Battle Creek is managed by Nodak Insurance, and Nodak Insurance reinsures 100% of the risk on all insurance policies issued by Battle Creek. NI Holdings’ financial statements set forth herein include the consolidated financial results of NI Holdings and Nodak Insurance, including Nodak Insurance’s subsidiaries American West and Primero and its affiliate Battle Creek.
Marketplace Conditions and Trends
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 ordercommercial multi-peril market continued to compete for business. A hard market, generally considered a beneficial industry trend, is characterized by reduced competition that results in higher pricing. We believe that the market is in a “firming” phase in response to higher frequency and severity of weather-related events in our markets as well as the rest of the world.benefit from significant positive rate changes throughout 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 planted, 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 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 commercial farmers obtain crop insurance on their plantings each year.
Changing Climate Conditions
Longer-term natural catastrophe trends may be changing, and new types of catastrophe losses may be developing due to climate change, a phenomenon that has been associated with extreme weather events linked to rising temperatures, and includes effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail, and snow. The frequency, number, and severity of these losses are unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Our ability to effectively manage catastrophe risk is dependent, in part, on the reliance of various catastrophe models, which may produce unreliable output as a result of inaccurate or incomplete data, along with the inherent uncertainty of future frequency and severity of losses. The impact of changing climate conditions on the overall insurance industry may also materially affect the availability and cost of reinsurance to us. In addition, these changes could impact the creditworthiness of issuers of securities in which the Company invests, subjecting our investment portfolio to increased credit and interest rate risk, with the potential for reduced investment returns and/or material realized or unrealized losses.
Principal Revenue Items
NI HoldingsThe Company derives its revenue primarily from net premiums earned, net investment income, and net realized 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).reinsurers.
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’The Company’s property and casualty policies, other than some of our auto lines and the non-standard auto policies, typically have a term of twelve months. For example, for a policy that is written on July 1, 2017, one-half of the premiums would be earned in 2017 and the other half would be earned in 2018.
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 generally 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 FCIC by November 15, regardless of whether the farmer pays the premium to the insurer. Except for claims madeoccurring in the spring (primarily for prevented planting and required replanting claims), claims are required to be madefiled 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 Holdingsthe Company covers crops planted in the spring.
Net investment income and net realized capital gain (loss) on investments
NI HoldingsThe Company invests its surplusexcess cash in fixed income and the funds supporting its insurance liabilities (including unearned premiums and unpaid losses and LAE) in cash, cash equivalents, equities, and fixed incomeequity securities. Investment income includes interest and dividends earned on invested assets.assets, and is reported net of investment-related expenses. Net realized capital gains and losses on investments are reported separately from net investment income. NI HoldingsThe Company recognizes realized capital gains when investments are sold for an amount greater than their cost or amortized cost (in the case of fixed income securities) and recognizes realized capital losses when investments are written down as a result of an other-than-temporary impairmentsimpairment or are sold for an amount less than their cost or amortized cost, as applicable. The Company’sCompany recognizes changes in unrealized gains and losses of equity securities in net income as part of net capital gains and losses on investments. These gains and losses may be significant given the fair market value of the equity portfolio and the inherent volatility in equity markets. The changes in unrealized gains and losses on fixed income securities are recorded in other comprehensive income (loss), net of income taxes. Therefore, these change have no impact on net income, but do impact shareholders’ equity.
The portfolio of investments for NI Holdings and its insurance subsidiaries is managed by Conning, Inc. and Disciplined Growth Investors, whoInvestors. 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’The Company’s expenses consist primarily of losslosses and LAE, amortization of deferred policy acquisition costs, other underwriting and general expenses, and income taxes.
LossLosses and Loss Adjustment Expenses
LossLosses 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 expenses and other underwriting and general expenses.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, as well as paymentsseparately.
Income taxes
Current income taxes represent amounts paid to bureausthe federal government and assessmentscertain 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 statistical agencies for policy service and administration items such as rating manuals, rating plans, and experience data.
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policyholder premiums.
Income taxes
NI Holdings usesWe use 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. At December 31, 2017, 2016 and 2015, NI Holdings had recorded valuation allowances with respect to its deferred income tax assets of $628, $1,022, and $1,084, respectively. The effect of a change in tax rates is recognized in the period of the enactment date, which is the primary reason fordate. Total income taxes reflect both current income taxes and the change in valuation allowance in 2017, as a resultthe net deferred income tax asset or liability, excluding amounts attributed to accumulated other comprehensive income.
Critical Accounting Policies
General
The preparation of the TCJA enacted on December 22, 2017.
Key Financial Measures
NI Holdings evaluates its insurance operations by monitoring certain key measures of growth and profitability. In addition to reviewing its financial performance based on results determinedstatements in accordance with accounting principles generally accepted in the United States of America (“GAAP”), NI Holdings utilizes certain non-GAAP financial measures that are used widely in the property and casualty insurance industry and which it believes are valuable in managing its business and for comparison to its peers. These non-GAAP measures are the expense ratio, loss and LAE ratio, combined ratio, written premiums, ratio of net written premiums to statutory surplus, underwriting gain, return on average equity, and risk-based capital.
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 loss 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 loss 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 sum of the loss and LAE ratio and the expense ratio, and measures its overall underwriting gain. If the combined ratio is below 100%, NI Holdings is making an underwriting gain. If its combined ratio is at or above 100%, it is not profitable without investment income and may not be profitable if investment income is insufficient.
Net premiums written to statutory surplus ratio
The net premiums written to statutory surplus ratio represents the ratio of net premiums written, after reinsurance ceded, to statutory surplus. The 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 is theoretically using its capacity to write more policies. 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 loss 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 the Company’s 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 equity to generate net income. In determining return on average equity for a given year, net income (loss) is divided by the average of the beginning and ending equity for that year.
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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 HoldingsThe Company is required to make estimates and assumptions in certain circumstances that affect amounts reported in its financial statementsConsolidated Financial Statements and related footnotes. NI Holdings evaluatesWe evaluate these estimates and assumptions on an ongoing basis based on historical developments, market conditions, industry trends, and other information that it believeswe believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to these estimates and assumptions and that reported results of operations would not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. NI Holdings believesWe believe 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) IBNR, which are reserves for claims that have been incurred but have not yet been reported and for the future development of case reservesreserves.
LAE consist of two components – allocated loss adjustment expenses (“IBNR”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,one of the insurance companies, its claims personnel establish a case reserve for the estimated amount of the ultimate payment to the extent it can be determined or estimated. The amount of the loss reserve for the reported claim is based primarily upon an evaluation of coverage, liability, damages suffered, and any other information considered pertinent to estimating the exposure presented by the claim. Each claim is contested or settled individually based upon its merits, and some property and casualty claims may take years to resolve, especially ifin 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 mostlyusually involves the weather perils of wind and hail, NI Holdings utilizeswe utilize 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 Companyus to determine within a reasonable time (5 – 7 days) an estimated number of claims and estimated loss paymentslosses from the storm. If the Company estimateswe estimate the damages to be in excess of itsthe 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 Holdingsthe Company maintains estimates of reserves for losses and LAE incurred but not reported. These reserves include estimates for the future development of case reserves. Some claims may not be reported for several years. As a result, the liability for unpaid losses and LAE includes significant estimates for IBNR.
The Company estimates multi-peril crop insurance losses on a quarterly basis based upon historical loss patterns, current crop conditions, current weather patterns, and input from crop loss adjusters. These estimates have proven to be reasonably accurate indicators of the Company’s anticipated losses for this line of business.
NI Holdings utilizesWe utilize an independent actuary to assist with the estimation of itsthe 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 as described below. The CompanyWe then reducesreduce 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 would varyvaries depending on the judgment of the actuary as to what is the most appropriate method for the property and casualty business. The Company’s managementManagement 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 HoldingsWe 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 accruesThe Company determines 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 accountconsiders 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 losslosses unpaid (or unreported). The expected future loss component of the method is calculated by multiplying earned premium for the given exposure
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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 losslosses 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 — This methodThe Ratio of Paid ALAE to Paid Loss Method utilizes the ratio of paid adjusted loss adjustment expense (“ALAE”)ALAE to paid losses and is similar to the Paid and Case Incurred Loss Development 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 the ultimate ALAE. ALAE reserves are calculated by subtracting paid losses from ultimate ALAE.
The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both internal and external events, such as changes in claims handling procedures, inflation, legal trends, increases in the state-dictated minimum liability limits in the recent cases of nonstandard auto insurance, and legislative changes, among others. The impact of many of these items on ultimate costs for claimslosses and claimloss 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 HoldingsWe continually refines itsrefine our 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 considersWe consider 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, which is possible but unlikely as the Company usually settles claims in less than 50 days on average, 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.
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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, (asas in the case of Hurricane Katrina)a hurricane, has an impact on not only the availability and cost of building materials such as roofing and other such 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.
Actual settlement experience differsdifferent 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.
Year-End Actuarial Loss Reserves
NI Holdings’ liabilities for unpaid loss and LAE are summarized below:
December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Case reserves | $ | 29,376 | $ | 42,081 | $ | 31,038 | ||||||
IBNR reserves | 12,386 | 10,359 | 9,195 | |||||||||
Net unpaid losses and LAE | 41,762 | 52,440 | 40,233 | |||||||||
Reinsurance recoverables on losses | 4,128 | 7,192 | 5,109 | |||||||||
Liability for unpaid losses and LAE | $ | 45,890 | $ | 59,632 | $ | 45,342 | ||||||
The following tables provides case and IBNR reserves for unpaid losses and LAE by segment.
As of December 31, 2017 | ||||||||||||
Case Reserves | IBNR Reserves | Total Reserves | ||||||||||
Private passenger auto | $ | 13,008 | $ | 4,107 | $ | 17,115 | ||||||
Non-standard auto | 5,186 | 624 | 5,810 | |||||||||
Home and farm | 6,667 | 2,394 | 9,061 | |||||||||
Crop | 997 | 22 | 1,019 | |||||||||
All other | 3,518 | 5,239 | 8,757 | |||||||||
Net unpaid losses and LAE | $ | 29,376 | $ | 12,386 | $ | 41,762 | ||||||
Reinsurance recoverables on losses | 3,171 | 957 | 4,128 | |||||||||
Liability for unpaid losses and LAE | $ | 32,547 | $ | 13,343 | $ | 45,890 |
As of December 31, 2016 | ||||||||||||
Case Reserves | IBNR Reserves | Total Reserves | ||||||||||
Private passenger auto | $ | 19,767 | $ | 3,904 | $ | 23,671 | ||||||
Non-standard auto | 5,209 | 724 | 5,933 | |||||||||
Home and farm | 9,533 | 2,105 | 11,638 | |||||||||
Crop | 3,607 | 84 | 3,691 | |||||||||
All other | 3,965 | 3,542 | 7,507 | |||||||||
Net unpaid losses and LAE | $ | 42,081 | $ | 10,359 | $ | 52,440 | ||||||
Reinsurance recoverables on losses | 6,286 | 906 | 7,192 | |||||||||
Liability for unpaid losses and LAE | $ | 48,367 | $ | 11,265 | $ | 59,632 |
As of December 31, 2015 | ||||||||||||
Case Reserves | IBNR Reserves | Total Reserves | ||||||||||
Private passenger auto | $ | 16,671 | $ | 2,862 | $ | 19,533 | ||||||
Non-standard auto | 5,080 | 600 | 5,680 | |||||||||
Home and farm | 6,008 | 1,751 | 7,759 | |||||||||
Crop | 914 | 24 | 938 | |||||||||
All other | 2,365 | 3,958 | 6,323 | |||||||||
Net unpaid losses and LAE | $ | 31,038 | $ | 9,195 | $ | 40,233 | ||||||
Reinsurance recoverables on losses | 3,782 | 1,327 | 5,109 | |||||||||
Liability for unpaid losses and LAE | $ | 34,820 | $ | 10,522 | $ | 45,342 |
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 affect the Company’s results of operations.
Total Reserves
As of December 31, 2017, the impact of a 1% change in our estimate for unpaid losses and LAE, net of reinsurance recoverables, on our net income after income taxes of 21% would be approximately $330.
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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 income taxes of 21% resulting from various changes from the inflation factor implicitly embedded in the estimated payment pattern as of December 31, 2017. A change in inflation may or may not fully affect 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% | $ | (395) | ||||
1% | $ | 401 | ||||
3% | $ | 1,219 | ||||
5% | $ | 2,062 |
Inflation includes actual inflation as well as social inflation that includes future emergence of new classes of losses or types of losses, change in judicial awards, and any other changes beyond assumed levels that affect 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 income taxes of 21%, which results from various changes to the level of case reserves as of December 31, 2017. 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% | $ | (2,575) | ||||
-5% | $ | (1,287) | ||||
-2% | $ | (515) | ||||
+2% | $ | 515 | ||||
+5% | $ | 1,287 | ||||
+10% | $ | 2,575 |
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 Company’s investments,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 investments gains or losses on equity securities are reported 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-temporarily impairment isother-than-temporary impairments are recognized.
NI Holdings evaluates securities for other-than-temporary impairment (“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 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 or 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 other-than-temporary impairment 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 other-than-temporary impairment 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 other-than-temporary impairment will be recognized in earnings.
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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 investments. 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 year ended December 31, 2017, NI Holdings’ investment portfolio experienced a change in net unrealized gains of $4,697. The overall portfolio experienced increased in unrealized gains, with gains increasing in both fixed income and equity securities.
NI Holdings has evaluated each security and taken into account the severity and duration of any impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. The Company’s fixed income portfolio is managed by Conning Asset Management, which specializes in the handling of insurance company investments and participates in this evaluation.
For the year ended December 31, 2017, NI Holdings recognized $330 of other-than-temporary impairments of its investment securities. For the year ended December 31, 2016, NI Holdings recognized no other-than-temporary impairments of its investment securities. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.
For moreadditional information on the Company’s investments, see Part II, Item 8, Note 5 to the Consolidated Financial Statements, included elsewhere in this Report.
Fair Value Measurements
NI Holdings uses fair value measurements to record fair value adjustments to certain assets“Investments” and to determine fair value disclosures. Investment securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, NI Holdings may be required to record 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:
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, 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 that 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 from 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 independent pricing services 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
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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.
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 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 would provide 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 S&P. 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 for the years ended December 31, 2017 and 2016, and no adjustments were made to the estimates provided by the pricing service for the years ended December 31, 2017 and 2016. 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 6 to the Consolidated Financial Statements, included elsewhere in this Report.“Fair Value Measurements”.
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 were 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 December 31, 20172021 and 2016,2020, deferred policy acquisition costs and the related liability for unearned premiums were as follows:
December 31, | ||||||||
2017 | 2016 | |||||||
Deferred policy acquisition costs | $ | 8,859 | $ | 8,942 | ||||
Liability for unearned premiums | 63,262 | 57,445 |
December 31, | ||||||||
2021 | 2020 | |||||||
Deferred policy acquisition costs | $ | 24,947 | $ | 23,968 | ||||
Liability for unearned premiums | 127,789 | 119,363 |
There were no VOBA intangible assets remaining at December 31, 2021 or 2020.
The method followed in computing deferred policy acquisition costsDAC 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 deferred policy acquisition costs.DAC. If the estimation of net realizable value indicates that the deferred policy acquisition costsDAC are not recoverable, they would be written off or a premium deficiency reserve would be established.
Income Taxes
NI HoldingsCurrent 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. The Company 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
The Company had gross deferred income tax assets of $4,279$10,070 at December 31, 20172021 and $6,648$8,603 at December 31, 2016.2020, 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. Valuation allowancesA valuation allowance of $628$1,008 and $1,022 had been established$931 was maintained at December 31, 20172021 and 2016,December 31, 2020, respectively.
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NI HoldingsThe Company had gross deferred income tax liabilities of $6,190$14,568 at December 31, 20172021 and $8,541$16,429 at December 31, 2016,2020, arising primarily from deferred policy acquisition costs, and net unrealized capital gains on investments.investments, and other intangible assets.
NI HoldingsThe Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments require NI Holdingsus to make projections of future taxable income. The judgments and estimates the Company makeswe make 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.
The effect of a change in income tax rates is recognized in the period of the enactment date. The TCJA enacted on December 22, 2017 will change the income tax rate from 35% in 2017 to 21% in 2018 and beyond. Although current income taxes payable for 2017 are not impacted, accounting guidance requires that deferred income tax assets and liabilities are re-valued upon date of enactment with the impact recorded in current year income tax expense. The impact to the Company’s deferred income taxes was to reduce the Company’s net deferred income tax liability by $1,274, which is reflected as a reduction of income tax expense in the Consolidated Statement of Operations for the year ended December 31, 2017.
Accounting guidance provides companies the option to reclassify income tax effects that are stranded in accumulated other comprehensive income (“AOCI”) as a result of income tax reform to retained earnings. The Company accumulates unrealized gains on investments in equity with the corresponding income tax effects. The Company has early adopted this guidance on a prospective basis as of December 31, 2017, and elects to reclassify material stranded income tax effects in AOCI to retained earnings using a portfolio method.
As of December 31, 2017, NI Holdings2021, the Company had no material unrecognized income tax benefits or accrued interest and penalties. Federal income tax returns for the years 20132018 through 20162020 are open for examination.
Results of Operations
NI Holdings’Our 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, regulatory changes in regulations, general economic conditions, rising medical expenses, judicial trends, fluctuations in interest rates, and other changes in the investment environment.
NI HoldingsOur premium levels and underwriting results have been, and will 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 impacteffect on premium growth. The markets that NI Holdings serveswe serve are diversified, enough such thatwhich requires management mustto regularly monitor the Company’sour performance and competitive position to schedule appropriate rate actions by line of business and geographic market. Current market conditions are neutral reflecting neither a hard nor a soft market.to schedule appropriate rate actions.
Premiums in the multi-peril crop insurance business are primarily influenced by the number of acres, plantedcommodity prices, and types of crops insured because the pricing is setrates are established by the RMA rather than individual insurance carriers. The expected experience of this business for the calendar year may also significantly affect the reported net earned premiums earned 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 generally extends into the fourth quarter. Losses on this business are more heavily concentratedHowever, as was the case in 2020, if we experience a higher-than-average number of prevented planting claims early in the second and third quarters.season, recognition of earned premiums may be accelerated due to a 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 our other lines of business are 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 elevated weather-related activity.
For more information on the Company’s results of operations by segment, see Part II, Item 8, Note 20 “Segment Information”.
Years ended December 31, 20172021, 2020, and 20162019
The consolidated net income for NI Holdingsthe Company was $15,612$8,332 for the year ended December 31, 20172021, compared to $4,638 a$41,344 for the year ago. ended December 31, 2020 and $26,500 for the year ended December 31, 2019.
The major components of NI Holdings’our operating revenues and net income for the two years were as follows:
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Revenues: | ||||||||
Net premiums earned | $ | 179,464 | $ | 152,756 | ||||
Fee and other income | 1,648 | 1,666 | ||||||
Net investment income | 5,031 | 3,644 | ||||||
Net realized capital gain on investments | 2,997 | 5,681 | ||||||
Total revenues | $ | 189,140 | $ | 163,747 | ||||
Components of net income: | ||||||||
Net premiums earned | $ | 179,464 | $ | 152,756 | ||||
Losses and loss adjustment expenses | 122,711 | 118,508 | ||||||
Amortization of deferred policy acquisition costs and other underwriting and general expenses | 44,423 | 39,122 | ||||||
Underwriting gain (loss) | 12,330 | (4,874 | ) | |||||
Fee and other income | 1,648 | 1,666 | ||||||
Net investment income | 5,031 | 3,644 | ||||||
Net realized capital gain on investments | 2,997 | 5,681 | ||||||
Income before income taxes | 22,006 | 6,117 | ||||||
Income taxes | 6,394 | 1,479 | ||||||
Net income | $ | 15,612 | $ | 4,638 |
three periods are shown below:
Year Ended December 31, | |||||||||||
2021 | 2020 | 2019 | |||||||||
Revenues: | |||||||||||
Net premiums earned | $ | 299,589 | $ | 283,661 | $ | 246,438 | |||||
Fee and other income | 1,775 | 1,801 | 2,125 | ||||||||
Net investment income | 7,131 | 7,271 | 7,433 | ||||||||
Net capital gain on investments | 15,479 | 13,624 | 14,783 | ||||||||
Total revenues | $ | 323,974 | $ | 306,357 | $ | 270,779 | |||||
| |||||||||||
Components of net income: | |||||||||||
Net premiums earned | $ | 299,589 | $ | 283,661 | $ | 246,438 | |||||
Losses and loss adjustment expenses | 216,379 | 168,473 | 169,710 | ||||||||
Amortization of deferred policy acquisition costs and other underwriting and general expenses | 96,289 | 85,068 | 67,258 | ||||||||
Underwriting gain (loss) | (13,079 | ) | 30,120 | 9,470 | |||||||
Fee and other income | 1,775 | 1,801 | 2,125 | ||||||||
Net investment income | 7,131 | 7,271 | 7,433 | ||||||||
Net capital gain on investments | 15,479 | 13,624 | 14,783 | ||||||||
Income before income taxes | 11,306 | 52,816 | 33,811 | ||||||||
Income taxes | 2,974 | 11,472 | 7,311 | ||||||||
Net income | $ | 8,332 | $ | 41,344 | $ | 26,500 |
Net Premiums Earned
NI Holdings’ net
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Net premiums earned: | ||||||||||||
Direct premium | $ | 333,254 | $ | 301,061 | $ | 257,661 | ||||||
Assumed premium | 8,035 | 6,459 | 5,897 | |||||||||
Ceded premium | (41,700 | ) | (23,859 | ) | (17,120 | ) | ||||||
Total net premiums earned | $ | 299,589 | $ | 283,661 | $ | 246,438 |
Net premiums earned for the year ended December 31, 20172021 increased 17.5%$15,928, or 5.6%, to $179,464$299,589, compared to $152,756$283,661 for the year ended December 31, 2016.
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Net premiums earned: | ||||||||
Private passenger auto | $ | 55,378 | $ | 48,250 | ||||
Non-standard auto | 10,530 | 10,671 | ||||||
Home and farm | 58,395 | 50,243 | ||||||
Crop | 43,826 | 33,163 | ||||||
All other | 11,335 | 10,429 | ||||||
Total net premiums earned | $ | 179,464 | $ | 152,756 | ||||
2020.
Our personal lines ofNet premiums earned for the year ended December 31, 2020 increased $37,223, or 15.1%, to $283,661, compared to $246,438 for the year ended December 31, 2019.
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Net premiums earned: | ||||||||||||
Private passenger auto | $ | 72,533 | $ | 72,009 | $ | 67,983 | ||||||
Non-standard auto | 58,585 | 53,737 | 57,114 | |||||||||
Home and farm | 73,792 | 74,879 | 71,171 | |||||||||
Crop | 26,848 | 35,718 | 38,019 | |||||||||
Commercial | 57,285 | 38,288 | 4,097 | |||||||||
All other | 10,546 | 9,030 | 8,054 | |||||||||
Total net premiums earned | $ | 299,589 | $ | 283,661 | $ | 246,438 |
Below are comments regarding significant changes in net premiums earned, by business (privatesegment:
Private passenger auto home and farm) continued to grow outside of North Dakota, and– Net premiums earned for 2021 increased $524, or 0.7%, from 2020. Premiums were favorably impacted by lower ceding ofcontinued soft market conditions in this segment throughout the year.
Non-standard auto – Net premiums due to a higher retention amountearned for 2021 increased $4,848, or 9.0%, from 2020. The segment has benefited from the improved economic environment in the Chicago market where our catastrophe reinsurance program in 2017. Our non-standard auto business is concentrated.
Home and farm – Net premiums earned for 2021 decreased $1,087, or 1.5%, from 2020. The modest decrease was relatively flatdue to competitive market conditions and the related rate reduction taken in early 2021 in the Nodak Insurance farmowners line of business, and a year-over-year as rate increases were neededincrease in Nevada to cover the higher losses experienced inceded written premiums for this business. Our
Crop – Net premiums earned for 2021 decreased $8,870, or 24.8%, from 2020. Direct earned premiums increased by $3,648 primarily due to higher commodity prices on multi-peril crop business experiencedbusiness. However, this increase was offset by a large increase in ceded earned premiums as a result of significant multi-peril crop losses from this year’s extreme drought conditions across North and South Dakota. We also placed a higher number of multi-peril crop policies in the assigned risk fund of the SRA for 2021, resulting in higher levels of premiums and losses in 2017, which reduced the level of premium sharing required withbeing ceded to the federal government on relatively flat directgovernment.
Commercial – Net premiums earned.earned for 2021 increased $18,997, or 49.6%, from 2020. The increase was primarily driven by growth in our Westminster commercial business as a result of a continuation of favorable market conditions, the positive impact of Westminster’s financial size category, and the 2020 AM Best rating upgrade.
All other – Net premiums earned for 2021 increased $1,516, or 16.8%, from 2020. Net premiums earned increased related to our participation in an assumed domestic and international reinsurance pool of business. As of January 1, 2022, the Company made the decision to non-renew its participation in these pools.
Losses and LAELoss Adjustment Expenses
NI Holdings’ net
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Net losses and LAE: | ||||||||||||
Direct losses and LAE | $ | 280,998 | $ | 185,370 | $ | 173,943 | ||||||
Assumed losses and LAE | 6,899 | 3,308 | 4,032 | |||||||||
Ceded losses and LAE | (71,518 | ) | (20,205 | ) | (8,265 | ) | ||||||
Total net losses and LAE | $ | 216,379 | $ | 168,473 | $ | 169,710 |
Net losses and LAE for the year ended December 31, 20172021 increased 3.6%$47,906, or 28.4%, to $122,711$216,379, compared to $118,508$168,473 for the year ended December 31, 2016.2020.
Net losses and LAE for the year ended December 31, 2020 decreased $1,237, or 0.7%, to $168,473, compared to $169,710 for the year ended December 31, 2019.
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Net losses and LAE: | ||||||||||||
Private passenger auto | $ | 59,721 | $ | 45,511 | $ | 52,696 | ||||||
Non-standard auto | 34,453 | 30,347 | 32,654 | |||||||||
Home and farm | 52,145 | 36,745 | 45,601 | |||||||||
Crop | 27,831 | 31,379 | 32,091 | |||||||||
Commercial | 34,779 | 20,430 | 2,489 | |||||||||
All other | 7,450 | 4,061 | 4,179 | |||||||||
Total net losses and LAE | $ | 216,379 | $ | 168,473 | $ | 169,710 |
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Loss and LAE ratio: | ||||||||||||
Private passenger auto | 82.3% | 63.2% | 77.5% | |||||||||
Non-standard auto | 58.8% | 56.5% | 57.2% | |||||||||
Home and farm | 70.7% | 49.1% | 64.1% | |||||||||
Crop | 103.7% | 87.9% | 84.4% | |||||||||
Commercial | 60.7% | 53.4% | 60.8% | |||||||||
All other | 70.6% | 45.0% | 51.9% | |||||||||
Total loss and LAE ratio | 72.2% | 59.4% | 68.9% |
Below are comments regarding significant changes in net losses and LAE, and the net loss and LAE ratios, by business segment:
Private passenger auto – The Company’snet loss and LAE ratio decreased to 68.4% for 2017,deteriorated 19.1 percentage points in 2021 compared to 77.6% for 2016.
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Loss and LAE ratio: | ||||||||
Private passenger auto | 62.8% | 78.5% | ||||||
Non-standard auto | 82.5% | 93.4% | ||||||
Home and farm | 68.0% | 87.6% | ||||||
Crop | 74.0% | 58.4% | ||||||
All other | 62.8% | 69.8% | ||||||
Total loss and LAE ratio | 68.4% | 77.6% | ||||||
Our personal lines2020. The increase was a result of business (private passenger auto, home and farm) experienced fewer weather related losses in 2017a return to average loss frequency due to increased miles driven by our insureds compared to 2016, particularly2020 when pandemic-related restrictions were still in North Dakota. Our non-standard auto business improved from a year agoplace. Loss experience in 2021 has also been adversely impacted by an increase in uninsured/underinsured motorist liability claims frequency, as well as increased severity due to inflationary factors. We are assessing necessary future rate actions as a result of strategic pricing and underwriting actions.the increased loss activity.
A very dry start to the 2017 growing season increased our loss experience for the multi-peril crop business when compared to prior years.Non-standard auto – The net loss and LAE ratio deteriorated 2.3 percentage points in 2021 compared to 2020. Direct Auto has experienced modest elevations in loss frequency and severity compared to 2020 despite increased miles being driven compared to 2020. Overall net losses and LAE increased due to strong year-to-date direct written premium growth at Direct Auto. These profitable results have been offset by Primero’s higher loss frequency and severity due largely to the continued economic challenges in the Las Vegas market.
Home and farm – The net loss and LAE ratio deteriorated 21.6 percentage points in 2021 compared to 2020. This increase was driven by above average weather-related losses in 2021. These losses included a severe weather-related catastrophe event in North Dakota during June, along with additional significant weather-related losses in Nebraska and South Dakota during the second half of the year.
Crop – The net loss and LAE ratio deteriorated 15.8 percentage points in 2021 compared to 2020. The extreme drought conditions across North Dakota, South Dakota, and Minnesota resulted in significantly elevated multi-peril crop losses. However, in anticipation of the dry weather, we placed a higher number of multi-peril crop policies in the assigned risk fund of the SRA for the entire year ended December 31, 2017 came2021, resulting in line with average expectations, which provided a normal level of premium retention under the risk-sharing arrangement withincreased premiums and losses ceded to the federal governmentgovernment.
Commercial – The net loss and LAE ratio deteriorated 7.3 percentage points in 2021 compared to a year ago.
In2020. This increase was primarily due to increased fire loss frequency in the all other segment, the assumed reinsuranceWestminster book of business was adversely impacted by hurricanes Harvey, Irma, and Maria during the third quarterfirst and second quarters. Westminster had a strong second half of 2017,the year as the Company continued to benefit from favorable market conditions, along with improved loss frequency and by the California wildfires during the fourth quarter of 2017. This adverse experience was more than offset by improvementsseverity.
All other – The net loss and LAE ratio deteriorated 25.6 percentage points in excess liability and commercial multi-peril coverages.
NI Holdings realized favorable development on prior accident years of $10,101 in 2017,2021 compared to $4,7562020. The increase was primarily due to elevated loss severity in our assumed domestic and international reinsurance pool of favorable development on prior accident years realizedbusiness, in 2016. Net favorable development is primarily the result of prior years’ claims settling for less 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.particular anticipated losses associated with Hurricane Ida.
Amortization of Deferred Policy Acquisition Costs and Other Underwriting and General Expenses
Total underwriting
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Underlying expenses | $ | 97,269 | $ | 93,637 | $ | 69,791 | ||||||
Deferral of policy acquisition costs | (65,554 | ) | (60,041 | ) | (48,721 | ) | ||||||
Other underwriting and general expenses | 31,715 | 33,596 | 21,070 | |||||||||
Amortization of deferred policy acquisition costs | 64,574 | 51,472 | 46,188 | |||||||||
Total reported expenses | $ | 96,289 | $ | 85,068 | $ | 67,258 |
Underlying expenses for the year ended December 31, 2021 decreased $3,632, or 3.9%, compared to the year ended December 31, 2020. Underlying expenses for the year ended December 31, 2020 increased $23,846, or 34.2%, compared to the year ended December 31, 2019, primarily due to the acquisition of Westminster.
Expense deferrals were $5,513 higher in the year ended December 31, 2021 compared to 2020, while amortization of those costs was $13,102 higher in 2021. This increase in net expense was primarily due to strong year-over-year growth in our commercial and general expenses, includingnon-standard auto segments which generally pay higher agent commissions than our other lines, as well as growth in our other segments. In addition, under acquisition accounting, there were no deferred policy acquisition costs reported on the acquisition balance sheet of Westminster, which had the impact of decreasing 2020 amortization of deferred policy acquisition costs increased $5,301 in 2017, or 13.6%, comparedrelative to 2016. Expenses were higher in 2017 duefuture years. Offsetting this impact, the Company recorded an intangible asset, referred to increased commissions and other policyas the VOBA, on its acquisition costsbalance sheet which was amortized during 2020 as a resultcomponent of increasedother underwriting and general expenses. As our mix of business has shifted and these premiums written. In addition, as a new public company, additionalcontinue to be earned, the related deferral and amortization of expenses were incurred due to increased salaries, legal and accounting costs, taxes and fees, and holding company costs. The expense ratiohave also changed.
Underwriting Gain (Loss)
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Underwriting gain (loss): | ||||||||||||
Private passenger auto | $ | (7,704 | ) | $ | 6,512 | $ | (3,599 | ) | ||||
Non-standard auto | 1,362 | 2,651 | 3,383 | |||||||||
Home and farm | (475 | ) | 17,260 | 5,464 | ||||||||
Crop | (9,195 | ) | (468 | ) | 1,532 | |||||||
Commercial | 2,506 | 1,500 | 745 | |||||||||
All other | 427 | 2,665 | 1,945 | |||||||||
Total underwriting gain (loss) | $ | (13,079 | ) | $ | 30,120 | $ | 9,470 |
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Combined ratio: | ||||||||||||
Private passenger auto | 110.6% | 91.0% | 105.3% | |||||||||
Non-standard auto | 97.7% | 95.1% | 94.1% | |||||||||
Home and farm | 100.6% | 76.9% | 92.3% | |||||||||
Crop | 134.2% | 101.3% | 96.0% | |||||||||
Commercial | 95.6% | 96.1% | 81.8% | |||||||||
All other | 96.0% | 70.5% | 75.9% | |||||||||
Total combined ratio | 104.4% | 89.4% | 96.2% |
Underwriting gain (loss) measures the pretaxpre-tax profitability of a company’sour insurance business.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.
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Underwriting gain (loss): | ||||||||
Private passenger auto | $ | 3,739 | $ | (3,595 | ) | |||
Non-standard auto | (1,217 | ) | (2,215 | ) | ||||
Home and farm | 500 | (9,582 | ) | |||||
Crop | 6,959 | 9,269 | ||||||
All other | 2,349 | 1,249 | ||||||
Total underwriting gain (loss) | $ | 12,330 | $ | (4,874 | ) | |||
The combined ratio represents the sum of these losses and expenses as a percentage of net premiums earned, and measures our overall underwriting profit. A combined ratio below 100% generally indicates a profitable line of business.
The results from underwriting resultsoperations decreased $43,199 for our personal lines of business (private passenger auto, home and farm) improved significantly year-over-year. Thethe year ended December 30, 2021 compared to the year ended December 31, 2016 included a high number2020. The overall combined ratio deteriorated 15.0 percentage points.
The primary drivers behind the elevated combined ratio for the year ended December 31, 2021 were the extreme drought conditions across North Dakota, South Dakota, and Minnesota on our multi-peril crop business; above average weather-related losses in North Dakota, South Dakota, and Nebraska; the return to average frequency, and increased severity due to inflationary factors, of weather related events that generated underwriting losses. Strategic ratingprivate passenger and underwriting actions acrossnon-standard auto physical damage claims; and higher levels of uninsured/underinsured motorist liability claims in private passenger auto.
These elevated losses were partially offset by profitable and strong growth from Direct Auto in the personal lines of business,non-standard segment, along with an average yearcontinued profitability and growth from Westminster’s commercial business, particularly during the second half of weather related losses, helped to bring those lines back to profitability.
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the year.
Rate increasesFee and Other Income
The Company had fee and other underwriting actions on our non-standard auto business reducedincome of $1,775 for the underwriting loss considerably from a year ago. ended December 31, 2021, compared to $1,801 for the year ended December 31, 2020, and $2,125 for the year ended December 31, 2019.
Fee income attributable to this segmentPrimero’s non-standard auto business is a key component in measuring its profitability. Fee income on this business was $1,087 and $1,157 for the years ended December 31, 2017 and 2016, respectively.
The crop insurance business generated a lower underwriting gain for 2017decreased slightly during 2021 compared to 2016. While loss experience was higher for 2017, premium retention under the risk-sharing arrangement with the federal government was also higher to offset most of the increased loss experience.
