Company Quick10K Filing
Quick10K
NI Holdings
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$16.99 22 $377
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
8-K 2019-08-07 Earnings, Exhibits
8-K 2019-05-21 Shareholder Vote, Regulation FD, Exhibits
8-K 2019-05-08 Earnings, Exhibits
8-K 2019-03-13 Earnings, Exhibits
8-K 2018-11-13 Earnings, Exhibits
8-K 2018-08-31 M&A, Regulation FD, Exhibits
8-K 2018-08-03 Earnings, Exhibits
8-K 2018-05-31 Regulation FD, Other Events, Exhibits
8-K 2018-05-22 Shareholder Vote, Regulation FD, Exhibits
8-K 2018-03-05 Other Events, Exhibits
8-K 2018-01-11 Earnings, Other Events, Exhibits
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NODK 2019-06-30
Part I. - Financial Information
Item 1. - Financial Statements
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
Item 4. - Controls and Procedures
Part II. - Other Information
Item 1. - Legal Proceedings
Item 1A. - Risk Factors
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. - Defaults Upon Senior Securities
Item 4. - Mine Safety Disclosures
Item 5. - Other Information
Item 6. - Exhibits
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32 ex32.htm

NI Holdings Earnings 2019-06-30

NODK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q-22568_nodk.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission file number 001-37973

 

 

NI HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

NORTH DAKOTA   81-2683619
(State or other jurisdiction of   (IRS Employer
incorporation or organization)   Identification No.)

 

1101 First Avenue North

Fargo, North Dakota

  58102
(Address of principal executive offices)   (Zip Code)

(701) 298-4200

Registrant’s telephone number, including area code

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

 

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class Trading Symbol(s)  Name of each exchange on which registered
Common Stock, $0.01 par value per share NODK  Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes    No  o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x  Yes    No  o

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 o Accelerated filer x
Non-accelerated filer o Smaller reporting company x
    Emerging growth company x

 

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. o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o  Yes    No  x

The number of shares of Registrant’s common stock outstanding on July 31, 2019 was 22,095,065. No preferred shares are issued or outstanding.

 

 

 i

 

TABLE OF CONTENTS

Part I. - FINANCIAL INFORMATION 3
Item 1. - Financial Statements 3
Unaudited Consolidated Balance Sheets 3
Unaudited Consolidated Statements of Operations 4
Unaudited Consolidated Statements of Comprehensive Income (Loss) 5
Unaudited Consolidated Statements of Changes in Equity 6
Unaudited Consolidated Statements of Cash Flows 8
Notes to Unaudited Consolidated Financial Statements 9
Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations 41
Item 3. - Quantitative and Qualitative Disclosures about Market Risk 65
Item 4. - Controls and Procedures 65
Part II. - OTHER INFORMATION 66
Item 1. - Legal Proceedings 66
Item 1A. - Risk Factors 66
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds 66
Item 3. - Defaults upon Senior Securities 67
Item 4. - Mine Safety Disclosures 67
Item 5. - Other Information 67
Item 6. - Exhibits 67
Signatures 68

 ii

CERTAIN IMPORTANT INFORMATION

Unless the context otherwise requires, as used in this quarterly report on Form 10-Q:

·“NI Holdings”, “the Company”, “we”, “us”, and “our” refer to NI Holdings, Inc., together with Nodak Insurance Company and its subsidiaries and its affiliate (Battle Creek Mutual Insurance Company) and Direct Auto Insurance Company (acquired August 31, 2018), for periods discussed after completion of the conversion, and for periods discussed prior to completion of the conversion refer to Nodak Mutual Insurance Company and all of its subsidiaries and Battle Creek Mutual Insurance Company;
·“Nodak Mutual Group” refers to Nodak Mutual Group, Inc., which is the majority shareholder of NI Holdings;
·the “conversion” refers to the series of transactions by which Nodak Mutual Insurance Company converted from a mutual insurance company to a stock insurance company, as Nodak Insurance Company, and became a wholly-owned subsidiary of NI Holdings, an intermediate stock holding company formed on the date of conversion;
·“Nodak Stock” refers to Nodak Insurance Company, the successor company to Nodak Mutual Insurance Company after the conversion;
·“Nodak Mutual” refers to Nodak Mutual Insurance Company, the predecessor company to Nodak Insurance Company prior to the conversion;
·“Nodak Insurance” refers to Nodak Stock or Nodak Mutual interchangeably;
·“members” refers to the policyholders of Nodak Insurance, who are the named insureds under insurance policies issued by Nodak Insurance;
·“Battle Creek” refers to Battle Creek Mutual Insurance Company. Battle Creek is not a subsidiary of Nodak Insurance, but all of its insurance policies are reinsured by Nodak Insurance through a 100% quota-share reinsurance agreement and Battle Creek is controlled by Nodak Insurance as a result of an affiliation agreement between Battle Creek and Nodak Insurance. Battle Creek is consolidated with Nodak Insurance for financial reporting purposes; and
·“Direct Auto” refers to Direct Auto Insurance Company. On August 31, 2018, NI Holdings completed the acquisition of 100% of the common stock of Direct Auto from the private shareholders of Direct Auto. Direct Auto became a consolidated subsidiary of NI Holdings on this date. Direct Auto is a property and casualty insurance company specializing in non-standard automobile insurance in the state of Illinois.
·“American West” refers to American West Insurance Company. American West is a wholly-owned subsidiary of Nodak Insurance.
·“Primero” refers to Primero Insurance Company. Primero is an indirect, wholly-owned subsidiary of Nodak Insurance.
·“Nodak Agency” refers to Nodak Agency, Inc. Nodak Agency is a wholly-owned subsidiary of Nodak Insurance.

FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements, which can be identified by the use of such words as “estimate”, “project”, “believe”, “could”, “may”, “intend”, “anticipate”, “plan”, “seek”, “expect” and similar expressions. These forward-looking statements include:

·statements of goals, intentions and expectations;
·statements regarding prospects and business strategy; and
·estimates of future costs, benefits and results.

The forward-looking statements are subject to numerous assumptions, risks and uncertainties, including, among other things, the factors discussed under the heading “Risk Factors” in this Quarterly Report and our Annual Report on Form 10-K that could affect the actual outcome of future events.

 1

All of these factors are difficult to predict and many are beyond our control. These important factors include those discussed under “Risk Factors” and those listed below:

·material changes to the federal crop insurance program;
·future economic conditions in the markets in which we compete that are less favorable than expected;
·the effect of legislative, judicial, economic, demographic, and regulatory events in the jurisdictions where we do business;
·our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our producer network;
·our ability to successfully integrate Direct Auto;
·financial market conditions, including, but not limited to, changes in interest rates and the stock markets causing a reduction of investment income or investment gains and a reduction in the value of our investment portfolio;
·heightened competition, including specifically the intensification of price competition, the entry of new competitors, and the development of new products by new or existing competitors, resulting in a reduction in the demand for our products;
·changes in general economic conditions, including inflation, unemployment, interest rates, and other factors;
·estimates and adequacy of loss reserves and trends in loss and loss adjustment expenses;
·changes in the coverage terms required by state laws with respect to minimum auto liability insurance, including higher minimum limits;
·our inability to obtain regulatory approval of, or to implement, premium rate increases;
·our ability to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us and to collect amounts that we believe we are entitled to under such reinsurance;
·the potential impact on our reported net income that could result from the adoption of future accounting standards issued by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, or other standard-setting bodies;
·unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;
·the potential impact of fraud, operational errors, systems malfunctions, or cybersecurity incidents;
·adverse litigation or arbitration results; and
·adverse changes in applicable laws, regulations or rules governing insurance holding companies and insurance companies, and tax or accounting matters including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements, and changes that affect the cost of, or demand for our products.

Because forward-looking information is subject to various risks and uncertainties, actual results may differ materially from that expressed or implied by the forward-looking information.

 2

Part I. -
FINANCIAL INFORMATION

Item 1. - Financial Statements

NI Holdings, Inc.

Unaudited Consolidated Balance Sheets

(dollar amounts in thousands, except par value) 

 

   June 30, 2019   December 31, 2018 
Assets:          
Cash and cash equivalents  $60,574   $68,950 
Fixed income securities, at fair value   276,987    254,969 
Equity securities, at fair value   59,606    48,498 
Other investments   1,914    1,954 
Total cash and investments   399,081    374,371 
           
Premiums and agents' balances receivable   72,903    34,287 
Deferred policy acquisition costs   16,721    12,866 
Reinsurance recoverables on losses   3,366    2,232 
Accrued investment income   2,018    1,898 
Property and equipment   7,484    6,979 
Receivable from Federal Crop Insurance Corporation   29,668    16,169 
Goodwill and other intangibles   3,036    4,623 
Other assets   3,878    5,067 
Total assets  $538,155   $458,492 
           
Liabilities:          
Unpaid losses and loss adjustment expenses  $98,809   $87,121 
Unearned premiums   121,944    84,767 
Reinsurance premiums payable   4,117     
Federal income tax payable   222    197 
Deferred income taxes, net   2,755    711 
Accrued expenses and other liabilities   12,994    9,943 
Commitments and contingencies        
Total liabilities   240,841    182,739 
           
Equity:          
Common stock, $0.01 par value, authorized: 25,000,000 shares;
issued: 23,000,000 shares; and
outstanding: 2019 – 22,095,065 shares, 2018 – 22,192,894 shares
   230    230 
Preferred stock, without par value, authorized 5,000,000 shares,
no shares issued or outstanding
        
Additional paid-in capital   95,121    94,486 
Unearned employee stock ownership plan shares   (1,914)   (1,914)
Retained earnings   208,330    183,946 
Accumulated other comprehensive income, net of income taxes   4,427    6,376 
Treasury stock, at cost, 2019 – 713,565 shares, 2018 – 615,736 shares   (12,308)   (10,634)
Non-controlling interest   3,428    3,263 
Total equity   297,314    275,753 
           
Total liabilities and equity  $538,155   $458,492 
           

 

The accompanying notes are an integral part of these consolidated financial statements. 

 3

NI Holdings, Inc.

Unaudited Consolidated Statements of Operations

(dollar amounts in thousands, except per share amounts) 

 

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2019   2018   2019   2018 
Revenues:                
Net premiums earned  $65,114   $50,677   $115,620   $86,789 
Fee and other income   646    470    1,110    847 
Net investment income   1,778    1,523    3,521    2,892 
Net capital gain on investments   1,110    250    8,969    719 
Total revenues   68,648    52,920    129,220    91,247 
                     
Expenses:                    
Losses and loss adjustment expenses   48,193    40,721    74,427    59,570 
Amortization of deferred policy acquisition costs   16,151    8,618    25,373    15,657 
Other underwriting and general expenses   789    3,184    8,261    8,022 
Total expenses   65,133    52,523    108,061    83,249 
                     
Income before income taxes   3,515    397    21,159    7,998 
Income taxes   1,000    141    4,848    1,590 
    Net income   2,515    256    16,311    6,408 
Net income attributable to non-controlling interest   37    30    60    60 
    Net income attributable to NI Holdings, Inc.  $2,478   $226   $16,251   $6,348 
                     
                     
Basic earnings per common share  $0.11   $0.01   $0.73   $0.28 
Diluted earnings per common share  $0.11   $0.01   $0.73   $0.28 
                     

 

The accompanying notes are an integral part of these consolidated financial statements. 

 4

 

NI Holdings, Inc.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(dollar amounts in thousands) 

 

   Three Months Ended June 30, 2019  

 

Six Months Ended June 30, 2019

 
  

Attributable

to NI

Holdings, Inc.

  

Attributable

to Non-

Controlling Interest

   Total  

Attributable

to NI

Holdings, Inc.

  

Attributable

to Non-

Controlling Interest

   Total 
Net income  $2,478   $37   $2,515   $16,251   $60   $16,311 
                               
Other comprehensive income, before income taxes:                              
Holding gains on investments   3,766    64    3,830    7,858    136    7,994 
Reclassification adjustment for net realized capital (gain) loss included in net income   8    (4)   4    34    (3)   31 
Other comprehensive income, before income taxes   3,774    60    3,834    7,892    133    8,025 
                               
Income tax expense related to items of other comprehensive income   (792)   (13)   (805)   (1,657)   (28)   (1,685)
Other comprehensive income, net of income taxes   2,982    47    3,029    6,235    105    6,340 
                               
Comprehensive income  $5,460   $84   $5,544   $22,486   $165   $22,651 
                               

 

   Three Months Ended June 30, 2018  

 

Six Months Ended June 30, 2018

 
  

Attributable

to NI

Holdings, Inc.

  

Attributable

to Non-

Controlling Interest

   Total  

Attributable

to NI

Holdings, Inc.

  

Attributable

to Non-

Controlling Interest

   Total 
Net income  $226   $30   $256   $6,348   $60   $6,408 
                               
Other comprehensive income (loss), before income taxes:                              
Holding gains (losses) on investments   757    (24)   733    (3,162)   (106)   (3,268)
Reclassification adjustment for net realized capital gain included in net income   (250)       (250)   (719)       (719)
Other comprehensive income (loss), before income taxes   507    (24)   483    (3,881)   (106)   (3,987)
                               
Income tax benefit (expense) related to items of other comprehensive income (loss)   (106)   5    (101)   815    22    837 
Other comprehensive income (loss), net of income taxes   401    (19)   382    (3,066)   (84)   (3,150)
                               
Comprehensive income (loss)  $627   $11   $638   $3,282   $(24)  $3,258 
                               

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

 5

NI Holdings, Inc.

Unaudited Consolidated Statements of Changes in Equity

(dollar amounts in thousands) 

 

Three Months Ended June 30, 2019
   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,
April 1, 2019
  $230   $94,829   $(1,914)  $205,853   $1,445   $(10,332)  $3,344   $293,455 
                                         
Net income               2,478            37    2,515 
Other comprehensive income, net of income taxes                   2,982        47    3,029 
Purchase of treasury stock                       (2,004)       (2,004)
Share-based compensation       318                        318 
Issuance of vested award shares       (26)       (1)       28        1 
Balance,
June 30, 2019
  $230   $95,121   $(1,914)  $208,330   $4,427   $(12,308)  $3,428   $297,314 
                                         

 

Six Months Ended June 30, 2019
   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, 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               16,251            60    16,311 
Other comprehensive income, net of income taxes                   6,235        105    6,340 
Purchase of treasury stock                       (2,006)       (2,006)
Share-based compensation       935                        935 
Issuance of vested award shares       (300)       (51)       332        (19)
Balance,
June 30, 2019
  $230   $95,121   $(1,914)  $208,330   $4,427   $(12,308)  $3,428   $297,314 
                                         

 

The accompanying notes are an integral part of these consolidated financial statements. 

 6

 

NI Holdings, Inc.

Unaudited Consolidated Statements of Changes in Equity

(dollar amounts in thousands) 

 

Three Months Ended June 30, 2018
   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,
April 1, 2018
  $230   $93,678   $(2,157)  $158,987   $12,531   $(7,763)  $3,143   $258,649 
                                         
Net income               226            30    256 
Other comprehensive loss, net of income taxes                   401        (19)   382 
Share-based compensation       279                        279 
Issuance of vested award shares       (125)               125         
Balance,
June 30, 2018
  $230   $93,832   $(2,157)  $159,213   $12,932   $(7,638)  $3,154   $259,566 
                                         

 

 

Six Months Ended June 30, 2018
   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, 2018
  $230   $93,496   $(2,157)  $152,865   $15,998   $(8,037)  $3,178   $255,573 
                                         
Net income               6,348            60    6,408 
Other comprehensive loss, net of income taxes                   (3,066)       (84)   (3,150)
Share-based compensation       735                        735 
Issuance of vested award shares       (399)               399         
Balance,
June 30, 2018
  $230   $93,832   $(2,157)  $159,213   $12,932   $(7,638)  $3,154   $259,566 
                                         

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

7 

NI Holdings, Inc.

Unaudited Consolidated Statements of Cash Flows

(dollar amounts in thousands) 

 

   Six Months Ended June 30 31, 
   2019   2018 
Cash flows from operating activities:          
Net income  $16,311   $6,408 
Adjustments to reconcile net income to operating cash flows:          
Net capital gain on investments   (8,969)   (719)
Deferred income tax expense (benefit)   359    (1,006)
Depreciation of property and equipment   245    243 
Amortization of intangibles   1,587     
Share-based compensation   935    735 
Amortization of deferred policy acquisition costs   25,373    15,657 
Deferral of policy acquisition costs   (29,228)   (18,988)
Net amortization of premiums and discounts on investments   532    631 
Gain on sale of property and equipment   13     
Changes in operating assets and liabilities:          
Premiums and agents’ balances receivable   (38,616)   (48,543)
Reinsurance premiums receivable / payable   4,117    415 
Reinsurance recoverables on losses   (1,134)   527 
Accrued investment income   (120)   164 
Receivable from Federal Crop Insurance Corporation   (13,499)   (629)
Federal income tax recoverable / payable   25    (1,004)
Other assets   1,192    229 
Unpaid losses and loss adjustment expenses   11,688    17,486 
Unearned premiums   37,177    36,692 
Accrued expenses and other liabilities   3,051    6,401 
Net cash flows from operating activities   11,039    14,699 
           
Cash flows from investing activities:          
Proceeds from sales of fixed income securities   25,612    38,286 
Proceeds from sales of equity securities   6,077    5,033 
Purchases of fixed income securities   (40,168)   (48,733)
Purchases of equity securities   (8,185)   (5,559)
Purchases of property and equipment, net   (765)   (383)
Other   39    18 
Net cash flows from investing activities   (17,390)   (11,338)
           
Cash flows from financing activities:          
Purchases of treasury stock   (2,006)    
Issuance of restricted stock awards   (19)    
Net cash flows from financing activities   (2,025)    
           
Net (decrease) increase in cash and cash equivalents   (8,376)   3,361 
           
Cash and cash equivalents at beginning of period   68,950    27,594 
           
Cash and cash equivalents at end of period  $60,574   $30,955 

 

The Company paid $4,000 and $3,600 in federal income taxes during the six months ended June 30, 2019 and 2018, respectively.

 

The accompanying notes are an integral part of these consolidated financial statements. 

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

Notes to Unaudited Consolidated Financial Statements

1.Organization

 

NI Holdings, Inc. (“NI Holdings”) is a North Dakota business corporation that is the stock holding company of Nodak Insurance Company and became such in connection with the conversion of Nodak Mutual Insurance Company from a mutual to stock form of organization and the creation of a mutual holding company. The conversion was consummated on March 13, 2017. Immediately following the conversion, all of the outstanding shares of common stock of Nodak Insurance Company (the successor to Nodak Mutual Insurance Company) were issued to Nodak Mutual Group, Inc., which then contributed the shares to NI Holdings in exchange for 55% of the outstanding shares of common stock of NI Holdings. Nodak Insurance Company then became a wholly-owned stock subsidiary of NI Holdings. Prior to completion of the conversion, NI Holdings conducted no business and had no assets or liabilities. As a result of the conversion, NI Holdings became the holding company for Nodak Insurance Company and its existing subsidiaries. The newly issued shares of NI Holdings were available for public trading on March 16, 2017.

These consolidated financial statements of NI Holdings include the financial position and results of NI Holdings and six other entities:

·Nodak Insurance Company (“Nodak Insurance”, formerly Nodak Mutual Insurance Company prior to the conversion);
·Nodak Agency, Inc. (“Nodak Agency”);
·American West Insurance Company (“American West”);
·Primero Insurance Company (“Primero”);
·Battle Creek Mutual Insurance Company (“Battle Creek”, an affiliated company with Nodak Insurance); and
·Direct Auto Insurance Company (“Direct Auto”).