Underwriting results for the all other segment increased in 20172020 due to improvements in the commercial multi-peril and excess liability businesses, partially offset by the impactsa decreased policy count.
Fee and Other Income
NI Holdings had fee and other income of $1,648 for the year ended December 31, 2017, compared to $1,666 for the year ended December 31, 2016. The majority of fee income is attributable to the non-standard auto insurance business.
Net Investment Income
The following table sets forthshows our average cash and invested assets, net investment income, and return on average cash and invested assets for the reported periods:
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
Average cash and invested assets | $ | 260,781 | $ | 202,735 | ||||
Net investment income | $ | 5,031 | $ | 3,644 | ||||
Return on average cash and invested assets | 1.9% | 1.8% |
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Average cash and invested assets | $ | 502,375 | $ | 449,148 | $ | 394,403 | ||||||
| ||||||||||||
Gross investment income | $ | 10,339 | $ | 10,519 | $ | 9,826 | ||||||
Investment expenses | 3,208 | 3,248 | 2,393 | |||||||||
Net investment income | $ | 7,131 | $ | 7,271 | $ | 7,433 | ||||||
| ||||||||||||
Gross return on average cash and invested assets | 2.1% | 2.3% | 2.5% | |||||||||
Net return on average cash and invested assets | 1.4% | 1.6% | 1.9% |
Investment income, net of investment expense, increased $1,387decreased $140 for the year ended December 31, 20172021 compared to 2016.the year ended December 31, 2020. This increase is attributable to an increasedecrease was primarily driven by the continued impact of lower reinvestment rates in invested assets, asthe fixed income securities portfolio.
The Company’s net return on average cash and invested assets increaseddeclined year-over-year, driven by a combination of factors. Interest income decreased primarily due to $313,885 at December 31, 2017 from $207,677 at December 31, 2016, primarily as a resultpersistent low reinvestment rate environment, ongoing maturities of existing holdings with higher embedded yields, and significant cash inflows to the proceedsinvestment portfolio from the Company’s IPO. The weighted averageCompany's business operations. These decreases were partially offset by an increased allocation to high dividend equities within our equity portfolio, which increased the portfolio’s dividend yield on invested assets rose slightlycompared to 1.9% in 2017 from 1.8% in 2016.the prior year.
Net Realized Capital Gain on Investments
NI HoldingsNet capital gain on investments consisted of the following:
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Gross realized gains | $ | 18,130 | $ | 9,740 | $ | 4,652 | ||||||
Gross realized losses, excluding other-than-temporary impairment losses | (362 | ) | (1,969 | ) | (1,406 | ) | ||||||
Net realized gain on investments | 17,768 | 7,771 | 3,246 | |||||||||
| ||||||||||||
Change in net unrealized gain on equity securities | (2,289 | ) | 5,853 | 11,537 | ||||||||
Net capital gain on investments | $ | 15,479 | $ | 13,624 | $ | 14,783 |
The Company had realized capital gains on investment of $2,997$17,768 for the year ended December 31, 2017,2021, compared to $5,681$7,771 for the year ended December 31, 2016. The Company recorded other-than-temporary impairments of $330 in2020 and $3,246 for the year ended December 31, 2017, and2019. The Company reported no other-than-temporary impairmentslosses during any of the periods presented.
The Company’s equity portfolio experienced a decrease in net unrealized gains of $2,289 during the year ended December 31, 2016.2021. The net decrease is included in net capital gain on investments in the Company’s Consolidated Statements of Operations. It was primarily driven by $17,118 in net realized gains taken throughout the year, as a result of ongoing portfolio rebalancing as well as a strategic reallocation of equity investment strategies designed to increase exposure to income-oriented equities in order to maintain yield in the portfolio. The resulting net appreciation in the equity securities portfolio of $14,289 in 2021 is indicative of a strong rally in U.S. equity markets during the year.
The Company’s fixed income securities and equity securities are classified as available for sale because it will, from time to time, make sales of securities that are not impaired, consistent with our investment goals and policies. At December 31, 2017,The fixed income portion of the Company hadportfolio experienced a decrease in net unrealized gains on fixed income securities of $1,780 and net unrealized gains on equity securities of $18,533. At$9,796 during the year ended December 31, 2016,2021. The decrease was primarily the Company had net unrealized gains on fixed income securitiesresult of $1,210an increase in U.S. interest rates, with 5-year and net unrealized gains on equity securities10-year U.S. Treasury yields increasing during the year by 90 basis points and 60 basis points, respectively. The rise in rates was partially mitigated by a tightening of $14,406.
NI Holdings has evaluated each securitycredit spreads across fixed-income sectors, given an improvement in a loss position and taken into accountcapital markets following the severity and durationvolatility affecting invested assets in 2020 due to the impact of the impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. NI Holdings believes that the foregoing declines in fair value in its existing portfolio are most likely attributable to short-term market trends and there is no evidence that it will not recover the entire amortized cost basis.COVID-19 pandemic.
Income before Income Taxes
For the year ended December 31, 2017, NI Holdings2021, the Company had pre-tax income of $22,006$11,306, compared to $52,816 and $33,811 for the years ended December 31, 2020 and 2019, respectively. The decrease in pre-tax results was largely attributable to the significant increase in loss experience during 2021.
Income Taxes
The Company recorded income tax expense of $6,117$2,974 for the year ended December 31, 2016. The increase in pre-tax income was largely attributable to the decrease in losses and LAE on the private passenger auto and home and farm lines of business when2021, compared to the higher level of weather related losses in 2016.
Income Taxes
NI Holdings recorded income tax expense of $6,394$11,472 and $7,311 for the yearyears ended December 31, 2017, compared to $1,479 of income tax expense for the year ended December 31, 2016.
Income tax expense for 2017 included a reduction of $1,274 to income tax expense due to a new corporate income tax rate of 21% for tax years 20182020 and beyond, enacted on December 22, 2017. Accounting guidance requires that companies re-measure
49
existing deferred tax assets (including loss carryforwards) and liabilities and record an offset for the net amount as a component of income tax expense from continuing operations in the period of enactment. Any change to a previously recorded valuation allowance as a result of re-measuring existing temporary differences and loss carryforward should also be reflected as a component of income tax expense from continuing operations. In addition, the valuation allowance against certain deferred income tax assets decreased by $394 to $628 at December 31, 2017 from $1,022 at December 31, 2016.
2019, respectively. Our effective tax rate for 20172021 was 29.1%26.3% compared to an effective tax rate of 24.2%21.7% and 21.6% for 2016. The increase in2020 and 2019, respectively.
A portion of the effective tax rate was the result of a lesser impact of comparable permanent tax adjustments realized on a higher income beforeis due to Illinois state income taxes, amount for 2017.which led to the increased effective tax rate in 2021 given the higher proportion of these taxes relative to the Company’s overall income tax expense in comparison with 2020 and 2019.
The valuation against certain deferred income tax assets was $1,008 as of December 31, 2021 compared to $931 as of December 31, 2020.
Net Income
For the year ended December 31, 2017, NI Holdings had2021, net income afterbefore non-controlling interest of $15,991was $8,332, compared to net income after non-controlling interest of $4,551$41,344 and $26,500 for 2016.the years ended December 31, 2020 and 2019, respectively. This increasedecrease in net income was primarilylargely attributable to decreased losses and LAEthe significant increase in the Company’s private passenger auto and home and farm lines of business, when compared to a higher level of weather related losses in 2016.loss experience during 2021.
Return on Average Equity
For the year ended December 31, 2017, NI Holdings2021, the Company had annualized return on average equity, after non-controlling interest, of 7.9%2.4%, compared to annualized return on average equity, after non-controlling interest, of 3.1%12.4% and 9.1% for the yearyears ended December 31, 2016. 2020 and 2019, respectively.
Average equity is calculated as the average between beginning and ending shareholders’ equity excluding non-controlling interest for the year.period.
Years ended December 31, 2016 and 2015
The major components of NI Holdings’ operating revenues and net income are as follows:
Year Ended December 31, | ||||||||
2016 | 2015 | |||||||
Revenues: | ||||||||
Net premiums earned | $ | 152,756 | $ | 139,473 | ||||
Fee and other income | 1,666 | 1,854 | ||||||
Net investment income | 3,644 | 3,571 | ||||||
Net realized capital gain on investments | 5,681 | 823 | ||||||
Total revenues | $ | 163,747 | $ | 145,721 | ||||
Components of net income: | ||||||||
Net premiums earned | $ | 152,756 | $ | 139,473 | ||||
Losses and loss adjustment expenses | 118,508 | 83,876 | ||||||
Amortization of deferred policy acquisition costs and other underwriting and general expenses | 39,122 | 35,972 | ||||||
Underwriting (loss) gain | (4,874 | ) | 19,625 | |||||
Fee and other income | 1,666 | 1,854 | ||||||
Net investment income | 3,644 | 3,571 | ||||||
Net realized capital gain on investments | 5,681 | 823 | ||||||
Income before income taxes | 6,117 | 25,873 | ||||||
Income taxes | 1,479 | 8,288 | ||||||
Net income | $ | 4,638 | $ | 17,585 |
Net Premiums Earned
NI Holdings’ net premiums earned increased 9.5% to $152,756 for the year ended December 31, 2016 compared to $139,473 for the year ended December 31, 2015.
Year Ended December 31, | ||||||||
2016 | 2015 | |||||||
Net premiums earned: | ||||||||
Private passenger auto | $ | 48,250 | $ | 43,985 | ||||
Non-standard auto | 10,671 | 11,373 | ||||||
Home and farm | 50,243 | 48,432 | ||||||
Crop | 33,163 | 25,713 | ||||||
All other | 10,429 | 9,970 | ||||||
Total net premiums earned | $ | 152,756 | $ | 139,473 | ||||
Our personal lines of business (private passenger auto, home and farm) grew modestly in 2016, while our non-standard auto business declined slightly. Loss experience in our crop business was extremely favorable in 2015, resulting in a very high level of premiums ceded to the federal government. Loss experience in 2016 was again favorable, but not as favorable as 2015 so premiums ceded were less than a year ago.
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Losses and LAE
NI Holdings’ net losses and LAE for the year ended December 31, 2016 increased 41.3% to $118,508 compared to $83,876 for the year ended December 31, 2015. The Company’s loss and LAE ratio increased to 77.6% for 2016, compared to 60.1% for 2015.
Year Ended December 31, | ||||||||
2016 | 2015 | |||||||
Loss and LAE ratio: | ||||||||
Private passenger auto | 78.5% | 67.5% | ||||||
Non-standard auto | 93.4% | 87.5% | ||||||
Home and farm | 87.6% | 63.8% | ||||||
Crop | 58.4% | 42.9% | ||||||
All other | 69.8% | 23.4% | ||||||
Total loss and LAE ratio | 77.6% | 60.1% | ||||||
Our personal lines of business (private passenger auto, home and farm) experienced a very high number of weather related losses in 2016 compared to 2015, particularly in North Dakota. Our non-standard auto business deteriorated due to higher frequency and severity of losses.
The loss experience in our crop business was favorable in 2016, although not as favorable as in 2015. The favorable loss and LAE ratios resulted in lower levels of premium retention under the risk-sharing arrangement with the federal government.
In the all other segment, the assumed reinsurance book of business was adversely impacted by Canadian wildfires during the second quarter of 2016.
NI Holdings realized favorable development on prior accident years of $4,756 in 2016, compared to $8,888 of favorable development on prior accident years realized in 2015. Net favorable development is primarily the result of prior years’ claims settling for less 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 $3,150 in 2016, or 8.8% higher than in 2015. This increase is due to an increase of $1,802 in amortization of deferred policy acquisition costs and an increase of $1,348 in other underwriting and general 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.
Year Ended December 31, | ||||||||
2016 | 2015 | |||||||
Underwriting gain (loss): | ||||||||
Private passenger auto | $ | (3,595 | ) | $ | 1,553 | |||
Non-standard auto | (2,215 | ) | (1,251 | ) | ||||
Home and farm | (9,582 | ) | 2,674 | |||||
Crop | 9,269 | 10,913 | ||||||
All other | 1,249 | 5,736 | ||||||
Total underwriting gain (loss) | $ | (4,874 | ) | $ | 19,625 | |||
The underwriting loss for the year ended December 31, 2016 was primarily due to a high number of weather related events that generated underwriting losses in our personal lines of business (private passenger auto, home and farm). Non-standard auto and crop results in 2016 also deteriorated from 2015, although the underwriting gain on crop was still very favorable. The commercial multi-peril and excess liability lines of business within the all other segment experienced increased losses, along with losses from Canadian wildfires in the second quarter of 2016 in our assumed reinsurance book of business.
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Fee and Other Income
NI Holdings had fee and other income of $1,666 for the year ended December 31, 2016, compared to $1,854 for the year ended December 31, 2015. Fee income is primarily related to the non-standard auto insurance business.
Net Investment Income
The following table sets forth our average cash and invested assets, investment income, and return on average cash and invested assets for the reported periods:
Year Ended December 31, | ||||||||
2016 | 2015 | |||||||
Average cash and invested assets | $ | 202,735 | $ | 191,987 | ||||
Net investment income | $ | 3,644 | $ | 3,571 | ||||
Return on average cash and invested assets | 1.8% | 1.9% |
Investment income, net of investment expense, increased $73 for the year ended December 31, 2016 compared to 2015. This increase is attributable to an increase in invested assets, as cash and invested assets increased to $207,677 at December 31, 2016 from $197,793 at December 31, 2015. This increase more than offset a decrease in the weighted average yield on invested assets to 1.8% in 2016 from 1.9% in 2015 as higher yielding fixed income securities matured and were replaced with lower yielding securities.
Net Realized Capital Gain on Investments
NI Holdings had realized capital gains on investment of $5,681 for the year ended December 31, 2016, compared to $823 for the year ended December 31, 2015. The Company recorded no other-than-temporary impairments in the year ended December 31, 2016, and $139 of other-than-temporary impairments in the year ended December 31, 2015.
NI Holdings’ fixed income securities and equity securities are classified as available for sale because it will, from time to time, make sales of securities that are not impaired, consistent with our investment goals and policies. At December 31, 2016, the Company had net unrealized gains on fixed income securities of $1,210 and net unrealized gains on equity securities of $14,406. At December 31, 2015, the Company had net unrealized gains on fixed income securities of $2,092 and net unrealized gains on equity securities of $15,453.
NI Holdings has evaluated each security and taken into account the severity and duration of the impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. NI Holdings believes that the foregoing declines in fair value in its existing portfolio are most likely attributable to short-term market trends and there is no evidence that it will not recover the entire amortized cost basis.
Income before Income Taxes
For the year ended December 31, 2016, NI Holdings had pre-tax income of $6,117 compared to pre-tax income of $25,873 for the year ended December 31, 2015. The decrease in pre-tax income was largely attributable to the increase in losses and LAE on the private passenger auto and home and farm lines of business due to a higher number of weather related losses in 2016.
Income Taxes
NI Holdings recorded income tax expense of $1,479 for the year ended December 31, 2016, compared to $8,288 of income tax expense for the year ended December 31, 2015. Our effective tax rate for 2016 was 24.2% compared to an effective tax rate of 32.0% for 2015. The decrease in the effective tax rate was the result of a greater impact of comparable permanent tax adjustments realized on a lower income before income taxes amount for 2016.
Net Income
For the year ended December 31, 2016, NI Holdings had net income after non-controlling interest of $4,551 compared to net income after non-controlling interest of $17,456 for 2015. This decrease in net income was primarily attributable to increased losses and LAE in the company’s private passenger auto and home and farm lines of business, due to a higher number of weather related losses in 2016.
Return on Average Equity
For the year ended December 31, 2016, NI Holdings had annualized return on average equity, after non-controlling interest, of 3.1% compared to annualized return on average equity, after non-controlling interest, of 12.2% for the year ended December 31,
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2015. Average equity is calculated as the average between beginning and ending equity excluding non-controlling interest for the year.
Financial Position
The major components of NI Holdings’ financial position are as follows:
December 31, | ||||||||
2017 | 2016 | |||||||
Assets | ||||||||
Cash and investments | $ | 313,885 | $ | 207,677 | ||||
Premiums and agents’ balances receivable | 25,632 | 21,986 | ||||||
Deferred policy acquisition costs | 8,859 | 8,942 | ||||||
Other assets | 28,612 | 40,098 | ||||||
Total assets | $ | 376,988 | 278,703 | |||||
Liabilities | ||||||||
Unpaid losses and loss adjustment expenses | $ | 45,890 | $ | 59,632 | ||||
Unearned premiums | 63,262 | 57,445 | ||||||
Other liabilities | 12,263 | 8,208 | ||||||
Total liabilities | 121,415 | 125,285 | ||||||
Equity | 255,573 | 153,418 | ||||||
Total liabilities and equity | $ | 376,988 | $ | 278,703 |
At December 31, 2017, NI Holdings had total assets of $376,988, an increase of $98,285, or 35.3% over amounts reported at December 31, 2016. The increase was primarily attributable to net proceeds of $93,145 from issuance of NI Holdings common stock on March 13, 2017.
At December 31, 2017, total liabilities were $121,415, a decrease of $3,870, or 3.1% over amounts reported at December 31, 2016. The decrease was primarily due to lower levels of unpaid losses and loss adjustment expenses offset by higher levels of unearned premiums. Unpaid losses and loss adjustment expenses decreased due to lower levels of open case claims, partially offset by higher IBNR on our assumed reinsurance business. Unearned premiums increased from a year ago, reflecting the increase in direct premiums written in our private passenger auto and home and farm lines of business.
Total equity increased by $102,155, or 66.6% from December 31, 2016 to December 31, 2017. The increase in equity primarily reflects net proceeds of $93,145 from the issuance of NI Holdings common stock and net income of $15,612 for the year ended December 31, 2017, partially offset by the purchase of treasury stock of $8,037.
Effect of Stock Offering on Nodak Insurance Company and NI Holdings
NI Holdings was formed on March 13, 2017 and became the holding company for Nodak Insurance and its existing subsidiaries. The increased capitalization from our initial public offering should (i) enhance investment income by increasing our investment portfolio, and (ii) provide capital to permit the Company to seek acquisitions and other diversification opportunities. The newly issued stock of NI Holdings was available for public trading on March 16, 2017.
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Liquidity and Capital Resources
NI HoldingsThe Company generates sufficient funds from its operations and maintains a high degree of liquidity in its investment portfolio to meet the demands of claim settlements and operating expenses. The primary sources of funds are premium collections, investment earnings, and maturing investments. In addition,2017, we raised $93,145 in net proceeds from our initial public offering,IPO, which arewe 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 two installments were paid in January 2021 and January 2022. The Company anticipates using the net proceeds from the IPO to satisfy this obligation in December 2022.
We currently anticipate that cash generated from our operations and available if necessaryfrom our investment portfolio, along with the remaining IPO net proceeds, will be sufficient to meet the demands of claim settlements and operating expenses.fund our operations.
NI Holdings’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 changechanges in cash and cash equivalents for the years ended December 31, 2017, 2016,2021, 2020, and 20152019 were as follows:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Cash flows provided by operating activities | $ | 18,425 | $ | 7,307 | $ | 17,177 | ||||||
Cash flows (used in) investing activities | (91,857 | ) | (3,510 | ) | (24,385 | ) | ||||||
Cash flows provided by financing activities | 82,708 | 0 | 0 | |||||||||
Net increase (decrease) in cash and cash equivalents | $ | 9,276 | $ | 3,797 | $ | (7,208 | ) |
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Net cash flows from operating activities | $ | 29,168 | $ | 51,010 | $ | 25,665 | ||||||
Net cash flows from investing activities | (48,151 | ) | 200 | (30,458 | ) | |||||||
Net cash flows from financing activities | (11,471 | ) | (12,265 | ) | (2,025 | ) | ||||||
Net increase (decrease) in cash and cash equivalents | $ | (30,454 | ) | $ | 38,945 | $ | (6,818 | ) |
For the year ended December 31, 2021, net cash provided by operating activities totaled $29,168 compared to $51,010 a year ago. Consolidated net income of $8,332 for the year ended December 31, 2021 compared to consolidated net income of $41,344 for the same period a year ago. The decrease in consolidated net income, along with changes in reinsurance recoverables on losses, other assets, and unearned premiums, were offset by changes to the FCIC receivable/payable and unpaid losses and LAE.
For the year ended December 31, 2017,2021, net cash used by investing activities totaled $48,151 compared to $200 net cash provided by investing activities a year ago. In 2021, the Company invested excess cash generated from operations and the implementation of the intercompany reinsurance pooling agreement into longer term investments.
For the year ended December 31, 2021, net cash used by financing activities totaled $11,471 compared to $12,265 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 $4,316 during 2021, compared to $12,234 during 2020.
For the year ended December 31, 2020, net cash provided by operating activities totaled $18,425$51,010 compared to $7,307$25,665 for the year ended December 31, 2016.2019. The Company reduced its levelsconsolidated net income of reinsurance receivables and collected more unearned premiums$41,344 for the year ended December 31, 20172020 compared to the year ended December 31, 2016, whileconsolidated net income increased significantly from 2016. Net cash used in investing activities totaled $91,857of $26,500 for the year ended December 31, 2017, compared2019. The increase in cash flows from operating activities also reflected differences in the activity between the Company and the FCIC during 2020 and 2019, growth in unearned premiums due to increasing sales of the Westminster commercial business, and lower levels of loss and loss adjustment expenses. During 2019, unrealized gains on investments were offset by increases in unpaid losses and LAE and unearned premiums to serve as the primary reconciling items between net income and net cash used of $3,510 in the year ended December 31, 2016, primarily reflecting the opportunity to invest the proceedsflows from the common stock offering in longer-term investments in 2017. Net cash provided by financing activities of $82,708 for the year ended December 31, 2017 reflect the net proceeds from our initial public offering, offset by the initial funding of our new employee stock option plan and the repurchase of treasury stock for $8,037.operating activities.
For the year ended December 31, 2016,2020, net cash flows from operatingprovided by investing activities totaled $7,307$200 compared to $17,177$30,458 used by investing activities for the year ended December 31, 2015. This decrease2019. In 2020, the initial cash payment made at the time of the Westminster acquisition was $703 more than the cash and cash equivalents received in the acquisition. During 2020, the sales and maturities of securities approximated the purchase of new securities. Normally, the excess cash flowsgenerated from operating activities was primarily due tooperations would be invested in longer term investments. However, the increaseimplementation of the intercompany pooling reinsurance agreement necessitated substantial cash transfers between the insurance company subsidiaries during December 2020, which were not fully reinvested in loss payments to insureds. Cash flowslonger-term investments by year-end. The prior year reflects the impact of investing excess cash generated from operations into longer term investments, partially offset by sales and maturities of fixed income securities.
For the year ended December 31, 2020, net cash used in investingby financing activities totaled $3,510$12,265 compared to $2,025 for the year ended December 31, 2016, compared to $24,385 in 2015, primarily reflecting the demand2019. The Company repurchased shares of its own common stock for cash due to higher weather related losses in 2016.$12,234 and $2,006 during 2020 and 2019, respectively.
As a standalone entity, and outside of the net proceeds from the recent initial public offering, NI Holdings’IPO, the Company’s principal source of long-term liquidity will be dividend payments from Nodak Insurance. its directly-owned subsidiaries.
Nodak Insurance will beis restricted by the insurance laws of North Dakota as to the amount of dividendsliquid 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 insurance company’sCompany’s surplus as regards policyholders as of the preceding December 31, or (ii) the insurance company’sCompany’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 after the conversionto us during 2022 without the prior approval of the North Dakota Insurance Department is $15,654approximately $21,493 based upon the policyholders’ surplus of Nodak Insurance at December 31, 2017.2021. Prior to its payment of any extraordinary dividend, Nodak Insurance will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North Dakota Insurance Department has the power to limit or prohibit dividend payments if Nodak Insurancean insurance company is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. The Nodak Insurance Board of Directors declared and paid a $6,000 dividend to NI Holdings during the year ended December 31, 2020. No dividends were declared or paid inby Nodak Insurance during the yearyears ended December 31, 2017.2021 or 2019.
As a public company, NI HoldingsDirect Auto re-domesticated from Illinois to North Dakota during 2021, and is now subject to the proxy solicitation, periodic reporting, insider trading, and other requirementssame dividend restrictions as Nodak Insurance. The amount available for payment of dividends from Direct Auto to us during 2022 without the prior approval of the Exchange ActNorth Dakota Insurance Department is approximately $3,796 based upon the surplus of Direct Auto at December 31, 2021. No dividends were declared or paid by Direct Auto during the years ended December 31, 2021, 2020, or 2019.
Westminster re-domesticated from Maryland to North Dakota during 2021, and is now subject to mostthe same dividend restrictions as Nodak Insurance. The amount available for payment of dividends from Westminster to us during 2022 without the prior approval of the provisionsNorth Dakota Insurance Department is approximately $2,471 based upon the surplus of SOX. As a result, NI Holdings anticipates incurring higher levels of expenses related to accounting and legal services that will be necessary to comply with such requirements.Westminster at December 31, 2021. No dividends were declared or paid by Westminster during the years ended December 31, 2021 or 2020.
Contractual Obligations Table
The following table summarizes, as of December 31, 2017, NI Holdings’ future payments and estimated claims and claims related payments for continuing operations.
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1 – 3 years | 3 – 5 years | More than 5 years | |||||||||||||||
Estimated gross loss & LAE payments | $ | 45,890 | $ | 29,055 | $ | 12,389 | $ | 3,598 | $ | 848 | ||||||||||
Operating lease obligations | 30 | 30 | — | — | — | |||||||||||||||
Total | $ | 45,920 | $ | 29,085 | $ | 12,389 | $ | 3,598 | $ | 848 |
The timingprimary contractual obligations of the amounts of theCompany include gross loss and LAE payments, is an estimate based on historicalconsideration due relating to the acquisition of Westminster, and operating lease obligations.
The Company’s unpaid losses and LAE were $139,662 as of December 31, 2021. Historical payment experience indicates that approximately 57% of this amount will be paid during 2022 and another 30% will be paid over the expectations of future payment patterns.subsequent two years. The actual timing and amounts of these payments in the future may varyvary.
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 amounts stated above.net proceeds from the IPO at time of closing, with another $20,000 payable in three equal installments. We paid the first two installments on the first two anniversaries of the closing, in January 2021 and January 2022. We will pay the final installment, plus or minus any adjustments, in December 2022.
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 Part II, Item 8, Note 4 to the Consolidated Financial Statements, included elsewhere in this Report.“Recent Accounting Pronouncements”.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk is the risk that a company will incur losses due to adverse changes in the fair value of financial instruments. NI HoldingsThe Company has exposure to three principal types of market risk through its investment activities: interest rate risk, credit risk, and equity risk. NI Holdings’Our primary market risk exposure is to changes in interest rates. NI Holdings hasWe have not entered, and doesdo not plan to enter, into any derivative financial instruments for hedging, trading, or speculative purposes.
Interest Rate Risk
Interest rate risk is the risk that a company will incur economic losses due to adverse changes in interest rates. NI Holdings’Our exposure to interest rate changes primarily results from itsour significant holdings of fixed income securities. Fluctuations in interest rates have a direct impact on the fair value of these securities.
The portfolio duration of the fixed income securities in NI Holdings’the Company’s investment portfolio at December 31, 2017,2021 was 3.994.35 years. The Company’sThese fixed income securities include U.S. government bonds, securities issued by government agencies, obligations of state and local governments and governmental authorities, and corporate bonds, most of which are exposed to changes in prevailing interest rates and which may experience moderate fluctuations in fair value resulting from changes in interest rates. NI Holdings carries these investmentsrates, and are carried as available for sale. This allowsWe manage the Company to manage its exposure to risks associated with interest rate fluctuations through active review of its investment portfolio by its management and Board of Directors review of the portfolio and consultation with our outside investment manager.
Fluctuations in near-termPotential higher interest rates could haveoftentimes correlated to inflation would also reduce the carrying value of our fixed maturity and short-term investments, negatively impacting the Company’s book value in the short-term. Over the long-term, however, higher interest rates would provide an impact on NI Holdings’ resultsincremental benefit to our net investment income over time as excess cash and proceeds of operationsmaturing bonds are reinvested at higher rates. We manage our exposure to interest rate increases by monitoring the duration within our investment portfolio and cash flows. Certain of thesemaintaining maturities that minimize any forced sales within the portfolio.
Additionally, we hold certain fixed income securities maythat have call features. In a declining interest rate environment, these securities may be called by their issuer and replaced with securities bearing lower interest rates.
If NI Holdings iswe are required to sell thesefixed income securities in a rising interest rate environment, itthe Company may recognize investment losses.
As a general matter, NI Holdings attemptswe attempt to match the durations of its assets with the durations of its liabilities. The Company’s investment objectives include maintaining adequate liquidity to meet its operational needs, optimizing its after-tax investment income, and its after-tax total return, all of which are subject to NI Holdings’management’s tolerance for risk.
56
The table below shows the interest rate sensitivity of NI Holdings’the Company’s fixed income securities measured in terms of fair value (which is equal to the carrying value for all of its investment securities that are subject to interest rate changes) at December 31, 2017:
Hypothetical Change in Interest Rate | Estimated Change in Fair Value | Fair Value | ||||||
200 basis point increase | $ | (19,088 | ) | $ | 217,449 | |||
100 basis point increase | $ | (9,599 | ) | $ | 226,938 | |||
No change | $ | — | $ | 236,537 | ||||
100 basis point decrease | $ | 9,396 | $ | 245,933 | ||||
200 basis point decrease | $ | 18,598 | $ | 255,135 |
2021 and 2020:
As of December 31, 2021 | As of December 31, 2020 | |||||||||||||||
Hypothetical Change in Interest Rate | Estimated Change in Fair Value | Fair Value | Estimated Change in Fair Value | Fair Value | ||||||||||||
200 basis point increase | $ | (31,975 | ) | $ | 332,676 | $ | (23,122 | ) | $ | 297,288 | ||||||
100 basis point increase | (16,116 | ) | 348,535 | (11,438 | ) | 308,972 | ||||||||||
No change | — | 364,651 | — | 320,410 | ||||||||||||
100 basis point decrease | 16,018 | 380,669 | 11,279 | 331,689 | ||||||||||||
200 basis point decrease | 32,119 | 396,770 | 23,046 | 343,456 |
The interest rate exposure of the Company’s portfolio increased this year compared to last year, as measured by the increased duration of our portfolio. The increase in interest rate exposure was intended to better align the Company’s portfolio with the long-term asset/liability matching target derived from periodic financial modeling of the Company’s business and liabilities. Significant further increases in the portfolio’s interest rate exposure are not expected, aside from normal ongoing fluctuations due to changes in the capital market and interest rate environment.
Credit Risk
Credit risk is the potential economic loss principally arising from adverse changes in the financial condition of a specific debt issuer. NI Holdings addressesWe address this risk by investing primarily in fixed income securities that are rated at least investment grade by Moody’s or an equivalent rating quality. NI HoldingsWe also independently, and through itsour outside investment manager, monitorsmonitor the financial condition of all of the issuers of fixed income securities in the portfolio. To limit its exposure to risk, the Company employs diversification rules that limit the credit exposure to any single issuer or asset class.
Equity Risk
Equity price risk is the risk that NI Holdingswe will incur economic losses due to adverse changes in equity prices.
Impact of Inflation
Inflation increases consumers’ needs for property and casualty insurance due to the increase in the value of the property insured and any potential liability exposure. Inflation also increases claims incurred by property and casualty insurers as property repairs, replacements, and medical expenses increase. These cost increases reduce profit margins to the extent that rate increases are not implemented on an adequate and timely basis. NI Holdings establishes insurance premiums levels before the amount of losses and LAE, or the extent to which inflation may affect these expenses, are known. Therefore, NI Holdings attempts to anticipate the potential impact of inflation when establishing rates. Because inflation has remained relatively low in recent years, financial results have not been significantly affected by it.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholdersShareholders and boardBoard of directorsDirectors of NI Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of NI Holdings, Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 20172021 and 2016, and2020, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the three-year period ended December 31, 2017,2021, and the related notes and the schedule listed in Item 15(a)(2) (collectively referred to as the “financial“consolidated financial statements”). Our audits also included the financial statement schedule listed in the Table of Contents at Item 15(a)(2). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of NI Holdings, Inc. and Subsidiariesthe Company as of December 31, 20172021 and 2016,2020, and the results of theirits operations and theirits cash flows for each of the three years in the three-year period ended December 31, 2017,2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal controls over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Mazars USA LLP
We have served as the Company’s auditor since February 2016.
/s/ Mazars USA LLP
Fort Washington, Pennsylvania
March 7, 2018
9, 2022
NI Holdings, Inc.
Consolidated Balance Sheets
December 31, 20172021 and 20162020
(dollar amounts in thousands, except par value)
2017 | 2016 | |||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 27,594 | $ | 18,318 | ||||
Fixed income securities, at fair value | 236,758 | 161,470 | ||||||
Equity securities, at fair value | 47,561 | 25,917 | ||||||
Other investments | 1,972 | 1,972 | ||||||
Total cash and investments | 313,885 | 207,677 | ||||||
Premiums and agents' balances receivable | 25,632 | 21,986 | ||||||
Deferred policy acquisition costs | 8,859 | 8,942 | ||||||
Reinsurance recoverables on losses | 4,128 | 7,192 | ||||||
Accrued investment income | 1,996 | 1,431 | ||||||
Property and equipment | 5,877 | 4,819 | ||||||
Receivable from Federal Crop Insurance Corporation | 10,501 | 16,761 | ||||||
Goodwill | 2,628 | 2,628 | ||||||
Federal income tax recoverable | — | 2,933 | ||||||
Other assets | 3,482 | 4,334 | ||||||
Total assets | $ | 376,988 | $ | 278,703 | ||||
Liabilities: | ||||||||
Unpaid losses and loss adjustment expenses | $ | 45,890 | $ | 59,632 | ||||
Unearned premiums | 63,262 | 57,445 | ||||||
Reinsurance payable | 428 | 39 | ||||||
Federal income tax payable | 991 | — | ||||||
Deferred income taxes, net | 2,539 | 2,915 | ||||||
Accrued expenses and other liabilities | 8,305 | 5,254 | ||||||
Commitments and contingencies | — | — | ||||||
Total liabilities | 121,415 | 125,285 | ||||||
Equity: | ||||||||
Common stock, $0.01 par value, authorized 25,000,000 shares, issued: 2017 - 23,000,000 shares, 2016 – none; and outstanding: 2017 – 22,337,644 shares, 2016 - none | 230 | — | ||||||
Preferred stock, without par value, authorized 5,000,000 shares, no shares issued or outstanding | — | — | ||||||
Additional paid-in capital | 93,496 | — | ||||||
Unearned employee stock ownership plan shares | (2,157 | ) | — | |||||
Retained earnings | 152,865 | 139,591 | ||||||
Accumulated other comprehensive income, net of income taxes | 15,998 | 10,305 | ||||||
Treasury stock, at cost, 2017 – 446,671 shares, 2016 - none | (8,037 | ) | — | |||||
Non-controlling interest | 3,178 | 3,522 | ||||||
Total equity | 255,573 | 153,418 | ||||||
Total liabilities and equity | $ | 376,988 | $ | 278,703 |
The accompanying notes are an integral part of these consolidated financial statements.