Nodak Insurance is the largest domestic property and casualty insurance company in North Dakota. Nodak Insurance was incorporated on April 15, 1946 under the laws of North Dakota, and benefits from a strong marketing affiliation with the North Dakota Farm Bureau (“NDFB”). Nodak Insurance specializes in providing private passenger auto, homeowners, farmowners, commercial, crop hail, and Federal multi-peril crop insurance coverages.

Nodak Agency, a wholly-owned subsidiary of Nodak Insurance, is an inactive shell corporation.

American West, a wholly-owned subsidiary of Nodak Insurance, is a property and casualty insurance company licensed in eight states in the Midwest and Western regions of the United States. American West began writing policies in 2002 and primarily writes personal auto, homeowners, and farm coverages in South Dakota. American West also writes personal auto in North Dakota, as well as crop hail and Federal multi-peril crop insurance coverages in Minnesota and South Dakota.

Primero is a wholly-owned subsidiary of Tri-State, Ltd. Tri-State, Ltd. is an inactive shell corporation 100% owned by Nodak Insurance. Primero is a property and casualty insurance company writing non-standard automobile coverage in the states of Nevada, Arizona, North Dakota and South Dakota.

Battle Creek is controlled by Nodak 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. Battle Creek is a property and casualty insurance company writing personal auto, homeowners, and farm coverages solely in the state of Nebraska.

Direct Auto, a wholly-owned subsidiary of NI Holdings, is a property and casualty company licensed in Illinois. Direct Auto began writing non-standard automobile coverage in 2007, and was acquired by NI Holdings on August 31, 2018 via a stock purchase agreement. See Note 4.

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 and Direct Auto personnel manage the day-to-day operations of their respective companies. The insurance companies share a combined business plan to achieve market penetration and underwriting profitability objectives. Distinctions within the products of the insurance companies generally relate to the states in which the risk is located and specific risk profiles targeted within similar classes of business.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

 

2.  Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ended December 31, 2019.

Our consolidated financial statements include our accounts and those of our wholly-owned subsidiaries, as well as Battle Creek, an entity we control via contract. We have eliminated all significant inter-company accounts and transactions in consolidation. The terms “we”, “us”, “our”, or “the Company” as used herein refer to the consolidated entity.

3.  Summary of Significant Accounting Policies

Use of Estimates:

In preparing our consolidated financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates.

We make estimates and assumptions that can have a significant effect on amounts and disclosures we report in our consolidated financial statements. The most significant estimates relate to our reserves for unpaid losses and loss adjustment expenses, earned premiums for crop insurance, valuation of investments, determination of other-than-temporary impairments, valuation allowances for deferred income tax assets, deferred policy acquisition costs, and the valuations used to establish intangible assets acquired related to business combinations. While we believe our estimates are appropriate, the ultimate amounts may differ from the estimates provided. We regularly review our methods for making these estimates as well as the continuing appropriateness of the estimated amounts, and we reflect any adjustment we consider necessary in our current results of operations.

Variable-Interest Entities:

Any company deemed to be a variable interest entity (“VIE”) is required to be consolidated by the primary beneficiary of the VIE.

We assess our investments in other entities at inception to determine if any meet the qualifications of a VIE. We consider an investment in another company to be a VIE if (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) the characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the obligation to absorb expected losses of the entity or the right to receive the expected residual returns of the entity), or (c) the voting rights of the equity holders are not proportional to their obligations to absorb the expected losses of the entity and/or the rights to receive the expected residual returns of the entity, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. Upon the occurrence of certain events, we would reassess our initial determination of whether the investment is a VIE.

We evaluate whether we are the primary beneficiary of each VIE and we consolidate the VIE if we have both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity. We consider the contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights, and board representation of the respective parties in determining whether we qualify as the primary beneficiary. Our assessment of whether we are the primary beneficiary of a VIE is performed at least annually.

We control two-thirds of the Board of Directors of Battle Creek via a 100% quota-share reinsurance agreement between Nodak Insurance and Battle Creek and a surplus note issued by Battle Creek to Nodak Insurance. Through the effects of the 100% quota-share agreement with Battle Creek, we are considered the primary beneficiary of Battle Creek’s operating results excluding investment income, bad debt expense, and income taxes. Therefore, 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 Equity in our Consolidated Balance Sheet.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

Cash and Cash Equivalents:

Cash and cash equivalents include certain investments in highly liquid debt instruments with original maturities of three months or less. Cost approximates fair value for these short-term investments.

Investments:

We have categorized our investment portfolio as “available-for-sale” and have reported the portfolio at fair value. Unrealized gains and losses on fixed income securities, and on equity securities prior to January 1, 2019, net of income taxes, are reported in accumulated other comprehensive income. Effective January 1, 2019, in accordance with a change in accounting principle, changes in unrealized gains and losses on equity securities are reported as a component of net capital gain on investments in our operating results.

Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Amortization of premium and accretion of discount are computed using an effective interest method. Net investment income includes interest and dividend income together with amortization of purchase premiums and discounts, and is net of investment management and custody fees. Realized gains and losses on investments are determined using the specific identification method and are included in net capital gain on investments, along with the change in unrealized gains and losses on equity securities after January 1, 2019.

We review our investments each quarter to determine whether a decline in fair value below the amortized cost basis is other than temporary. Accordingly, we assess whether we intend to sell or it is more likely than not that we will be required to sell a security before recovery of its amortized cost basis. For fixed income securities that are considered other-than-temporarily impaired and that we do not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, we separate the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and, therefore, is not required to be recognized as losses in the Consolidated Statement of Operations, but is recognized in other comprehensive income.

We classify each fair value measurement at the appropriate level in the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted market price in active markets for identical assets or liabilities (Level I measurements) and the lowest priority to unobservable inputs (Level III measurements). An asset’s or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation.

Level I – Quoted price in active markets for identical assets and liabilities.

Level II – Quoted prices in markets that are not active or inputs that are observable either directly or indirectly. Level II inputs include quoted prices for similar assets or liabilities other than quoted in prices in Level I, quoted prices in markets that are not active, or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

Level III – Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect the reporting entity’s own assumptions that market participants would use in pricing the asset or liability. Level III assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Fair Value of Other Financial Instruments:

Our other financial instruments, aside from investments, are cash and cash equivalents, premiums and agents’ balances receivable, and accrued expenses and accounts payable. The carrying amounts for cash and cash equivalents, premiums and agents’ balances receivable, and accrued expenses and accounts payable approximate their fair value based on their short-term nature. Other invested assets that do not have observable inputs and little or no market activity are carried on a cost basis. The carrying value of these other invested assets was $1,914 at June 30, 2019 and $1,954 at December 31, 2018.

Reclassifications:

Certain amounts in the 2018 consolidated financial statements have been reclassified to conform to the 2019 presentation.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

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 Company uses the direct write-off method for recognizing bad debts. Accounts billed directly to the policyholder are provided grace payment and cancellation notice periods per state insurance regulations. Any earned but uncollected premiums are written off within 90 days after the effective date of policy cancellation.

Direct Auto also provides for agency billing for a portion of their agents. Accounts billed to agents are due within 60 days of the statement date. The balances are carried as agents’ balances receivable until it is determined the amount is not collectible from the agent. At that time, the balance is written off as uncollectible. The agent is responsible for all past due balances. As part of its agent appointment, Direct Auto requires a personal guarantee for all balances due to Direct Auto from the principal of the contracted agency.

Policy Acquisition Costs:

We defer our policy acquisition costs, consisting primarily of commissions, premium taxes and certain other underwriting costs, reduced by ceding commissions, which vary with and relate directly to the production of business. We amortize these deferred policy acquisition costs over the period in which we earn the premiums. The method we follow in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses, and certain other costs we expect to incur as we earn the premium.

Property and Equipment:

We report property and equipment at cost less accumulated depreciation. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets.

Losses and Loss Adjustment Expenses:

Liabilities for unpaid losses and loss adjustment expenses are estimates at a given point in time of the amounts we expect to pay with respect to policyholder claims based on facts and circumstances then known. At the time of establishing our estimates, we recognize that our ultimate liability for losses and loss adjustment expenses will exceed or be less than such estimates. We base our estimates of liabilities for unpaid losses and loss adjustment expenses on assumptions as to future loss trends, expected claims severity, judicial theories of liability, and other factors. During the loss adjustment period, we may learn additional facts regarding certain claims, and, consequently, it often becomes necessary for us to refine and adjust our estimates of the liability. We reflect any adjustments to our liabilities for unpaid losses and loss adjustment expenses in our operating results in the period in which we determine the need for a change in the estimates.

We maintain liabilities for unpaid losses and loss adjustment expenses with respect to both reported and unreported claims. We establish these liabilities for the purpose of covering the ultimate costs of settling all losses, including investigation and litigation costs. We base the amount of our liability for reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim, and the insurance policy provisions relating to the type of loss our policyholder incurred. We determine the amount of our liability for unreported losses and loss adjustment expenses on the basis of historical information by line of insurance. Inflation is not explicitly selected in the loss reserve analysis. However, historical inflation is embedded in the estimated loss reserving function through analysis of costs and trends and reviews of historical reserving results. 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.

Reserve estimates can change over time because of unexpected changes in assumptions related to our external environment and, to a lesser extent, assumptions as to our internal operations. Assumptions related to our external environment include the absence of significant changes in tort law and the legal environment which may impact liability exposure, the trends in judicial interpretations of insurance coverage and policy provisions, and the rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims, payment and case reserving methodologies, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the quality and characteristics of business

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

written within a given line of business, and consistency in reinsurance coverage and collectability of reinsured losses, among other items. To the extent we determine that underlying factors impacting our assumptions have changed, we attempt to make appropriate adjustments for such changes in our reserves. Accordingly, our ultimate liability for unpaid losses and loss adjustment expenses will likely differ from the amount recorded.