59
2021 | 2020 | |||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 70,623 | $ | 101,077 | ||||
Fixed income securities, at fair value | 364,651 | 320,410 | ||||||
Equity securities, at fair value | 77,690 | 69,952 | ||||||
Other investments | 2,005 | 2,924 | ||||||
Total cash and investments | 514,969 | 494,363 | ||||||
| ||||||||
Premiums and agents' balances receivable | 51,452 | 48,523 | ||||||
Deferred policy acquisition costs | 24,947 | 23,968 | ||||||
Reinsurance premiums receivable | 0- | 93 | ||||||
Reinsurance recoverables on losses | 21,200 | 8,710 | ||||||
Income tax recoverable | 364 | 0- | ||||||
Accrued investment income | 2,524 | 2,141 | ||||||
Property and equipment, net | 9,869 | 9,899 | ||||||
Receivable from Federal Crop Insurance Corporation | 0- | 6,646 | ||||||
Goodwill and other intangibles | 17,722 | 18,194 | ||||||
Other assets | 8,735 | 5,066 | ||||||
Total assets | $ | 651,782 | $ | 617,603 | ||||
| ||||||||
Liabilities: | ||||||||
Unpaid losses and loss adjustment expenses | $ | 139,662 | $ | 105,750 | ||||
Unearned premiums | 127,789 | 119,363 | ||||||
Reinsurance premiums payable | 326 | 0— | ||||||
Income tax payable | 0- | 754 | ||||||
Deferred income taxes | 5,506 | 8,757 | ||||||
Payable to Federal Crop Insurance Corporation | 4,962 | 0- | ||||||
Westminster consideration payable | 13,020 | 19,287 | ||||||
Accrued expenses and other liabilities | 13,104 | 14,820 | ||||||
Total liabilities | 304,369 | 268,731 | ||||||
| ||||||||
Commitments and contingencies | 0- | 0- | ||||||
| ||||||||
Shareholders’ equity: | ||||||||
Common stock, $0.01 par value, authorized 25,000,000 shares, issued: 23,000,000 shares; and outstanding: 2021 – 21,219,808 shares, 2020 – 21,318,638 shares | 230 | 230 | ||||||
Preferred stock, without par value, authorized 5,000,000 shares, 0 shares issued or outstanding | 0— | 0— | ||||||
Additional paid-in capital | 98,166 | 97,911 | ||||||
Unearned employee stock ownership plan shares | (1,184 | ) | (1,427 | ) | ||||
Retained earnings | 267,207 | 258,741 | ||||||
Accumulated other comprehensive income, net of income taxes | 5,237 | 12,840 | ||||||
Treasury stock, at cost, 2021 – 1,661,767 shares, 2020 – 1,538,622 shares | (26,452 | ) | (23,968 | ) | ||||
Non-controlling interest | 4,209 | 4,545 | ||||||
Total shareholders’ equity | 347,413 | 348,872 | ||||||
| ||||||||
Total liabilities and shareholders’ equity | $ | 651,782 | $ | 617,603 |
NI Holdings, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2017, 2016 and 2015
(dollar amounts in thousands, except per share data)
2017 | 2016 | 2015 | ||||||||||
Revenues: | ||||||||||||
Net premiums earned | $ | 179,464 | $ | 152,756 | $ | 139,473 | ||||||
Fee and other income | 1,648 | 1,666 | 1,854 | |||||||||
Net investment income | 5,031 | 3,644 | 3,571 | |||||||||
Net realized capital gain on investments | 2,997 | 5,681 | 823 | |||||||||
Total revenues | 189,140 | 163,747 | 145,721 | |||||||||
Expenses: | ||||||||||||
Losses and loss adjustment expenses | 122,711 | 118,508 | 83,876 | |||||||||
Amortization of deferred policy acquisition costs | 27,750 | 20,423 | 18,621 | |||||||||
Other underwriting and general expenses | 16,673 | 18,699 | 17,351 | |||||||||
Total expenses | 167,134 | 157,630 | 119,848 | |||||||||
Income before income taxes | 22,006 | 6,117 | 25,873 | |||||||||
Income taxes | 6,394 | 1,479 | 8,288 | |||||||||
Net income | 15,612 | 4,638 | 17,585 | |||||||||
Net income (loss) attributable to non-controlling interest | (379 | ) | 87 | 129 | ||||||||
Net income attributable to NI Holdings, Inc. | $ | 15,991 | $ | 4,551 | $ | 17,456 | ||||||
Basic earnings per common share | $ | 0.71 | ||||||||||
Diluted earnings per common share | $ | 0.71 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
60
NI Holdings, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2017, 2016 and 2015
(dollar amounts in thousands)
2017 | ||||||||||||
Attributable to Non-Controlling | Attributable to NI Holdings, Inc. | Total | ||||||||||
Net income (loss) | $ | (379 | ) | $ | 15,991 | $ | 15,612 | |||||
Other comprehensive income, before income taxes: | ||||||||||||
Holding gains on investments | 6 | 7,623 | 7,629 | |||||||||
Reclassification adjustment for net realized capital loss (gain) included in net income | 49 | (3,046 | ) | (2,997 | ) | |||||||
Other comprehensive income, before income taxes | 55 | 4,577 | 4,632 | |||||||||
Income tax (expense) related to items of other comprehensive income | (20 | ) | (1,601 | ) | (1,621 | ) | ||||||
Other comprehensive income, net of income taxes | 35 | 2,976 | 3,011 | |||||||||
Comprehensive income (loss) | $ | (344 | ) | $ | 18,967 | $ | 18,623 |
2016 | ||||||||||||
Attributable to Non-Controlling | Attributable to NI Holdings, Inc. | Total | ||||||||||
Net income | $ | 87 | $ | 4,551 | $ | 4,638 | ||||||
Other comprehensive income (loss), before income taxes: | ||||||||||||
Holding gains on investments | 68 | 3,862 | 3,930 | |||||||||
Reclassification adjustment for net realized capital loss (gain) included in net income | 10 | (5,691 | ) | (5,681 | ) | |||||||
Other comprehensive income (loss), before income taxes | 78 | (1,829 | ) | (1,751 | ) | |||||||
Income tax benefit (expense) related to items of other comprehensive income | (27 | ) | 640 | 613 | ||||||||
Other comprehensive income (loss), net of income taxes | 51 | (1,189 | ) | (1,138 | ) | |||||||
Comprehensive income | $ | 138 | $ | 3,362 | $ | 3,500 |
2015 | ||||||||||||
Attributable to Non-Controlling | Attributable to NI Holdings, Inc. | Total | ||||||||||
Net income | $ | 129 | $ | 17,456 | $ | 17,585 | ||||||
Other comprehensive (loss), before income taxes: | ||||||||||||
Holding (losses) on investments | (152 | ) | (4,192 | ) | (4,345 | ) | ||||||
Reclassification adjustment for net realized capital (gain) included in net income | — | (823 | ) | (823 | ) | |||||||
Other comprehensive (loss), before income taxes | (152 | ) | (5,015 | ) | (5,168 | ) | ||||||
Income tax benefit related to items of other comprehensive income | 53 | 1,755 | 1,809 | |||||||||
Other comprehensive (loss), net of income taxes | (99 | ) | (3,260 | ) | (3,359 | ) | ||||||
Comprehensive income | $ | 30 | $ | 14,196 | $ | 14,226 |
The accompanying notes are an integral part of these consolidated financial statements.
61
NI Holdings, Inc.
Consolidated Statement of Changes in Equity
Years Ended December 31, 2017, 2016 and 2015
(dollar amounts in thousands)
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 Equity | |||||||||||||||||||||||||
Balance, January 1, 2015 | $ | — | $ | — | $ | — | $ | 117,584 | $ | 14,754 | $ | — | $ | 3,354 | $ | 135,692 | ||||||||||||||||
Net income | — | — | — | 17,456 | — | — | 129 | 17,585 | ||||||||||||||||||||||||
Other comprehensive (loss), net of income taxes | — | — | — | — | (3,260 | ) | — | (99 | ) | (3,359 | ) | |||||||||||||||||||||
Balance, December 31, 2015 | $ | — | $ | — | $ | — | $ | 135,040 | $ | 11,494 | $ | — | $ | 3,384 | $ | 149,918 | ||||||||||||||||
Net income | — | — | — | 4,551 | — | — | 87 | 4,638 | ||||||||||||||||||||||||
Other comprehensive income (loss), net of income taxes | — | — | — | — | (1,189 | ) | — | 51 | (1,138 | ) | ||||||||||||||||||||||
Balance, December 31, 2016 | $ | — | $ | — | $ | — | $ | 139,591 | $ | 10,305 | $ | — | $ | 3,522 | $ | 153,418 | ||||||||||||||||
Issuance of common stock | 230 | 92,915 | (2,400 | ) | — | — | — | — | 90,745 | |||||||||||||||||||||||
Net income (loss) | — | — | — | 15,991 | — | — | (379 | ) | 15,612 | |||||||||||||||||||||||
Other comprehensive income, net of income taxes | — | — | — | — | 2,976 | — | 35 | 3,011 | ||||||||||||||||||||||||
Reclassification of tax effects stranded in AOCI from tax reform | — | — | — | (2,717 | ) | 2,717 | — | — | — | |||||||||||||||||||||||
Share-based compensation | — | 423 | — | — | — | — | — | 423 | ||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | (8,037 | ) | — | (8,037 | ) | ||||||||||||||||||||||
Distribution of employee stock ownership plan shares | — | 158 | 243 | — | — | — | — | 401 | ||||||||||||||||||||||||
Balance, December 31, 2017 | $ | 230 | $ | 93,496 | $ | (2,157 | ) | $ | 152,865 | $ | 15,998 | $ | (8,037 | ) | $ | 3,178 | $ | 255,573 |
The accompanying notes are an integral part of these consolidated financial statements.
62
NI Holdings, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2017, 2016 and 2015
(dollar amounts in thousands)
2017 | 2016 | 2015 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 15,612 | $ | 4,638 | $ | 17,585 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Net realized capital gain on investments | (2,997 | ) | (5,681 | ) | (823 | ) | ||||||
Deferred income tax expense | (2,067 | ) | (82 | ) | 378 | |||||||
Depreciation of property and equipment | 500 | 441 | 523 | |||||||||
Amortization of intangibles | 43 | 57 | 52 | |||||||||
Distribution of employee stock ownership plan shares | 401 | — | — | |||||||||
Share-based incentive compensation | 423 | — | — | |||||||||
Amortization of deferred policy acquisition costs | 27,750 | 20,423 | 18,621 | |||||||||
Deferral of policy acquisition costs | (27,667 | ) | (20,921 | ) | (19,825 | ) | ||||||
Net amortization of premiums and discounts on investments | 1,368 | 894 | 616 | |||||||||
Changes in assets and liabilities which provided (used) cash: | ||||||||||||
Premiums and agents’ balances receivable | (3,646 | ) | (1,947 | ) | (2,501 | ) | ||||||
Reinsurance recoverables on losses | 3,064 | (1,921 | ) | 1,853 | ||||||||
Accrued investment income | (565 | ) | (67 | ) | (169 | ) | ||||||
Receivable from Federal Crop Insurance Corporation | 6,260 | (2,759 | ) | 2,304 | ||||||||
Federal income tax recoverable / payable | 3,924 | (2,051 | ) | (2,049 | ) | |||||||
Other assets | 506 | (902 | ) | 673 | ||||||||
Unpaid losses and loss adjustment expenses | (13,742 | ) | 14,290 | (5,176 | ) | |||||||
Unearned premiums | 5,817 | 3,958 | 3,592 | |||||||||
Reinsurance payable | 389 | (498 | ) | 382 | ||||||||
Accrued expenses and other liabilities | 3,052 | (565 | ) | 1,141 | ||||||||
Net cash provided by operating activities | 18,425 | 7,307 | 17,177 | |||||||||
Cash flows from investing activities: | ||||||||||||
Proceeds from sales of fixed income securities | 24,584 | 21,692 | 13,698 | |||||||||
Proceeds from sales of equity securities | 11,125 | 9,084 | 2,821 | |||||||||
Purchases of fixed income securities | (100,896 | ) | (31,188 | ) | (37,033 | ) | ||||||
Purchases of equity securities | (25,419 | ) | (2,624 | ) | (3,340 | ) | ||||||
Purchases of property and equipment, net | (1,334 | ) | (548 | ) | (531 | ) | ||||||
Other | 83 | 74 | — | |||||||||
Net cash used in investing activities | (91,857 | ) | (3,510 | ) | (24,385 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from issuance of common stock | 93,145 | — | — | |||||||||
Purchases of treasury stock | (8,037 | ) | — | — | ||||||||
Loan to employee stock ownership plan | (2,400 | ) | — | — | ||||||||
Net cash provided by financing activities | 82,708 | — | — | |||||||||
Net increase (decrease) in cash and cash equivalents | 9,276 | 3,797 | (7,208 | ) | ||||||||
Cash and cash equivalents at beginning of period | 18,318 | 14,521 | 21,729 | |||||||||
Cash and cash equivalents at end of period | $ | 27,594 | $ | 18,318 | $ | 14,521 | ||||||
The Company paid $4,550, $3,800 and $10,072 in income taxes during 2017, 2016 and 2015, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
NI Holdings, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2021, 2020 and 2019
(dollar amounts in thousands, except per share data)
2021 | 2020 | 2019 | ||||||||||
Revenues: | ||||||||||||
Net premiums earned | $ | 299,589 | $ | 283,661 | $ | 246,438 | ||||||
Fee and other income | 1,775 | 1,801 | 2,125 | |||||||||
Net investment income | 7,131 | 7,271 | 7,433 | |||||||||
Net capital gain on investments | 15,479 | 13,624 | 14,783 | |||||||||
Total revenues | 323,974 | 306,357 | 270,779 | |||||||||
| ||||||||||||
Expenses: | ||||||||||||
Losses and loss adjustment expenses | 216,379 | 168,473 | 169,710 | |||||||||
Amortization of deferred policy acquisition costs | 64,574 | 51,472 | 46,188 | |||||||||
Other underwriting and general expenses | 31,715 | 33,596 | 21,070 | |||||||||
Total expenses | 312,668 | 253,541 | 236,968 | |||||||||
| ||||||||||||
Income before income taxes | 11,306 | 52,816 | 33,811 | |||||||||
Income taxes | 2,974 | 11,472 | 7,311 | |||||||||
Net income | 8,332 | 41,344 | 26,500 | |||||||||
Net income (loss) attributable to non-controlling interest | (84 | ) | 955 | 99 | ||||||||
Net income attributable to NI Holdings, Inc. | $ | 8,416 | $ | 40,389 | $ | 26,401 | ||||||
| ||||||||||||
Earnings per common share: | ||||||||||||
Basic | $ | 0.39 | $ | 1.86 | $ | 1.19 | ||||||
Diluted | $ | 0.39 | $ | 1.84 | $ | 1.19 | ||||||
| ||||||||||||
Share data: | ||||||||||||
Weighted average common shares outstanding used in basic per common share calculations | 21,424,060 | 21,772,475 | 22,179,747 | |||||||||
Plus: Dilutive securities | 232,366 | 169,995 | 85,601 | |||||||||
Weighted average common shares used in diluted per common share calculations | 21,656,426 | 21,942,470 | 22,265,348 |
The accompanying notes are an integral part of these consolidated financial statements.
NI Holdings, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2021, 2020 and 2019 (dollar amounts in thousands)
2021 | ||||||||||||
Attributable to NI Holdings, Inc. | Attributable to Non-Controlling Interest | Total | ||||||||||
Net income (loss) | $ | 8,416 | $ | (84 | ) | $ | 8,332 | |||||
Other comprehensive loss, before income taxes: | ||||||||||||
Holding losses on investments | (8,827 | ) | (319 | ) | (9,146 | ) | ||||||
Reclassification adjustment for net realized capital gain included in net income | (648 | ) | (2 | ) | (650 | ) | ||||||
Other comprehensive loss, before income taxes | (9,475 | ) | (321 | ) | (9,796 | ) | ||||||
Income tax benefit related to items of other comprehensive loss | 1,872 | 69 | 1,941 | |||||||||
Other comprehensive loss, net of income taxes | (7,603 | ) | (252 | ) | (7,855 | ) | ||||||
Comprehensive income (loss) | $ | 813 | $ | (336 | ) | $ | 477 |
2020 | ||||||||||||
Attributable to NI Holdings, Inc. | Attributable to Non-Controlling Interest | Total | ||||||||||
Net income | $ | 40,389 | $ | 955 | $ | 41,344 | ||||||
Other comprehensive income, before income taxes: | ||||||||||||
Holding gains on investments | 10,051 | 116 | 10,167 | |||||||||
Reclassification adjustment for net realized capital gain included in net income | (902 | ) | (1 | ) | (903 | ) | ||||||
Other comprehensive income, before income taxes | 9,149 | 115 | 9,264 | |||||||||
Income tax expense related to items of other comprehensive income | (1,921 | ) | (24 | ) | (1,945 | ) | ||||||
Other comprehensive income, net of income taxes | 7,228 | 91 | 7,319 | |||||||||
Comprehensive income | $ | 47,617 | $ | 1,046 | $ | 48,663 |
2019 | ||||||||||||
Attributable to NI Holdings, Inc. | Attributable to Non-Controlling Interest | Total | ||||||||||
Net income | $ | 26,401 | $ | 99 | $ | 26,500 | ||||||
Other comprehensive income, before income taxes: | ||||||||||||
Holding gains on investments | 9,583 | 177 | 9,760 | |||||||||
Reclassification adjustment for net realized capital gain included in net income | (191 | ) | (3 | ) | (194 | ) | ||||||
Other comprehensive income, before income taxes | 9,392 | 174 | 9,566 | |||||||||
Income tax expense related to items of other comprehensive income | (1,972 | ) | (37 | ) | (2,009 | ) | ||||||
Other comprehensive income, net of income taxes | 7,420 | 137 | 7,557 | |||||||||
Comprehensive income | $ | 33,821 | $ | 236 | $ | 34,057 |
The accompanying notes are an integral part of these consolidated financial statements.
NI Holdings, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2021, 2020 and 2019
(dollar amounts in thousands)
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 | |||||||||||||||||||||||||
Balance, January 1, 2019 | $ | 230 | $ | 94,486 | $ | (1,914) | $ | 183,946 | $ | 6,376 | $ | (10,634) | $ | 3,263 | $ | 275,753 | ||||||||||||||||
| ||||||||||||||||||||||||||||||||
Cumulative effect of change in accounting for equity securities | - | - | - | 8,184 | (8,184) | - | - | - | ||||||||||||||||||||||||
Net income | - | - | - | 26,401 | - | - | 99 | 26,500 | ||||||||||||||||||||||||
Other comprehensive income, net of income taxes | - | - | - | - | 7,420 | - | 137 | 7,557 | ||||||||||||||||||||||||
Share-based compensation | - | 1,613 | - | - | - | - | - | 1,613 | ||||||||||||||||||||||||
Purchase of treasury stock | - | - | - | - | - | (2,006 | ) | - | (2,006 | ) | ||||||||||||||||||||||
Issuance of vested award shares | - | (300 | ) | - | (51 | ) | - | 332 | - | (19 | ) | |||||||||||||||||||||
Distribution of employee stock ownership plan shares | - | 162 | 243 | - | - | - | - | 405 | ||||||||||||||||||||||||
Balance, December 31, 2019 | 230 | 95,961 | (1,671 | ) | 218,480 | 5,612 | (12,308 | ) | 3,499 | 309,803 | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Net income | - | - | - | 40,389 | - | - | 955 | 41,344 | ||||||||||||||||||||||||
Other comprehensive income, net of income taxes | - | - | - | - | 7,228 | - | 91 | 7,319 | ||||||||||||||||||||||||
Share-based compensation | - | 2,297 | - | - | - | - | - | 2,297 | ||||||||||||||||||||||||
Purchase of treasury stock | - | - | - | - | - | (12,234 | ) | - | (12,234 | ) | ||||||||||||||||||||||
Issuance of vested award shares | - | (477 | ) | - | (128 | ) | - | 574 | (31 | ) | ||||||||||||||||||||||
Distribution of employee stock ownership plan shares | - | 130 | 244 | - | - | - | - | 374 | ||||||||||||||||||||||||
Balance, December 31, 2020 | 230 | 97,911 | (1,427 | ) | 258,741 | 12,840 | (23,968 | ) | 4,545 | 348,872 | ||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Net income (loss) | - | - | - | 8,416 | - | - | (84 | ) | 8,332 | |||||||||||||||||||||||
Other comprehensive loss, net of income taxes | - | - | - | - | (7,603 | ) | - | (252 | ) | (7,855 | ) | |||||||||||||||||||||
Share-based compensation | - | 2,408 | - | - | - | - | - | 2,408 | ||||||||||||||||||||||||
Purchase of treasury stock | - | - | - | - | - | (4,316 | ) | - | (4,316 | ) | ||||||||||||||||||||||
Issuance of vested award shares | - | (2,370 | ) | - | 50 | - | 1,832 | - | (488 | ) | ||||||||||||||||||||||
Distribution of employee stock ownership plan shares | - | 217 | 243 | - | - | - | - | 460 | ||||||||||||||||||||||||
Balance, December 31, 2021 | $ | 230 | $ | 98,166 | $ | (1,184 | ) | $ | 267,207 | $ | 5,237 | $ | (26,452 | ) | $ | 4,209 | $ | 347,413 |
The accompanying notes are an integral part of these consolidated financial statements.
NI Holdings, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2021, 2020 and 2019
(dollar amounts in thousands)
2021 | 2020 | 2019 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 8,332 | $ | 41,344 | $ | 26,500 | ||||||
Adjustments to reconcile net income to net cash flows from operating activities: | ||||||||||||
Net capital gain on investments | (15,479 | ) | (13,624 | ) | (14,783 | ) | ||||||
Deferred income tax (benefit) expense | (1,310 | ) | 638 | 1,871 | ||||||||
Depreciation of property and equipment | 694 | 709 | 538 | |||||||||
Amortization of intangibles | 472 | 5,224 | 1,711 | |||||||||
Distribution of employee stock ownership plan shares | 460 | 373 | 405 | |||||||||
Share-based incentive compensation | 2,408 | 2,297 | 1,613 | |||||||||
Amortization of deferred policy acquisition costs | 64,574 | 51,472 | 46,188 | |||||||||
Deferral of policy acquisition costs | (65,553 | ) | (60,041 | ) | (48,721 | ) | ||||||
Net amortization of premiums and discounts on investments | 2,080 | 1,460 | 1,146 | |||||||||
Loss on sale of property and equipment | 31 | 6 | 37 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Premiums and agents’ balances receivable | (2,929 | ) | (3,325 | ) | (2,404 | ) | ||||||
Reinsurance premiums receivable / payable | 419 | (828 | ) | 170 | ||||||||
Reinsurance recoverables on losses | (12,490 | ) | (3,902 | ) | (1,813 | ) | ||||||
Income tax recoverable / payable | (1,118 | ) | (753 | ) | 889 | |||||||
Accrued investment income | (383 | ) | 17 | (191 | ) | |||||||
Federal Crop Insurance Corporation receivable / payable | 11,608 | 7,584 | 1,939 | |||||||||
Other assets | (3,669 | ) | 186 | (109 | ) | |||||||
Unpaid losses and loss adjustment expenses | 33,912 | 3,932 | 6,129 | |||||||||
Unearned premiums | 8,426 | 13,476 | 4,509 | |||||||||
Accrued expenses and other liabilities | (1,317 | ) | 4,765 | 41 | ||||||||
Net cash flows from operating activities | 29,168 | 51,010 | 25,665 | |||||||||
| ||||||||||||
Cash flows from investing activities: | ||||||||||||
Proceeds from maturities and sales of fixed income securities | 73,015 | 87,874 | 59,649 | |||||||||
Proceeds from sales of equity securities | 44,600 | 27,718 | 20,174 | |||||||||
Purchases of fixed income securities | (128,480 | ) | (91,559 | ) | (92,012 | ) | ||||||
Purchases of equity securities | (37,491 | ) | (22,312 | ) | (17,042 | ) | ||||||
Purchases of property and equipment | (696 | ) | (543 | ) | (1,290 | ) | ||||||
Acquisition of Westminster American Insurance Company (cash consideration paid net of cash and cash equivalents acquired) | 0- | (703 | ) | 0- | ||||||||
Proceeds from sale of other investments and other | 901 | (275 | ) | 63 | ||||||||
Net cash flows from investing activities | (48,151 | ) | 200 | (30,458 | ) | |||||||
| ||||||||||||
Cash flows from financing activities: | ||||||||||||
Purchases of treasury stock | (4,316 | ) | (12,234 | ) | (2,006 | ) | ||||||
Installment payment on Westminster consideration payable | (6,667 | ) | 0- | 0- | ||||||||
Issuance of restricted stock awards | (488 | ) | (31 | ) | (19 | ) | ||||||
Net cash flows from financing activities | (11,471 | ) | (12,265 | ) | (2,025 | ) | ||||||
| ||||||||||||
Net (decrease) increase in cash and cash equivalents | (30,454 | ) | 38,945 | (6,818 | ) | |||||||
| ||||||||||||
Cash and cash equivalents at beginning of period | 101,077 | 62,132 | 68,950 | |||||||||
| ||||||||||||
Cash and cash equivalents at end of period | $ | 70,623 | $ | 101,077 | $ | 62,132 | ||||||
| ||||||||||||
| ||||||||||||
Non-cash item: Present value of installment payable issued in connection with acquisition of Westminster American Insurance Company | $ | 0- | $ | 18,787 | $ | 0- | ||||||
| ||||||||||||
Federal and state income taxes paid | $ | 5,402 | $ | 11,586 | $ | 4,000 |
The accompanying notes are an integral part of these consolidated financial statements.
NI Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2017, 20162021, 2020 and 2015
2019
(dollar amounts in thousands)
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 consummatedcompleted on March 13, 2017. Immediately following the conversion, all of the outstanding shares of common stock of Nodak Insurance Company (the successor to Nodak Mutual Insurance Company) were issued to Nodak Mutual Group, Inc., which then contributed the shares to NI Holdings in exchange for 55% of the outstanding shares of common stock of NI Holdings. Nodak Insurance Company then became a wholly-owned stock subsidiary of NI Holdings. Prior to completion of the conversion, NI Holdings conducted no business and had no assets or liabilities. As a result of the conversion, NI Holdings became the holding company for Nodak Insurance Company and its existing subsidiaries. The newly issued shares
These Consolidated Financial Statements include the financial position and results of operations of NI Holdings were available for public trading on March 16, 2017.and seven other entities:
The consolidated financial statements of NI Holdings consist primarily of five 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”), and an affiliated company, Battle Creek Mutual Insurance Company (“Battle Creek”).
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 Federation (“NDFB”). Nodak Insurance is a leading writer of property and casualty insurance in North Dakota, specializing in providingoffering private passenger auto, homeowners, farmowners, commercial multi-peril, crop hail, and Federal multi-peril crop insurance coverages.coverages through its captive agents in the state.
Nodak Agency, Inc.
Nodak Agency a wholly-owned subsidiary of Nodak Insurance, is an inactive shell corporation.
American West a wholly-owned subsidiary of Nodak Insurance Company
American West is a property and casualty insurance company licensed in eight states in the Midwest and Western regions of the United States. American West began writing policies in 2002 and primarily writes personal auto, homeowners, and farm coverages in South Dakota. American West also writes personal auto coverage in North Dakota, as well as crop hail and Federal multi-peril crop insurance coverages in Minnesota and South Dakota.
Primero Insurance Company
Primero is a wholly-owned subsidiary of Tri-State, Ltd. Tri-State, Ltd. is an inactive shell corporation 100% owned by Nodak Insurance. Primero is a property and casualty insurance company writing non-standard automobile coverage in the states of Nevada, Arizona, North Dakota, and South Dakota.
Battle Creek is controlled by NodakMutual Insurance via a surplus note and 100% quota-share agreement. The terms of the surplus note and quota-share agreement allow Nodak Insurance to appoint two-thirds of the Battle Creek Board of Directors. Company
Battle Creek is a property and casualty insurance company writing personal auto, homeowners, and farm coverages solely in the state of Nebraska. Battle Creek became affiliated with Nodak Insurance in 2011, and Nodak Insurance provides underwriting, claims management, policy administration, and other administrative services to Battle Creek. Because we have concluded that we control Battle Creek, we consolidate the financial statements of Battle Creek, and Battle Creek’s policyholders’ interest in Battle Creek is reflected as a non-controlling interest in shareholders’ equity in our Consolidated Balance Sheets and its net income or loss is excluded from net income attributed to NI Holdings in our Consolidated Statements of Operations.
Direct Auto Insurance Company
Direct Auto is a property and casualty insurance company licensed in Illinois. Direct Auto began writing non-standard automobile coverage in 2007, and was acquired by NI Holdings on August 31, 2018 via a stock purchase agreement.
Westminster American Insurance Company
Westminster is a property and casualty insurance company licensed in seventeen states and the District of Columbia. Westminster is headquartered in Owings Mills, Maryland and underwrites commercial multi-peril insurance in the states of Delaware, Georgia, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Virginia, West Virginia, and the District of Columbia. Westminster was acquired by NI Holdings on January 1, 2020 via a stock purchase agreement.
Nodak Insurance markets and distributes its policies through its captive agents, while all other companies utilize the independent agent distribution channel. Additionally, all of the Company’s insurance subsidiary and affiliate companies are rated “A” Excellent by AM Best.
The same executive management team provides oversight and underwriting personnel administer products, classes of business,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 Nodak Insurance and its insurance subsidiaries. In addition, the insurance companies share a combined business plan to achieve market penetration and underwriting profitability objectives. Distinctions within the productstheir respective companies.
2.Summary 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.Significant Accounting Policies
2. Basis of Consolidation:
Our consolidated financial statements,Consolidated Financial Statements, which we have prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”),GAAP, include our accounts and those of our wholly-owned subsidiaries, as well as Battle Creek, an entity we control via contract.a surplus note agreement. 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.
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3. Summary of Significant Accounting Policies
Use of Estimates:
In preparing our consolidated financial statements,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.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, and deferred policy acquisition costs.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 continuingcontinued 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 100% quota-share reinsurance agreement between Nodak Insurance and Battle Creek, as well assurplus note which provides us with the ability to control a majorityappoint two-thirds of the Board of Directors of Battle Creek. ThroughUnder the effects of the 100% quota-sharequota share reinsurance agreement with Battle Creek, we are considered the primary beneficiary ofthat existed through December 31, 2019, Battle Creek’s operating results excludingincluded only net investment income, bad debt expense, and income taxes. Therefore,Effective January 1, 2020, the Company implemented an intercompany pooling reinsurance agreement, and Battle Creek’s operating results now include its participation in the underwriting results of the pool (2% during 2021 and 2020). For more information, see Part II, Item 8, Note 12 “Related Party Transactions”. 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.Consolidated Balance Sheet and its net income or loss is excluded from net income or loss attributed to NI Holdings in our Consolidated Statement of Operations.
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 portfolioThe Company’s fixed income securities and equity securities are classified as “available-for-sale”available-for-sale and have reported the portfoliocarried at estimated fair value withas determined by management based upon quoted market prices or a recognized independent 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 investments gains or losses on equity securities are reported in net income (loss). Investment income is recognized when earned, and realized capital gains and losses net of income taxes, reported in accumulated other comprehensive income. on investments are recognized when investments are sold, or an other-than-temporary impairment is recognized.
Fair values are based on quoted market prices or dealer quotes,independent pricing services, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Amortization of premium and accretion of discount are computed using an effective interest method. Realized gains and losses are determined using the specific identification method and included in the determination of net income. 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 on investments, along with the change in unrealized gains and losses on equity securities.
We frequently review our investment portfolio for declines in fair value. Our process for identifying declines in the fair value of investments each quarter to determine whetherthat 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 value belowvalues are other-than-temporary, the amortized cost basiscredit loss component of the impairment is other than temporary. Accordingly, we assess whether wereflected in net income (loss) as a realized capital loss on investment if the Company does not intend to sell the security, and the remaining portion of the other-than-temporary loss is recognized in other comprehensive income (loss), net of income taxes. If the Company intends to sell the security, or determines that it is more likely than not that weit will be required to sell athe 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 therecovering its cost or amortized cost basis we separateless any current-period credit losses, the full amount of the impairment into the amount that is credit related (creditother-than-temporary loss component) and the amount due to all other factors. The credit loss component is recognized in earningsnet income (loss). Fair values of interest rate sensitive instruments may be affected by increases and isdecreases 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 difference between the security’s amortized cost basis and the present value of its
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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 Statements of Operations, but is recognized in other comprehensive income.
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 termworthiness of the assets or liabilities.
Level III – Unobservable inputs that are supported by little or no market activity and are significant toissuer, prepayment options, relative values of other investments, the fair valueliquidity of the assets or liabilities. Unobservable inputs reflect the reporting entity’s own assumptions thatinstrument, and other general 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.conditions. For more information on investment valuation measurements, see Part II, Item 8, Note 6 “Fair Value Measurements”.
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.basis, which approximates fair value. All other invested assets have been assessed for impairment. The carrying value of these other invested assets was $1,972$2,005 at both December 31, 20172021 and 2016.$2,924 at December 31, 2020.
Reclassifications:
Certain amounts in the 2016 and 2015 consolidated financial statements have been reclassified to conform to the 2017 presentation. This includes a change in the Company’s reportable segments. The prior segments were non-standard auto, crop, and other property and casualty. The new segments used throughout this filing are private passenger auto, non-standard auto, home and farm, crop, and all other.
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 comprise primarily 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 excess moisture (known as “prevented planting”). In these situations, recognition of the remaining unearned premium may be accelerated if it is determined that the risk period has ended when these types of claims are filed.
The Company uses the direct write-off method for recognizing bad debts. Accounts billed directly to the policyholder are deemed to be delinquent after 60 days except for those accounts associated with amounts due from insureds for premiums, in which case policyprovided grace payment and cancellation procedures are commenced in accordance withnotice periods per state insurance regulations. Any earned but uncollected premiums are written off immediately uponwithin 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, 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 estimated useful lives of the assets.
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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 suchmay differ from these 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 based on the basis of historical information by line of insurance. We account for inflationInflation is not explicitly selected in the reserving function through analysis of costs and trends and reviews ofloss reserve analysis. However, historical reserving results.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 expense.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 absencepotential impact of significant changes in tort law and the legal environment thatwhich may affectimpact 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 affectingimpacting 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.
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. Forreturn which includes NI Holdings and its wholly-owned subsidiaries.
Insurance companies typically pay state premium taxes rather than state income taxes. However, Direct Auto is subject to state income taxes in the year ended December 31, 2016,state of Illinois, in addition to state premium taxes. Additionally, NI Holdings, on a stand-alone basis, pays state income taxes to the consolidatedstate of North Dakota for income or losses generated as a separate financial entity. State premium taxes are included as a part of amortization of deferred policy acquisition costs. State income taxes are reported along with federal income tax return included Nodak Mutual Insurance Company and its owned subsidiaries. For the year ended December 31, 2017, the consolidated federaltaxes as income tax return will include NI Holdings, Inc. and its owned subsidiaries.expense (benefit).
The Company reportsdid not have any material uncertain tax positions. The Company’s policy is to recognize tax-related interest and penalties if any,accrued related to unrecognized benefits as parta component of income tax expense in the year such amounts are determinable.expense. The Company did not recognize any tax-related interest and penalties, nor did it have any tax-related interest or penalties accrued as of December 31, 2021 and 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.
Accounting guidance requires that companiesWe 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. The guidanceWe also requiresrecord 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 from continuing operations.
New accounting guidance also allows companiesThe Company has elected to reclassify any tax effects stranded in accumulated other comprehensive income as a result of a change in income tax reformrates 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 ESOP are not considered outstanding until they are released and allocated to plan participants. Unearned shares related to the Company’s Restricted Stock Units (“RSUs”) and Performance Share Units (“PSUs”) are not considered outstanding until they are earned by award participants. See Part II, Item 8, Note 13 “Benefit Plans” and Note 19 “Share Based Compensation”.
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 staff and advisors. We also limit the amount of our total investment portfolio that we invest in any one security.
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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 $250. During the normal course of business, balances are maintained above the FDIC insurance limit. The Company maintains short-term investment balances in investment grade money market accounts that are insured by the Securities Investor Protection Corporation (“SIPC”) up to $500. On occasion, balances for these accounts are maintained in excess of the SIPC insurance limit.
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 known 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 Intangible AssetsIntangibles:
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 intangible assetsother intangibles with an indefinite useful life for impairment annually. We also assess goodwill and other intangible assetsintangibles 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 intangible assetsintangibles could result from changes in economic and operating conditions in future periods. We did not record any impairments of goodwill or other intangible assetsintangibles during the years ended December 31, 2017, 2016, and 2015.2021, 2020, or 2019.
Goodwill representingarising from the acquisition of Primero in 2014 represents the excess of the purchase price over the fair value of the net assets acquired, is reported separately in the Consolidated Balance Sheet.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 intangible assetsintangibles 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 that 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 VOBA. The state insurance license asset has an indefinite life, while the Direct Auto trade name is being amortized over five years from the August 31, 2018 acquisition/valuation date. The favorable lease contract and VOBA assets have been fully amortized.
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 asset and Westminster trade name are being amortized over twenty years and ten years, respectively, from the January 1, 2020 acquisition/valuation date. The VOBA asset has been fully amortized.
3.Acquisition of Westminster American Insurance Company
On January 1, 2020, the Company completed the acquisition of 100% of the common stock of Westminster from the private shareholder of Westminster, and Westminster became a consolidated subsidiary of the Company. Westminster is a property and casualty insurance company specializing in multi-peril commercial insurance in nine states and the District of Columbia.
Westminster is 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 financial results of Westminster have been included in the Consolidated Financial Statements and the Company’s commercial business segment following the acquisition close date.
We account for business acquisitions in accordance with the acquisition method of accounting, which requires 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 following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2019:
Pro Forma Year Ended December 31, | ||||
2019 | ||||
Revenues | $ | 292,858 | ||
| ||||
Net income attributable to NI Holdings, Inc. | 24,394 | |||
| ||||
Basic earnings per common share attributable to NI Holdings, Inc. | 1.10 |
The Company did not reflect any material, non-recurring pro forma adjustments directly attributable to the business combination in the above pro forma revenue and earnings.
These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting Westminster’s results to reflect the deferral and amortization of policy acquisition costs and the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from January 1, 2019, with the related income tax effects.
The Company incurred acquisition-related costs of $828 and $83 during the years ended December 31, 2020 and 2019, respectively. These expenses were reclassified into first quarter 2019 in the pro forma amounts presented above.
The Company paid $20,000 in cash consideration to the private shareholder of Westminster as of the closing date, and an additional $20,000 to be paid in 3 equal annual installments. The acquisition of Westminster did not include any contingent consideration other than a provision regarding future changes to federal income tax rates. The first two installments were paid in January 2021 and January 2022. The final installment is due to be paid in December 2022.
The following table summarizes the consideration transferred to acquire Westminster and the amounts of identified assets acquired and liabilities assumed at the acquisition date:
Fair Value of Consideration: | ||||
Cash consideration transferred | $ | 20,000 | ||
Present value of future cash consideration | 18,787 | |||
Total cash consideration | $ | 38,787 | ||
| ||||
Fair Value of Identifiable Assets Acquired and Liabilities Assumed: | ||||
Identifiable net assets: | ||||
Cash and cash equivalents | $ | 19,297 | ||
Fixed income securities | 12,073 | |||
Equity securities | 2,705 | |||
Other investments | 735 | |||
Premiums and agents' balances receivable | 8,507 | |||
Reinsurance recoverables on losses | 763 | |||
Accrued investment income | 70 | |||
Property and equipment | 2,376 | |||
Federal income tax recoverable | 138 | |||
State insurance licenses (included in goodwill and other intangibles) | 1,800 | |||
Distribution network (included in goodwill and other intangibles) | 6,700 | |||
Trade name (included in goodwill and other intangibles) | 500 | |||
Value of business acquired (included in goodwill and other intangibles) | 4,750 | |||
Other assets | 76 | |||
Unpaid losses and loss adjustment expenses | (8,568 | ) | ||
Unearned premiums | (16,611 | ) | ||
Deferred income taxes, net | (1,583 | ) | ||
Reinsurance premiums payable | (565 | ) | ||
Accrued expenses and other liabilities | (1,132 | ) | ||
Total identifiable net assets | $ | 32,031 | ||
| ||||
Goodwill | $ | 6,756 |
The fair value of the assets acquired included premiums and agents’ balances receivable of $8,507 and reinsurance recoverables on losses of $763. These are the gross amounts due from policyholders and reinsurers, respectively, none of which were anticipated to be uncollectible. The Company did not acquire any other material receivables as a result of the acquisition of Westminster.
The fair values of the acquired distribution network, state insurance licenses, Westminster trade name, and 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 are being amortized over their useful lives of up to twenty years. The goodwill is not deductible for income tax purposes.
4.Recent Accounting Pronouncements
As an emerging growth company,EGC, we have elected to use the extended transition period for complying with any new or revised financial accounting standards from the Financial Accounting Standards Board (“FASB”) pursuant to Section 13(a) of the Exchange Act. The following discussion includes effective dates for both public business entities and emerging growth companies, as well as whether specific guidance may be adopted early.
Adopted
On July 1, 2017,In January 2019, the Company early adopted amended guidance from the Financial Accounting Standards Board (the “FASB”) on goodwill impairment testing. Under the amended guidance, the optional qualitative assessment (Step 0) and the first step of the quantitative assessment (Step 1) remain unchanged. Step 2 is eliminated. As a result, for annual impairment testing or in the event a test is required priorFASB that generally requires entities to the annual test, the Company will use Step 0 to determine if an impairment might exist and Step 1 to determine the amount of goodwill impairment. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds itsmeasure equity securities at fair value notand recognize changes in fair value in their results of operations. The FASB issued other impairment, disclosure, and presentation improvements related to exceedfinancial instruments within the carrying amount of goodwill in the reporting unit. This guidance is effective for annual and interim reporting periods beginning after December 15,guidance. Effective January 1, 2019, for public business entities. For private companies and emerging growth companies,we applied this guidance, is also effective for annual and interim reporting periods beginning after December 15, 2021. Early adoption is permitted for all entities beginning in 2017. The Company has early adopted this guidance on a prospective basis as a change in accounting principle, therefore at the date of adoption there is no impact to the Company’s financial position or results of operations.
In March 2016, the FASB issued amended guidance to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the
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Consolidated Statement of Cash Flows. All excess income tax benefits and income tax deficiencies should be recognized as income tax expense or benefit in the Consolidated Statement of Operations, instead of affecting additional paid-in-capital on the Consolidated Balance Sheet. These discrete income tax items should be classified along with other income tax cash flows as an operating activity on the Consolidated Statement of Cash Flows. In addition, cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. This guidance is effective for annual periods beginning after December 15, 2016 for public business entities. For private companies and emerging growth companies, this guidance is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for all entities in any period. An entity that elects early adoption must adopt all amendments in the same period. Amendments requiring recognition of excess income tax benefits and income tax deficiencies in the Consolidated Statement of Operations should be applied prospectively. The Company has early adopted this guidance on a prospective basis for the year ended December 31, 2017. At the date of adoption, there is a minimal impact to the computation of diluted earnings per share, but no impact to the Company’s financial position or results of operations.
In February 2018, the FASB issued new guidance to provide companies the option to reclassify income tax effects that are stranded in accumulated other comprehensive income as a result of income tax reform to retained earnings. This guidance is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for reporting periods for which financial statements have not yet been issued or made available for issuance. In the period of adoption, an entity would be able to choose whether to apply the amendments retrospectively or in the period of adoption. The Company has elected to early adopt this guidance on a prospective basis, resultingresulted in a $2,717cumulative-effect reclassification of stranded income tax effectsafter-tax unrealized net capital gains aggregating $8,184, from accumulated other comprehensive income to retained earnings within the Equity section of the Consolidated Balance Sheet as of December 31, 2017. There was noearnings. This reclassification had 0no impact to the Company’s financial position, results of operations or cash flows.
Not Yet Adoptedat the date of adoption. The after-tax change in accounting for equity securities did not affect the Company’s total shareholders’ equity; however, the unrealized net capital gains reclassified at the transition date to retained earnings will never be recognized in net income. Prior year financial statements were not restated. Going forward, the accounting used for equity securities will record the market fluctuations attributed to equity securities through our results of operations rather than as a component of other comprehensive income, which will add a level of volatility to our net income.
In May 2014,December 2019, the Company adopted guidance from the FASB issued guidance that establishes the manner in which an entity recognizes the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. While the guidance will replacereplaces most existing GAAP revenue recognition guidance, the scope of the guidance excludes insurance contracts. The Company has reviewed its sources of revenues, and has determined that no material revenues are derived from non-insurance contracts and thus subject to the new revenue recognition guidance. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017 for public business entities. For private companies and emerging growth companies, this guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted for all entities. We currently believe that this guidance will haveAs a result, there was no impact to the Company’s financial position, results of operations, or cash flows.
In December 2019, the Company adopted amended guidance from the FASB that addressed diversity in how certain cash receipts and cash payments are presented and classified in the Consolidated Statement of Cash Flows, and the presentation of restricted cash in the Consolidated Statement of Cash Flows. The amendments provided clarity on ourthe treatment of eight specifically defined types of cash inflows and outflows, and requires entities to explain the changes during a reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. There was no impact to the Company’s financial position, results of operations, or cash flows.
In January 2016,2020, the Company adopted amended guidance from the FASB issued amended guidance that generally requires entitiesshortened the amortization period of premiums on certain fixed income securities held at a premium to measure equity securities at fair value and recognize changes in fair value in their resultsthe earliest call date rather than through the maturity date of operations.the callable security. The amended guidance also simplifies the impairment assessmentadoption of equity securities without readily determinable fair values by requiring entities to perform a qualitative assessment to identify impairment. The FASB issued other disclosure and presentation improvements related to financial instruments within the guidance. The amended guidance is effective for annual and interim reporting periods beginning after December 15, 2017 for public business entities. For private companies and emerging growth companies, this guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted for all non-public entities as ofdid not materially impact the fiscal year beginning after December 15, 2017, including interim periods within those fiscal years. We are evaluating the requirements of this amended measurement and classification of financial instruments guidance and the potential impact on ourCompany’s financial position, results of operations, andor 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 balance sheet,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, iswas 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, 20192021 and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted2022. We will adopt this guidance for all entities.the year ended December 31, 2022. We do not expect the adoption of this new guidance to have a significant impact on our financial position, results of operations, or cash flows. Upon adoption, the Company will recognize a right of use asset and operating lease 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 requirerequires timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The guidance will requirerequires 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. FinancialThe guidance also requires financial institutions and other organizations will nowto use forward-looking information to better form their credit loss estimates. Many of the loss estimation techniques applied today willprior to adoption of this standard are still be permitted, although the inputs to those techniques will changehave changed to reflect the full amount of expected credit losses. Organizations willare to continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative
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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 iswas effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 for public business entities that arefilers with the SEC filers. For privateexcluding smaller reporting companies, and emerging growth companies that did not relinquish private company relief. For all other entities, this guidance iswill be effective for annual reporting periods beginning after December 15, 20202022 and interim periods within those fiscal years beginning after December 15, 2021.years. Early adoption is permitted for all entitiesentities. We will adopt this guidance for the year ended December 31, 2022, as of the fiscal yearswe will lose our EGC status beginning after December 15, 2018, including interim periods within those fiscal years. We are evaluating the impact31, 2022. Based on our evaluation, adoption of this new guidancestandard will not have a significant impact on our financial position, results of operations, and cash flows.
In August and November 2016,December 2019, the FASB issued amended guidance onto simplify the presentation and classification of various items in the Statement of Cash Flows. The amendments address specific cash flow issues, including debt prepayments and contingent consideration payments made after a business combination.accounting for income taxes. The amended guidance also requires the Statement of Cash Flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Currently, the Statement of Cash Flows only explains the change in cash and cash equivalents. The amended guidance iswas effective for annual and interim reporting periodsfiscal years beginning after December 15, 20172020, including interim periods within those fiscal years, for public business entities. For private companies and emerging growth companies, thisthe amended guidance iswill be effective for annual reporting periodsfiscal years beginning after December 15, 20182021, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted2022. We will adopt this guidance for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments are to be applied using a retrospective transition method to each period presented. Theended December 31, 2022. Based on our evaluation, adoption of this amended guidancenew standard will not have ana significant impact on our financial position or results of operations. We are evaluating the impact this amended guidance will have on our Statement of Cash Flows.
In March 2017, the FASB issued amended guidance to shorten the amortization period of premiums on certain purchased callable fixed income securities to the earliest call date. The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For private companies and emerging growth companies, this amended guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are evaluating the requirements of this guidance and the potential impact to our financial position, results of operations, and cash flows.
5.Investments
The amortized cost and estimated fair value of investmentfixed income securities as of December 31, 20172021 and 20162020 were as follows:
December 31, 2017 | ||||||||||||||||
Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Fixed income securities: | ||||||||||||||||
U.S. Government and agencies | $ | 9,531 | $ | 175 | $ | (57 | ) | $ | 9,649 | |||||||
Obligations of states and political subdivisions | 81,741 | 1,171 | (317 | ) | 82,595 | |||||||||||
Corporate securities | 88,474 | 1,197 | (220 | ) | 89,451 | |||||||||||
Residential mortgage-backed securities | 28,557 | 124 | (157 | ) | 28,524 | |||||||||||
Commercial mortgage-backed securities | 11,228 | 61 | (119 | ) | 11,170 | |||||||||||
Asset-backed securities | 15,447 | 10 | (88 | ) | 15,369 | |||||||||||
Total fixed income securities | 234,978 | 2,738 | (958 | ) | 236,758 | |||||||||||
Equity securities: | ||||||||||||||||
Basic materials | 768 | 124 | — | 892 | ||||||||||||
Communications | 3,027 | 1,449 | (154 | ) | 4,322 | |||||||||||
Consumer, cyclical | 5,303 | 4,156 | (120 | ) | 9,339 | |||||||||||
Consumer, non-cyclical | 7,090 | 3,940 | (125 | ) | 10,905 | |||||||||||
Energy | 2,003 | 272 | (44 | ) | 2,231 | |||||||||||
Financial | 2,007 | 410 | — | 2,417 | ||||||||||||
Industrial | 5,038 | 4,167 | — | 9,205 | ||||||||||||
Technology | 3,792 | 4,668 | (210 | ) | 8,250 | |||||||||||
Total equity securities | 29,028 | 19,186 | (653 | ) | 47,561 | |||||||||||
Total investments | $ | 264,006 | $ | 21,924 | $ | (1,611 | ) | $ | 284,319 |
December 31, 2016 | ||||||||||||||||
Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Fixed income securities: | ||||||||||||||||
U.S. Government and agencies | $ | 5,834 | $ | 260 | $ | (44 | ) | $ | 6,050 | |||||||
Obligations of states and political subdivisions | 68,915 | 882 | (401 | ) | 69,396 | |||||||||||
Corporate securities | 50,610 | 1,028 | (468 | ) | 51,170 | |||||||||||
Residential mortgage-backed securities | 22,750 | 102 | (215 | ) | 22,637 | |||||||||||
Commercial mortgage-backed securities | 8,033 | 104 | (41 | ) | 8,096 | |||||||||||
Asset-backed securities | 4,118 | 17 | (14 | ) | 4,121 | |||||||||||
Total fixed income securities | 160,260 | 2,393 | (1,183 | ) | 161,470 | |||||||||||
Equity securities: | ||||||||||||||||
Basic materials | 90 | 13 | (1 | ) | 102 | |||||||||||
Communications | 1,307 | 1,601 | (81 | ) | 2,827 | |||||||||||
Consumer, cyclical | 1,665 | 3,646 | (50 | ) | 5,261 | |||||||||||
Consumer, non-cyclical | 2,015 | 2,411 | (208 | ) | 4,218 | |||||||||||
Energy | 1,053 | 234 | — | 1,287 | ||||||||||||
Financial | 314 | 277 | — | 591 | ||||||||||||
Industrial | 2,251 | 2,766 | — | 5,017 | ||||||||||||
Technology | 2,816 | 3,855 | (57 | ) | 6,614 | |||||||||||
Total equity securities | 11,511 | 14,803 | (397 | ) | 25,917 | |||||||||||
Total investments | $ | 171,771 | $ | 17,196 | $ | (1,580 | ) | $ | 187,387 |
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December 31, 2021 | ||||||||||||||||
Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Fixed income securities: | ||||||||||||||||
U.S. Government and agencies | $ | 13,118 | $ | 467 | $ | (87 | ) | $ | 13,498 | |||||||
Obligations of states and political subdivisions | 84,668 | 2,979 | (353 | ) | 87,294 | |||||||||||
Corporate securities | 144,476 | 4,214 | (1,069 | ) | 147,621 | |||||||||||
Residential mortgage-backed securities | 26,190 | 266 | (300 | ) | 26,156 | |||||||||||
Commercial mortgage-backed securities | 32,878 | 815 | (161 | ) | 33,532 | |||||||||||
Asset-backed securities | 52,604 | 131 | (313 | ) | 52,422 | |||||||||||
Redeemable preferred stocks | 4,008 | 136 | (16 | ) | 4,128 | |||||||||||
Total fixed income securities | $ | 357,942 | $ | 9,008 | $ | (2,299 | ) | $ | 364,651 |
December 31, 2020 | ||||||||||||||||
Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Fixed income securities: | ||||||||||||||||
U.S. Government and agencies | $ | 13,334 | $ | 1,055 | $ | (6 | ) | $ | 14,383 | |||||||
Obligations of states and political subdivisions | 61,001 | 3,278 | (35 | ) | 64,244 | |||||||||||
Corporate securities | 117,628 | 8,549 | (147 | ) | 126,030 | |||||||||||
Residential mortgage-backed securities | 35,017 | 1,478 | (1 | ) | 36,494 | |||||||||||
Commercial mortgage-backed securities | 23,976 | 1,700 | (21 | ) | 25,655 | |||||||||||
Asset-backed securities | 50,751 | 535 | (86 | ) | 51,200 | |||||||||||
Redeemable preferred stocks | 2,198 | 206 | 0- | 2,404 | ||||||||||||
Total fixed income securities | $ | 303,905 | $ | 16,801 | $ | (296 | ) | $ | 320,410 |
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.these securities.
December 31, 2017 | ||||||||
Amortized Cost | Fair Value | |||||||
Due to mature: | ||||||||
One year or less | $ | 12,761 | $ | 12,766 | ||||
After one year through five years | 86,830 | 87,642 | ||||||
After five years through ten years | 69,586 | 70,680 | ||||||
After ten years | 10,569 | 10,607 | ||||||
Mortgage / asset-backed securities | 55,232 | 55,063 | ||||||
Total fixed income securities | $ | 234,978 | $ | 236,758 | ||||
December 31, 2021 | ||||||||
Amortized Cost | Fair Value | |||||||
Due to mature: | ||||||||
One year or less | $ | 14,457 | $ | 14,586 | ||||
After one year through five years | 82,429 | 84,760 | ||||||
After five years through ten years | 82,270 | 84,173 | ||||||
After ten years | 63,106 | 64,894 | ||||||
Mortgage / asset-backed securities | 111,672 | 112,110 | ||||||
Redeemable preferred stocks | 4,008 | 4,128 | ||||||
Total fixed income securities | $ | 357,942 | $ | 364,651 |
December 31, 2020 | ||||||||
Amortized Cost | Fair Value | |||||||
Due to mature: | ||||||||
One year or less | $ | 17,722 | $ | 17,933 | ||||
After one year through five years | 86,709 | 91,457 | ||||||
After five years through ten years | 59,408 | 64,987 | ||||||
After ten years | 28,124 | 30,280 | ||||||
Mortgage / asset-backed securities | 109,744 | 113,349 | ||||||
Redeemable preferred stocks | 2,198 | 2,404 | ||||||
Total fixed income securities | $ | 303,905 | $ | 320,410 |
December 31, 2016 | ||||||||
Amortized Cost | Fair Value | |||||||
Due to mature: | ||||||||
One year or less | $ | 10,935 | $ | 11,069 | ||||
After one year through five years | 45,904 | 46,891 | ||||||
After five years through ten years | 55,430 | 55,619 | ||||||
After ten years | 13,090 | 13,037 | ||||||
Mortgage / asset-backed securities | 34,901 | 34,854 | ||||||
Total fixed income securities | $ | 160,260 | $ | 161,470 | ||||
Fixed income securities with a fair value of $3,493$7,977 at December 31, 20172021 and $3,530$6,093 at December 31, 20162020 were deposited with various state regulatory agencies as required by law. The Company has not pledged any assets to secure any obligations.
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The investment category and duration of the Company’s gross unrealized losses on fixed income securities and equity securities were as follows:
December 31, 2017 | ||||||||||||||||||||||||
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 | $ | 6,442 | $ | (54 | ) | $ | 497 | $ | (3 | ) | $ | 6,939 | $ | (57 | ) | |||||||||
Obligations of states and political subdivisions | 28,219 | (251 | ) | 3,593 | (66 | ) | 31,812 | (317 | ) | |||||||||||||||
Corporate securities | 39,025 | (201 | ) | 1,195 | (19 | ) | 40,220 | (220 | ) | |||||||||||||||
Residential mortgage-backed securities | 7,573 | (40 | ) | 7,248 | (117 | ) | 14,821 | (157 | ) | |||||||||||||||
Commercial mortgage-backed securities | 4,652 | (64 | ) | 1,643 | (55 | ) | 6,295 | (119 | ) | |||||||||||||||
Asset-backed securities | 13,386 | (80 | ) | 781 | (8 | ) | 14,167 | (88 | ) | |||||||||||||||
Total fixed income securities | 99,297 | (690 | ) | 14,957 | (268 | ) | 114,254 | (958 | ) | |||||||||||||||
Equity securities: | ||||||||||||||||||||||||
Communications | 840 | (48 | ) | 107 | (106 | ) | 947 | (154 | ) | |||||||||||||||
Consumer, cyclical | 898 | (116 | ) | 214 | (4 | ) | 1,112 | (120 | ) | |||||||||||||||
Consumer, non-cyclical | 1,894 | (125 | ) | — | — | 1,894 | (125 | ) | ||||||||||||||||
Energy | 243 | (44 | ) | — | — | 243 | (44 | ) | ||||||||||||||||
Technology | 634 | (120 | ) | 152 | (90 | ) | 786 | (210 | ) | |||||||||||||||
Total equity securities | 4,509 | (453 | ) | 473 | (200 | ) | 4,982 | (653 | ) | |||||||||||||||
Total investments | $ | 103,806 | $ | (1,143 | ) | $ | 15,430 | $ | (468 | ) | $ | 119,236 | $ | (1,611 | ) | |||||||||
December 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 | $ | 3,125 | $ | (87 | ) | $ | 0- | $ | 0- | $ | 3,125 | $ | (87 | ) | ||||||||||
Obligations of states and political subdivisions | 19,769 | (350 | ) | 222 | (3 | ) | 19,991 | (353 | ) | |||||||||||||||
Corporate securities | 46,816 | (1,015 | ) | 1,895 | (54 | ) | 48,711 | (1,069 | ) | |||||||||||||||
Residential mortgage-backed securities | 17,407 | (261 | ) | 1,434 | (39 | ) | 18,841 | (300 | ) | |||||||||||||||
Commercial mortgage-backed securities | 11,287 | (160 | ) | 216 | (1 | ) | 11,503 | (161 | ) | |||||||||||||||
Asset-backed securities | 28,797 | (308 | ) | 995 | (5 | ) | 29,792 | (313 | ) | |||||||||||||||
Redeemable preferred stocks | 1,493 | (16 | ) | 0- | 0- | 1,493 | (16 | ) | ||||||||||||||||
Total fixed income securities | $ | 128,694 | $ | (2,197 | ) | $ | 4,762 | $ | (102 | ) | $ | 133,456 | $ | (2,299 | ) |
December 31, 2016 | ||||||||||||||||||||||||
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 | $ | 2,750 | $ | (44 | ) | $ | — | $ | — | $ | 2,750 | $ | (44 | ) | ||||||||||
Obligations of states and political subdivisions | 16,559 | (396 | ) | 245 | (5 | ) | 16,804 | (401 | ) | |||||||||||||||
Corporate securities | 13,479 | (175 | ) | 2,006 | (293 | ) | 15,485 | (468 | ) | |||||||||||||||
Residential mortgage-backed securities | 15,692 | (215 | ) | — | — | 15,692 | (215 | ) | ||||||||||||||||
Commercial mortgage-backed securities | 2,513 | (41 | ) | — | — | 2,513 | (41 | ) | ||||||||||||||||
Asset-backed securities | 2,291 | (14 | ) | — | — | 2,291 | (14 | ) | ||||||||||||||||
Total fixed income securities | 53,284 | (885 | ) | 2,251 | (298 | ) | 55,535 | (1,183 | ) | |||||||||||||||
Equity securities: | ||||||||||||||||||||||||
Basic materials | 32 | (1 | ) | — | — | 32 | (1 | ) | ||||||||||||||||
Communications | 167 | (81 | ) | — | — | 167 | (81 | ) | ||||||||||||||||
Consumer, cyclical | 63 | (5 | ) | 174 | (45 | ) | 237 | (50 | ) | |||||||||||||||
Consumer, non-cyclical | 239 | (208 | ) | — | — | 239 | (208 | ) | ||||||||||||||||
Technology | 543 | (57 | ) | — | — | 543 | (57 | ) | ||||||||||||||||
Total equity securities | 1,044 | (352 | ) | 174 | (45 | ) | 1,218 | (397 | ) | |||||||||||||||
Total investments | $ | 54,328 | $ | (1,237 | ) | $ | 2,425 | $ | (343 | ) | $ | 56,753 | $ | (1,580 | ) | |||||||||
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 | $ | 931 | $ | (6 | ) | $ | 0— | $ | 0— | $ | 931 | $ | (6 | ) | ||||||||||
Obligations of states and political subdivisions | 1,806 | (35 | ) | 0— | 0— | 1,806 | (35 | ) | ||||||||||||||||
Corporate securities | 3,215 | (97 | ) | 734 | (50 | ) | 3,949 | (147 | ) | |||||||||||||||
Residential mortgage-backed securities | 68 | (1 | ) | 0— | 0— | 68 | (1 | ) | ||||||||||||||||
Commercial mortgage-backed securities | 1,103 | (21 | ) | 0— | 0— | 1,103 | (21 | ) | ||||||||||||||||
Asset-backed securities | 5,785 | (31 | ) | 4,188 | (55 | ) | 9,973 | (86 | ) | |||||||||||||||
Total fixed income securities | $ | 12,908 | $ | (191 | ) | $ | 4,922 | $ | (105 | ) | $ | 17,830 | $ | (296 | ) |
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 temporaryother-than-temporary involves consideration of several factors. These factors include (i) the time period in
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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,other-than-temporary, the costcredit loss component of the securitiesimpairment is written down to fair value and the previously unrealized loss is therefore reflected in net income (loss) as a realized capital loss on investment.
Theinvestment if the Company recorded impairmentsdoes not intend to sell the security, and the remaining portion of $330the other-than-temporary loss is recognized in other comprehensive income (loss), net of income taxes. If the year ended December 31, 2017.Company intends to sell the security, or determines that it is more likely than not that it will be required to sell the security prior to recovering its cost or amortized cost basis less any current-period credit losses, the full amount of the other-than-temporary loss is recognized in net income (loss). The Company did not record any other-than-temporary impairments in 2016 and recorded $1392021, 2020, or 2019.
As of December 31, 2017, we held 196 fixed income securities with unrealized losses. As of December 31, 2016, we held 129 fixed income securities with unrealized losses. In conjunction with our outside investment advisors, we analyzed the credit ratings of the securities as well as the historical monthly-amortizedmonthly amortized cost to fair value ratio of securities in an unrealized loss position. This analysis yielded no fixed income securities that had fair values less than 80% of amortized cost for the preceding 12-month period.
Net investment income consisted of the following:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Fixed income securities | $ | 6,067 | $ | 4,709 | $ | 4,420 | ||||||
Equity securities | 650 | 376 | 368 | |||||||||
Real estate | 352 | 311 | 293 | |||||||||
Cash and cash equivalents | — | 64 | 98 | |||||||||
Total gross investment income | 7,069 | 5,460 | 5,179 | |||||||||
Investment expenses | 2,038 | 1,816 | 1,608 | |||||||||
Net investment income | $ | 5,031 | $ | 3,644 | $ | 3,571 | ||||||
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Fixed income securities | $ | 8,489 | $ | 8,682 | $ | 8,394 | ||||||
Equity securities | 1,221 | 1,220 | 996 | |||||||||
Real estate | 625 | 587 | 365 | |||||||||
Cash and cash equivalents | 4 | 30 | 71 | |||||||||
Total gross investment income | 10,339 | 10,519 | 9,826 | |||||||||
Investment expenses | 3,208 | 3,248 | 2,393 | |||||||||
Net investment income | $ | 7,131 | $ | 7,271 | $ | 7,433 |
Net realized capital gain on investments consisted of the following:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Gross realized gains | $ | 3,615 | $ | 6,098 | $ | 1,328 | ||||||
Gross realized losses, excluding other-than-temporary impairment losses | (288 | ) | (417 | ) | (366 | ) | ||||||
Other-than-temporary impairment losses | (330 | ) | — | (139 | ) | |||||||
Net realized capital gain on investments | $ | 2,997 | $ | 5,681 | $ | 823 |
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Gross realized gains: | ||||||||||||
Fixed income securities | $ | 677 | $ | 1,035 | $ | 341 | ||||||
Equity securities | 17,453 | 8,705 | 4,311 | |||||||||
Total gross realized gains | 18,130 | 9,740 | 4,652 | |||||||||
| ||||||||||||
Gross realized losses, excluding other-than-temporary impairment losses: | ||||||||||||
Fixed income securities | (27 | ) | (132 | ) | (147 | ) | ||||||
Equity securities | (335 | ) | (1,837 | ) | (1,259 | ) | ||||||
Total gross realized losses, excluding other-than-temporary impairment losses | (362 | ) | (1,969 | ) | (1,406 | ) | ||||||
| ||||||||||||
Net realized gain on investments | 17,768 | 7,771 | 3,246 | |||||||||
| ||||||||||||
Change in net unrealized gain on equity securities | (2,289 | ) | 5,853 | 11,537 | ||||||||
Net capital gain on investments | $ | 15,479 | $ | 13,624 | $ | 14,783 |
6.Fair Value Measurements
WeThe Company 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, we may be required to record other assets or liabilities at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets. Accounting guidance on fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The three levels of the fair value hierarchy are as follows:
Level I:Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level II:Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level II includes fixed income securities with quoted prices that are traded less frequently than exchange traded instruments. Valuation techniques include matrix pricing which is a mathematical technique used widely in the industry to value fixed income securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.
Level III:Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
The Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs in our valuation techniques and applyminimize the use of unobservable inputs onlywhen developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon the estimates of the Company or other third-parties, 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 we 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 extentrespective reporting dates may be different than the amounts reported at each period-end. Additionally, changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations.
The Company uses quoted values and other data provided by an independent pricing service in its process for determining fair values of its investments. The evaluations of such pricing services represent an exit price and a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale. This pricing service provides us with one quote per instrument. For fixed income securities that have quoted prices in active markets, market quotations are provided. For fixed income securities that do not trade on a daily basis, the independent pricing service prepares estimates of fair value using a wide array of observable inputs are unavailable.including relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The largest classobservable market inputs that the Company’s independent pricing service utilizes may include (listed in order of assetspriority for use) benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and liabilities carried atother 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 value byvalues for any of the CompanyCompany’s investments at December 31, 20172021, 2020, or 2019.
Should the independent pricing service be unable to provide a fair value estimate, we would attempt to obtain a non-binding fair value estimate from a number of broker-dealers and 2016 werewould 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 securities.
Prices provided by independent pricing servicessecurity, we would use that estimate. In instances where the Company would be able to obtain fair value estimates from more than one broker-dealer, we would review the range of estimates and independent broker quotes can vary widely, even forselect the same security.
Our available-for-sale investments are comprised of a variety of different securities, which are classified into levelsmost appropriate value based on the facts and circumstances. Should neither the independent pricing service nor a broker-dealer provide a fair value estimate, we would develop a fair value estimate based on cash flow analyses and other valuation techniquetechniques that utilize certain unobservable inputs. Accordingly, the Company classifies such a security as a Level III investment.
The fair value estimates of our 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 inputs usedpricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency across securities in their valuation. common sectors, durations, and credit ratings. This review will also include all fixed income securities rated lower than “A” by Moody’s Investors Service, Inc. or Standard & Poor’s Financial Services LLC. If, after this review, management does not believe the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the independent pricing service. In its review, management did not identify any such discrepancies, and no adjustments were made to the estimates provided by the independent pricing service, for the years ended December 31, 2021, 2020, or 2019. The classification within the fair value hierarchy is then confirmed based on the final conclusions from the pricing review.
The valuation of cash equivalents and equity securities are generally based on Level I inputs, which use the market-approach valuation technique. The valuation of our fixed income securities generally incorporates significant Level II inputs using the market and income approach techniques. We may assign a lower level to inputs typically considered to be Level II based on our assessment of liquidity and relative level of uncertainty surrounding inputs. There were no assets or liabilities classified at Level III at December 31, 20172021 or 2016.
74
2020.