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. For the year ended December 31, 2016, the consolidated federal income tax return included Nodak Mutual Insurance Company and its wholly-owned subsidiaries. For the year ended December 31, 2017 and thereafter, the consolidated federal income tax return included and will include thereafter NI Holdings and its wholly-owned subsidiaries. Direct Auto became part of the consolidated federal income tax return as of its acquisition date.

Insurance companies typically pay state premium taxes rather than state income taxes. However, Direct Auto is subject to state income taxes in the state of Illinois, in addition to state premium taxes. Additionally, NI Holdings, on a stand-alone basis, pays state income taxes to the state of North Dakota for income or losses generated as separate financial entity. While state premium taxes are included as a part of amortization of deferred policy acquisition costs, state income taxes are combined with federal income taxes within the financial reporting category labeled income taxes.

The Company reports tax-related interest and penalties, if any, as part of income tax expense in the year such amounts are determinable.

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 companies 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 requires 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 Company has elected to reclassify any tax effects stranded in accumulated other comprehensive income as a result of a change in income tax rates to retained earnings.

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 investment staff and advisors. We also limit the amount of our total investment portfolio that we invest in any one security.

Property and liability insurance coverages are marketed through captive agents in North Dakota and through independent insurance agencies located throughout all operating areas. All business is billed directly to 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 knows as “treaties” or by negotiation on substantial individual risks. Ceded reinsurance is treated as the risk and liability of the assuming companies.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

Reinsurance contracts do not relieve the Company from its obligations to policyholders. In the event that all or any of the reinsuring companies might be unable to meet their obligations under existing reinsurance agreements, the Company would be liable for such defaulted amounts.

Goodwill and Other Intangibles:

Goodwill represents the excess of the purchase price over the underlying fair value of acquired entities. When completing acquisitions, we seek also to identify separately identifiable intangible assets that we have acquired. We assess goodwill and intangible assets with an indefinite useful life for impairment annually. We also assess goodwill and other intangible assets 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 assets could result from changes in economic and operating conditions in future periods. We did not record any impairments of goodwill or other intangible assets during the three or six month periods ended June 30, 2019 and 2018.

Goodwill arising from the acquisition of Primero in 2014 represents the excess of the purchase price over the fair value of the net assets acquired. The purchase price in excess of the fair value of net assets acquired was negotiated at arms-length with an unrelated party and was based upon the strategic decision by Company management to expand both the geographic footprint and product lines of the Company. The nature of the business acquired was such that there were limited intangible assets not reflected in the net assets acquired. The purchase price was paid with a combination of cash and cancellation of obligations owed to the acquired company by the sellers. The goodwill which arose from this transaction is included in the basis of the net assets acquired and is not deductible for income tax purposes.

Intangible assets arising from the acquisition of Direct Auto in 2018 represent the estimated fair values of certain intangible assets, including a favorable lease contract, a state insurance license, the value of the Direct Auto trade name, and the value of business acquired (“VOBA”). The state insurance license asset has an indefinite life, while the favorable lease contract, Direct Auto trade name, and VOBA assets will be amortized over eighteen months, five years, and twelve months, respectively, from the August 31, 2018 acquisition/valuation date.

 

4.   Acquisition of Direct Auto Insurance Company

On August 31, 2018, the Company completed the acquisition of 100% of the common stock of Direct Auto from the private shareholders of Direct Auto, and Direct Auto became a consolidated subsidiary of the Company. Direct Auto is a property and casualty insurance company specializing in non-standard automobile insurance in the state of Illinois. The Company realized a $4,578 gain on the purchase of Direct Auto due to the use of applicable purchase accounting guidance (known as a “bargain purchase”).

Direct Auto remains headquartered in Chicago, Illinois and the current president (who was also one of the principal shareholders) of Direct Auto continues to manage the Direct Auto insurance operations along with the current staff and management team. The results of Direct Auto are included as part of the Company’s non-standard auto business segment following the closing date.

We account for business acquisitions in accordance with the acquisition method of accounting, which requires, among other things, that most assets acquired, liabilities assumed, and contingent consideration be recognized at their fair values as of the acquisition date, which is the closing date for the Direct Auto 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 Company does not expect any adjustments during this period.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

 

The acquired Direct Auto business contributed revenues of $12,269 and net loss of $35 to the Company for the three months ended June 30, 2019, and revenues of $24,842 and net income of $4,099 for the six months ended June 30, 2019. The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2017:

  

Pro forma

Three Months Ended

June 30,

  

Pro forma

Six Months Ended

June 30,

 
   2019   2018   2019   2018 
Revenues  $68,648   $64,531   $129,220   $113,197 
                     
Net income (loss) attributable to NI Holdings, Inc.   2,508    (397)   16,356    6,479 
                     
Basic earnings (loss) per share attributable to NI Holdings, Inc.   0.11    (0.02)   0.74    0.29 

 

The Company did not reflect any material, nonrecurring 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 the results of Direct Auto 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, 2017, with the related income tax effects.

In 2018, the Company incurred $118 of acquisition-related costs. These expenses did not impact the pro forma amounts presented above.

The Company paid $17,000 in cash consideration to the private shareholders of Direct Auto. The acquisition of Direct Auto did not include any contingent consideration. The following table summarizes the consideration transferred to acquire Direct Auto and the amounts of identified assets acquired and liabilities assumed at the acquisition date:

Fair Value of Consideration:
Total cash consideration transferred  $17,000 
      
Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:     
Identifiable net assets:     
Cash and cash equivalents  $44,485 
Fixed income securities, at fair value   11,414 
Equity securities, at fair value   14,634 
Premiums and agents' balances receivable   5,849 
Accrued investment income   63 
Property and equipment   31 
Favorable lease contract (included in goodwill and other intangibles)   20 
License (included in goodwill and other intangibles)   100 
Trade name (included in goodwill and other intangibles)   248 
Value of business acquired (included in goodwill and other intangibles)   5,134 
Other assets   107 
Unpaid losses and loss adjustment expenses   (40,967)
Unearned premiums   (15,955)
Federal income tax payable   (1,486)
Deferred income taxes, net   (1,442)
Accrued expenses and other liabilities   (657)
Total identifiable net assets  $21,578 
      
Gain on bargain purchase  $4,578 

 

The fair value of the assets acquired includes premiums and agents’ balances receivable of $5,849. This is the gross amount due from policyholders and agents, none of which is anticipated to be uncollectible. The Company did not acquire any other material class of receivable as a result of the acquisition of Direct Auto.

We have completed our final analysis of the assets and liabilities acquired and assigned fair values to the acquired intangibles

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

consisting of favorable lease contract, state insurance license, Direct Auto trade name, and VOBA intangible assets of $20, $100, $248, and $5,134, respectively. The state insurance license has an indefinite life, while the other intangible assets will be amortized over useful lives of up to five years.

The gain realized on bargain purchase of $4,578 from the Direct Auto acquisition is included in fee and other income in the Company’s Consolidated Statements of Operations during the three months ended September 30, 2018.

5.   Recent Accounting Pronouncements

As an emerging growth company, we have elected to use the extended transition period for complying with any new or revised financial accounting standards 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, 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 prior 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 its fair value, not to exceed the carrying amount of goodwill in the reporting unit. The Company early adopted this guidance during the year ended December 31, 2017 on a prospective basis as a change in accounting principle, therefore at the date of adoption there was 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 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. Amendments requiring recognition of excess income tax benefits and income tax deficiencies in the Consolidated Statement of Operations should be applied prospectively. The Company early adopted this guidance on a prospective basis for the year ended December 31, 2017. At the date of adoption, there was an immaterial 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. In the period of adoption, an entity was able to choose whether to apply the amendments retrospectively or in the period of adoption. The Company elected to early adopt this guidance on a prospective basis, resulting in a $2,717 reclassification of stranded income tax effects from accumulated other comprehensive income to retained earnings within the Equity section of the Consolidated Balance Sheet as of December 31, 2017. There was no impact to the Company’s financial position, results of operations, or cash flows.

In January 2019, the Company adopted amended guidance from the FASB that generally requires entities to measure equity securities at fair value and recognize changes in fair value in their results of operations. The FASB issued other impairment, disclosure, and presentation improvements related to financial instruments within the guidance. Effective January 1, 2019, we applied this guidance, which resulted in a cumulative-effect reclassification of after-tax unrealized net capital gains aggregating $8,184, from accumulated other comprehensive income to retained earnings. This reclassification had impact to the Company’s results of operations at the date of adoption. The after-tax change in accounting for equity securities did not affect the Company’s 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.

Not Yet Adopted

In May 2014, 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 replace most

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

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 have no impact on our financial position, results of operations, or cash flows when we adopt this guidance for the year ended December 31, 2019.

In February 2016, the FASB issued new guidance that requires lessees to recognize leases, including operating leases, on the lessee’s Consolidated Balance Sheet, unless a lease is considered a short-term lease. The new guidance also requires entities to make new judgments to identify leases. In July 2018, the FASB issued additional guidance to allow an optional transition method. An entity may apply the new leases guidance at the beginning of the earliest period presented in the financial statements, or at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of cumulative adoption. The new guidance, which replaces the current lease guidance, is effective for annual and interim reporting periods beginning after December 15, 2018 for public business entities. For private companies and emerging growth companies, this guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities. We do not expect the adoption of this new guidance to have a significant impact on our financial position, results of operations, or cash flows.

In June 2016, the FASB issued a new standard that will require timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The guidance will require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Finally, the guidance amends the accounting for credit losses on available-for-sale fixed income securities and purchased financial assets with credit deterioration. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 for public business entities which are SEC filers. For private companies and emerging growth companies, this guidance is effective for annual reporting periods beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted for all entities as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are evaluating the impact this new guidance will have on our financial position, results of operations, and cash flows.

In August 2016, the FASB issued amended guidance that addresses diversity in how certain cash receipts and cash payments are presented and classified in the Consolidated Statement of Cash Flows. The amendments provide clarity on the treatment of eight specifically defined types of cash inflows and outflows. 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 using a retrospective transition method to each period presented or prospectively if adoption of an issue is impracticable. The adoption of this amended guidance will have no effect on our financial position or results of operations. We do not expect this amended guidance to have a significant impact on our Consolidated Statement of Cash Flows when we adopt this guidance for the year ended December 31, 2019.