The following tables set forth our assets thatwhich are measured on a recurring basis by the level within the fair value hierarchy in which fair value measurements fall:
December 31, 2017 | ||||||||||||||||
Total | Level I | Level II | Level III | |||||||||||||
Fixed income securities: | ||||||||||||||||
U.S. Government and agencies | $ | 9,649 | $ | — | $ | 9,649 | $ | — | ||||||||
Obligations of states and political subdivisions | 82,595 | — | 82,595 | — | ||||||||||||
Corporate securities | 89,451 | — | 89,451 | — | ||||||||||||
Residential mortgage-backed securities | 28,524 | — | 28,524 | — | ||||||||||||
Commercial mortgage-backed securities | 11,170 | — | 11,170 | — | ||||||||||||
Asset-backed securities | 15,369 | — | 15,369 | — | ||||||||||||
Total fixed income securities | 236,758 | — | 236,758 | — | ||||||||||||
Equity securities: | ||||||||||||||||
Basic materials | 892 | 892 | — | — | ||||||||||||
Communications | 4,322 | 4,322 | — | — | ||||||||||||
Consumer, cyclical | 9,339 | 9,339 | — | — | ||||||||||||
Consumer, non-cyclical | 10,905 | 10,905 | — | — | ||||||||||||
Energy | 2,231 | 2,231 | — | — | ||||||||||||
Financial | 2,417 | 2,417 | — | — | ||||||||||||
Industrial | 9,205 | 9,205 | — | — | ||||||||||||
Technology | 8,250 | 8,250 | — | — | ||||||||||||
Total equity securities | 47,561 | 47,561 | — | — | ||||||||||||
Cash and cash equivalents | 27,594 | 27,594 | — | — | ||||||||||||
Total assets at fair value | $ | 311,913 | $ | 75,155 | $ | 236,758 | $ | — |
December 31, 2016 | December 31, 2021 | |||||||||||||||||||||||||||||||
Total | Level I | Level II | Level III | Total | Level I | Level II | Level III | |||||||||||||||||||||||||
Fixed income securities: | ||||||||||||||||||||||||||||||||
U.S. Government and agencies | $ | 6,050 | $ | — | $ | 6,050 | $ | — | $ | 13,498 | $ | 0- | $ | 13,498 | $ | 0- | ||||||||||||||||
Obligations of states and political subdivisions | 69,396 | — | 69,396 | — | 87,294 | 0- | 87,294 | 0- | ||||||||||||||||||||||||
Corporate securities | 51,170 | — | 51,170 | — | 147,621 | 0- | 147,621 | 0- | ||||||||||||||||||||||||
Residential mortgage-backed securities | 22,637 | — | 22,637 | — | 26,156 | 0- | 26,156 | 0- | ||||||||||||||||||||||||
Commercial mortgage-backed securities | 8,096 | — | 8,096 | — | 33,532 | 0- | 33,532 | 0- | ||||||||||||||||||||||||
Asset-backed securities | 4,121 | — | 4,121 | — | 52,422 | 0- | 52,422 | 0- | ||||||||||||||||||||||||
Redeemable preferred stocks | 4,128 | 0- | 4,128 | 0- | ||||||||||||||||||||||||||||
Total fixed income securities | 161,470 | — | 161,470 | — | 364,651 | 0- | 364,651 | 0- | ||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||
Basic materials | 102 | 102 | — | — | 653 | 653 | 0- | 0- | ||||||||||||||||||||||||
Communications | 2,827 | 2,827 | — | — | 4,379 | 4,379 | 0- | 0- | ||||||||||||||||||||||||
Consumer, cyclical | 5,261 | 5,261 | — | — | 12,685 | 12,685 | 0- | 0- | ||||||||||||||||||||||||
Consumer, non-cyclical | 4,218 | 4,218 | — | — | 16,075 | 16,075 | 0- | 0- | ||||||||||||||||||||||||
Energy | 1,287 | 1,287 | — | — | 2,477 | 2,477 | 0- | 0- | ||||||||||||||||||||||||
Financial | 591 | 591 | — | — | 4,694 | 4,694 | 0- | 0- | ||||||||||||||||||||||||
Industrial | 5,017 | 5,017 | — | — | 16,658 | 16,658 | 0- | 0- | ||||||||||||||||||||||||
Technology | 6,614 | 6,614 | — | — | 17,522 | 17,522 | 0- | 0- | ||||||||||||||||||||||||
Perpetual preferred stocks | 2,547 | 2,547 | 0- | 0- | ||||||||||||||||||||||||||||
Total equity securities | 25,917 | 25,917 | — | — | 77,690 | 77,690 | 0- | 0- | ||||||||||||||||||||||||
Cash and cash equivalents | 18,318 | 18,318 | — | — | 45,741 | 45,741 | 0- | 0- | ||||||||||||||||||||||||
Total assets at fair value | $ | 205,705 | $ | 44,235 | $ | 161,470 | $ | — | $ | 488,082 | $ | 123,431 | $ | 364,651 | $ | 0- |
December 31, 2020 | ||||||||||||||||
Total | Level I | Level II | Level III | |||||||||||||
Fixed income securities: | ||||||||||||||||
U.S. Government and agencies | $ | 14,383 | $ | 0- | $ | 14,383 | $ | 0- | ||||||||
Obligations of states and political subdivisions | 64,244 | 0- | 64,244 | 0- | ||||||||||||
Corporate securities | 126,030 | 0- | 126,030 | 0- | ||||||||||||
Residential mortgage-backed securities | 36,494 | 0- | 36,494 | 0- | ||||||||||||
Commercial mortgage-backed securities | 25,655 | 0- | 25,655 | 0- | ||||||||||||
Asset-backed securities | 51,200 | 0- | 51,200 | 0- | ||||||||||||
Redeemable preferred stocks | 2,404 | 0- | 2,404 | 0- | ||||||||||||
Total fixed income securities | 320,410 | 0- | 320,410 | 0- | ||||||||||||
| ||||||||||||||||
Equity securities: | ||||||||||||||||
Basic materials | 1,285 | 1,285 | 0- | 0- | ||||||||||||
Communications | 7,455 | 7,455 | 0- | 0- | ||||||||||||
Consumer, cyclical | 9,929 | 9,929 | 0- | 0- | ||||||||||||
Consumer, non-cyclical | 14,633 | 14,633 | 0- | 0- | ||||||||||||
Energy | 1,499 | 1,499 | 0- | 0- | ||||||||||||
Financial | 6,235 | 6,235 | 0- | 0- | ||||||||||||
Industrial | 12,733 | 12,733 | 0- | 0- | ||||||||||||
Technology | 16,145 | 16,145 | 0- | 0- | ||||||||||||
Utility | 38 | 38 | 0- | 0- | ||||||||||||
Total equity securities | 69,952 | 69,952 | 0- | 0- | ||||||||||||
| ||||||||||||||||
Cash equivalents | 65,354 | 65,354 | 0- | 0- | ||||||||||||
Total assets at fair value | $ | 455,716 | $ | 135,306 | $ | 320,410 | $ | 0- |
There were no liabilities measured at fair value on a recurring basis at December 31, 20172021 or 2016.2020.
7.Reinsurance
The Company will assumecedes and cedeassumes certain premiums and losses to and from various companies and associations under variousa variety of reinsurance agreements. The Company seeks to limit the maximum net loss that can arise from large risks or risks in concentrated areas of exposure through use of these agreements, either on an automatic basis under general reinsurance contracts known as treaties or by negotiationthrough facultative contracts on substantial individual risks.
Reinsurance contracts do not relieve the Company from its obligationobligations 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
During 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 atyear ended December 31, 2017,2021, the Company retained the first $10,000 of weather relatedweather-related losses from catastrophecatastrophic events and had reinsurance under various reinsurance agreements up to $74,600$117,000 in excess of its $10,000 retained risk. TheseThe Company experienced one catastrophe event during 2021 in excess of the retention level, resulting in a reinsurance risk limits will remain in effect for 2018. Prior to January 1, 2017,recovery of $5,612.
During the year ended December 31, 2020, the Company collectively retained the first $5,000$10,000 of weather related losses.weather-related losses from catastrophic events and had reinsurance under various reinsurance agreements up to $97,000 in excess of its $10,000 retained risk. During the year ended December 31, 2019, the Company retained the first $10,000 of weather-related losses from catastrophic events and had reinsurance under various reinsurance agreements up to $78,600 in excess of its $10,000 retained risk. The Company did not experience any catastrophe events during 2020 or 2019 which exceeded the retention level.
For 2022, the catastrophe retention amount will increase to $15,000 while the overall catastrophic reinsurance program limit increased to $125,000 in excess of the $15,000 retention.
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 largest reinsurance recoverables on paid and unpaid losses were due from reinsurance companies with A.M.AM Best ratings of A“A” or higher.
A reconciliation of direct to net premiums on both a written and an earned basis is as follows:
2017 | 2016 | 2015 | ||||||||||||||||||||||
Premiums Written | Premiums Earned | Premiums Written | Premiums Earned | Premiums Written | Premiums Earned | |||||||||||||||||||
Direct premium | $ | 195,238 | $ | 189,418 | $ | 180,870 | $ | 176,958 | $ | 172,775 | $ | 169,222 | ||||||||||||
Assumed premium | 6,709 | 6,711 | 6,591 | 6,546 | 3,729 | 3,690 | ||||||||||||||||||
Ceded premium | (16,665 | ) | (16,665 | ) | (30,748 | ) | (30,748 | ) | (33,439 | ) | (33,439 | ) | ||||||||||||
Net premiums | $ | 185,282 | $ | 179,464 | $ | 156,713 | $ | 152,756 | $ | 143,065 | $ | 139,473 | ||||||||||||
Percentage of assumed premium earned to net premium earned | 3.7% | 4.3% | 2.6% |
Year Ended December 31, | ||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
Premiums Written | Premiums Earned | Premiums Written | Premiums Earned | Premiums Written | Premiums Earned | |||||||||||||||||||
Direct premium | $ | 342,215 | $ | 333,254 | $ | 314,187 | $ | 301,061 | $ | 262,145 | $ | 257,661 | ||||||||||||
Assumed premium | 8,183 | 8,035 | 6,590 | 6,459 | 5,921 | 5,897 | ||||||||||||||||||
Ceded premium | (42,629 | ) | (41,700 | ) | (23,633 | ) | (23,859 | ) | (17,120 | ) | (17,120 | ) | ||||||||||||
Net premiums | $ | 307,769 | $ | 299,589 | $ | 297,144 | $ | 283,661 | $ | 250,946 | $ | 246,438 |
A reconciliation of direct to net losses and loss adjustment expenses is as follows:
2017 | 2016 | 2015 | ||||||||||
Direct losses and loss adjustment expenses | $ | 124,117 | $ | 146,391 | $ | 89,242 | ||||||
Assumed losses and loss adjustment expenses | 6,177 | 4,947 | 3,023 | |||||||||
Ceded losses and loss adjustment expenses | (7,583 | ) | (32,830 | ) | (8,389 | ) | ||||||
Net losses and loss adjustment expenses | $ | 122,711 | $ | 118,508 | $ | 83,876 |
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Direct losses and loss adjustment expenses | $ | 280,998 | $ | 185,370 | $ | 173,943 | ||||||
Assumed losses and loss adjustment expenses | 6,899 | 3,308 | 4,032 | |||||||||
Ceded losses and loss adjustment expenses | (71,518 | ) | (20,205 | ) | (8,265 | ) | ||||||
Net losses and loss adjustment expenses | $ | 216,379 | $ | 168,473 | $ | 169,710 |
If 100% of our ceded reinsurance would bewas cancelled as of December 31, 2017,2021, no ceded commissions would need to be returned to the reinsurers. Reinsurance contracts are typically effective from January 1 through December 31 each year.
8.Deferred Policy Acquisition Costs
Activity concerningExpenses directly related to successfully acquire insurance policies, primarily commissions, premium taxes and underwriting costs, are deferred and amortized over the terms of the policies. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate the costs for recoverability. The table below shows the deferred policy acquisition costs was as follows:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Balance, beginning of year | $ | 8,942 | $ | 8,444 | $ | 7,240 | ||||||
Deferral of policy acquisition costs | 27,667 | 20,921 | 19,825 | |||||||||
Amortization of deferred policy acquisition costs | (27,750 | ) | (20,423 | ) | (18,621 | ) | ||||||
Balance, end of year | $ | 8,859 | $ | 8,942 | $ | 8,444 |
and asset reconciliation:
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Balance, beginning of year | $ | 23,968 | $ | 15,399 | $ | 12,866 | ||||||
Deferral of policy acquisition costs | 65,553 | 60,041 | 48,721 | |||||||||
Amortization of deferred policy acquisition costs | (64,574 | ) | (51,472 | ) | (46,188 | ) | ||||||
Balance, end of year | $ | 24,947 | $ | 23,968 | $ | 15,399 |
9.Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and loss adjustment expensesLAE is summarized as follows:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Balance at beginning of year: | ||||||||||||
Liability for unpaid losses and loss adjustment expenses | $ | 59,632 | $ | 45,342 | $ | 50,518 | ||||||
Reinsurance recoverables on losses | 7,192 | 5,109 | 5,676 | |||||||||
Net balance at beginning of year | 52,440 | 40,233 | 44,842 | |||||||||
Incurred related to: | ||||||||||||
Current year | 132,812 | 123,264 | 92,764 | |||||||||
Prior years | (10,101 | ) | (4,756 | ) | (8,888 | ) | ||||||
Total Incurred | 122,711 | 118,508 | 83,876 | |||||||||
Paid related to: | ||||||||||||
Current year | 104,769 | 90,772 | 70,290 | |||||||||
Prior years | 28,620 | 15,529 | 18,195 | |||||||||
Total paid | 133,389 | 106,301 | 88,485 | |||||||||
Balance at end of year: | ||||||||||||
Liability for unpaid losses and loss adjustment expenses | 45,890 | 59,632 | 45,342 | |||||||||
Reinsurance recoverables on losses | 4,128 | 7,192 | 5,109 | |||||||||
Net balance at end of year | $ | 41,762 | $ | 52,440 | $ | 40,233 |
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Balance at beginning of year: | ||||||||||||
Liability for unpaid losses and LAE | $ | 105,750 | $ | 93,250 | $ | 87,121 | ||||||
Reinsurance recoverables on losses | 8,710 | 4,045 | 2,232 | |||||||||
Net balance at beginning of year | 97,040 | 89,205 | 84,889 | |||||||||
| ||||||||||||
Acquired unpaid losses and LAE related to: | ||||||||||||
Current year | 0- | 0- | 0- | |||||||||
Prior years | 0- | 8,568 | 0- | |||||||||
Total acquired | 0- | 8,568 | 0- | |||||||||
| ||||||||||||
Incurred related to: | ||||||||||||
Current year | 220,517 | 165,181 | 176,219 | |||||||||
Prior years | (4,138 | ) | 3,292 | (6,509 | ) | |||||||
Total incurred | 216,379 | 168,473 | 169,710 | |||||||||
| ||||||||||||
Paid related to: | ||||||||||||
Current year | 150,278 | 116,755 | 125,940 | |||||||||
Prior years | 44,679 | 52,451 | 39,454 | |||||||||
Total paid | 194,957 | 169,206 | 165,394 | |||||||||
| ||||||||||||
Balance at end of year: | ||||||||||||
Liability for unpaid losses and LAE | 139,662 | 105,750 | 93,250 | |||||||||
Reinsurance recoverables on losses | 21,200 | 8,710 | 4,045 | |||||||||
Net balance at end of year | $ | 118,462 | $ | 97,040 | $ | 89,205 |
The prior years’ provision for unpaidDuring the year ended December 31, 2021, the Company’s incurred reported losses and loss adjustment expenses decreased by $10,101, $4,756,LAE included $4,138 of net favorable development on prior accident years, primarily attributable to the Direct Auto non-standard auto business. During the year ended December 31, 2020, incurred reported losses and $8,888 during 2017, 2016,LAE included $3,292 of net unfavorable development on prior accident years, primarily attributable to our 2019 multi-peril crop business. During the year ended December 31, 2019, incurred reported losses and 2015, respectively. The decrease isLAE included $6,509 of net favorable development on prior accident years, primarily attributable to the Direct Auto non-standard auto business.
Increases and decreases are generally the result of ongoing analysis of recent loss development trends. As additional information becomes known regarding individual claims, original estimates are increased or decreased accordingly.
The tables on the following tablespages present information, organized by our primary operating segments, about incurred and paid claims development as of December 31, 2017,2021, net of reinsurance, as well as cumulative claim frequency and the total of IBNR reserves plus expected development on reported claims. The cumulative number of reported claims represents open claims, claims closed with payment, and claims closed without payment. It does not include an estimated amount for unreported claims. The number of claims is measured by claim event (such as a car accident or storm damage) and an individual claim event may result in more than one reported claim (such as a car accident with both property and liability damages). The Company considers a claim that does not result in a liability as a claim closed without payment. The segment information presented in the tables is prior to the effects of the intercompany reinsurance pooling arrangement.
The tables include unaudited information about incurred and paid claims development (a) for the years ended December 31, 20082012 through 2015 for the Private Passenger Auto, Primero Non-Standard Auto, Home and Farm, and Crop segments, (b) through 2017 for the Direct Auto Non-Standard Auto information, and (c) through 2019 for the Westminster Commercial information, which we present as supplementary information.
Private Passenger Auto | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | At December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||
(prior years unaudited) | ||||||||||||||||||||||||||||||||||||||||||||||||
Accident Year | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | Total IBNR Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims | ||||||||||||||||||||||||||||||||||||
(in thousands, except claim counts) | ||||||||||||||||||||||||||||||||||||||||||||||||
2008 | $ | 26,058 | $ | 23,877 | $ | 24,140 | $ | 24,248 | $ | 23,215 | $ | 23,196 | $ | 23,040 | $ | 22,979 | $ | 22,975 | $ | 22,953 | $ | — | 9,945 | |||||||||||||||||||||||||
2009 | — | 29,397 | 27,749 | 26,460 | 25,813 | 26,137 | 25,910 | 25,420 | 25,409 | 25,273 | 42 | 11,359 | ||||||||||||||||||||||||||||||||||||
2010 | — | — | 26,090 | 23,801 | 23,102 | 23,325 | 23,265 | 23,271 | 23,249 | 23,123 | — | 11,518 | ||||||||||||||||||||||||||||||||||||
2011 | — | — | — | 25,552 | 24,126 | 25,220 | 24,409 | 24,209 | 23,967 | 23,814 | 32 | 11,480 | ||||||||||||||||||||||||||||||||||||
2012 | — | — | — | — | 26,962 | 24,787 | 24,323 | 24,098 | 24,133 | 23,298 | 65 | 9,718 | ||||||||||||||||||||||||||||||||||||
2013 | — | — | — | — | — | 29,079 | 27,840 | 27,363 | 27,334 | 26,014 | 93 | 10,819 | ||||||||||||||||||||||||||||||||||||
2014 | — | — | — | — | — | — | 32,548 | 31,349 | 30,427 | 29,099 | 396 | 11,733 | ||||||||||||||||||||||||||||||||||||
2015 | — | — | — | — | — | — | — | 32,438 | 31,532 | 30,461 | 320 | 11,658 | ||||||||||||||||||||||||||||||||||||
2016 | — | — | — | — | — | — | — | — | 40,227 | 39,260 | 918 | 14,203 | ||||||||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | — | — | — | — | 40,779 | 2,232 | 12,738 | ||||||||||||||||||||||||||||||||||||
Total | $ | 284,074 | ||||||||||||||||||||||||||||||||||||||||||||||
Private Passenger Auto | Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
(prior years unaudited) | ||||||||||||||||||||||||||||||||||||||||
Accident Year | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||||||||||||||||
2008 | $ | 17,152 | $ | 20,367 | $ | 22,214 | $ | 22,484 | $ | 22,790 | $ | 22,799 | $ | 22,883 | $ | 22,926 | $ | 22,933 | $ | 22,952 | ||||||||||||||||||||
2009 | — | 18,203 | 21,880 | 24,105 | 24,412 | 24,784 | 24,829 | 24,918 | 25,103 | 25,131 | ||||||||||||||||||||||||||||||
2010 | — | — | 18,100 | 21,491 | 21,633 | 22,844 | 22,810 | 22,938 | 23,063 | 23,123 | ||||||||||||||||||||||||||||||
2011 | — | — | — | 19,116 | 22,161 | 22,325 | 23,024 | 23,339 | 23,583 | 23,732 | ||||||||||||||||||||||||||||||
2012 | — | — | — | — | 18,681 | 21,434 | 21,888 | 22,640 | 22,726 | 23,073 | ||||||||||||||||||||||||||||||
2013 | — | — | — | — | — | 20,077 | 23,576 | 24,765 | 24,918 | 25,718 | ||||||||||||||||||||||||||||||
2014 | — | — | — | — | — | — | 22,744 | 25,727 | 27,076 | 27,443 | ||||||||||||||||||||||||||||||
2015 | — | — | — | — | — | — | — | 23,401 | 27,171 | 28,933 | ||||||||||||||||||||||||||||||
2016 | — | — | — | — | — | — | — | — | 29,009 | 35,845 | ||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | — | — | — | — | 31,031 | ||||||||||||||||||||||||||||||
Total | $ | 266,981 | ||||||||||||||||||||||||||||||||||||||
All outstanding liabilities prior to 2008, net of reinsurance | 22 | |||||||||||||||||||||||||||||||||||||||
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance | $ | 17,115 | ||||||||||||||||||||||||||||||||||||||
Private Passenger Auto | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | At December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | Total IBNR Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims | ||||||||||||||||||||||||||||||||||||
(in thousands, except claim counts) | ||||||||||||||||||||||||||||||||||||||||||||||||
2012 | $ | 26,962 | $ | 24,787 | $ | 24,323 | $ | 24,098 | $ | 24,133 | $ | 23,298 | $ | 23,621 | $ | 23,651 | $ | 22,523 | $ | 22,570 | $ | 5 | 9,727 | |||||||||||||||||||||||||
2013 | — | 29,079 | 27,840 | 27,363 | 27,334 | 26,014 | 26,138 | 26,105 | 26,077 | 26,096 | 11 | 10,826 | ||||||||||||||||||||||||||||||||||||
2014 | — | — | 32,548 | 31,349 | 30,427 | 29,099 | 29,144 | 29,298 | 29,479 | 29,423 | 16 | 11,745 | ||||||||||||||||||||||||||||||||||||
2015 | — | — | — | 32,438 | 31,532 | 30,461 | 30,503 | 30,679 | 30,455 | 30,379 | 24 | 11,688 | ||||||||||||||||||||||||||||||||||||
2016 | — | — | — | — | 40,227 | 39,260 | 39,057 | 39,314 | 38,535 | 38,416 | 93 | 14,325 | ||||||||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | 40,779 | 40,199 | 40,120 | 40,427 | 40,488 | 159 | 13,753 | ||||||||||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 44,925 | 43,428 | 43,641 | 43,575 | 353 | 14,675 | ||||||||||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 53,769 | 53,328 | 53,364 | 881 | 16,540 | ||||||||||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 46,247 | 48,519 | 1,546 | 13,541 | ||||||||||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 57,316 | 3,819 | 14,064 | ||||||||||||||||||||||||||||||||||||
Total | $ | 390,146 |
78 (1) Prior years unaudited
Private Passenger Auto | Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||||||||||||||||
2012 | $ | 18,681 | $ | 21,434 | $ | 21,888 | $ | 22,640 | $ | 22,726 | $ | 23,073 | $ | 23,271 | $ | 23,324 | $ | 22,490 | $ | 22,555 | |||||||||||||||||||
2013 | — | 20,077 | 23,576 | 24,765 | 24,918 | 25,718 | 25,843 | 26,035 | 26,019 | 26,073 | |||||||||||||||||||||||||||||
2014 | — | �� | 22,744 | 25,727 | 27,076 | 27,443 | 28,281 | 28,765 | 29,239 | 29,407 | |||||||||||||||||||||||||||||
2015 | — | — | — | 23,401 | 27,171 | 28,933 | 29,598 | 29,795 | 30,120 | 30,355 | |||||||||||||||||||||||||||||
2016 | — | — | — | — | 29,009 | 35,845 | 37,307 | 38,108 | 37,833 | 38,173 | |||||||||||||||||||||||||||||
2017 | — | — | — | — | — | 31,033 | 37,050 | 38,331 | 39,738 | 40,111 | |||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 34,358 | 40,213 | 41,479 | 42,820 | |||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 42,414 | 48,414 | 50,370 | |||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 35,495 | 42,585 | |||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 42,326 | |||||||||||||||||||||||||||||
Total | $ | 364,775 | |||||||||||||||||||||||||||||||||||||
All outstanding liabilities prior to 2012, net of reinsurance | 18 | ||||||||||||||||||||||||||||||||||||||
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance | $ | 25,389 |
(1) Prior years unaudited
Non- Standard Auto | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | At December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||
(prior years unaudited) | ||||||||||||||||||||||||||||||||||||||||||||||||
Accident Year | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | Total IBNR Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims | ||||||||||||||||||||||||||||||||||||
(in thousands, except claim counts) | ||||||||||||||||||||||||||||||||||||||||||||||||
2008 | $ | 11,284 | $ | 11,029 | $ | 10,907 | $ | 10,895 | $ | 10,902 | $ | 10,901 | $ | 10,914 | $ | 10,896 | $ | 10,898 | $ | 10,898 | $ | — | 2,836 | |||||||||||||||||||||||||
2009 | — | 13,269 | 12,790 | 12,702 | 12,655 | 12,604 | 12,586 | 12,584 | 12,584 | 12,584 | — | 3,250 | ||||||||||||||||||||||||||||||||||||
2010 | — | — | 8,462 | 8,536 | 8,442 | 8,411 | 8,410 | 8,400 | 8,400 | 8,402 | — | 2,092 | ||||||||||||||||||||||||||||||||||||
2011 | — | — | — | 8,129 | 8,173 | 8,178 | 8,191 | 8,168 | 8,168 | 8,168 | — | 1,939 | ||||||||||||||||||||||||||||||||||||
2012 | — | — | — | — | 8,749 | 8,491 | 8,369 | 8,361 | 8,302 | 8,312 | — | 2,045 | ||||||||||||||||||||||||||||||||||||
2013 | — | — | — | — | — | 11,063 | 10,823 | 10,800 | 10,804 | 10,843 | 10 | 2,596 | ||||||||||||||||||||||||||||||||||||
2014 | — | — | — | — | — | — | 7,297 | 7,619 | 7,591 | 7,577 | 17 | 1,760 | ||||||||||||||||||||||||||||||||||||
2015 | — | — | — | — | — | — | — | 9,727 | 9,806 | 9,655 | 37 | 1,792 | ||||||||||||||||||||||||||||||||||||
2016 | — | — | — | — | — | — | — | — | 9,967 | 10,048 | 126 | 1,709 | ||||||||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | — | — | — | — | 8,722 | 434 | 1,372 | ||||||||||||||||||||||||||||||||||||
Total | $ | 95,209 | ||||||||||||||||||||||||||||||||||||||||||||||
Non-Standard Auto | Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
(prior years unaudited) | ||||||||||||||||||||||||||||||||||||||||
Accident Year | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||||||||||||||||
2008 | $ | 6,123 | $ | 9,878 | $ | 10,680 | $ | 10,852 | $ | 10,867 | $ | 10,901 | $ | 10,899 | $ | 10,896 | $ | 10,898 | $ | 10,898 | ||||||||||||||||||||
2009 | — | 7,356 | 11,621 | 12,495 | 12,624 | 12,602 | 12,584 | 12,584 | 12,584 | 12,584 | ||||||||||||||||||||||||||||||
2010 | — | — | 4,788 | 7,792 | 8,332 | 8,411 | 8,410 | 8,400 | 8,400 | 8,402 | ||||||||||||||||||||||||||||||
2011 | — | — | — | 4,457 | 7,445 | 7,984 | 8,146 | 8,168 | 8,168 | 8,168 | ||||||||||||||||||||||||||||||
2012 | — | — | — | — | 4,377 | 7,522 | 7,983 | 8,276 | 8,302 | 8,312 | ||||||||||||||||||||||||||||||
2013 | — | — | — | — | — | 6,320 | 9,675 | 10,508 | 10,717 | 10,805 | ||||||||||||||||||||||||||||||
2014 | — | — | — | — | — | — | 3,733 | 6,707 | 7,423 | 7,521 | ||||||||||||||||||||||||||||||
2015 | — | — | — | — | — | — | — | 5,335 | 8,685 | 9,479 | ||||||||||||||||||||||||||||||
2016 | — | — | — | — | — | — | — | — | 5,409 | 8,882 | ||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | — | — | — | — | 4,348 | ||||||||||||||||||||||||||||||
Total | $ | 89,399 | ||||||||||||||||||||||||||||||||||||||
All outstanding liabilities prior to 2008, net of reinsurance | — | |||||||||||||||||||||||||||||||||||||||
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance | $ | 5,810 | ||||||||||||||||||||||||||||||||||||||
Non-Standard Auto (Primero) | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | At December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | Total IBNR Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims | ||||||||||||||||||||||||||||||||||||
(in thousands, except claim counts) | ||||||||||||||||||||||||||||||||||||||||||||||||
2012 | $ | 8,749 | $ | 8,491 | $ | 8,369 | $ | 8,361 | $ | 8,302 | $ | 8,312 | $ | 8,324 | $ | 8,324 | $ | 8,323 | $ | 8,324 | $ | 0— | 2,048 | |||||||||||||||||||||||||
2013 | — | 11,063 | 10,823 | 10,800 | 10,804 | 10,843 | 10,833 | 10,828 | 10,844 | 10,844 | 0— | 2,617 | ||||||||||||||||||||||||||||||||||||
2014 | — | — | 7,297 | 7,619 | 7,591 | 7,577 | 7,612 | 7,625 | 7,606 | 7,606 | 0— | 1,838 | ||||||||||||||||||||||||||||||||||||
2015 | — | — | — | 9,727 | 9,806 | 9,655 | 9,691 | 9,641 | 9,622 | 9,623 | 0— | 1,793 | ||||||||||||||||||||||||||||||||||||
2016 | — | — | — | — | 9,967 | 10,048 | 10,054 | 10,033 | 10,008 | 9,976 | 0— | 1,740 | ||||||||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | 8,722 | 8,654 | 8,556 | 8,541 | 8,543 | 9 | 1,460 | ||||||||||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 10,445 | 11,804 | 11,763 | 11,766 | 12 | 1,794 | ||||||||||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 12,264 | 11,391 | 11,236 | 58 | 1,502 | ||||||||||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 9,018 | 8,824 | 129 | 950 | ||||||||||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 10,073 | 1,006 | 933 | ||||||||||||||||||||||||||||||||||||
Total | $ | 96,815 |
79 (1) Prior years unaudited
Non-Standard Auto (Primero) | Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||||||||||||||||
2012 | $ | 4,377 | $ | 7,522 | $ | 7,983 | $ | 8,276 | $ | 8,302 | $ | 8,312 | $ | 8,324 | $ | 8,324 | $ | 8,323 | $ | 8,324 | |||||||||||||||||||
2013 | — | 6,320 | 9,675 | 10,508 | 10,717 | 10,805 | 10,815 | 10,818 | 10,844 | 10,844 | |||||||||||||||||||||||||||||
2014 | — | — | 3,733 | 6,707 | 7,423 | 7,521 | 7,579 | 7,605 | 7,606 | 7,606 | |||||||||||||||||||||||||||||
2015 | — | — | — | 5,335 | 8,685 | 9,479 | 9,557 | 9,620 | 9,622 | 9,623 | |||||||||||||||||||||||||||||
2016 | — | — | — | — | 5,409 | 8,882 | 9,790 | 9,912 | 9,974 | 9,976 | |||||||||||||||||||||||||||||
2017 | — | — | — | — | — | 4,348 | 7,660 | 8,204 | 8,460 | 8,506 | |||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 5,492 | 10,536 | 11,616 | 11,730 | |||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 6,309 | 10,007 | 10,971 | |||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 4,111 | 7,645 | |||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 4,869 | |||||||||||||||||||||||||||||
Total | $ | 90,094 | |||||||||||||||||||||||||||||||||||||
All outstanding liabilities prior to 2012, net of reinsurance | 0— | ||||||||||||||||||||||||||||||||||||||
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance | $ | 6,721 |
(1) Prior years unaudited
Home and Farm | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | At December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||
(prior years unaudited) | ||||||||||||||||||||||||||||||||||||||||||||||||
Accident Year | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | Total IBNR Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims | ||||||||||||||||||||||||||||||||||||
(in thousands, except claim counts) | ||||||||||||||||||||||||||||||||||||||||||||||||
2008 | $ | 20,151 | $ | 19,591 | $ | 19,913 | $ | 19,528 | $ | 19,386 | $ | 19,430 | $ | 19,138 | $ | 19,071 | $ | 19,071 | $ | 19,072 | $ | — | 4,544 | |||||||||||||||||||||||||
2009 | — | 16,584 | 15,797 | 15,657 | 15,577 | 16,065 | 16,074 | 16,001 | 16,001 | 16,001 | — | 4,010 | ||||||||||||||||||||||||||||||||||||
2010 | — | — | 23,477 | 23,007 | 22,454 | 22,209 | 22,198 | 22,202 | 22,190 | 22,190 | — | 5,321 | ||||||||||||||||||||||||||||||||||||
2011 | — | — | — | 31,948 | 32,104 | 32,113 | 31,771 | 31,684 | 31,388 | 31,306 | 2 | 5,851 | ||||||||||||||||||||||||||||||||||||
2012 | — | — | — | — | 25,179 | 24,439 | 24,320 | 24,091 | 24,081 | 24,079 | 3 | 3,607 | ||||||||||||||||||||||||||||||||||||
2013 | — | — | — | — | — | 29,976 | 29,217 | 28,531 | 28,315 | 28,286 | 168 | 4,180 | ||||||||||||||||||||||||||||||||||||
2014 | — | — | — | — | — | — | 36,663 | 36,001 | 35,770 | 35,589 | 67 | 5,229 | ||||||||||||||||||||||||||||||||||||
2015 | — | — | — | — | — | — | — | 32,789 | 31,818 | 31,297 | 222 | 3,908 | ||||||||||||||||||||||||||||||||||||
2016 | — | — | — | — | — | — | — | — | 45,825 | 44,510 | 225 | 6,244 | ||||||||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | — | — | — | — | 42,110 | 1,707 | 4,521 | ||||||||||||||||||||||||||||||||||||
Total | $ | 294,440 | ||||||||||||||||||||||||||||||||||||||||||||||
Home and Farm | Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
(prior years unaudited) | ||||||||||||||||||||||||||||||||||||||||
Accident Year | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||||||||||||||||
2008 | $ | 16,353 | $ | 18,677 | $ | 18,975 | $ | 19,302 | $ | 19,075 | $ | 19,077 | $ | 19,089 | $ | 19,071 | $ | 19,071 | $ | 19,072 | ||||||||||||||||||||
2009 | — | 12,657 | 14,654 | 14,904 | 15,436 | 15,935 | 15,960 | 16,000 | 16,001 | 16,001 | ||||||||||||||||||||||||||||||
2010 | — | — | 19,902 | 21,940 | 21,955 | 22,068 | 22,117 | 22,154 | 22,190 | 22,190 | ||||||||||||||||||||||||||||||
2011 | — | — | — | 29,399 | 33,019 | 31,126 | 31,460 | 31,702 | 31,277 | 31,304 | ||||||||||||||||||||||||||||||
2012 | — | — | — | — | 21,761 | 23,863 | 24,029 | 24,168 | 24,075 | 24,076 | ||||||||||||||||||||||||||||||
2013 | — | — | — | — | — | 23,354 | 26,934 | 27,183 | 27,221 | 27,456 | ||||||||||||||||||||||||||||||
2014 | — | — | — | — | — | — | 32,207 | 35,199 | 35,219 | 35,371 | ||||||||||||||||||||||||||||||
2015 | — | — | — | — | — | — | — | 27,204 | 30,164 | 30,350 | ||||||||||||||||||||||||||||||
2016 | — | — | — | — | — | — | — | — | 37,656 | 44,942 | ||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | — | — | — | — | 34,657 | ||||||||||||||||||||||||||||||
Total | $ | 285,419 | ||||||||||||||||||||||||||||||||||||||
All outstanding liabilities prior to 2008, net of reinsurance | 40 | |||||||||||||||||||||||||||||||||||||||
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance | $ | 9,061 | ||||||||||||||||||||||||||||||||||||||
Non-Standard Auto (Direct Auto) | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | At December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 (1) | 2017 (1) | 2018 | 2019 | 2020 | 2021 | Total IBNR Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims | ||||||||||||||||||||||||||||||||||||
(in thousands, except claim counts) | ||||||||||||||||||||||||||||||||||||||||||||||||
2012 | $ | 7,164 | $ | 4,159 | $ | 3,927 | $ | 3,916 | $ | 4,215 | $ | 4,643 | $ | 4,909 | $ | 4,930 | $ | 5,009 | $ | 4,998 | $ | 12 | 3,357 | |||||||||||||||||||||||||
2013 | — | 10,596 | 6,020 | 5,869 | 5,261 | 5,278 | 5,160 | 5,049 | 5,131 | 5,106 | 22 | 3,373 | ||||||||||||||||||||||||||||||||||||
2014 | — | — | 14,010 | 9,068 | 6,224 | 8,381 | 6,745 | 6,476 | 6,672 | 6,524 | 34 | 4,776 | ||||||||||||||||||||||||||||||||||||
2015 | — | — | — | 17,917 | 14,498 | 13,043 | 10,538 | 10,704 | 10,945 | 10,576 | 92 | 9,057 | ||||||||||||||||||||||||||||||||||||
2016 | — | — | — | — | 20,547 | 14,660 | 13,552 | 13,956 | 12,876 | 12,291 | (638 | ) | 11,137 | |||||||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | 23,376 | 18,621 | 15,858 | 14,648 | 13,678 | 28 | 11,720 | ||||||||||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 25,791 | 22,662 | 21,980 | 20,541 | (282 | ) | 14,917 | |||||||||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 24,932 | 25,473 | 24,574 | 395 | 10,918 | ||||||||||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 24,036 | 22,919 | (2,387 | ) | 13,623 | |||||||||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 30,579 | (4,381 | ) | 14,784 | |||||||||||||||||||||||||||||||||||
Total | $ | 151,786 |
80 (1) Prior years unaudited
Non-Standard Auto (Direct Auto) | Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 (1) | 2017 (1) | 2018 | 2019 | 2020 | 2021 | |||||||||||||||||||||||||||||
2012 | $ | 1,696 | $ | 2,421 | $ | 3,041 | $ | 3,587 | $ | 4,081 | $ | 4,503 | $ | 4,671 | $ | 4,730 | $ | 4,915 | $ | 4,946 | |||||||||||||||||||
2013 | — | 1,944 | 3,123 | 3,796 | 4,291 | 4,602 | 4,808 | 4,890 | 4,960 | 5,000 | |||||||||||||||||||||||||||||
2014 | — | — | 2,201 | 3,573 | 4,452 | 5,369 | 5,781 | 6,151 | 6,327 | 6,364 | |||||||||||||||||||||||||||||
2015 | — | — | — | 2,967 | 5,202 | 7,057 | 8,327 | 9,560 | 10,057 | 10,176 | |||||||||||||||||||||||||||||
2016 | — | — | — | — | 3,526 | 6,272 | 8,559 | 10,603 | 11,058 | 11,519 | |||||||||||||||||||||||||||||
2017 | — | — | — | — | — | 4,385 | 6,981 | 10,034 | 11,366 | 12,098 | |||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 6,034 | 12,285 | 15,204 | 16,759 | |||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 10,203 | 16,214 | 18,982 | |||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 9,964 | 15,401 | |||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 13,767 | |||||||||||||||||||||||||||||
Total | $ | 115,012 | |||||||||||||||||||||||||||||||||||||
All outstanding liabilities prior to 2012, net of reinsurance | 20 | ||||||||||||||||||||||||||||||||||||||
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance | $ | 36,794 |
(1) Prior years unaudited
Crop | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | At December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(prior years unaudited) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Home and Farm | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | At December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accident Year | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | Total IBNR Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | Total IBNR Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in thousands, except claim counts) | (in thousands, except claim counts) | (in thousands, except claim counts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2008 | $ | 20,534 | $ | 20,868 | $ | 22,257 | $ | 22,941 | $ | 22,941 | $ | 22,941 | $ | 22,941 | $ | 22,941 | $ | 22,941 | $ | 22,941 | $ | — | 2,962 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2009 | — | 17,517 | 15,450 | 15,450 | 15,450 | 15,450 | 15,450 | 15,450 | 15,450 | 15,450 | — | 2,367 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2010 | — | — | 20,742 | 20,717 | 20,717 | 20,717 | 20,717 | 20,717 | 20,717 | 20,717 | — | 2,108 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2011 | — | — | — | 55,094 | 54,953 | 59,651 | 59,651 | 59,651 | 59,651 | 59,651 | — | 3,211 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2012 | — | — | — | — | 13,546 | 13,676 | 13,673 | 13,673 | 13,673 | 13,673 | — | 2,137 | $ | 25,179 | $ | 24,439 | $ | 24,320 | $ | 24,091 | $ | 24,081 | $ | 24,079 | $ | 24,088 | $ | 24,086 | $ | 24,324 | $ | 24,325 | $ | 0— | 3,631 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2013 | — | — | — | — | — | 40,976 | 39,665 | 39,665 | 39,665 | 39,665 | — | 2,097 | — | 29,976 | 29,217 | 28,531 | 28,315 | 28,286 | 28,315 | 27,593 | 27,588 | 27,595 | 0— | 4,189 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2014 | — | — | — | — | — | — | 22,686 | 20,333 | 20,333 | 20,333 | — | 2,268 | — | — | 36,663 | 36,001 | 35,770 | 35,589 | 35,684 | 35,534 | 35,497 | 35,503 | 0— | 5,243 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2015 | — | — | — | — | — | — | — | 13,813 | 13,849 | 13,849 | — | 2,427 | — | — | — | 32,789 | 31,818 | 31,297 | 31,577 | 31,446 | 31,612 | 31,600 | 3 | 3,923 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2016 | — | — | — | — | — | — | — | — | 20,209 | 19,582 | 2 | 2,803 | — | — | — | — | 45,825 | 44,510 | 44,945 | 44,602 | 44,728 | 44,745 | 45 | 6,348 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | — | — | — | — | 33,733 | 20 | 2,831 | — | — | — | — | — | 42,110 | 41,593 | 41,886 | 41,779 | 41,804 | 109 | 4,943 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 42,515 | 43,846 | 43,747 | 43,682 | 107 | 4,580 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 45,438 | 45,828 | 45,471 | 375 | 5,483 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 36,264 | 35,668 | 674 | 4,070 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 53,079 | 4,413 | 4,837 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 259,594 | Total | $ | 383,472 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) Prior years unaudited
Crop | Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
(prior years unaudited) | ||||||||||||||||||||||||||||||||||||||||
Accident Year | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | ||||||||||||||||||||||||||||||
2008 | $ | 19,098 | $ | 22,941 | $ | 22,941 | $ | 22,941 | $ | 22,941 | $ | 22,941 | $ | 22,941 | $ | 22,941 | $ | 22,941 | $ | 22,941 | ||||||||||||||||||||
2009 | — | 13,462 | 15,450 | 15,450 | 15,450 | 15,450 | 15,450 | 15,450 | 15,450 | 15,450 | ||||||||||||||||||||||||||||||
2010 | — | — | 19,678 | 20,717 | 20,717 | 20,717 | 20,717 | 20,717 | 20,717 | 20,717 | ||||||||||||||||||||||||||||||
2011 | — | — | — | 57,741 | 59,651 | 59,651 | 59,651 | 59,651 | 59,651 | 59,651 | ||||||||||||||||||||||||||||||
2012 | — | — | — | — | 13,078 | 13,673 | 13,673 | 13,673 | 13,673 | 13,673 | ||||||||||||||||||||||||||||||
2013 | — | — | — | — | — | 35,511 | 39,665 | 39,665 | 39,665 | 39,665 | ||||||||||||||||||||||||||||||
2014 | — | — | — | — | — | — | 17,788 | 20,333 | 20,333 | 20,333 | ||||||||||||||||||||||||||||||
2015 | — | — | — | — | — | — | — | 12,866 | 13,849 | 13,849 | ||||||||||||||||||||||||||||||
2016 | — | — | — | — | — | — | — | — | 16,444 | 19,487 | ||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | — | — | — | — | 32,809 | ||||||||||||||||||||||||||||||
Total | $ | 258,575 | ||||||||||||||||||||||||||||||||||||||
All outstanding liabilities prior to 2008, net of reinsurance | — | |||||||||||||||||||||||||||||||||||||||
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance | $ | 1,019 | ||||||||||||||||||||||||||||||||||||||
Home and Farm | Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||||||||||||||||
2012 | $ | 21,761 | $ | 23,863 | $ | 24,029 | $ | 24,168 | $ | 24,075 | $ | 24,076 | $ | 24,087 | $ | 24,086 | $ | 24,324 | $ | 24,325 | |||||||||||||||||||
2013 | — | 23,354 | 26,934 | 27,183 | 27,221 | 27,456 | 27,495 | 27,560 | 27,583 | 27,590 | |||||||||||||||||||||||||||||
2014 | — | — | 32,207 | 35,199 | 35,219 | 35,371 | 35,481 | 35,482 | 35,485 | 35,503 | |||||||||||||||||||||||||||||
2015 | — | — | — | 27,204 | 30,164 | 30,350 | 30,573 | 31,383 | 31,597 | 31,597 | |||||||||||||||||||||||||||||
2016 | — | — | — | — | 37,656 | 44,942 | 44,270 | 44,530 | 44,583 | 44,650 | |||||||||||||||||||||||||||||
2017 | — | — | — | — | — | 34,657 | 38,928 | 40,442 | 40,941 | 41,414 | |||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 37,881 | 42,814 | 43,178 | 43,549 | |||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 38,709 | 43,253 | 44,119 | |||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 29,274 | 33,988 | |||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 41,043 | |||||||||||||||||||||||||||||
Total | $ | 367,778 | |||||||||||||||||||||||||||||||||||||
All outstanding liabilities prior to 2012, net of reinsurance | 0— | ||||||||||||||||||||||||||||||||||||||
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance | $ | 15,694 |
(1) Prior years unaudited
Crop | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | At December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | Total IBNR Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims | ||||||||||||||||||||||||||||||||||||
(in thousands, except claim counts) | ||||||||||||||||||||||||||||||||||||||||||||||||
2012 | $ | 13,546 | $ | 13,676 | $ | 13,673 | $ | 13,673 | $ | 13,673 | $ | 13,673 | $ | 13,673 | $ | 13,673 | $ | 13,673 | $ | 13,673 | $ | 0— | 2,137 | |||||||||||||||||||||||||
2013 | — | 40,976 | 39,665 | 39,665 | 39,665 | 39,665 | 39,665 | 39,665 | 39,665 | 39,665 | 0— | 2,097 | ||||||||||||||||||||||||||||||||||||
2014 | — | — | 22,686 | 20,333 | 20,333 | 20,333 | 20,333 | 20,333 | 20,333 | 20,333 | 0— | 2,268 | ||||||||||||||||||||||||||||||||||||
2015 | — | — | — | 13,813 | 13,849 | 13,849 | 13,849 | 13,849 | 13,849 | 13,849 | 0— | 2,427 | ||||||||||||||||||||||||||||||||||||
2016 | — | — | — | — | 20,209 | 19,582 | 19,487 | 19,487 | 19,487 | 19,487 | 0— | 2,806 | ||||||||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | 33,733 | 34,181 | 34,181 | 34,181 | 34,181 | 0— | 2,968 | ||||||||||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 12,506 | 11,730 | 11,730 | 11,730 | 0— | 2,147 | ||||||||||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 33,913 | 37,629 | 37,629 | 0— | 3,101 | ||||||||||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 28,688 | 28,759 | 0— | 2,442 | ||||||||||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 28,574 | 314 | 2,620 | ||||||||||||||||||||||||||||||||||||
Total | $ | 247,880 |
(1) Prior years unaudited
Crop | Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||||||||||||||||
2012 | $ | 13,078 | $ | 13,673 | $ | 13,673 | $ | 13,673 | $ | 13,673 | $ | 13,673 | $ | 13,673 | $ | 13,673 | $ | 13,673 | $ | 13,673 | |||||||||||||||||||
2013 | — | 35,511 | 39,665 | 39,665 | 39,665 | 39,665 | 39,665 | 39,665 | 39,665 | 39,665 | |||||||||||||||||||||||||||||
2014 | — | — | 17,788 | 20,333 | 20,333 | 20,333 | 20,333 | 20,333 | 20,333 | 20,333 | |||||||||||||||||||||||||||||
2015 | — | — | — | 12,866 | 13,849 | 13,849 | 13,849 | 13,849 | 13,849 | 13,849 | |||||||||||||||||||||||||||||
2016 | — | — | — | — | 16,444 | 19,487 | 19,487 | 19,487 | 19,487 | 19,487 | |||||||||||||||||||||||||||||
2017 | — | — | — | — | — | 32,767 | 34,181 | 34,181 | 34,181 | 34,181 | |||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 10,764 | 11,730 | 11,730 | 11,730 | |||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 26,332 | 37,629 | 37,629 | |||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 28,038 | 28,759 | |||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 29,525 | |||||||||||||||||||||||||||||
Total | $ | 248,831 | |||||||||||||||||||||||||||||||||||||
All outstanding liabilities prior to 2012, net of reinsurance | 0— | ||||||||||||||||||||||||||||||||||||||
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance | $ | (951) |
(1) Prior years unaudited
Commercial (Westminster) | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | At December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 (1) | 2017 (1) | 2018 (1) | 2019 (1) | 2020 | 2021 | Total IBNR Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims | ||||||||||||||||||||||||||||||||||||
(in thousands, except claim counts) | ||||||||||||||||||||||||||||||||||||||||||||||||
2012 | $ | 2,795 | $ | 2,492 | $ | 2,539 | $ | 2,583 | $ | 2,666 | $ | 2,680 | $ | 2,680 | $ | 2,680 | $ | 2,680 | $ | 2,680 | $ | 0— | 133 | |||||||||||||||||||||||||
2013 | — | 2,214 | 1,982 | 2,000 | 1,935 | 2,058 | 2,053 | 2,037 | 2,036 | 2,036 | 0— | 138 | ||||||||||||||||||||||||||||||||||||
2014 | — | — | 4,385 | 4,274 | 4,286 | 4,428 | 4,450 | 4,443 | 4,445 | 4,443 | 0— | 272 | ||||||||||||||||||||||||||||||||||||
2015 | — | — | — | 3,082 | 3,258 | 4,019 | 4,218 | 4,293 | 4,238 | 4,294 | 7 | 278 | ||||||||||||||||||||||||||||||||||||
2016 | — | — | — | — | 4,661 | 5,719 | 6,200 | 6,091 | 6,248 | 6,354 | 16 | 264 | ||||||||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | 5,552 | 6,249 | 6,838 | 7,347 | 7,905 | 249 | 320 | ||||||||||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 10,358 | 11,177 | 12,414 | 12,769 | 378 | 479 | ||||||||||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 11,658 | 13,051 | 14,564 | 1,659 | 415 | ||||||||||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 14,774 | 14,063 | 1,944 | 465 | ||||||||||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 30,911 | 5,437 | 520 | ||||||||||||||||||||||||||||||||||||
Total | $ | 100,019 |
(1) Prior years unaudited
Commercial (Westminster) | Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 (1) | 2017 (1) | 2018 (1) | 2019 (1) | 2020 | 2021 | |||||||||||||||||||||||||||||
2012 | $ | 1,634 | $ | 2,364 | $ | 2,442 | $ | 2,537 | $ | 2,591 | $ | 2,680 | $ | 2,680 | $ | 2,680 | $ | 2,680 | $ | 2,680 | |||||||||||||||||||
2013 | — | 1,494 | 1,727 | 1,829 | 1,889 | 1,949 | 2,035 | 2,036 | 2,036 | 2,036 | |||||||||||||||||||||||||||||
2014 | — | — | 3,330 | 3,921 | 4,151 | 4,269 | 4,395 | 4,403 | 4,410 | 4,443 | |||||||||||||||||||||||||||||
2015 | — | — | — | 2,126 | 2,794 | 3,332 | 3,950 | 4,206 | 4,231 | 4,287 | |||||||||||||||||||||||||||||
2016 | — | — | — | — | 3,172 | 5,289 | 5,630 | 5,693 | 6,112 | 6,338 | |||||||||||||||||||||||||||||
2017 | — | — | — | — | — | 3,573 | 4,927 | 5,865 | 6,576 | 7,206 | |||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 6,494 | 9,472 | 10,591 | 11,911 | |||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 6,294 | 9,925 | 11,056 | |||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 8,146 | 10,853 | |||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 16,269 | |||||||||||||||||||||||||||||
Total | $ | 77,079 | |||||||||||||||||||||||||||||||||||||
All outstanding liabilities prior to 2012, net of reinsurance | 0— | ||||||||||||||||||||||||||||||||||||||
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance | $ | 22,940 |
(1) Prior years unaudited
Commercial (non-Westminster) | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | At December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | Total IBNR Plus Expected Development on Reported Claims | Cumulative Number of Reported Claims | ||||||||||||||||||||||||||||||||||||
(in thousands, except claim counts) | ||||||||||||||||||||||||||||||||||||||||||||||||
2012 | $ | 1,600 | $ | 1,125 | $ | 1,001 | $ | 988 | $ | 985 | $ | 970 | $ | 969 | $ | 969 | $ | 970 | $ | 969 | $ | 0— | 142 | |||||||||||||||||||||||||
2013 | — | 2,690 | 2,637 | 2,566 | 2,548 | 2,508 | 2,511 | 2,511 | 2,511 | 2,511 | 0— | 227 | ||||||||||||||||||||||||||||||||||||
2014 | — | — | 2,180 | 1,732 | 1,694 | 1,675 | 1,650 | 1,650 | 1,650 | 1,650 | 0— | 163 | ||||||||||||||||||||||||||||||||||||
2015 | — | — | — | 1,695 | 1,643 | 1,637 | 1,582 | 1,580 | 1,580 | 1,580 | 0— | 135 | ||||||||||||||||||||||||||||||||||||
2016 | — | — | — | — | 2,683 | 2,526 | 2,515 | 2,516 | 2,512 | 2,512 | 0— | 288 | ||||||||||||||||||||||||||||||||||||
2017 | — | — | — | — | — | 2,530 | 2,513 | 2,510 | 2,497 | 2,494 | 0— | 167 | ||||||||||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 1,652 | 1,576 | 1,609 | 1,555 | 1 | 147 | ||||||||||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 2,607 | 2,782 | 2,777 | 15 | 189 | ||||||||||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 2,293 | 2,054 | 29 | 129 | ||||||||||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 2,726 | 220 | 177 | ||||||||||||||||||||||||||||||||||||
Total | $ | 20,828 |
(1) Prior years unaudited
Commercial (non-Westminster) | Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
Accident Year | 2012 (1) | 2013 (1) | 2014 (1) | 2015 (1) | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||||||||||||||||||||||||||
2012 | $ | 776 | $ | 932 | $ | 985 | $ | 969 | $ | 969 | $ | 970 | $ | 969 | $ | 969 | $ | 970 | $ | 969 | |||||||||||||||||||
2013 | — | 2,520 | 2,751 | 2,530 | 2,504 | 2,508 | 2,511 | 2,511 | 2,511 | 2,511 | |||||||||||||||||||||||||||||
2014 | — | — | 1,782 | 1,925 | 1,563 | 1,640 | 1,650 | 1,650 | 1,650 | 1,650 | |||||||||||||||||||||||||||||
2015 | — | — | — | 1,274 | 1,796 | 1,818 | 1,580 | 1,580 | 1,580 | 1,580 | |||||||||||||||||||||||||||||
2016 | — | — | — | — | 1,822 | 2,806 | 2,498 | 2,512 | 2,512 | 2,512 | |||||||||||||||||||||||||||||
2017 | — | — | — | — | — | 1,530 | 2,465 | 2,497 | 2,497 | 2,494 | |||||||||||||||||||||||||||||
2018 | — | — | — | — | — | — | 1,049 | 1,213 | 1,240 | 1,554 | |||||||||||||||||||||||||||||
2019 | — | — | — | — | — | — | — | 1,917 | 2,712 | 2,717 | |||||||||||||||||||||||||||||
2020 | — | — | — | — | — | — | — | — | 1,543 | 1,892 | |||||||||||||||||||||||||||||
2021 | — | — | — | — | — | — | — | — | — | 1,687 | |||||||||||||||||||||||||||||
Total | $ | 19,566 | |||||||||||||||||||||||||||||||||||||
All outstanding liabilities prior to 2012, net of reinsurance | 0— | ||||||||||||||||||||||||||||||||||||||
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance | $ | 1,262 |
(1) Prior years unaudited
The following table presents a reconciliation of the net incurred and paid claims development tables to the liability for unpaid losses and loss adjustment expenses in our Consolidated Balance Sheet:
December 31, 2017 | ||||
Net outstanding liabilities: | ||||
Private passenger auto | $ | 17,115 | ||
Non-standard auto | 5,810 | |||
Home and farm | 9,061 | |||
Crop | 1,019 | |||
All other | 8,757 | |||
41,762 | ||||
Reinsurance ceded: | ||||
Private passenger auto | 690 | |||
Non-standard auto | — | |||
Home and farm | 1,449 | |||
Crop | 133 | |||
All other | 1,856 | |||
4,128 | ||||
Gross liability for unpaid losses and loss adjustment expenses | $ | 45,890 |
| December 31, 2021 | |||
Liabilities for unpaid losses and loss adjustment expenses: | ||||
Private passenger auto | $ | 26,390 | ||
Non-standard auto (Primero) | 6,721 | |||
Non-standard auto (Direct Auto) | 36,794 | |||
Home and farm | 19,161 | |||
Crop | 6,002 | |||
Commercial (Westminster) | 31,662 | |||
Commercial (non-Westminster) | 1,262 | |||
All other | 11,670 | |||
Total liabilities for unpaid losses and loss adjustment expenses | 139,662 | |||
Reinsurance recoverables on losses: | ||||
Private passenger auto | 1,001 | |||
Non-standard auto (Primero) | 0- | |||
Non-standard auto (Direct Auto) | 0- | |||
Home and farm | 3,467 | |||
Crop | 6,953 | |||
Commercial (Westminster) | 8,722 | |||
Commercial (non-Westminster) | 0- | |||
All other | 1,057 | |||
Total reinsurance recoverables on losses | 21,200 | |||
Net liability for unpaid losses and loss adjustment expenses | $ | 118,462 |
The following table presents required supplementary information about average historical claims duration as of December 31, 2017:
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance | ||||||||||||||||||||||||||||||||||||||||
Years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | ||||||||||||||||||||||||||||||
Private Passenger Auto | 53.7% | 21.7% | 11.7% | 6.3% | 2.7% | 1.7% | 1.0% | 0.4% | 0.5% | 0.1% | ||||||||||||||||||||||||||||||
Non-Standard Auto | 75.1% | 20.8% | 3.2% | 0.7% | 0.2% | —% | —% | —% | —% | —% | ||||||||||||||||||||||||||||||
Home and Farm | 73.3% | 8.4% | 10.6% | 2.5% | 2.1% | 1.2% | 0.6% | 0.2% | 0.3% | 0.1% | ||||||||||||||||||||||||||||||
Crop | 93.4% | 4.5% | 2.1% | —% | —% | —% | —% | —% | —% | —% | ||||||||||||||||||||||||||||||
2021:
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance | ||||||||||||||||||||||||||||||||||||||||
Years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | ||||||||||||||||||||||||||||||
Private Passenger Auto | 54.4% | 20.4% | 10.6% | 5.9% | 4.7% | 3.2% | 0.8% | 0— | 0— | 0— | ||||||||||||||||||||||||||||||
Non-Standard Auto (Primero) | 78.2% | 16.6% | 3.8% | 0.9% | 0.2% | 0.2% | 0.1% | 0— | 0— | 0— | ||||||||||||||||||||||||||||||
Non-Standard Auto (Direct Auto) | 35.4% | 25.1% | 16.2% | 9.9% | 6.1% | 2.9% | 2.1% | 1.5% | 0.6% | 0.2% | ||||||||||||||||||||||||||||||
Home and Farm | 68.1% | 14.5% | 9.4% | 4.9% | 2.4% | 0.5% | 0.2% | 0— | 0— | 0— | ||||||||||||||||||||||||||||||
Crop | 100.0% | 0— | 0— | 0— | 0— | 0— | 0— | 0— | 0— | 0— | ||||||||||||||||||||||||||||||
Commercial (Westminster) | 70.4% | 23.6% | 6.0% | 0— | 0— | 0— | 0— | 0— | 0— | 0— | ||||||||||||||||||||||||||||||
Commercial (non-Westminster) | 87.3% | 3.7% | 2.6% | 3.0% | 2.9% | 0.5% | 0— | 0— | 0— | 0— |
10.Property and Equipment
Property and equipment consisted of the following:
December 31, | ||||||||||
2017 | 2016 | Estimated Useful Life | ||||||||
Cost: | ||||||||||
Real estate | $ | 10,633 | $ | 9,578 | 10 - 31 years | |||||
Electronic data processing equipment | 1,288 | 1,637 | 5-7 years | |||||||
Furniture and fixtures | 3,511 | 3,762 | 5-7 years | |||||||
Automobiles | 1,595 | 1,488 | 2-3 years | |||||||
Gross cost | 17,027 | 16,465 | ||||||||
Accumulated depreciation | (11,150 | ) | (11,646 | ) | ||||||
Total property and equipment, net | $ | 5,877 | $ | 4,819 | ||||||
December 31, | |||||||||||
2021 | 2020 | Estimated Useful Life | |||||||||
Cost: | |||||||||||
Land | $ | 1,403 | $ | 1,401 | indefinite | ||||||
Building and improvements | 14,193 | 13,912 | 10 – 43 years | ||||||||
Electronic data processing equipment | 1,518 | 1,271 | 5 – 7 years | ||||||||
Furniture and fixtures | 2,885 | 2,867 | 5 – 7 years | ||||||||
Automobiles | 1,228 | 1,275 | 2 – 3 years | ||||||||
Gross cost | 21,227 | 20,726 | |||||||||
| |||||||||||
Accumulated depreciation | (11,358 | ) | (10,827 | ) | |||||||
Total property and equipment, net | $ | 9,869 | $ | 9,899 |
Depreciation expense was $500, $441,$694, $709, and $523$538 during the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively.
11.Goodwill and Other Intangibles
11. Goodwill
The following table presents the carrying amount of the Company’s goodwill by segment:
December 31, | |||||||
2021 | 2020 | ||||||
Non-standard auto from acquisition of Primero | $ | 2,628 | $ | 2,628 | |||
Commercial from acquisition of Westminster | 6,756 | 6,756 | |||||
Total | $ | 9,384 | $ | 9,384 |
Other Intangible Assets
The following table presents the carrying amount of the Company’s other intangible assets:
December 31, 2021 | Gross Carrying Amount | Accumulated Amortization | Net | |||||||
Subject to amortization: | ||||||||||
Trade names | $ | 748 | $ | 265 | $ | 483 | ||||
Distribution network | 6,700 | 745 | 5,955 | |||||||
Total subject to amortization | 7,448 | 1,010 | 6,438 | |||||||
| ||||||||||
Not subject to amortization – state insurance licenses | 1,900 | 0- | 1,900 | |||||||
Total | $ | 9,348 | $ | 1,010 | $ | 8,338 |
December 31, 2020 | Gross Carrying Amount | Accumulated Amortization | Net | |||||||
Subject to amortization: | ||||||||||
Trade names | $ | 748 | $ | 166 | $ | 582 | ||||
Distribution network | 6,700 | 372 | 6,328 | |||||||
Total subject to amortization | 7,448 | 538 | 6,910 | |||||||
| ||||||||||
Not subject to amortization – state insurance licenses | 1,900 | 0- | 1,900 | |||||||
Total | $ | 9,348 | $ | 538 | $ | 8,810 |
Amortization expense was $472, $5,224, and $1,711 during the years ended December 31, 2021, 2020 and 2019, respectively. The VOBA intangible asset of $4,750 acquired in the Westminster transaction was fully amortized during 2020.
Other intangible assets that have finite lives, including trade names and distribution networks, are amortized over their useful lives. As of December 31, 2021, the estimated amortization of other intangible assets with finite lives for the next five years in the period ended December 31, 2026, and thereafter is as follows:
Year ending December 31, | Amount | |||
2022 | $ | 472 | ||
2023 | 455 | |||
2024 | 422 | |||
2025 | 422 | |||
2026 | 422 | |||
Thereafter | 4,245 | |||
Total other intangible assets with finite lives | $ | 6,438 |
12.Related Party Transactions
Intercompany Reinsurance Pooling Arrangement
Effective January 1, 2020, all of our insurance subsidiary and affiliate companies entered into an intercompany reinsurance pooling agreement. This agreement was finalized, approved, and implemented during the fourth quarter of 2020, retroactive to the January 1 effective date. Nodak Insurance is the lead company of the pool, and assumes the net premiums, net losses, and underwriting expenses from each of the other five companies. Nodak Insurance then retrocedes balances back to each company, while retaining its own share of the pool’s net underwriting results, based on individual pool percentages established in the respective pooling agreement. This arrangement allows each insurance company to rely upon the capacity of the pool’s total statutory capital and surplus. As a result, they are evaluated by AM Best on a group basis and hold a single combined financial strength rating, long-term issuer credit rating, and financial size category.
In connection with the pooling agreement, the quota share agreement between Battle Creek and Nodak Insurance was cancelled. As a result, the Company’s consolidated financial position and results of operations are impacted by the portion of Battle Creek’s underwriting results that are allocated to the policyholders of Battle Creek rather than the shareholders of NI Holdings.
For the years ended December 31, 2021 and 2020, the pooling share percentages by insurance company were:
Pool Percentage | |||||
Nodak Insurance Company | 66.0 | % | |||
American West Insurance Company | 7.0 | % | |||
Primero Insurance Company | 3.0 | % | |||
Battle Creek Mutual Insurance Company | 2.0 | % | |||
Direct Auto Insurance Company | 13.0 | % | |||
Westminster American Insurance Company | 9.0 | % | |||
Total | 100.0 | % |
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 $1,289, $1,258$1,369, $1,370, and $1,230 for$1,352 during the years ended December 31, 2017, 20162021, 2020, and 2015,2019 respectively. Royalty amounts payable of $99$113 and $96$113 were accrued as a liability to the NDFB at December 31, 20172021 and 2016,2020, respectively.
During 2020, Nodak Insurance paid $1,129 of membership dues on behalf of its NDFB members in North Dakota in response to the COVID-19 pandemic.
Dividends
State insurance laws require our insurance subsidiaries to maintain certain minimum capital and surplus amounts on a statutory basis. Our insurance subsidiaries are subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval from their domiciliary insurance regulatory authorities. Our insurance subsidiaries are also subject to risk-based capital (“RBC”) requirements that may further affect their ability to pay dividends. Our insurance subsidiaries statutory capital and surplus at December 31, 2021 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin.
The amount available for payment of dividends from Nodak Insurance to NI Holdings during 2022 without the prior approval of the North Dakota Insurance Department is $21,493 based upon the surplus of Nodak Insurance at December 31, 2021. Prior to its payment of any dividend, Nodak Insurance will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North Dakota Insurance Department has the power to limit or prohibit dividend payments if Nodak Insurance is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. The Board of Directors of Nodak Insurance declared and paid a $6,000 dividend to NI Holdings during the year ended December 31, 2020. No dividends were declared or paid by Nodak Insurance during the years ended December 31, 2021 or 2019.
Direct Auto was re-domesticated from Illinois to North Dakota during 2021, and is now subject to the same dividend restrictions as Nodak Insurance. The amount available for payment of dividends from Direct Auto to NI Holdings during 2022 without the prior approval of the North Dakota Insurance Department is $3,796 based upon the surplus of Direct Auto at December 31, 2021. No dividends were declared or paid by Direct Auto during the years ended December 31, 2021, 2020, or 2019.
Westminster was re-domesticated from Maryland to North Dakota during 2021, and is now subject to the same dividend restrictions as Nodak Insurance. The amount available for payment of dividends from Westminster to NI Holdings during 2022 without the prior approval of the North Dakota Insurance Department is $2,471 based upon the surplus of Westminster at December 31, 2021. No dividends were declared or paid by Westminster during the years ended December 31, 2021 or 2020.
Battle Creek Mutual Insurance Company
The following table illustratestables disclose the standalone balance sheets and statements of operations of Battle Creek, prior to intercompany eliminations, to illustrate the impact of including Battle Creek in our Consolidated Balance Sheets prior to intercompany eliminations:
December 31, | ||||||||
2017 | 2016 | |||||||
Assets: | ||||||||
Cash and cash equivalents (overdraft) | $ | (726 | ) | $ | 124 | |||
Investments | 4,364 | 4,290 | ||||||
Premiums and agents’ balances receivable | 4,055 | 2,841 | ||||||
Reinsurance recoverables(1) | 20,932 | 19,299 | ||||||
Accrued investment income | 29 | 31 | ||||||
Deferred income tax asset, net | 389 | 915 | ||||||
Property and equipment | 370 | 331 | ||||||
Other assets | 54 | 55 | ||||||
Total assets | $ | 29,467 | $ | 27,886 | ||||
Liabilities: | ||||||||
Unpaid losses and loss adjustment expenses | $ | 7,995 | $ | 8,917 | ||||
Unearned premiums | 12,937 | 10,382 | ||||||
Notes payable(1) | 3,000 | 3,000 | ||||||
Reinsurance payable(1) | 965 | 992 | ||||||
Accrued expenses and other liabilities | 1,392 | 1,073 | ||||||
Total liabilities | 26,289 | 24,364 | ||||||
Equity: | ||||||||
Non-controlling interest | 3,178 | 3,522 | ||||||
Total equity | 3,178 | 3,522 | ||||||
Total liabilities and equity | $ | 29,467 | $ | 27,886 | ||||
(1) Amount eliminated in consolidation. |
and Statements of Operations:
Total statutory revenues and expenses
December 31, | ||||||||
2021 | 2020 | |||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 4,398 | $ | 6,055 | ||||
Investments | 10,610 | 5,543 | ||||||
Premiums and agents’ balances receivable | 5,038 | 4,738 | ||||||
Deferred policy acquisition costs | 499 | 479 | ||||||
Pooling receivable (1) | 0- | 920 | ||||||
Reinsurance recoverables on losses (2) | 10,173 | 5,646 | ||||||
Accrued investment income | 51 | 27 | ||||||
Deferred income taxes | 142 | 101 | ||||||
Property and equipment | 325 | 337 | ||||||
Other assets | 52 | 49 | ||||||
Total assets | $ | 31,288 | $ | 23,895 | ||||
| ||||||||
Liabilities: | ||||||||
Unpaid losses and LAE | $ | 2,937 | $ | 2,445 | ||||
Unearned premiums | 2,544 | 2,381 | ||||||
Notes payable (1) | 3,000 | 3,000 | ||||||
Pooling payable (1) | 5,580 | 0- | ||||||
Reinsurance losses payable (2) | 12,754 | 11,221 | ||||||
Accrued expenses and other liabilities | 264 | 303 | ||||||
Total liabilities | 27,079 | 19,350 | ||||||
| ||||||||
Equity: | ||||||||
Non-controlling interest | 4,209 | 4,545 | ||||||
Total equity | 4,209 | 4,545 | ||||||
| ||||||||
Total liabilities and equity | $ | 31,288 | $ | 23,895 | ||||
|
(1) | Amount fully eliminated in consolidation. |
(2) | Amount partly eliminated in consolidation. |
Year Ended December 31, | ||||||||||||||
2021 | 2020 | 2019 | ||||||||||||
Revenues: | ||||||||||||||
Net premiums earned | $ | 5,992 | $ | 5,673 | $ | 0- | ||||||||
Fee and other income | (11 | ) | (23 | ) | (9 | ) | ||||||||
Net investment income | 49 | (3 | ) | 139 | ||||||||||
Net capital gain on investments | 2 | 1 | 3 | |||||||||||
Total revenues | 6,032 | 5,648 | 133 | |||||||||||
| ||||||||||||||
Expenses: | ||||||||||||||
Losses and loss adjustment expenses | 4,328 | 3,369 | 0- | |||||||||||
Amortization of deferred policy acquisition costs | 1,291 | 1,029 | 0- | |||||||||||
Other underwriting and general expenses | 470 | 77 | 0- | |||||||||||
Total expenses | 6,089 | 4,475 | 0- | |||||||||||
| ||||||||||||||
Income (loss) before income taxes | (57 | ) | 1,173 | 133 | ||||||||||
Income taxes | 27 | 218 | 34 | |||||||||||
Net income (loss) | $ | (84 | ) | $ | 955 | $ | 99 | |||||||
|
12. 13.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’s contributions expense to the money purchase plan totaled $854, $762, and $701 for 2017, 2016 and 2015, respectively.
The Company alsoNodak Insurance sponsors a 401(k) plan with an automatic contribution to all eligible employees and a matching contribution for eligible employees of 50% up to 3% of eligible compensation.at Nodak Insurance, Primero, and Direct Auto. Westminster also sponsors a separate 401(k) plan. The Company’s contributions expenseCompany reported expenses related to the 401(k) plan totaled $411, $422,plans totaling $722, $651, and $390$516 during the years ended December 31, 2021, 2020, and 2019, respectively.
Nodak Insurance also contributes an additional elective amount of employee compensation as a profit-sharing contribution for 2017, 2016eligible employees that is invested in a portfolio of investments directed by the Company. The reported expenses related to this profit-sharing contribution were $697, $900, and 2015,$618 during years ended December 31, 2021, 2020, and 2019 respectively.
All fees associated with boththe plans are deducted from the eligible employee accounts.
Deferred Compensation Plan
Effective April 28, 2016, the Board of Directors authorizedThe Company also offers a non-qualified deferred compensation plan coveringto key executives of the Company as(as designated by the Board of Directors.Directors). The Company’s policy is to fund the plan in a given calendar year by amounts that exceedrepresent the excess of the maximum contribution allowed by the Employee Retirement Income Security Act (“ERISA”), beginning in 2017. Funds deposited were $138 for over the yearkey 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 $914, $308, and $458 during the years ended December 31, 2017.2021, 2020, and 2019, respectively.