In November 2016, the FASB issued amended guidance on the presentation of restricted cash in the Consolidated Statement of Cash Flows. Entities will be required 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. 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, 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. The adoption of this amended guidance will have no effect on our financial position or results of operations. We do not expect this amended guidance to have a significant impact on our Consolidated Statement of Cash Flows when we adopt this guidance for the year ended December 31, 2019.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

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.

In August 2018, the FASB issued modified disclosure requirements relating to the fair value of assets and liabilities. The amended requirements are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. We do not expect these modified requirements will have a material impact on our financial statement disclosures.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

 

6.       Investments

The amortized cost and estimated fair value of investment securities as of June 30, 2019 and December 31, 2018, were as follows:

   June 30, 2019 
  

Cost or Amortized
Cost

   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 
Fixed income securities:                    
U.S. Government and agencies  $18,537   $406   $(3)  $18,940 
Obligations of states and political subdivisions   58,157    1,459    (86)   59,530 
Corporate securities   102,430    2,731    (22)   105,139 
Residential mortgage-backed securities   47,985    754    (69)   48,670 
Commercial mortgage-backed securities   20,767    634    (56)   21,345 
Asset-backed securities   23,411    137    (185)   23,363 
Total fixed income securities   271,287    6,121    (421)   276,987 
                     
Equity securities:                    
Basic materials   1,542    103    (66)   1,579 
Communications   5,285    2,111    (432)   6,964 
Consumer, cyclical   5,382    3,758    (212)   8,928 
Consumer, non-cyclical   8,773    5,638    (342)   14,069 
Energy   2,033    74    (317)   1,790 
Financial   5,156    504    (107)   5,553 
Industrial   5,112    3,503    (93)   8,522 
Technology   7,327    5,171    (297)   12,201 
Total equity securities   40,610    20,862    (1,866)   59,606 
Total investments  $311,897   $26,983   $(2,287)  $336,593 

 

   December 31, 2018 
   Cost or Amortized
Cost
   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 
Fixed income securities:                    
U.S. Government and agencies  $19,183   $158   $(133)  $19,208 
Obligations of states and political subdivisions   52,782    475    (559)   52,698 
Corporate securities   95,290    265    (1,413)   94,142 
Residential mortgage-backed securities   50,902    110    (729)   50,283 
Commercial mortgage-backed securities   19,520    65    (270)   19,315 
Asset-backed securities   19,617    4    (298)   19,323 
Total fixed income securities   257,294    1,077    (3,402)   254,969 
                     
Equity securities:                    
Basic materials   1,527        (187)   1,340 
Communications   4,076    1,296    (424)   4,948 
Consumer, cyclical   5,128    2,650    (167)   7,611 
Consumer, non-cyclical   9,356    3,929    (916)   12,369 
Energy   1,622    8    (289)   1,341 
Financial   4,856    121    (549)   4,428 
Industrial   4,537    2,529    (368)   6,698 
Technology   7,037    3,647    (921)   9,763 
Total equity securities   38,139    14,180    (3,821)   48,498 
Total investments  $295,433   $15,257   $(7,223)  $303,467 

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

 

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.

   June 30, 2019 
   Amortized Cost   Fair Value 
Due to mature:          
One year or less  $16,653   $16,733 
After one year through five years   93,935    95,908 
After five years through ten years   55,388    57,324 
After ten years   13,148    13,644 
Mortgage / asset-backed securities   92,163    93,378 
Total fixed income securities  $271,287   $276,987 
           

 

   December 31, 2018 
   Amortized Cost   Fair Value 
Due to mature:          
One year or less  $12,490   $12,463 
After one year through five years   96,900    96,614 
After five years through ten years   52,128    51,351 
After ten years   5,737    5,620 
Mortgage / asset-backed securities   90,039    88,921 
Total fixed income securities  $257,294   $254,969 
           

Fixed income securities with a fair value of $4,936 at June 30, 2019 and $4,900 at December 31, 2018, 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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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

The investment category and duration of the Company’s gross unrealized losses on fixed income securities and equity securities were as follows:

   June 30, 2019 
   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  $589   $(2)  $399   $(1)  $988   $(3)
Obligations of states and political subdivisions   3,576    (57)   1,163    (29)   4,739    (86)
Corporate securities   1,486    (3)   9,976    (19)   11,462    (22)
Residential mortgage-backed securities           9,674    (69)   9,674    (69)
Commercial mortgage-backed securities   1,379    (8)   2,009    (48)   3,388    (56)
Asset-backed securities   980    (20)   11,149    (165)   12,129    (185)
Total fixed income securities   8,010    (90)   34,370    (331)   42,380    (421)
                               
Equity securities:                              
Basic materials   686    (66)           686    (66)
Communications   1,907    (362)   143    (70)   2,050    (432)
Consumer, cyclical   935    (212)           935    (212)
Consumer, non-cyclical   1,853    (342)           1,853    (342)
Energy   1,012    (317)           1,012    (317)
Financial   1,517    (107)           1,517    (107)
Industrial   940    (93)           940    (93)
Technology   1,743    (297)           1,743    (297)
Total equity securities   10,593    (1,796)   143    (70)   10,736    (1,866)
Total investments  $18,603   $(1,886)  $34,513   $(401)  $53,116   $(2,287)

 

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

   December 31, 2018 
   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  $2,593   $(3)  $7,523   $(130)  $10,116   $(133)
Obligations of states and political subdivisions   8,467    (119)   18,218    (440)   26,685    (559)
Corporate securities   24,793    (266)   45,033    (1,147)   69,826    (1,413)
Residential mortgage-backed securities   10,325    (62)   26,459    (667)   36,784    (729)
Commercial mortgage-backed securities   5,980    (55)   7,117    (215)   13,097    (270)
Asset-backed securities   7,908    (183)   10,276    (115)   18,184    (298)
Total fixed income securities   60,066    (688)   114,626    (2,714)   174,692    (3,402)
                               
Equity securities:                              
Basic materials   1,340    (187)           1,340    (187)
Communications   2,001    (378)   167    (46)   2,168    (424)
Consumer, cyclical   1,237    (167)           1,237    (167)
Consumer, non-cyclical   4,781    (899)   316    (17)   5,097    (916)
Energy   1,041    (289)           1,041    (289)
Financial   3,722    (549)           3,722    (549)
Industrial   2,281    (368)           2,281    (368)
Technology   3,212    (833)   123    (88)   3,335    (921)
Total equity securities   19,615    (3,670)   606    (151)   20,221    (3,821)
Total investments  $79,681   $(4,358)  $115,232   $(2,865)  $194,913   $(7,223)

 

Investments with unrealized losses are categorized with a duration of greater than 12 months when all positions of a security have continually been in a loss position for at least 12 months.

We frequently review our investment portfolio for declines in fair value. Our process for identifying declines in the fair value of investments that are other than temporary involves consideration of several factors. These factors include (i) the time period in which there has been a significant decline in value, (ii) an analysis of the liquidity, business prospects, and overall financial condition of the issuer, (iii) the significance of the decline, and (iv) our intent and ability to hold the investment for a sufficient period of time for the value to recover. When our analysis of the above factors results in the conclusion that declines in fair values are other than temporary, the cost of the securities is written down to fair value and the previously unrealized loss is therefore reflected as a realized capital loss on investment.

The Company recorded no impairments during the three or six month periods ended June 30, 2019 and 2018.

As of June 30, 2019, we held 97 fixed income securities with unrealized losses. As of December 31, 2018, we held 317 fixed income securities with unrealized losses. In conjunction with our outside investment advisors, we analyzed the credit ratings of the securities as well as the historical monthly amortized cost to fair value ratio of securities in an unrealized loss position. This analysis yielded no fixed income securities which had fair values less than 80% of amortized cost for the preceding 12-month period.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

 

Net investment income consisted of the following:

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
Fixed income securities  $1,995   $1,674   $3,971   $3,273 
Equity securities   233    243    457    472 
Real estate   91    91    182    182 
Cash and cash equivalents   18    43    35    62 
Total gross investment income   2,337    2,051    4,645    3,989 
Investment expenses   559    528    1,124    1,097 
Net investment income  $1,778   $1,523   $3,521   $2,892 
                     

Net capital gain on investments consisted of the following:

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
Gross realized gains:                    
Fixed income securities  $53   $50   $55   $62 
Equity securities   325    555    1,023    1,133 
Total gross realized gains   378    605    1,078    1,195 
                     
Gross realized losses, excluding other-than-temporary impairment losses:                    
Fixed income securities   (57)   (230)   (86)   (279)
Equity securities   (548)   (125)   (660)   (197)
Total gross realized losses, excluding other-than-temporary impairment losses   (605)   (355)   (746)   (476)
Net realized gain (loss) on investments   (227)   250    332    719 
                     
Change in net unrealized gain on equity securities   1,337        8,637     
Net capital gain on investments  $1,110   $250   $8,969   $719 
                     

Effective January 1, 2019, the market fluctuations attributed to equity securities are included in the Company’s results of operations. Prior to the adoption of this accounting pronouncement, net unrealized gains and losses on equity securities were recorded in accumulated other comprehensive income. The after-tax amount of unrealized gains on equity securities, aggregating $8,184 as of December 31, 2018, was reclassified from accumulated other comprehensive income to retained earnings as of January 1, 2019.

7.   Fair Value Measurements

We maximize the use of observable inputs in our valuation techniques and apply unobservable inputs only to the extent that observable inputs are unavailable. The largest class of assets and liabilities carried at fair value by the Company at June 30, 2019 and December 31, 2018 were fixed income securities.

Prices provided by independent pricing services and independent broker quotes can vary widely, even for the same security.

Our available-for-sale investments are comprised of a variety of different securities, which are classified into levels based on the valuation technique and inputs used in their valuation. The valuation of cash equivalents and equity securities are generally based on Level I inputs, which use the market approach valuation technique. The valuation of fixed income securities generally incorporates significant Level II inputs using the market and income approach techniques. We may assign a lower level to inputs typically considered to be Level II based on our assessment of liquidity and relative level of uncertainty surrounding inputs. There were no assets or liabilities classified as Level III at June 30, 2019 or December 31, 2018.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

 

The following tables set forth our assets which are measured on a recurring basis by the level within the fair value hierarchy in which fair value measurements fall:

   June 30, 2019 
   Total   Level I   Level II   Level III 
Fixed income securities:                    
U.S. Government and agencies  $18,940   $   $18,940   $ 
Obligations of states and political subdivisions   59,530        59,530     
Corporate securities   105,139        105,139     
Residential mortgage-backed securities   48,670        48,670     
Commercial mortgage-backed securities   21,345        21,345     
Asset-backed securities   23,363        23,363     
Total fixed income securities   276,987        276,987     
                     
Equity securities:                    
Basic materials   1,579    1,579         
Communications   6,964    6,964         
Consumer, cyclical   8,928    8,928         
Consumer, non-cyclical   14,069    14,069         
Energy   1,790    1,790         
Financial   5,553    5,553         
Industrial   8,522    8,522         
Technology   12,201    12,201         
Total equity securities   59,606    59,606         
                     
Cash and cash equivalents   60,574    60,574         
Total assets at fair value  $397,167   $120,180   $276,987   $ 

 

   December 31, 2018 
   Total   Level I   Level II   Level III 
Fixed income securities:                    
U.S. Government and agencies  $19,208   $   $19,208   $ 
Obligations of states and political subdivisions   52,698        52,698     
Corporate securities   94,142        94,142     
Residential mortgage-backed securities   50,283        50,283     
Commercial mortgage-backed securities   19,315        19,315     
Asset-backed securities   19,323        19,323     
Total fixed income securities   254,969        254,969     
                     
Equity securities:                    
Basic materials   1,340    1,340         
Communications   4,948    4,948         
Consumer, cyclical   7,611    7,611         
Consumer, non-cyclical   12,369    12,369         
Energy   1,341    1,341         
Financial   4,428    4,428         
Industrial   6,698    6,698         
Technology   9,763    9,763         
Total equity securities   48,498    48,498         
                     
Cash and cash equivalents   68,950    68,950         
Total assets at fair value  $372,417   $117,448   $254,969   $ 

There were no liabilities measured at fair value on a recurring basis at June 30, 2019 or December 31, 2018.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

8.   Reinsurance

The Company will assume and cede certain premiums and losses to and from various companies and associations under various reinsurance agreements. The Company seeks to limit the maximum net loss that can arise from large risks or risks in concentrated areas of exposure through use of these agreements, either on an automatic basis under general reinsurance contracts known as treaties or by negotiation on substantial individual risks.

Reinsurance contracts do not relieve the Company from its obligation to policyholders. Additionally, failure of reinsurers to honor their obligations could result in significant losses to us. There can be no assurance that reinsurance will continue to be available to us at the same extent, and at the same cost, as it has in the past. The Company may choose in the future to reevaluate the use of reinsurance to increase or decrease the amounts of risk ceded to reinsurers.

As a group, during the three and six month periods ended June 30, 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. During the years ended December 31, 2018 and 2017, the catastrophic retention amount was $10,000 while the catastrophic reinsurance was $74,600. Prior to January 1, 2017, the group collectively retained the first $5,000 of weather-related losses.

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. Best ratings of “A-” or higher.

A reconciliation of direct to net premiums on both a written and an earned basis is as follows:

   Three Months Ended June 30, 2019   Six Months Ended June 30, 2019 
   Premiums Written   Premiums Earned   Premiums Written   Premiums Earned 
Direct premium  $103,243   $69,499   $158,896   $121,752 
Assumed premium   3,003    2,973    4,032    3,999 
Ceded premium   (7,358)   (7,358)   (10,131)   (10,131)
Net premiums  $98,888   $65,114   $152,797   $115,620 
                     
Percentage of assumed earned premium to net earned premium        4.6%         3.5% 

 

   Three Months Ended June 30, 2018   Six Months Ended June 30, 2018 
   Premiums Written   Premiums Earned   Premiums Written   Premiums Earned 
Direct premium  $88,580   $53,987   $127,854   $91,179 
Assumed premium   3,249    3,249    4,532    4,488 
Ceded premium   (6,559)   (6,559)   (8,878)   (8,878)
Net premiums  $85,270   $50,677   $123,508   $86,789 
                     
Percentage of assumed earned premium to net earned premium        6.4%         5.2% 

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Table of Contents 

NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

A reconciliation of direct to net losses and loss adjustment expenses is as follows:

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
Direct losses and loss adjustment expenses  $49,602   $41,121   $76,233   $59,758 
Assumed losses and loss adjustment expenses   540    487    983    1,076 
Ceded losses and loss adjustment expenses   (1,959)   (887)   (2,789)   (1,264)
Net losses and loss adjustment expenses  $48,193   $40,721   $74,427   $59,570 
                     

If 100% of our ceded reinsurance was cancelled as of June 30, 2019 or December 31, 2018, no ceded commissions would need to be returned to the reinsurers. Reinsurance contracts are typically effective from January 1 through December 31 each year.

9.       Deferred Policy Acquisition Costs

Activity with regards to our deferred policy acquisition costs was as follows:

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
Balance, beginning of period  $14,791   $8,980   $12,866   $8,859 
Deferral of policy acquisition costs   18,081    11,828    29,228    18,988 
Amortization of deferred policy acquisition costs   (16,151)   (8,618)   (25,373)   (15,657)
Balance, end of period  $16,721   $12,190   $16,721   $12,190 

10.       Unpaid Losses and Loss Adjustment Expenses

Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:

   Six Months Ended June 30, 
   2019   2018 
Balance at beginning of period:          
Liability for unpaid losses and loss adjustment expenses  $87,121   $45,890 
Reinsurance recoverables on losses   2,232    4,128 
Net balance at beginning of period   84,889    41,762 
           
Incurred related to:          
Current year   82,097    60,152 
Prior years   (7,670)   (582)
Total incurred   74,427    59,570 
           
Paid related to:          
Current year   35,717    25,220 
Prior years   28,156    16,337 
Total paid   63,873    41,557 
           
Balance at end of period:          
Liability for unpaid losses and loss adjustment expenses   98,809    63,376 
Reinsurance recoverables on losses   3,366    3,601 
Net balance at end of period  $95,443   $59,775 
           

The prior years’ provision for unpaid losses and loss adjustment expenses decreased by $7,670 during the six months ended June 30, 2019, compared to a decrease of $582 during the six months ended June 30, 2018. Increases and decreases are generally the result of ongoing analysis of loss development trends. As additional information becomes known regarding individual claims, original estimates are increased or decreased accordingly. The decrease for the six months ended June 30, 2019 was primarily attributable to continued favorable development of the Direct Auto book of business.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

11.    Property and Equipment

Property and equipment consisted of the following:

   June 30, 2019   December 31, 2018   Estimated Useful Life
Cost:             
Real estate  $12,410   $11,911   10 - 31 years
Electronic data processing equipment   1,349    1,286   5-7 years
Furniture and fixtures   2,829    2,829   5-7 years
Automobiles   1,663    1,596   2-3 years
Gross cost   18,251    17,622    
              
Accumulated depreciation   (10,767)   (10,643)   
Total property and equipment, net  $7,484   $6,979    
              

Depreciation expense was $103 and $104 for the three months ended June 30, 2019 and 2018, respectively, and $245 and $243 for the six months ended June 30, 2019 and 2018, respectively.

12.       Related Party Transactions

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 $396 and $375 during the three months ended June 30, 2019 and 2018, respectively. Royalties paid to the NDFB were $720 and $682 during the six months ended June 30, 2019 and 2018, respectively. Royalty amounts payable of $157 and $108 were accrued as a liability to the NDFB at June 30, 2019 and December 31, 2018, respectively.

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, 2018 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 2019 without the prior approval of the North Dakota Insurance Department is $17,588 based upon the policyholders’ surplus of Nodak Insurance at December 31, 2018. Prior to its payment of any extraordinary dividend, Nodak Insurance will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North Dakota Insurance Department has the power to limit or prohibit dividend payments if Nodak Insurance is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Nodak Insurance during the six months ended June 30, 2019 or the year ended December 31, 2018.

The amount available for payment of dividends from Direct Auto to NI Holdings during 2019 without the prior approval of the Illinois Department of Insurance is $6,653 based upon the statutory net income of Direct Auto for the year ended December 31, 2018. Prior to its payment of any dividend, Direct Auto will be required to provide notice of the dividend to the Illinois Department of Insurance. This notice must be provided to the Illinois Department of Insurance within five business days following declaration of any dividend and no less than 30 days prior to the payment of an extraordinary dividend or 10 days prior to the payment of an ordinary dividend. The Illinois Department of Insurance has the power to limit or prohibit dividend payments if Direct Auto is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Direct Auto during the six months ended June 30, 2019 or the year ended December 31, 2018.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

The following table illustrates the impact of including Battle Creek in our Consolidated Balance Sheets prior to intercompany eliminations:

   June 30, 2019   December 31, 2018 
Assets:          
Cash and cash equivalents (overdraft)  $(428)  $(818)
Investments   4,389    4,304 
Premiums and agents’ balances receivable   5,123    4,479 
Reinsurance recoverables on losses (1)   26,964    21,117 
Accrued investment income   30    31 
Deferred income tax asset, net   369    414 
Property and equipment   355    356 
Other assets   46    48 
Total assets  $36,848   $29,931 
           
Liabilities:          
Unpaid losses and loss adjustment expenses  $10,709   $6,579 
Unearned premiums   16,290    14,538 
Notes payable (1)   3,000    3,000 
Reinsurance premiums payable (1)   2,358    972 
Accrued expenses and other liabilities   1,063    1,579 
Total liabilities   33,420    26,668 
           
Equity:          
Non-controlling interest   3,428    3,263 
Total equity   3,428    3,263 
           
Total liabilities and equity  $36,848   $29,931 
           
(1)     Amount eliminated in consolidation.          