Employee Stock Ownership Plan
TheIn connection with our initial public offering in March 2017, the Company has established an Employee Stock Ownership Plan (the “ESOP”).its 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 primarilyinvests solely in common stock of the Company.
83
In connection with our initial public offering,the plan, Nodak Insurance loaned $2,400 to the ESOP’s related trust (the “ESOP Trust”). The ESOP loan will bewas for a period of ten years, and bearsbearing interest at the long-term Applicable Federal Rate effective on the closing date of the offering (2.79% annually). The ESOP Trust used the proceeds of the loan to purchase shares in our initial public offering, which resultsresulted in the ESOP Trust owning approximately 1.0% of the Company’s authorized shares. The ESOP has purchased the shares for investment and not for resale.
The shares purchased by the ESOP Trust in the offering are held in a suspense account as collateral for the ESOP loan. The shares held in the ESOP’s suspense account are not considered outstanding for earnings per share purposes. Nodak Insurance will makemakes 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 beare released from the suspense account and allocated to participant accounts at the end of the calendar year. This release and allocation will occuroccurs on an annual basis over the ten-year term of the ESOP loan. Nodak Insurance will havehas 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, willDirect Auto, and Westminster do not participate in the ESOP. American West and Battle Creek have no employees.
Each employee of Nodak Insurance will automatically becomebecomes 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 accountparticipants’ accounts and the market value of those shares. The shares are allocated to participants based on compensation as provided for in the Plan.ESOP.
In connection with the initial public offering,establishment of the ESOP, the Company created a contra-equity account on the Company’s consolidated balance sheetConsolidated Balance Sheet equal to the ESOP’s basis in the shares. The basis of those shares was set at $10.00 per share as part of the initial public offering. As shares are released from the ESOP suspense account, the contra-equity account will beis credited, which shall reducereduces the impact of the contra-equity account on the Company’s Consolidated Balance Sheet.Sheet over time. The Company shall record arecords compensation expense related to the shares released, which compensation expense is equal to the number of shares released from the suspense account multiplied by the average market value of the Company’s stock during the period.
The Company recognized compensation expense of $401 for$460, $373, and $405 during the yearyears ended December 31, 2017. At2021, 2020, and 2019, respectively, related to the end of 2017, 24,315 ESOP shares wereESOP.
Through December 31, 2021, the Company had released and allocated 121,575 ESOP shares to participants, with a remainder of 215,685118,425 ESOP shares in suspense at December 31, 2017.2021. Using the Company’s year-end market price of $16.98,$18.91 per share, the fair value of the unearned ESOP shares was $3,662$2,239 at December 31, 2017.2021.
14.Line of Credit
Nodak Insurance has a $3,000$5,000 line of credit with Wells Fargo Bank, N.A., The terms of which therethe line of credit include a floating interest rate with a floor rate of 3.25%. There were no outstanding amounts as ofduring the years ended December 31, 20172021, 2020, or 2016.2019. This line of credit is scheduled to expire on NovemberJanuary 30, 2018.2023.
14. 15.Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“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.
The components of our provision for income tax expense (benefit) were as follows:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Current | $ | 8,461 | $ | 1,564 | $ | 7,910 | ||||||
Deferred | (2,067 | ) | (85 | ) | 378 | |||||||
Total provision | $ | 6,394 | $ | 1,479 | $ | 8,288 | ||||||
84
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Current tax provision | ||||||||||||
Federal | $ | 3,930 | $ | 10,109 | $ | 5,116 | ||||||
State | 354 | 725 | 324 | |||||||||
Total current | 4,284 | 10,834 | 5,440 | |||||||||
Deferred tax (benefit) provision | (1,310 | ) | 638 | 1,871 | ||||||||
Total provision for income taxes | $ | 2,974 | $ | 11,472 | $ | 7,311 |
The provision for income taxes differs from the amount that would be computed by applying the statutory federal rate to income before provision for income taxes as a result of the following:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Income before income taxes | $ | 22,006 | $ | 6,117 | $ | 25,873 | ||||||
Expected provision for federal income taxes | $ | 7,702 | $ | 2,141 | $ | 9,067 | ||||||
Permanent differences | (736 | ) | (670 | ) | (111 | ) | ||||||
Change in valuation allowance | (394 | ) | (62 | ) | ||||||||
Stock conversion and IPO expenses | 568 | — | — | |||||||||
Impact of effective tax rate change on deferred income tax assets and liabilities | (1,274 | ) | — | — | ||||||||
Other | 528 | 70 | (668 | ) | ||||||||
Total provision | $ | 6,394 | $ | 1,479 | $ | 8,288 | ||||||
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Income before income taxes | $ | 11,306 | $ | 52,816 | $ | 33,811 | ||||||
| ||||||||||||
Expected provision for federal income taxes at 21% | $ | 2,374 | $ | 11,091 | $ | 7,100 | ||||||
| ||||||||||||
State income taxes, net of federal impact | 474 | 570 | 224 | |||||||||
Tax-exempt interest | (197 | ) | (209 | ) | (235 | ) | ||||||
Dividends received deduction | (122 | ) | (104 | ) | (89 | ) | ||||||
Compensation-related expenses | 326 | 130 | 151 | |||||||||
Change in valuation allowance | 77 | (17 | ) | 7 | ||||||||
Other | 42 | 11 | 153 | |||||||||
Total provision for income taxes | $ | 2,974 | $ | 11,472 | $ | 7,311 | ||||||
|
Income tax expense for the year ended December 31, 2017 includes a reduction of $1,274 to current income tax expense due to a new corporate income tax rate for tax year 2018 and beyond, enacted on December 22, 2017. Accounting guidance requires that companiesWe 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. The guidance also requiresWe 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 from continuing operations. The valuation allowance against certain deferred income tax assets decreased by $394 to $628was $1,008, $931, and $594 at December 31, 2017 from $1,022 at December 31, 2016.2021, 2020, and 2019, respectively.
The income tax effects of temporary differences that give rise to significant portions of our deferred income tax assets and deferred income tax liabilities valued at the new effective tax rate of 21% at December 31, 2017, are2021 and 2020 were as follows:
December 31, | ||||||||
2017 | 2016 | |||||||
Deferred income tax assets: | ||||||||
Unearned premium | $ | 2,657 | $ | 4,023 | ||||
Unpaid losses and loss adjustment expenses | 251 | 563 | ||||||
Carryovers | 1,040 | 1,810 | ||||||
Other | 331 | 252 | ||||||
Total deferred income tax assets | 4,279 | 6,648 | ||||||
Deferred income tax liabilities: | ||||||||
Deferred policy acquisition costs | 1,860 | 3,129 | ||||||
Net unrealized gains | 4,266 | 5,407 | ||||||
Other | 64 | 5 | ||||||
Total deferred income tax liabilities | 6,190 | 8,541 | ||||||
Net deferred income tax liability | (1,911 | ) | (1,893 | ) | ||||
Valuation allowance | (628 | ) | (1,022 | ) | ||||
Deferred income tax liability, net | $ | (2,539 | ) | $ | (2,915 | ) | ||
December 31, | ||||||||
2021 | 2020 | |||||||
Deferred income tax assets: | ||||||||
Unearned premium | $ | 5,783 | $ | 5,013 | ||||
Unpaid losses and LAE | 1,096 | 792 | ||||||
Net operating loss carryovers | 1,224 | 1,260 | ||||||
Other | 1,967 | 1,538 | ||||||
Total deferred income tax assets | 10,070 | 8,603 | ||||||
| ||||||||
Deferred income tax liabilities: | ||||||||
Deferred policy acquisition costs | 5,670 | 5,033 | ||||||
Net unrealized gains on investments | 7,382 | 9,897 | ||||||
Intangibles | 1,464 | 1,451 | ||||||
Other | 52 | 48 | ||||||
Total deferred income tax liabilities | 14,568 | 16,429 | ||||||
| ||||||||
Net deferred income tax liability | (4,498 | ) | (7,826 | ) | ||||
| ||||||||
Valuation allowance | (1,008 | ) | (931 | ) | ||||
Deferred income tax liability, net | $ | (5,506 | ) | $ | (8,757 | ) |
At December 31, 20172021 and 2016,2020, we had no00no unrecognized tax benefits, no accrued interest and penalties, and no significant uncertain tax positions. No000No interest and penalties were recognized during the years ended December 31, 2017, 2016,2021, 2020, or 2015.2019.
At December 31, 20172021 and 2016,2020, 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 federal income tax returns on a stand-alone basis, had net operating loss carryovers of $4,951$3,215 and $5,159$3,390 at December 31, 20172021 and 2016,2020, respectively. The net operating loss carryforward expiresbegan expiring in 2021 and will continue through 2032 due to limitations on the use of this net operating loss carryforward.
Westminster, which became part of the Company’s consolidated federal income tax return beginning in 2021 through 2030. In 2016, a $247 capital2020, had $2,122 and $2,340 of net operating loss carryover expiredat December 31, 2021 and none2020, respectively. This net operating loss carryforward expires in 2023 due to limitations on the use of the capitalthis net operating loss carryover was utilized against realized capital gains.carryforward.
15. 16.Operating Leases
We leased facilities, equipment, and softwarePrimero leases a facility in Spearfish, South Dakota under a non-cancellable operating lease expiring in 2023, and leases a facility in Las Vegas, Nevada on a month-to-month basis. Direct Auto leases a facility in Chicago, Illinois under a non-cancellable operating lease expiring at various times through November 2017. Expensesin 2029. Nodak Insurance leases a facility in Fargo, North Dakota under a non-cancellable operating lease expiring in 2024. There were expenses of $250, $370, and $316 related to these leases were $68, $74 and $236 forduring the years ended December 31, 2017, 20162021, 2020, and 2015,2019, respectively.
As of December 31, 2017,2021, we have no minimum future commitments under non-cancellable leases.leases for the next five years in the period ended December 31, 2026, and thereafter as follows:
We also sub-lease a portion of our home office building under non-cancellable operating leases.
Year ending December 31, | Estimated Future Minimum Commitments | |||
2022 | $ | 319 | ||
2023 | 358 | |||
2024 | 320 | |||
2025 | 286 | |||
2026 | 291 | |||
Thereafter | 775 |
16. 17.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.
The Company does not have any unrecorded or potential contingent liabilities or material commitments requiring the use of assets as of December 31, 2017 and 2016.
17. 18.Common Stock
Changes in the number of common stock shares outstanding arewere as follows:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Shares outstanding, beginning | — | n/a | n/a | |||||||||
Initial public offering | 23,000,000 | — | — | |||||||||
Shares repurchased related to employee stock ownership plan | (240,000 | ) | — | — | ||||||||
Shares repurchased | (446,671 | ) | — | — | ||||||||
Issuance related to ESOP | 24,315 | — | — | |||||||||
Shares outstanding, ending | 22,337,644 | n/a | n/a | |||||||||
Note: Shares were not available prior to the Company’s IPO in March 2017. |
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Shares outstanding, beginning | 21,318,638 | 22,119,380 | 22,192,894 | |||||||||
Treasury shares repurchased through stock repurchase authorization | (225,205 | ) | (856,499 | ) | (116,034 | ) | ||||||
Issuance of treasury shares for vesting of stock awards | 102,060 | 31,442 | 18,205 | |||||||||
Issuance of shares related to employee stock ownership plan | 24,315 | 24,315 | 24,315 | |||||||||
Shares outstanding, ending | 21,219,808 | 21,318,638 | 22,119,380 |
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 authorization. During the nine months ended September 30, 2021, we completed the repurchase of 144,110 shares of our common stock for $2,762 to close out this authorization.
On August 11, 2021, our Board of Directors approved an additional authorization for the repurchase of up to approximately $5,000 of the Company’s outstanding common stock. During the six months ended December 31, 2021, we completed the repurchase of 81,095 shares of our common stock for $1,554 under this new authorization.
The Companycost of this treasury stock is authorized to issue 25,000,000 sharesa reduction of common stock, with a par valueshareholders’ equity within our Consolidated Balance Sheets.
18. Stock Based19.Stock-Based Compensation
At its 20172020 Annual Shareholders’ Meeting, the NI Holdings, 2017Inc. 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 compensateafford such persons through various stock and cash-based arrangements, andan opportunity to provide them with opportunities for stockacquire 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”),RSUs, stock appreciation rights, dividend equivalents, and performance share units (“PSUs”)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 500,0001,000,000 shares of common stock, subject to adjustments as provided in the Plan. No eligible participant may be granted any awards for more than 100,000 shares from any stock options, stock appreciation rights, or performance awards denominated in shares in the aggregate in any calendar year, subject to adjustment in accordance with the Plan. The aggregate amount payable pursuant to all performance awards denominated in cash to any eligible person in any calendar year is limited to $1,000 in value. Directors who are not also employees of the Company may not be granted awards denominated in shares that exceed $100$150 in any calendar year.
86
Restricted Stock Units
On December 1, 2017, theThe Compensation Committee has awarded RSUs to non-employee directors and select employees.executives. RSUs are promises to issue actual shares of common stock at the end of a vesting period. The RSUs granted to employeesexecutives under the Plan were based on salary and generally vest 20% per year over a five-year period, while RSUs granted to non-employee directors vest in 2018. RSU participants accumulate an unvested right to receive cash dividend100% on the date of the next annual meeting of shareholders following the grant date. Dividend equivalents on RSUs are accrued during the restrictedvesting period and paid in cash at the end of the vesting period, but are subject to forfeiture until the underlying shares become vested. Participants do not have voting rights during the restricted period.with respect to RSUs.
The Company recognizes stock-based compensation costs based on the grant date fair valuevalue. The compensation costs are normally expensed over the vesting periodperiods to each vesting date; however, the cost of RSUs granted to executives are expensed immediately if the awards.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 restricted stock unitsRSUs is presented below:
Shares | Weighted-Average Fair Value | |||||||
Shares outstanding at December 31, 2016 | — | $ | — | |||||
Grants | 83,000 | 17.31 | ||||||
Vested | (17,500 | ) | 17.31 | |||||
Shares outstanding at December 31, 2017 | 65,500 | $ | 17.31 | |||||
Shares | Weighted-Average Grant-Date Fair Value Per Share | |||||||
Units outstanding and unearned at January 1, 2019 | 73,880 | $ | 16.87 | |||||
RSUs granted during 2019 | 57,100 | 15.81 | ||||||
RSUs earned during 2019 | (34,440 | ) | 16.24 | |||||
Units outstanding and unearned at December 31, 2019 | 96,540 | 16.47 | ||||||
| ||||||||
RSUs granted during 2020 | 66,000 | 14.27 | ||||||
RSUs earned during 2020 | (46,760 | ) | 16.33 | |||||
Units outstanding and unearned at December 31, 2020 | 115,780 | 15.27 | ||||||
| ||||||||
RSUs granted during 2021 | 58,700 | 18.76 | ||||||
RSUs earned during 2021 | (66,100 | ) | 15.77 | |||||
Units outstanding and unearned at December 31, 2021 | 108,380 | $ | 16.86 |
The following table shows a summarythe impact of RSU activity:activity to the Company’s financial results:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
RSU compensation expense | $ | 423 | $ | — | $ | — | ||||||
Income tax benefit | (148 | ) | — | — | ||||||||
RSU compensation expense, net of income taxes | $ | 275 | $ | n/a | $ | n/a | ||||||
Total grant-date fair value of vested RSUs at end of period | $ | 303 | $ | n/a | $ | n/a | ||||||
Note: Share-based compensation was not available prior to the Company’s IPO in March 2017. |
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
RSU compensation expense | $ | 1,065 | $ | 1,035 | $ | 792 | ||||||
Income tax benefit | (242 | ) | (217 | ) | (166 | ) | ||||||
RSU compensation expense, net of income taxes | $ | 823 | $ | 818 | $ | 626 | ||||||
| ||||||||||||
Total grant-date fair value of vested RSUs at end of period | $ | 1,042 | $ | 764 | $ | 568 |
At December 31, 2017,2021, there was $1,013$718 of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized over a weighted-average period of 1.062.04 years.
Performance Stock Units
19. Earnings Per Share
As described in Note 1,The Compensation Committee has awarded PSUs to select executives. PSUs are promises to issue actual shares of common stock at the conversionend 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 mutual companygrant date, subject to a stock company resultedthe 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 issuancedetermination of NI Holdings common shares on March 13, 2017. Earnings per share is 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.compensation costs. No forfeitures are currently estimated. The weighted average number of common shares outstanding was 22,512,401 for the year ended December 31, 2017. For the period prior to the date of the conversion, we assumedcurrent cost estimate assumes that the net common shares issued in the initial public offering of 22,760,000 shares were outstanding since January 1, 2017.cumulative growth targets will be achieved or exceeded.
Unearned ESOP shares are not considered outstanding until they are released and allocated to plan participants. Unearned RSU shares are not considered outstanding until they are earned by award participants.
On May 23, 2017, our Board of Directors approved an authorization for the repurchase of up to $8 millionA summary of the Company’s outstanding common stock. We completedPSUs is presented below:
Performance Share Units | Weighted-Average Grant-Date Fair Value Per Share | |||||||
Units outstanding and unearned at January 1, 2019 | 48,600 | $ | 16.25 | |||||
PSUs granted during 2019 (at target) | 62,400 | 15.21 | ||||||
Units outstanding and unearned at December 31, 2019 | 111,000 | 15.27 | ||||||
| ||||||||
PSUs granted during 2020 (at target) | 63,600 | 14.26 | ||||||
Units outstanding and unearned at December 31, 2020 | 174,600 | 15.15 | ||||||
| ||||||||
PSUs granted during 2021 (at target) | 64,600 | 18.64 | ||||||
PSUs earned during 2021 | (70,363 | ) | 16.25 | |||||
Performance adjustment (1) | 24,300 | 16.25 | ||||||
Forfeitures | (2,537 | ) | 16.25 | |||||
Units outstanding and unearned at December 31, 2021 | 190,600 | $ | 16.06 | |||||
| ||||||||
(1) Represents the change in PSUs issued based upon the attainment of performance goals established by the Company. |
The following table shows the repurchaseimpact of 446,671PSU activity to the Company’s financial results:
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
PSU compensation expense | $ | 1,344 | $ | 1,262 | $ | 822 | ||||||
Income tax benefit | (305 | ) | (265 | ) | (173 | ) | ||||||
PSU compensation expense, net of income taxes | $ | 1,039 | $ | 997 | $ | 649 | ||||||
| ||||||||||||
Total grant-date fair value of vested PSUs at end of period | $ | 1,143 | $ | 0- | $ | 0- |
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 our common stock for $8,037 during the three months ended June 30, 2017, and reflectedperformance period will range from 0% to 150% of the cost of this treasury stock as a reduction of equity within our Consolidated Balance Sheet as ofinitial target awards.
At December 31, 2017.2021, there was $1,125 of unrecognized compensation cost related to outstanding PSUs. That cost is expected to be recognized over a weighted-average period of 1.74 years.
The following table presents a reconciliation of the numerators and denominators we used in the basic and diluted per share computations for our common stock:
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Basic earnings per share: | ||||||||||||
Numerator: | ||||||||||||
Net income attributable to NI Holdings | $ | 15,991 | $ | 4,551 | $ | 17,456 | ||||||
Denominator: | ||||||||||||
Weighted average shares outstanding | 22,512,401 | n/a | n/a | |||||||||
Basic earnings per share | $ | 0.71 | $ | n/a | $ | n/a | ||||||
Diluted earnings per share: | ||||||||||||
Numerator: | ||||||||||||
Net income attributable to NI Holdings | $ | 15,991 | $ | 4,551 | $ | 17,456 | ||||||
Denominator: | ||||||||||||
Number of shares used in basic computation | 22,512,401 | n/a | n/a | |||||||||
Weighted average effect of dilutive securities | ||||||||||||
Add: Director and employee restricted stock units | 228 | n/a | n/a | |||||||||
Number of shares used in per share computations | 22,512,629 | n/a | n/a | |||||||||
Diluted earnings per share | $ | 0.71 | $ | n/a | $ | n/a |
88
20.Segment Information
We have fourfive primary reportable operating segments, which consist of private passenger auto insurance, non-standard auto insurance, home and farm insurance, crop insurance, and cropcommercial insurance. A fifthsixth segment captures all other insurance coverages we sell, including commercial coverages and 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 years ended December 31, 2017, 2016,2021, 2020, and 2015. Prior years have been restated to reflect the change in segments. For presentation in these tables, “LAE” refers to loss adjustment expenses.
Year Ended December 31, 2017 | ||||||||||||||||||||||||
Private Passenger Auto | Non- Standard Auto | Home and Farm | Crop | All Other | Total | |||||||||||||||||||
Direct premiums earned | $ | 58,424 | $ | 10,530 | $ | 63,701 | $ | 49,012 | $ | 7,751 | $ | 189,418 | ||||||||||||
Assumed premiums earned | 15 | — | (17 | ) | 2,524 | 4,189 | 6,711 | |||||||||||||||||
Ceded premiums earned | (3,061 | ) | — | (5,289 | ) | (7,710 | ) | (605 | ) | (16,665 | ) | |||||||||||||
Net premiums earned | 55,378 | 10,530 | 58,395 | 43,826 | 11,335 | 179,464 | ||||||||||||||||||
Direct losses and LAE | 34,743 | 8,690 | 40,381 | 36,110 | 4,193 | 124,117 | ||||||||||||||||||
Assumed losses and LAE | 279 | — | — | 1,654 | 4,244 | 6,177 | ||||||||||||||||||
Ceded losses and LAE | (271 | ) | — | (672 | ) | (5,322 | ) | (1,318 | ) | (7,583 | ) | |||||||||||||
Net losses and LAE | 34,751 | 8,690 | 39,709 | 32,442 | 7,119 | 122,711 | ||||||||||||||||||
Gross margin | 20,627 | 1,840 | 18,686 | 11,384 | 4,216 | 56,753 | ||||||||||||||||||
Underwriting and general expenses | 16,888 | 3,057 | 18,186 | 4,425 | 1,867 | 44,423 | ||||||||||||||||||
Underwriting gain (loss) | 3,739 | (1,217 | ) | 500 | 6,959 | 2,349 | 12,330 | |||||||||||||||||
Fee and other income | 1,087 | 1,648 | ||||||||||||||||||||||
(130 | ) | |||||||||||||||||||||||
Net investment income | 5,031 | |||||||||||||||||||||||
Net realized capital gain on investments | 2,997 | |||||||||||||||||||||||
Income before income taxes | 22,006 | |||||||||||||||||||||||
Income taxes | 6,394 | |||||||||||||||||||||||
Net income | 15,612 | |||||||||||||||||||||||
Net (loss) attributable to non-controlling interest | (379 | ) | ||||||||||||||||||||||
Net income attributable to NI Holdings, Inc. | $ | 15,991 | ||||||||||||||||||||||
Loss and LAE ratio | 62.8% | 82.5% | 68.0% | 74.0% | 62.8% | 68.4% | ||||||||||||||||||
Expense ratio | 30.5% | 29.0% | 31.1% | 10.1% | 16.5% | 24.8% | ||||||||||||||||||
Combined ratio | 93.2% | 111.6% | 99.1% | 84.1% | 79.3% | 93.1% | ||||||||||||||||||
Balances at December 31, 2017: | ||||||||||||||||||||||||
Premiums receivable | $ | 15,430 | $ | 1,196 | $ | 7,856 | $ | — | $ | 1,150 | $ | 25,632 | ||||||||||||
Deferred policy acquisition costs | 3,404 | 306 | 4,638 | — | 511 | 8,859 | ||||||||||||||||||
Reinsurance recoverables | 690 | — | 1,449 | 133 | 1,856 | 4,128 | ||||||||||||||||||
Receivable from Federal Crop Insurance Corporation | — | — | — | 10,501 | — | 10,501 | ||||||||||||||||||
Unpaid losses and LAE | 17,805 | 5,810 | 10,510 | 1,152 | 10,613 | 45,890 | ||||||||||||||||||
Unearned premiums | 24,442 | 1,762 | 32,691 | — | 4,367 | 63,262 | ||||||||||||||||||
89
Year Ended December 31, 2016 | ||||||||||||||||||||||||
Private Passenger Auto | Non- Standard Auto | Home and Farm | Crop | All Other | Total | |||||||||||||||||||
Direct premiums earned | $ | 51,535 | $ | 10,671 | $ | 58,445 | $ | 48,876 | $ | 7,431 | $ | 176,958 | ||||||||||||
Assumed premiums earned | 2 | — | 1 | 2,691 | 3,852 | 6,546 | ||||||||||||||||||
Ceded premiums earned | (3,287 | ) | — | (8,203 | ) | (18,404 | ) | (854 | ) | (30,748 | ) | |||||||||||||
Net premiums earned | 48,250 | 10,671 | 50,243 | 33,163 | 10,429 | 152,756 | ||||||||||||||||||
Direct losses and LAE | 41,022 | 9,965 | 65,119 | 23,173 | 7,112 | 146,391 | ||||||||||||||||||
Assumed losses and LAE | 316 | — | 634 | 766 | 3,231 | 4,947 | ||||||||||||||||||
Ceded losses and LAE | (3,446 | ) | — | (21,749 | ) | (4,570 | ) | (3,065 | ) | (32,830 | ) | |||||||||||||
Net losses and LAE | 37,892 | 9,965 | 44,004 | 19,369 | 7,278 | 118,508 | ||||||||||||||||||
Gross margin | 10,358 | 706 | 6,239 | 13,794 | 3,151 | 34,248 | ||||||||||||||||||
Underwriting and general expenses | 13,953 | 2,921 | 15,821 | 4,525 | 1,902 | 39,122 | ||||||||||||||||||
Underwriting gain (loss) | (3,595 | ) | (2,215 | ) | (9,582 | ) | 9,269 | 1,249 | (4,874 | ) | ||||||||||||||
Fee and other income | 1,157 | 1,666 | ||||||||||||||||||||||
(1,058 | ) | |||||||||||||||||||||||
Net investment income | 3,644 | |||||||||||||||||||||||
Net realized capital gain on investments | 5,681 | |||||||||||||||||||||||
Income before income taxes | 6,117 | |||||||||||||||||||||||
Income taxes | 1,479 | |||||||||||||||||||||||
Net income | 4,638 | |||||||||||||||||||||||
Net income attributable to non-controlling interest | 87 | |||||||||||||||||||||||
Net income attributable to NI Holdings, Inc. | $ | 4,551 | ||||||||||||||||||||||
Loss and LAE ratio | 78.5% | 93.4% | 87.6% | 58.4% | 69.8% | 77.6% | ||||||||||||||||||
Expense ratio | 28.9% | 27.4% | 31.5% | 13.6% | 18.2% | 25.6% | ||||||||||||||||||
Combined ratio | 107.5% | 120.8% | 119.1% | 72.1% | 88.0% | 103.2% | ||||||||||||||||||
Balances at December 31, 2016: | ||||||||||||||||||||||||
Premiums receivable | $ | 13,390 | $ | 906 | $ | 6,671 | $ | — | $ | 1,019 | $ | 21,986 | ||||||||||||
Deferred policy acquisition costs | 3,412 | 232 | 4,998 | — | 300 | 8,942 | ||||||||||||||||||
Reinsurance recoverables | 1,042 | — | 3,845 | 579 | 1,726 | 7,192 | ||||||||||||||||||
Receivable from Federal Crop Insurance Corporation | — | — | — | 16,761 | — | 16,761 | ||||||||||||||||||
Unpaid losses and LAE | 24,713 | 5,933 | 15,483 | 4,270 | 9,233 | 59,632 | ||||||||||||||||||
Unearned premiums | 22,119 | 1,457 | 29,777 | — | 4,092 | 57,445 | ||||||||||||||||||
90
Year Ended December 31, 2015 | ||||||||||||||||||||||||
Private Passenger Auto | Non- Standard Auto | Home and Farm | Crop | All Other | Total | |||||||||||||||||||
Direct premiums earned | $ | 46,721 | $ | 11,373 | $ | 54,372 | $ | 49,802 | $ | 6,954 | $ | 169,222 | ||||||||||||
Assumed premiums earned | 2 | — | — | 20 | 3,668 | 3,690 | ||||||||||||||||||
Ceded premiums earned | (2,738 | ) | — | (5,940 | ) | (24,109 | ) | (652 | ) | (33,439 | ) | |||||||||||||
Net premiums earned | 43,985 | 11,373 | 48,432 | 25,713 | 9,970 | 139,473 | ||||||||||||||||||
Direct losses and LAE | 30,303 | 9,954 | 34,501 | 13,198 | 1,286 | 89,242 | ||||||||||||||||||
Assumed losses and LAE | 29 | — | 303 | 810 | 1,881 | 3,023 | ||||||||||||||||||
Ceded losses and LAE | (660 | ) | — | (3,923 | ) | (2,971 | ) | (835 | ) | (8,389 | ) | |||||||||||||
Net losses and LAE | 29,672 | 9,954 | 30,881 | 11,037 | 2,332 | 83,876 | ||||||||||||||||||
Gross margin | 14,313 | 1,419 | 17,551 | 14,676 | 7,638 | 55,597 | ||||||||||||||||||
Underwriting and general expenses | 12,760 | 2,670 | 14,877 | 3,763 | 1,902 | 35,972 | ||||||||||||||||||
Underwriting gain (loss) | 1,553 | (1,251 | ) | 2,674 | 10,913 | 5,736 | 19,625 | |||||||||||||||||
Fee and other income | 1,246 | 1,854 | ||||||||||||||||||||||
(5 | ) | |||||||||||||||||||||||
Net investment income | 3,571 | |||||||||||||||||||||||
Net realized capital gain on investments | 823 | |||||||||||||||||||||||
Income before income taxes | 25,873 | |||||||||||||||||||||||
Income taxes | 8,288 | |||||||||||||||||||||||
Net income | 17,585 | |||||||||||||||||||||||
Net income attributable to non-controlling interest | 129 | |||||||||||||||||||||||
Net income attributable to NI Holdings, Inc. | $ | 17,456 | ||||||||||||||||||||||
Loss and LAE ratio | 67.5% | 87.5% | 63.8% | 42.9% | 23.4% | 60.1% | ||||||||||||||||||
Expense ratio | 29.0% | 23.5% | 30.7% | 14.6% | 19.1% | 25.8% | ||||||||||||||||||
Combined ratio | 96.5% | 111.0% | 94.5% | 57.6% | 42.5% | 85.9% | ||||||||||||||||||
Balances at December 31, 2015: | ||||||||||||||||||||||||
Premiums receivable | $ | 11,933 | $ | 741 | $ | 6,326 | $ | — | $ | 1,039 | $ | 20,039 | ||||||||||||
Deferred policy acquisition costs | 3,129 | 219 | 4,790 | — | 306 | 8,444 | ||||||||||||||||||
Reinsurance recoverables | 1,571 | — | 2,230 | 302 | 1,006 | 5,109 | ||||||||||||||||||
Receivable from Federal Crop Insurance Corporation | — | — | — | 14,002 | — | 14,002 | ||||||||||||||||||
Unpaid losses and LAE | 21,104 | 5,680 | 9,989 | 1,240 | 7,329 | 45,342 | ||||||||||||||||||
Unearned premiums | 20,498 | 1,327 | 27,775 | — | 3,887 | 53,487 | ||||||||||||||||||
2019.
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.tables below. The remaining fee and other income amounts are not allocated to any segment.
We do not assign or allocate all Consolidated Statement of Operations or Consolidated Balance Sheet line items to our operating segments. Those line items include investment income, net realized capital gain on investments, other income excluding non-standard auto insurance fees, and income taxes forwithin the Consolidated Statement of Operations statement.Operations. For the Consolidated Balance Sheet, those items include cash and investments, property and equipment, other assets, accrued expenses, federal income taxes recoverable or payable, and shareholders’ equity.