 

Total statutory revenues of Battle Creek, after intercompany eliminations, which is limited to net investment income and other income, were $46 and $34, respectively, during the three months ended June 30, 2019 and 2018, respectively.

Total statutory revenues of Battle Creek, after intercompany eliminations, which is limited to net investment income and other income, were $77 and $76, respectively, during the six months ended June 30, 2019 and 2018, respectively.

There were no statutory-basis expenses reported, after intercompany eliminations, during the three or six months ended June 30, 2019 and 2018.

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 contribution expense for the money-purchase plan totaled $199 and $197 during the three months ended June 30, 2019 and 2018, respectively, and $398 and $394 during the six months ended June 30, 2019 and 2018, respectively.

The Company also sponsors a 401(k) plan with an automatic contribution to all eligible employees and a matching contribution for eligible employees of 50% up to 3% of eligible compensation. The Company’s contributions expense to the 401(k) plan totaled $139 and $99 during the three months ended June 30, 2019 and 2018, respectively, and $278 and $239 during the six months ended June 30, 2019 and 2018, respectively. All fees associated with both plans are deducted from the eligible employee accounts.

Deferred Compensation Plan

The Board of Directors has authorized a non-qualified deferred compensation plan covering key executives of the Company as designated by the Board of Directors. The Company’s policy is to fund the plan in a given calendar year by amounts that exceed the maximum contribution allowed by the Employee Retirement Income Security Act (“ERISA”). The Company’s expenses included $14 and $14 during the three months ended June 30, 2019 and 2018, respectively, and $27 and $27 during the six months ended June 30, 2019 and 2018, respectively.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

Employee Stock Ownership Plan

The Company has established an Employee Stock Ownership Plan (the “ESOP”). The ESOP is intended to be an employee stock ownership plan within the meaning of Internal Revenue Code Section 4975(e)(7) and will invest primarily in common stock of the Company.

In connection with our initial public offering in March 2017, Nodak Insurance loaned $2,400 to the ESOP’s related trust (the “ESOP Trust”). The ESOP loan will be for a period of ten years and bears interest at the long-term Applicable Federal Rate effective on the closing date of the offering (2.79% annually). The ESOP Trust used the proceeds of the loan to purchase shares in our initial public offering, which results in the ESOP Trust owning approximately 1.0% of the Company’s authorized shares. The ESOP has purchased the shares for investment and not for resale.

The shares purchased by the ESOP Trust in the offering are held in a suspense account as collateral for the ESOP loan. The shares held in the ESOP’s suspense account are not considered outstanding for earnings per share purposes. Nodak Insurance will make semi-annual cash contributions to the ESOP in amounts no smaller than the amounts required for the ESOP Trust to make its loan payments to Nodak Insurance. While the ESOP makes two loan payments per year, a pre-determined portion of the shares will be released from the suspense account and allocated to participant accounts at the end of the calendar year. This release and allocation will occur on an annual basis over the ten-year term of the ESOP loan. Nodak Insurance will have a lien on the shares of common stock of the Company held by the ESOP to secure repayment of the loan from the ESOP to Nodak Insurance. If the ESOP is terminated as a result of a change in control of the Company, the ESOP may be required to pay the costs of terminating the plan.

It is anticipated that the only assets held by the ESOP will be shares of the Company’s common stock. Participants in the ESOP cannot direct the investment of any assets allocated to their accounts. The initial ESOP participants are employees of Nodak Insurance. The employees of Primero and Direct Auto do not participate in the ESOP. American West and Battle Creek have no employees.

Each employee of Nodak Insurance will automatically become a participant in the ESOP if such employee is at least 21 years old, has completed a minimum of one thousand hours of service with Nodak Insurance, and has completed an Eligibility Computation Period. Employees are not permitted to make any contributions to the ESOP. Participants in the ESOP will receive annual reports from the Company showing the number of shares of common stock of the Company allocated to the participant’s account and the market value of those shares. The shares are allocated to participants based on compensation as provided for in the ESOP.

In connection with the initial public offering, the Company created a contra-equity account on the Company’s Consolidated Balance Sheet equal to the ESOP’s basis in the shares. The basis of those shares was set at $10.00 per share as part of the initial public offering. As shares are released from the ESOP suspense account, the contra-equity account will be credited, which shall reduce the impact of the contra-equity account on the Company’s Consolidated Balance Sheet. The Company shall record a compensation expense related to the shares released, which compensation expense is equal to the number of shares released from the suspense account multiplied by the average market value of the Company’s stock during the period.

The Company recognized compensation expense of $103 and $100 during the three months ended June 30, 2019 and 2018, respectively, and $197 and $203 during the six months ended June 30, 2019 and 2018, respectively.

Through June 30, 2019 and December 31, 2018, 48,630 ESOP shares had been released and allocated to participants, with a remainder of 191,370 ESOP shares in suspense at June 30, 2019 and December 31, 2018. Using the Company’s quarter-end market price of $17.61 per share, the fair value of the unearned ESOP shares was $3,370 at June 30, 2019.

 

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

14.    Line of Credit

Nodak Insurance has a $5,000 line of credit with Wells Fargo Bank, N.A., of which there were no outstanding amounts as of June 30, 2019 or December 31, 2018. This line of credit is scheduled to expire on December 31, 2019.

15.    Income Taxes

At June 30, 2019 and December 31, 2018, we had no unrecognized tax benefits, no accrued interest and penalties, and no significant uncertain tax positions. No interest and penalties were recognized during the three or six month periods ended June 30, 2019 or 2018.

At June 30, 2019 and December 31, 2018, the Company, other than Battle Creek, had no income tax related carryovers for net operating losses, alternative minimum tax credits, or capital losses. Battle Creek, which files its income tax returns on a stand-alone basis, had $4,786 of net operating loss carryover at December 31, 2018. The net operating loss carryforward expires beginning in 2021 through 2030.

16.    Operating Leases

Our Primero subsidiary leases a facility in Spearfish, South Dakota under a non-cancellable operating lease expiring in 2023. Our Direct Auto subsidiary leases a facility in Chicago, Illinois under a non-cancellable operating lease expiring in 2020. There were expenses of $76 and $15 related to these leases during the three months ended June 30, 2019 and 2018, respectively, and expenses $151 and $30 during the six months ended June 30, 2019 and 2018, respectively.

As of June 30, 2019, we have minimum future commitments under non-cancellable leases as follows:

Year ending December 31,   Estimated Future
Minimum Commitments
 
 2019    152 
 2020    121 
 2021    60 
 2022    60 
 2023    30 
        

 

We also sub-lease portions of our home office building under non-cancellable operating leases.

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 June 30, 2019 or December 31, 2018.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

 

18.Common Stock

Changes in the number of common stock shares outstanding are as follows:

   Six Months Ended June 30 31, 
   2019   2018 
Shares outstanding, beginning of period   22,192,894    22,337,644 
Treasury shares repurchased through stock repurchase authorization   (116,034)    
Issuance of treasury shares for vesting of restricted stock units   18,205    22,200 
Shares outstanding, end of period   22,095,065    22,359,844 

 

On February 28, 2018, our Board of Directors approved an authorization for the repurchase of up to approximately $10 million 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 the six months ended June 30, 2019. The cost of this treasury stock is a reduction of Equity within our Consolidated Balance Sheet.

 

19.Stock Based Compensation

At its 2017 Annual Shareholders’ Meeting, the NI Holdings, Inc. 2017 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, 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, to compensate such persons through various stock and cash-based arrangements, and to provide them with opportunities for stock ownership in the Company, thereby aligning the interests of such persons with the Company’s shareholders.

The Plan provides for the grant of nonqualified stock options, incentive stock options, restricted stock units (“RSUs”), stock appreciation rights, dividend equivalents, and performance share units (“PSUs”) to employees, officers, consultants, advisors, non-employee directors, and independent contractors designated by the Compensation Committee of the Board of Directors (the “Compensation Committee”). Awards made under the Plan are based upon, among other things, a participant’s level of responsibility and performance within the Company.

The total aggregate number of shares of common stock that awards may be issued under all awards made under the Plan shall not exceed 500,000 shares of common stock, subject to adjustments as provided in the Plan. No eligible participant may be granted 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 in any calendar year.

Restricted Stock Units

The Compensation Committee has awarded RSUs to non-employee directors and select executives. RSUs are promises to issue actual shares of common stock at the end of a vesting period. The RSUs granted to executives under the Plan were based on salary and generally vest 20% per year over a five-year period, while RSUs granted to non-employee directors vest 100% on the date of the next annual meeting of shareholders following the grant date. Dividend equivalents on RSUs are accrued during the vesting period and paid in cash at the end of the vesting period, but are subject to forfeiture until the underlying shares become vested. Participants do not have voting rights with respect to RSUs.

The Company recognizes stock-based compensation costs based on the grant date fair value. The compensation costs are normally expensed over the vesting periods to each vesting date; however, the cost of RSUs granted to executives are expensed immediately if the executive has met certain retirement criteria and the RSUs become non-forfeitable. Estimated forfeitures are included in the determination of compensation costs. No forfeitures are currently estimated.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

 

A summary of the Company’s outstanding and unearned restricted stock units is presented below:

   RSUs  

Weighted-Average
Grant-Date

Fair Value

Per Share

 
Units outstanding and unearned at January 1, 2018   65,500   $17.31 
RSUs granted during 2018   40,000    16.25 
RSUs earned during 2018   (31,620)   16.99 
Units outstanding and unearned at December 31, 2018   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 June 30, 2019   96,540   $16.47 

 

The following table shows the impact of RSU activity to the Company’s financial results:

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
RSU compensation expense  $143   $208   $462   $642 
Income tax benefit   (30)   (44)   (97)   (135)
RSU compensation expense, net of income taxes  $113   $164   $365   $507 
                     

 

At June 30, 2019, there was $1,105 of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized over a weighted-average period of 3.13 years.