Year Ended December 31, 2021 | ||||||||||||||||||||||||||||
Private Passenger Auto | Non-Standard Auto | Home and Farm | Crop | Commercial | All Other | Total | ||||||||||||||||||||||
Direct premiums earned | $ | 76,749 | $ | 58,842 | $ | 84,102 | $ | 43,541 | $ | 65,104 | $ | 4,916 | $ | 333,254 | ||||||||||||||
Assumed premiums earned | 0- | 0- | 0- | 2,106 | 0- | 5,929 | 8,035 | |||||||||||||||||||||
Ceded premiums earned | (4,216 | ) | (257 | ) | (10,310 | ) | (18,799 | ) | (7,819 | ) | (299 | ) | (41,700 | ) | ||||||||||||||
Net premiums earned | 72,533 | 58,585 | 73,792 | 26,848 | 57,285 | 10,546 | 299,589 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Direct losses and LAE | 61,358 | 34,453 | 59,380 | 79,177 | 45,621 | 1,009 | 280,998 | |||||||||||||||||||||
Assumed losses and LAE | 0- | 0- | 0- | 617 | 0- | 6,282 | 6,899 | |||||||||||||||||||||
Ceded losses and LAE | (1,637 | ) | 0- | (7,235 | ) | (51,963 | ) | (10,842 | ) | 159 | (71,518 | ) | ||||||||||||||||
Net losses and LAE | 59,721 | 34,453 | 52,145 | 27,831 | 34,779 | 7,450 | 216,379 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Gross margin | 12,812 | 24,132 | 21,647 | (983 | ) | 22,506 | 3,096 | 83,210 | ||||||||||||||||||||
| ||||||||||||||||||||||||||||
Underwriting and general expenses | 20,516 | 22,770 | 22,122 | 8,212 | 20,000 | 2,669 | 96,289 | |||||||||||||||||||||
Underwriting gain (loss) | (7,704 | ) | 1,362 | (475 | ) | (9,195 | ) | 2,506 | 427 | (13,079 | ) | |||||||||||||||||
| ||||||||||||||||||||||||||||
Fee and other income | 1,280 | 1,775 | ||||||||||||||||||||||||||
| 2,642 | |||||||||||||||||||||||||||
Net investment income | 7,131 | |||||||||||||||||||||||||||
Net capital gain on investments | 15,479 | |||||||||||||||||||||||||||
Income before income taxes | 11,306 | |||||||||||||||||||||||||||
Income taxes | 2,974 | |||||||||||||||||||||||||||
Net income | 8,332 | |||||||||||||||||||||||||||
Net loss attributable to non-controlling interest | (84 | ) | ||||||||||||||||||||||||||
Net income attributable to NI Holdings, Inc. | $ | 8,416 | ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Operating Ratios: | ||||||||||||||||||||||||||||
Loss and LAE ratio | 82.3 | % | 58.8 | % | 70.7 | % | 103.7 | % | 60.7 | % | 70.6 | % | 72.2 | % | ||||||||||||||
Expense ratio | 28.3 | % | 38.9 | % | 30.0 | % | 30.6 | % | 34.9 | % | 25.3 | % | 32.1 | % | ||||||||||||||
Combined ratio | 110.6 | % | 97.7 | % | 100.6 | % | 134.2 | % | 95.6 | % | 96.0 | % | 104.4 | % | ||||||||||||||
| ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Balances at December 31, 2021: | ||||||||||||||||||||||||||||
Premiums and agents’ balances receivable | $ | 19,039 | $ | 8,143 | $ | 8,914 | $ | 0- | $ | 14,687 | $ | 669 | $ | 51,452 | ||||||||||||||
Deferred policy acquisition costs | 4,949 | 5,978 | 7,271 | 0- | 6,328 | 421 | 24,947 | |||||||||||||||||||||
Reinsurance recoverables | 1,001 | 0- | 3,467 | 6,953 | 8,722 | 1,057 | 21,200 | |||||||||||||||||||||
Goodwill and other intangibles | 0- | 2,810 | 0- | 0- | 14,912 | 0- | 17,722 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Unpaid losses and LAE | 26,390 | 43,515 | 19,161 | 6,002 | 32,924 | 11,670 | 139,662 | |||||||||||||||||||||
Unearned premiums | 28,820 | 18,679 | 42,399 | 0- | 34,672 | 3,219 | 127,789 | |||||||||||||||||||||
Payable to Federal Crop Insurance Corporation | 0- | 0- | 0- | 4,962 | 0- | 0- | 4,962 |
Year Ended December 31, 2020 | ||||||||||||||||||||||||||||
Private Passenger Auto | Non-Standard Auto | Home and Farm | Crop | Commercial | All Other | Total | ||||||||||||||||||||||
Direct premiums earned | $ | 74,998 | $ | 53,909 | $ | 82,036 | $ | 39,893 | $ | 45,557 | $ | 4,668 | $ | 301,061 | ||||||||||||||
Assumed premiums earned | 0- | 0- | 0- | 1,896 | 0- | 4,563 | 6,459 | |||||||||||||||||||||
Ceded premiums earned | (2,989 | ) | (172 | ) | (7,157 | ) | (6,071 | ) | (7,269 | ) | (201 | ) | (23,859 | ) | ||||||||||||||
Net premiums earned | 72,009 | 53,737 | 74,879 | 35,718 | 38,288 | 9,030 | 283,661 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Direct losses and LAE | 45,423 | 30,347 | 38,700 | 36,022 | 32,620 | 2,258 | 185,370 | |||||||||||||||||||||
Assumed losses and LAE | 0- | 0- | (116 | ) | 1,070 | 0- | 2,354 | 3,308 | ||||||||||||||||||||
Ceded losses and LAE | 88 | 0- | (1,839 | ) | (5,713 | ) | (12,190 | ) | (551 | ) | (20,205 | ) | ||||||||||||||||
Net losses and LAE | 45,511 | 30,347 | 36,745 | 31,379 | 20,430 | 4,061 | 168,473 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Gross margin | 26,498 | 23,390 | 38,134 | 4,339 | 17,858 | 4,969 | 115,188 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Underwriting and general expenses | 19,986 | 20,739 | 20,874 | 4,807 | 16,358 | 2,304 | 85,068 | |||||||||||||||||||||
Underwriting gain (loss) | 6,512 | 2,651 | 17,260 | (468 | ) | 1,500 | 2,665 | 30,120 | ||||||||||||||||||||
| ||||||||||||||||||||||||||||
Fee and other income | 1,337 | 1,801 | ||||||||||||||||||||||||||
| 3,988 | |||||||||||||||||||||||||||
Net investment income | 7,271 | |||||||||||||||||||||||||||
Net capital gain on investments | 13,624 | |||||||||||||||||||||||||||
Income before income taxes | 52,816 | |||||||||||||||||||||||||||
Income taxes | 11,472 | |||||||||||||||||||||||||||
Net income | 41,344 | |||||||||||||||||||||||||||
Net income attributable to non-controlling interest | 955 | |||||||||||||||||||||||||||
Net income attributable to NI Holdings, Inc. | $ | 40,389 | ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Operating Ratios: | ||||||||||||||||||||||||||||
Loss and LAE ratio | 63.2 | % | 56.5 | % | 49.1 | % | 87.9 | % | 53.4 | % | 45.0 | % | 59.4 | % | ||||||||||||||
Expense ratio | 27.8 | % | 38.6 | % | 27.9 | % | 13.5 | % | 42.7 | % | 25.5 | % | 30.0 | % | ||||||||||||||
Combined ratio | 91.0 | % | 95.1 | % | 76.9 | % | 101.3 | % | 96.1 | % | 70.5 | % | 89.4 | % | ||||||||||||||
| ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Balances at December 31, 2020: | ||||||||||||||||||||||||||||
Premiums and agents’ balances receivable | $ | 18,540 | $ | 6,543 | $ | 9,072 | $ | 0- | $ | 13,732 | $ | 636 | $ | 48,523 | ||||||||||||||
Deferred policy acquisition costs | 5,461 | 4,649 | 7,828 | 0- | 5,588 | 442 | 23,968 | |||||||||||||||||||||
Reinsurance recoverables | 412 | 0- | 588 | 121 | 5,374 | 2,215 | 8,710 | |||||||||||||||||||||
Receivable from Federal Crop Insurance Corporation | 0- | 0- | 0- | 6,646 | 0- | 0- | 6,646 | |||||||||||||||||||||
Goodwill and other intangibles | 0- | 2,860 | 0- | 0- | 15,334 | 0- | 18,194 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Unpaid losses and LAE | 20,311 | 43,336 | 11,737 | 771 | 19,089 | 10,506 | 105,750 | |||||||||||||||||||||
Unearned premiums | 28,293 | 16,147 | 41,301 | 0- | 30,705 | 2,917 | 119,363 |
Year Ended December 31, 2019 | ||||||||||||||||||||||||||||
Private Passenger Auto | Non-Standard Auto | Home and Farm | Crop | Commercial | All Other | Total | ||||||||||||||||||||||
Direct premiums earned | $ | 71,297 | $ | 57,278 | $ | 77,832 | $ | 42,277 | $ | 4,546 | $ | 4,431 | $ | 257,661 | ||||||||||||||
Assumed premiums earned | 0- | 0- | 0- | 2,072 | 1 | 3,824 | 5,897 | |||||||||||||||||||||
Ceded premiums earned | (3,314 | ) | (164 | ) | (6,661 | ) | (6,330 | ) | (450 | ) | (201 | ) | (17,120 | ) | ||||||||||||||
Net premiums earned | 67,983 | 57,114 | 71,171 | 38,019 | 4,097 | 8,054 | 246,438 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Direct losses and LAE | 53,022 | 32,654 | 47,282 | 35,148 | 2,541 | 3,296 | 173,943 | |||||||||||||||||||||
Assumed losses and LAE | 63 | 0- | 0- | 1,582 | 0- | 2,387 | 4,032 | |||||||||||||||||||||
Ceded losses and LAE | (389 | ) | 0- | (1,681 | ) | (4,639 | ) | (52 | ) | (1,504 | ) | (8,265 | ) | |||||||||||||||
Net losses and LAE | 52,696 | 32,654 | 45,601 | 32,091 | 2,489 | 4,179 | 169,710 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Gross margin | 15,287 | 24,460 | 25,570 | 5,928 | 1,608 | 3,875 | 76,728 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Underwriting and general expenses | 18,886 | 21,077 | 20,106 | 4,396 | 863 | 1,930 | 67,258 | |||||||||||||||||||||
Underwriting gain (loss) | (3,599 | ) | 3,383 | 5,464 | 1,532 | 745 | 1,945 | 9,470 | ||||||||||||||||||||
| ||||||||||||||||||||||||||||
Fee and other income | 1,638 | 2,125 | ||||||||||||||||||||||||||
5,021 | ||||||||||||||||||||||||||||
Net investment income | 7,433 | |||||||||||||||||||||||||||
Net capital gain on investments | 14,783 | |||||||||||||||||||||||||||
Income before income taxes | 33,811 | |||||||||||||||||||||||||||
Income taxes | 7,311 | |||||||||||||||||||||||||||
Net income | 26,500 | |||||||||||||||||||||||||||
Net income attributable to non-controlling interest | 99 | |||||||||||||||||||||||||||
Net income attributable to NI Holdings, Inc. | $ | 26,401 | ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Operating Ratios: | ||||||||||||||||||||||||||||
Loss and LAE ratio | 77.5 | % | 57.2 | % | 64.1 | % | 84.4 | % | 60.8 | % | 51.9 | % | 68.9 | % | ||||||||||||||
Expense ratio | 27.8 | % | 36.9 | % | 28.3 | % | 11.6 | % | 21.1 | % | 24.0 | % | 27.3 | % | ||||||||||||||
Combined ratio | 105.3 | % | 94.1 | % | 92.3 | % | 96.0 | % | 81.8 | % | 75.9 | % | 96.2 | % | ||||||||||||||
| ||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Balances at December 31, 2019: | ||||||||||||||||||||||||||||
Premiums and agents’ balances receivable | $ | 18,194 | $ | 7,876 | $ | 9,088 | $ | 0- | $ | 940 | $ | 593 | $ | 36,691 | ||||||||||||||
Deferred policy acquisition costs | 4,108 | 4,711 | 5,945 | 0- | 315 | 320 | 15,399 | |||||||||||||||||||||
Reinsurance recoverables | 500 | 0- | 1,068 | 998 | 6 | 1,473 | 4,045 | |||||||||||||||||||||
Receivable from Federal Crop Insurance Corporation | 0- | 0- | 0- | 14,230 | 0- | 0- | 14,230 | |||||||||||||||||||||
Goodwill and other intangibles | 0- | 2,912 | 0- | 0- | 0- | 0- | 2,912 | |||||||||||||||||||||
| ||||||||||||||||||||||||||||
Unpaid losses and LAE | 19,892 | 43,978 | 10,503 | 8,579 | 1,076 | 9,222 | 93,250 | |||||||||||||||||||||
Unearned premiums | 27,949 | 16,364 | 39,945 | 0- | 2,334 | 2,684 | 89,276 |
21.Statutory Net Income, Capital and Surplus, and Dividend Restrictions
The following table presents selected information, as filed with insurance regulatory authorities, for our insurance subsidiaries as determined in accordance with accounting practices prescribed or permitted by such insurance regulatory authorities as of and for the years ended December 31, 2017, 20162021, 2020, and 2015:2019:
2017 | 2016 | 2015 | ||||||||||
Nodak Insurance: | ||||||||||||
Statutory capital and surplus | $ | 156,545 | $ | 139,140 | $ | 135,771 | ||||||
Statutory unassigned surplus | 151,545 | 139,140 | 135,771 | |||||||||
Statutory net income | 13,915 | 3,665 | 16,221 | |||||||||
American West: | ||||||||||||
Statutory capital and surplus | $ | 12,409 | $ | 11,801 | $ | 11,185 | ||||||
Statutory unassigned surplus | 6,408 | 5,800 | 5,184 | |||||||||
Statutory net income | 429 | 782 | 458 | |||||||||
Primero: | ||||||||||||
Statutory capital and surplus | 8,936 | 8,616 | 8,827 | |||||||||
Statutory unassigned surplus | (323 | ) | (643 | ) | (432 | ) | ||||||
Statutory net income | 208 | (324 | ) | (11 | ) | |||||||
Battle Creek: | ||||||||||||
Statutory capital and surplus | 5,873 | 5,735 | 5,561 | |||||||||
Statutory unassigned surplus | 2,873 | 2,735 | 2,561 | |||||||||
Statutory net income | 153 | 174 | 127 |
2021 | 2020 | 2019 | ||||||||||
Nodak Insurance: | ||||||||||||
Statutory capital and surplus | $ | 221,761 | $ | 216,278 | $ | 189,836 | ||||||
Statutory unassigned surplus | 216,761 | 211,278 | 184,836 | |||||||||
Statutory net income | 5,311 | 24,529 | 9,398 | |||||||||
| ||||||||||||
American West: | ||||||||||||
Statutory capital and surplus | 18,400 | 18,368 | 16,168 | |||||||||
Statutory unassigned surplus | 12,399 | 12,367 | 10,167 | |||||||||
Statutory net income (loss) | (54 | ) | 2,158 | 2,232 | ||||||||
| ||||||||||||
Primero: | ||||||||||||
Statutory capital and surplus | 10,138 | 9,818 | 8,727 | |||||||||
Statutory unassigned surplus (deficit) | 879 | 559 | (532 | ) | ||||||||
Statutory net income (loss) | 127 | 1,023 | (1,256 | ) | ||||||||
| ||||||||||||
Battle Creek: | ||||||||||||
Statutory capital and surplus | 6,821 | 6,875 | 6,189 | |||||||||
Statutory unassigned surplus | 3,821 | 3,875 | 3,189 | |||||||||
Statutory net income (loss) | (77 | ) | 693 | 133 | ||||||||
| ||||||||||||
Direct Auto: | ||||||||||||
Statutory capital and surplus | 37,960 | 35,819 | 28,683 | |||||||||
Statutory unassigned surplus | 34,960 | 32,819 | 25,683 | |||||||||
Statutory net income | 6,451 | 7,898 | 7,377 | |||||||||
| ||||||||||||
Westminster: | ||||||||||||
Statutory capital and surplus | 24,706 | 23,592 | 20,897 | |||||||||
Statutory unassigned surplus | 19,706 | 18,592 | 15,897 | |||||||||
Statutory net income | 1,723 | 2,719 | 225 |
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”)RBC requirements that may further affect their ability to pay dividends. Our insurance subsidiaries statutory capital and surplus at December 31, 20172021 and 20162020 exceeded the amount of statutory capital and surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin.
Amounts available for distribution in 2022 to Nodak Insurance as dividends from its insurance subsidiaries without prior approval of insurance regulatory authorities are $1,241 in 2018 and $1,180 in 2017$1,840 from American West. Dividends available from Primero are $143 in 2018West and $0 in 2017.from Primero. 000No dividends were paid to Nodak Insurance from either entity during the years ended December 31, 2021, 2020, or 2019.
The amount available for payment of dividends from Nodak Insurance to NI Holdings after the conversionduring 2022 without the prior approval of the North Dakota Insurance Department is $15,654$21,493 based upon the policyholders’ surplus of Nodak Insurance at December 31, 2017.2021. Prior to its payment of any extraordinary dividend, Nodak Insurance will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North Dakota Insurance Department has the power to limit or prohibit dividend payments if Nodak Insurance is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. The Board of Directors of Nodak Insurance declared and paid a $6,000 dividend during the year ended December 31, 2020. No dividends were declared or paid in the yearyears ended December 31, 2017.2021 or 2019.
92
22. Reconciliation of Statutory FilingsDirect Auto was re-domesticated from Illinois to Amounts Reported Herein
Our insurance subsidiaries must file financial statements with state insurance regulatory authorities using accounting principlesNorth Dakota during 2021, and practices prescribed or permitted by those authorities. We refer to these accounting principles and practices as statutory accounting principles (“SAP”). Accounting principles used to prepare these SAP financial statements differ from those used to prepare financial statements based on GAAP.
Reconciliations of statutory net income and capital and surplus, as determined using SAP,is now subject to the amounts included insame dividend restrictions as Nodak Insurance. The amount available for payment of dividends from Direct Auto to NI Holdings during 2022 without the accompanying GAAP-basis financial statements are as follows asprior approval of and forthe North Dakota Insurance Department is $3,796 based upon the surplus of Direct Auto at December 31, 2021. No dividends were declared or paid by Direct Auto during the years ended December 31, 2017, 20162021, 2020, or 2019.
Westminster was re-domesticated from Maryland to North Dakota during 2021, and 2015:is now subject to the same dividend restrictions as Nodak Insurance. The amount available for payment of dividends from Westminster to NI Holdings during 2022 without the prior approval of the North Dakota Insurance Department is $2,471 based upon the surplus of Westminster at December 31, 2021. No dividends were declared or paid by Westminster during the years ended December 31, 2021 or 2020.
2017 | 2016 | 2015 | ||||||||||
Total equity on a GAAP basis | $ | 255,573 | $ | 153,418 | $ | 149,918 | ||||||
Equity of non-statutory entities | (84,321 | ) | (30 | ) | (30 | ) | ||||||
Investment in subsidiaries | 21,345 | 20,417 | 20,009 | |||||||||
Non-admitted assets | (4,077 | ) | (5,520 | ) | (4,185 | ) | ||||||
Deferred policy acquisition costs | (8,859 | ) | (8,942 | ) | (8,444 | ) | ||||||
Unrealized (gains) / losses on fixed income securities | (2,099 | ) | (1,209 | ) | (1,938 | ) | ||||||
Unrealized gains / (losses) on investments carried at cost | 2,374 | 2,092 | 1,931 | |||||||||
Deferred income taxes | 1,477 | 2,792 | 1,932 | |||||||||
Goodwill | (648 | ) | (365 | ) | (83 | ) | ||||||
Other intangibles | — | (43 | ) | (100 | ) | |||||||
Surplus notes | 3,000 | 3,000 | 3,000 | |||||||||
Other | (2 | ) | (318 | ) | (666 | ) | ||||||
Aggregate statutory surplus of insurance subsidiaries | $ | 183,763 | $ | 165,292 | $ | 161,344 | ||||||
Net income on a GAAP basis | $ | 15,612 | $ | 4,638 | $ | 17,585 | ||||||
Losses on non-statutory entities | 323 | — | — | |||||||||
Deferred policy acquisition costs | 76 | (517 | ) | (1,222 | ) | |||||||
Deferred income taxes | (287 | ) | (61 | ) | 398 | |||||||
Other than temporary impairment losses | — | — | 139 | |||||||||
Other | (1,018 | ) | 237 | (105 | ) | |||||||
Aggregate statutory net earnings | $ | 14,706 | $ | 4,297 | $ | 16,795 | ||||||
23. InterimItem 9.Changes in and Disagreements with Accountants on Accounting and Financial Data (Unaudited)Disclosure
The following table provides a summary of unaudited quarterly results for the periods presented. Earnings per share data is only available for the quarterly periods subsequent to the conversion and sale of stock.
For the year ended December 31, 2017 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
Net premiums earned | $ | 32,809 | $ | 45,653 | $ | 52,525 | $ | 48,477 | ||||||||
Net investment income | 999 | 1,303 | 1,404 | 1,325 | ||||||||||||
Total revenues | 34,771 | 47,616 | 56,566 | 50,187 | ||||||||||||
Total expenses | 27,740 | 47,655 | 59,691 | 32,048 | ||||||||||||
Net income before non-controlling interest | 4,749 | 117 | (2,693 | ) | 13,439 | |||||||||||
Net basic earnings per common share | 0.21 | 0.01 | (0.12 | ) | 0.62 |
For the year ended December 31, 2016 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
Net premiums earned | $ | 30,115 | $ | 37,136 | $ | 52,639 | $ | 32,866 | ||||||||
Net investment income | 982 | 1,032 | 820 | 810 | ||||||||||||
Total revenues | 31,490 | 38,806 | 59,135 | 34,316 | ||||||||||||
Total expenses | 21,788 | 41,472 | 61,696 | 32,674 | ||||||||||||
Net income before non-controlling interest | 6,219 | (1,819 | ) | (999 | ) | 1,237 | ||||||||||
Net basic earnings per common share | n/a | n/a | n/a | n/a |
Net investment income, total revenues, and total expenses have been reduced for prior quarters due to a reclassification to bring our figures from statutory accounting principles to U.S. generally accepted accounting principles. There was no impact to net income before non-controlling interest.
24. Subsequent Events
We have evaluated subsequent events through March 7, 2018, the date these consolidated financial statements were available for issuance.
94
There have been no changes or disagreements with accountants on accounting and financial disclosure.
Item 9A.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-14(a)) as of December 31, 2017.2021. 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 and timely, providing them with material information relating to the Company required to be disclosed in the reports the Company files or submits under the Exchange Act.effective.
Evaluation of Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, our management has reviewed and evaluated the effectiveness of our internal control over financial reporting based on the framework and criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Based on our evaluation under the COSO Framework, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current internal control over financial reporting is effective, and that our consolidated financial statementsConsolidated Financial Statements we include in this Annual Report on Form 10-K Report present fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with GAAP.accounting principles generally accepted in the United States of America.
Changes in Internal Controls
In the ordinary course of business, we periodically review our system of internal control over financial reporting to identify opportunities to improve our controls and increase efficiency, while ensuring that we maintain an effective internal control environment. In addition, when we acquire new businesses, we incorporate our controls and procedures into the acquired business as part of our integration activities. Since 2018, we have invested significant resources to comprehensively document and analyze our system of internal control over financial reporting. We have identified areas requiring improvement, and continue to make selected improvements to processes and controls to address issues identified through this review. These improvements may include such activities as implementing new, more efficient systems, automating manual processes, formalizing policies and procedures, increasing monitoring controls, and updating existing systems. We plan to continue this initiative as well as prepare for the first audit of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 for the annual period ending December 31, 2022, which may result in changes to our internal control over financial reporting.
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the year ended December 31, 2017,2021, to which this report relates that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Item 9B.Other Information
On December 1, 2017,March 7, 2022, the Board of Directors awarded a total of 83,000 time-based Restricted Stock Unit grants to non-employee directors and certain executive officers of the Company pursuantappointed Seth Daggett as the Company's Principal Accounting Officer. Mr. Daggett will replace Timothy Milius as the Company's Principal Accounting officer. Mr. Daggett will continue to grant agreements,serve as the formsCompany's Chief Financial Officer and Treasurer. Mr. Milius will continue to serve as the Secretary of which are attachedthe Company. Further information about Mr. Daggett may be found in the Company's Proxy Statement and Form 8-K filed on November 13, 2020, as Exhibits 10.12 and 10.13 in this Annual Reportamended on Form 10-K.March 4, 2021.
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Item 10.Directors, Executive Officers and Corporate Governance
We incorporate the response to this Item 10 by reference to our proxy statement we will file with the SEC on or about April 12, 20182022 relating to our Annual Meeting of Shareholders that we will hold on May 22, 201824, 2022 (our “Proxy Statement”). We respond to this Item with respect to our executive officers by reference to Part I of this Annual Report on Form 10-K.
We have posted a copy of our Code of Ethics and Business Conduct on the Governance Highlights page of the Corporate Governance section of our website, www.niholdingsinc.com, which you can access free of charge. Information contained on the website is not incorporated by reference in, or considered part of, this Form 10-K. We intend to disclose on our website any amendments to, or waivers from, our Code of Ethics and Business Conduct that are required to be disclosed by law or NASDAQ Listing Rules.
Item 11.Executive Compensation
We incorporate the response to this Item 11 by reference to our Proxy Statement.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
We incorporate the response to this Item 12 by reference to our Proxy Statement.
Item 13.Certain Relationships and Related Transactions, and Director Independence
We incorporate the response to this Item 13 by reference to our Proxy Statement.
Item 14.Principal Accountant Fees and Services
We incorporate the response to this Item 14 by reference to our Proxy Statement.
Item 15.Exhibits and Financial Statement Schedules
List of Financial Statements and Financial Statement Schedules
(a)The following documents are filed as a part of this report:
(1)Financial Statements and
(2)Financial Statement schedules required to be filed by Item 8 of this report.
Schedule I Condensed financial information of registrant – NI Holdings, Inc.
All other financial schedules are not required under the related instructions, as they are inapplicable or the information has been included in the Consolidated Financial Statements, and therefore have been omitted.
(3)The following exhibits are required by Item 601 of Regulation S-K and are included as part of this Form 10-K:
2.1Plan of Mutual Property and Casualty Insurance Company Conversion and Minority Offering of Nodak Mutual Insurance Company, dated as of January 21, 2016 (1)
3.1Articles of Incorporation of NI Holdings, Inc. (1)
3.2Bylaws of NI Holdings, Inc. (1)
3.3Amendment to the Bylaws of NI Holdings, Inc. (4)
3.4Amendment No. 2 to the Bylaws of NI Holdings, Inc. (6)
4.1Form of certificate evidencing shares of common stock of NI Holdings, Inc. (1)
4.2Description of Securities Registered Under Section 12 of the Exchange Act (8)
10.12017 NI Holdings, Inc. Equity Incentive Plan (5)
10.2Nodak Mutual Insurance Company Nonqualified Deferred Compensation Plan (1)
10.3#Employment Agreement dated as of April 28, 2016, between Michael J. Alexander and Nodak Mutual Insurance Company and NI Holdings, Inc. (1)
10.5#Employment Agreement dated as of April 28, 2016, between Patrick W. Duncan and Nodak Mutual Insurance Company and NI Holdings, Inc. (1)
10.6Trademark License Agreement dated as of October 1, 2016 between North Dakota Farm Bureau and Nodak Mutual Insurance Company (1)
10.7Multiple Peril Crop/Livestock Insurance Full Service Agency Agreement among American Farm Bureau Insurance Services, Inc. and Nodak Mutual Insurance Company, American West Insurance Company and Battle Creek Mutual Insurance Company for Crop Year 2016 (1)
10.8Crop Hail Insurance Full Service Agency Agreement among American Farm Bureau Insurance Services, Inc. and Nodak Mutual Insurance Company, American West Insurance Company and Battle Creek Mutual Insurance Company for Crop Year 2016 (1)
10.9#Nodak Mutual Insurance Company Cash Incentive Bonus Plan (3)
10.10#NI Holdings, Inc. Employee Stock Ownership Plan (1)
10.11Affiliation Agreement dated as of December 30, 2010 between Nodak Mutual Insurance Company and Battle Creek Mutual Insurance Company (2)
10.12Form of Time-Based Restricted Stock Unit Agreement for Non-Employee Directors (7)
10.13NI Holdings, Inc. 2020 Stock and Incentive Plan (7)
10.14*Form of Time-Based Restricted Stock Unit Agreement for Executives
10.15*Form of NI Holdings, Inc. Growth in Book Value Per Share Performance Share Unit Agreement
21.1*Subsidiaries of NI Holdings, Inc.
23.1*Consent of Mazars USA LLP, Fort Washington, PA, PCAOB 339
31.1*Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File
because its XBRL tags are embedded within the Inline XBRL document
101.SCH**Inline XBRL Taxonomy Extension Schema Linkbase Document
101.CAL**Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE**Inline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*Filed herewith.
**Inline XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
#Management contract or compensatory plan or arrangement.
(1)Filed as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-214057) filed with the SEC on October 11, 2016, and incorporated herein by reference.
(2)Filed as an exhibit to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-214057) filed with the SEC on November 14, 2016, and incorporated herein by reference.
(3)Filed as an exhibit to Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File No. 333-214057) filed with the SEC on January 12, 2017, and incorporated herein by reference.
None.(4)Filed as Exhibit 3.1 to the Company’s Form 8-K (File No. 001-37973) filed with the SEC on March 2, 2020, and incorporated herein by reference.
(5)Filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-37973) filed with the SEC on September 18, 2017, and incorporated herein by reference.
(6)Filed as Exhibit 3.1 to the Company’s Form 8-K (File No. 001-37973) filed with the SEC on April 22, 2020, and incorporated herein by reference.
(7)Filed as an Exhibit to the Company’s Form 8-K (File No. 001-37973) filed with the SEC on May 29, 2020, and incorporated herein by reference.
(8)Filed as an Exhibit to the Company’s Form 10-K (File No. 001-37973) filed with the SEC on March 10, 2021, and incorporated herein by reference.
Item 16.Form 10-K Summary
None.
Schedule I – Condensed financial information of registrant – NI Holdings, Inc.
NI Holdings, Inc. was formed on March 13, 2017. The following condensed financial information begins with that date.
Condensed Balance Sheet | ||||
December 31, 2017 | ||||
Assets: | ||||
Cash and cash equivalents | $ | 6,831 | ||
Fixed income securities, at fair value | 60,759 | |||
Equity securities, at fair value | 18,458 | |||
Total cash and investments | 86,048 | |||
Accrued investment income | 464 | |||
Investment in wholly-owned subsidiaries | 168,103 | |||
Federal income tax recoverable | 275 | |||
Total assets | $ | 254,890 | ||
Liabilities: | ||||
Accrued expenses and other liabilities | 2,260 | |||
Deferred income taxes, net | 236 | |||
Commitments and contingencies | — | |||
Total liabilities | 2,496 | |||
Shareholders’ equity | 252,394 | |||
Total liabilities and equity | $ | 254,890 | ||
Condensed Statement of Operations | ||||
Year Ended December 31, 2017 | ||||
Revenues: | ||||
Fee and other income | $ | 19 | ||
Net investment income | 916 | |||
Net realized capital gain on investments | 330 | |||
Total revenues | 1,265 | |||
Expenses: | ||||
Other underwriting and general expenses | 2,068 | |||
Total expenses | 2,068 | |||
Income (loss) before income taxes and equity in undistributed net income of subsidiaries | (803 | ) | ||
Income taxes | (572 | ) | ||
Income (loss) before equity in undistributed net income of subsidiaries | (231 | ) | ||
Equity in undistributed net income of subsidiaries | 16,222 | |||
Net income attributable to NI Holdings, Inc. | $ | 15,991 |
Condensed Statement of Comprehensive Income | ||||
Year Ended December 31, 2017 | ||||
Net income attributable to NI Holdings, Inc. | $ | 15,991 | ||
Other comprehensive income, net of income taxes: | ||||
Unrealized gain on investments | 990 | |||
Unrealized gain on subsidiaries | 1,986 | |||
Other comprehensive income, net of income taxes | 2,976 | |||
Comprehensive income | $ | 18,967 |
Condensed Balance Sheets | ||||||||
December 31, | ||||||||
2021 | 2020 | |||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 8,743 | $ | 8,838 | ||||
Fixed income securities, at fair value | 11,247 | 20,979 | ||||||
Equity securities, at fair value | 8,912 | 9,646 | ||||||
Total cash and investments | 28,902 | 39,463 | ||||||
| ||||||||
Income tax recoverable | 423 | 1,036 | ||||||
Accrued investment income | 94 | 134 | ||||||
Investment in wholly-owned subsidiaries | 327,340 | 324,305 | ||||||
Deferred income taxes | 861 | 529 | ||||||
Total assets | $ | 357,620 | $ | 365,467 | ||||
| ||||||||
Liabilities: | ||||||||
Westminster consideration payable | $ | 13,020 | $ | 19,287 | ||||
Accrued expenses and other liabilities | 1,396 | 1,853 | ||||||
Total liabilities | 14,416 | 21,140 | ||||||
Commitments and contingencies | - | - | ||||||
| ||||||||
Shareholders’ equity | 343,204 | 344,327 | ||||||
Total liabilities and equity | $ | 357,620 | $ | 365,467 |
99
Condensed Statement of Cash Flows | ||||
Year Ended December 31, 2017 | ||||
Cash flows from operating activities: | ||||
Net income attributable to NI Holdings, Inc. | $ | 15,991 | ||
Adjustments: | ||||
Equity in undistributed net income of subsidiaries | (16,222 | ) | ||
Other | 2,072 | |||
Net adjustments | (14,150 | ) | ||
Net cash provided by operating activities | 1,841 | |||
Cash flows from investing activities: | ||||
Net purchase of fixed income and equity securities | (77,718 | ) | ||
Net cash used by investing activities | (77,718 | ) | ||
Cash flows from financing activities: | ||||
Proceeds from issuance of common stock | 93,145 | |||
Purchase of treasury stock | (8,037 | ) | ||
Loan to employee stock ownership plan | (2,400 | ) | ||
Net cash flows from financing activities | 82,708 | |||
Net increase in cash and cash equivalents | 6,831 | |||
Cash and cash equivalents at beginning of period | — | |||
Cash and cash equivalents at end of period | $ | 6,831 | ||
Condensed Statements of Operations | ||||||||||||
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Revenues: | ||||||||||||
Fee and other income | $ | - | $ | (31 | ) | $ | 2 | |||||
Net investment income | 396 | 717 | 1,342 | |||||||||
Net capital gain on investments | 2,119 | 425 | 3,067 | |||||||||
Total revenues | 2,515 | 1,111 | 4,411 | |||||||||
| ||||||||||||
Expenses: | ||||||||||||
Other underwriting and general expenses | 4,543 | 5,711 | 3,383 | |||||||||
Total expenses | 4,543 | 5,711 | 3,383 | |||||||||
| ||||||||||||
Income (loss) before income taxes and equity in undistributed net income of subsidiaries | (2,028 | ) | (4,600 | ) | 1,028 | |||||||
Income tax (benefit) expense | (156 | ) | (1,190 | ) | 163 | |||||||
Income (loss) before equity in undistributed net income of subsidiaries | (1,872 | ) | (3,410 | ) | 865 | |||||||
Equity in undistributed net income of subsidiaries | 10,288 | 43,799 | 25,536 | |||||||||
Net income attributable to NI Holdings, Inc. | $ | 8,416 | $ | 40,389 | $ | 26,401 |
Condensed Statements of Comprehensive Income | ||||||||||||
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Net income attributable to NI Holdings, Inc. | $ | 8,416 | $ | 40,389 | $ | 26,401 | ||||||
Other comprehensive income (loss), net of income taxes: | ||||||||||||
Unrealized gain (loss) on investments | (346 | ) | 127 | 846 | ||||||||
Unrealized gain (loss) attributed to subsidiaries | (7,257 | ) | 7,101 | 6,574 | ||||||||
Other comprehensive income (loss), net of income taxes | (7,603 | ) | 7,228 | 7,420 | ||||||||
Comprehensive income | $ | 813 | $ | 47,617 | $ | 33,821 |
Condensed Statements of Cash Flows | ||||||||||||
Year Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income attributable to NI Holdings, Inc. | $ | 8,416 | $ | 40,389 | $ | 26,401 | ||||||
Adjustments: | ||||||||||||
Equity in undistributed net income of subsidiaries | (10,288 | ) | (43,799 | ) | (25,536 | ) | ||||||
Other | 1,159 | 1,395 | (1,079 | ) | ||||||||
Net adjustments | (9,129 | ) | (42,404 | ) | (26,615 | ) | ||||||
Net cash flows from operating activities | (713 | ) | (2,015 | ) | (214 | ) | ||||||
| ||||||||||||
Cash flows from investing activities: | ||||||||||||
Proceeds from maturities and sales of fixed income securities | 10,103 | 16,238 | 26,612 | |||||||||
Proceeds from sales of equity securities | 7,306 | 4,174 | 9,672 | |||||||||
Purchases of fixed income securities | (808 | ) | (1,550 | ) | (12,918 | ) | ||||||
Purchases of equity securities | (4,512 | ) | (4,139 | ) | (4,618 | ) | ||||||
Acquisition of Westminster American Insurance Company | — | (20,000 | ) | — | ||||||||
Net cash flows from investing activities | 12,089 | (5,277 | ) | 18,748 | ||||||||
| ||||||||||||
Cash flows from financing activities: | ||||||||||||
Dividend from subsidiaries | — | 6,000 | — | |||||||||
Purchase of treasury stock | (4,316 | ) | (12,234 | ) | (2,006 | ) | ||||||
Installment payment on Westminster consideration payable | (6,667 | ) | — | — | ||||||||
Issuance of restricted stock awards | (488 | ) | (31 | ) | (19 | ) | ||||||
Net cash flows from financing activities | (11,471 | ) | (6,265 | ) | (2,025 | ) | ||||||
| ||||||||||||
Net (decrease) increase in cash and cash equivalents | (95 | ) | (13,557 | ) | 16,509 | |||||||
| ||||||||||||
Cash and cash equivalents at beginning of period | 8,838 | 22,395 | 5,886 | |||||||||
| ||||||||||||
Cash and cash equivalents at end of period | $ | 8,743 | $ | 8,838 | $ | 22,395 |
Note A – Basis of presentation
In the parent-company-only financial statements, the Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since inception. The parent-company-only financial statements should be read in conjunction with the Company’s Consolidated Financial Statements.
Note B – Dividends from subsidiaries
The Company has received noa cash dividend of $6,000 from Nodak Insurance during the year ended December 31, 2020. No dividends from its subsidiaries since being formed on March 13, 2017.
were received during the years ended December 31, 2021 or 2019.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 7, 2018.9, 2022.
NI HOLDINGS, INC. | ||
/s/ Michael J. Alexander | ||
Michael J. Alexander | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 7, 2018,9, 2022, by the following persons on behalf of the registrant and in the capacities indicated.
Signature | Capacity | Date | ||
/s/ Michael J. Alexander | President and Chief Executive Officer (Principal | March | ||
Michael J. Alexander | ||||
/s/ | Chief Financial Officer (Principal Financial Officer and | March | ||
Seth C. Daggett | ||||
/s/ Eric K. Aasmundstad | Director | March | ||
Eric K. Aasmundstad | ||||
/s/ William R. Devlin | Director | March | ||
William R. Devlin | ||||
/s/ Duaine C. Espegard | Director | March | ||
Duaine C. Espegard | ||||
/s/ Cindy L. Launer | Director | March 9, 2022 | ||
Cindy L. Launer | ||||
/s/ Stephen V. Marlow | Director | March 9, 2022 | ||
Stephen V. Marlow | ||||
/s/ Jeffrey R. Missling | Director | March | ||
Jeffrey R. Missling | ||||
107