Performance Stock Units

The Compensation Committee has awarded PSUs to select executives. PSUs are promises to issue actual shares of common stock at the end of a vesting period, if certain performance conditions are met. The PSUs granted to employees under the Plan were based on salary and include a three-year book value cumulative growth target with threshold and stretch goals. They will vest on the third anniversary of the grant date, subject to the participant’s continuous employment through the vesting date and the level of performance achieved. Dividend equivalents on PSUs are accrued and paid in cash at the end of the performance period in accordance with the level of performance achieved, but are subject to forfeiture until the underlying shares become vested. Participants do not have voting rights with respect to PSUs.

The Company recognizes stock-based compensation costs based on the grant date fair value over the performance period of the awards. Estimated forfeitures are included in the determination of compensation costs. No forfeitures are currently estimated. The current cost estimate assumes that the cumulative growth target will be achieved.

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

 

A summary of the Company’s outstanding performance share units is presented below:

   PSUs  

Weighted-Average
Grant-Date

Fair Value

Per Share

 
Units outstanding at January 1, 2018      $ 
PSUs granted during 2018 (at target)   48,600    16.25 
Units outstanding at December 31, 2018   48,600   $16.25 
           
PSUs granted during 2019 (at target)   62,400    15.21 
Units outstanding at June 30, 2019   111,000   $15.27 

 

The following table shows the impact of PSU activity to the Company’s financial results:

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
PSU compensation expense  $175   $71   $472   $93 
Income tax benefit   (37)   (15)   (99)   (20)
PSU compensation expense, net of income taxes  $138   $56   $373   $73 
                     

 

The PSU grants above represent initial target awards and do not reflect potential increases or decreases resulting from financial performance objectives to be determined at the end of the performance period. The actual number of shares to be issued at the end of the performance period will range from 0% to 150% of the initial target awards.

At June 30, 2019, there was $1,343 of unrecognized compensation cost related to outstanding PSUs. That cost is expected to be recognized over a weighted-average period of 2.06 years.

 

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

 

20.  Earnings Per Share

As described in Note 1, the conversion of the mutual company to a stock company resulted in the issuance of NI Holdings common shares on March 13, 2017. 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. The weighted average number of common shares outstanding was 22,217,799 and 22,377,421, respectively, during the three months ended June 30, 2019 and 2018, respectively, and 22,223,185 and 22,369,632, respectively, during the six months ended June 30, 2019 and 2018, respectively.

Unearned ESOP shares are not considered outstanding until they are released and allocated to plan participants. Unearned RSU and PSU shares are not considered outstanding until they are earned by award participants.

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:

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
Basic earnings per common share:                    
Numerator:                    
Net income attributable to NI Holdings, Inc.  $2,478   $226   $16,251   $6,348 
Denominator:                    
Weighted average shares outstanding   22,217,799    22,377,421    22,223,185    22,369,632 
Basic earnings per common share  $0.11   $0.01   $0.73   $0.28 
                     
Diluted earnings per common share:                    
Numerator:                    
Net income attributable to NI Holdings, Inc.  $2,478   $226   $16,251   $6,348 
Denominator:                    
Number of shares used in basic computation   22,217,799    22,377,421    22,223,185    22,369,632 
Weighted average effect of dilutive securities                    
Add: RSUs and PSUs   80,362    19,537    65,339    15,939 
Number of shares used in diluted computation   22,298,161    22,396,958    22,288,524    22,385,571 
Diluted earnings per common share  $0.11   $0.01   $0.73   $0.28 

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

21.   Segment Information

We have four primary reportable operating segments, which consist of private passenger auto insurance, non-standard auto insurance, home and farm insurance, and crop insurance. A fifth 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 three and six month periods ended June 30, 2019 and 2018. For presentation in these tables, “LAE” refers to loss adjustment expenses.

The ratios presented in these tables are non-GAAP financial measures under Securities and Exchange Commission rules and regulations. The non-GAAP ratios may not be comparable to similarly-named measures reported by other companies.

The loss and LAE ratio equals losses and loss adjustment expenses divided by net premiums earned. The expense ratio equals amortization of deferred policy acquisition costs and other underwriting and general expenses, divided by net premiums earned. The combined ratio equals losses and loss adjustment expenses, amortization of deferred policy acquisition costs, and other underwriting and general expenses, divided by net premiums earned.

 

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NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

 

   Three Months Ended June 30, 2019 
   Private
Passenger
Auto
   Non-
Standard
Auto
   Home and
Farm
   Crop   All Other   Total 
Direct premiums earned  $17,592   $15,271   $19,215   $15,203   $2,218   $69,499 
Assumed premiums earned   3        (4)   2,097    877    2,973 
Ceded premiums earned   (909)       (1,958)   (4,300)   (191)   (7,358)
Net premiums earned   16,686    15,271    17,253    13,000    2,904    65,114 
                               
Direct losses and LAE   12,078    11,820    14,501    9,555    1,648    49,602 
Assumed losses and LAE   433            78    432    943 
Ceded losses and LAE   (589)       (1,034)   (867)   138    (2,352)
Net losses and LAE   11,922    11,820    13,467    8,766    2,218    48,193 
                               
Gross margin   4,764    3,451    3,786    4,234    686    16,921 
                               
Underwriting and general expenses   4,909    5,159    5,234    777    861    16,940 
Underwriting gain (loss)   (145)   (1,708)   (1,448)   3,457    (175)   (19)
                               
Fee and other income        506                   646 
         (1,202)                    
Net investment income                            1,778 
Net capital gain on investments                            1,110 
Income before income taxes                            3,515 
Income taxes                            1,000 
Net income                            2,515 
Net income attributable to non-controlling interest                            37 
Net income attributable to NI Holdings, Inc.                           $2,478 
                               
Non-GAAP Ratios:                              
Loss and LAE ratio   71.4%    77.4%    78.1%    67.4%    76.4%    74.0% 
Expense ratio   29.4%    33.8%    30.3%    6.0%    29.6%    26.0% 
Combined ratio   100.9%    111.2%    108.4%    73.4%    106.0%    100.0% 
                               
                               
Balances at June 30, 2019:                              
Premiums and agents’ balances receivable  $18,950   $9,086   $10,599   $32,552   $1,716   $72,903 
Deferred policy acquisition costs   4,231    4,968    6,056    794    672    16,721 
Reinsurance recoverables   326        1,441    407    1,192    3,366 
Receivable from Federal Crop Insurance Corporation               29,668        29,668 
Goodwill and other intangibles       3,036                3,036 
                               
Unpaid losses and LAE   17,544    48,379    13,762    9,948    9,176    98,809 
Unearned premiums   29,115    18,139    41,191    28,233    5,266    121,944 

 

36 

Table of Contents 

NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

   Three Months Ended June 30, 2018 
   Private
Passenger
Auto
   Non-
Standard
Auto
   Home and
Farm
   Crop   All Other   Total 
Direct premiums earned  $16,139   $3,476   $17,243   $15,084   $2,045   $53,987 
Assumed premiums earned   4        (4)   2,283    966    3,249 
Ceded premiums earned   (833)       (1,618)   (3,926)   (182)   (6,559)
Net premiums earned   15,310    3,476    15,621    13,441    2,829    50,677 
                               
Direct losses and LAE   11,177    2,973    16,542    9,724    705    41,121 
Assumed losses and LAE   47        (62)   164    338    487 
Ceded losses and LAE   (49)       47    (881)   (4)   (887)
Net losses and LAE   11,175    2,973    16,527    9,007    1,039    40,721 
                               
Gross margin   4,135    503    (906)   4,434    1,790    9,956 
                               
Underwriting and general expenses   4,703    890    5,138    163    908    11,802 
Underwriting gain (loss)   (568)   (387)   (6,044)   4,271    882    (1,846)
                               
Fee and other income        330                   470 
         (57)                    
Net investment income                            1,523 
Net capital gain on investments                            250 
Loss before income taxes                            397 
Income taxes                            141 
Net income                            256 
Net income attributable to non-controlling interest                            30 
Net income attributable to NI Holdings, Inc.                           $226 
                               
Non-GAAP Ratios:                              
Loss and LAE ratio   73.0%    85.5%    105.8%    67.0%    36.7%    80.4% 
Expense ratio   30.7%    25.6%    32.9%    1.2%    32.1%    23.3% 
Combined ratio   103.7%    111.1%    138.7%    68.2%    68.8%    103.6% 
                               
                               
Balances at June 30, 2018:                              
Premiums and agents’ balances receivable  $17,365   $1,126   $9,819   $44,397   $1,468   $74,175 
Deferred policy acquisition costs   3,754    322    5,250    2,267    597    12,190 
Reinsurance recoverables   432        589    899    1,681    3,601 
Receivable from Federal Crop Insurance Corporation               11,130        11,130 
Goodwill and other intangibles       2,628                2,628 
                               
Unpaid losses and LAE   18,592    5,942    18,838    10,020    9,984    63,376 
Unearned premiums   27,248    1,860    37,473    28,310    5,063    99,954 

 

37 

Table of Contents 

NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

 

   Six Months Ended June 30, 2019 
   Private
Passenger
Auto
   Non-
Standard
Auto
   Home and
Farm
   Crop   All Other   Total 
Direct premiums earned  $34,536   $29,862   $37,748   $15,216   $4,390   $121,752 
Assumed premiums earned   7        (8)   2,097    1,903    3,999 
Ceded premiums earned   (1,765)       (3,698)   (4,302)   (366)   (10,131)
Net premiums earned   32,778    29,862    34,042    13,011    5,927    115,620 
                               
Direct losses and LAE   22,180    18,976    22,757    9,069    3,251    76,233 
Assumed losses and LAE   482            78    826    1,386 
Ceded losses and LAE   (635)       (1,288)   (407)   (862)   (3,192)
Net losses and LAE   22,027    18,976    21,469    8,740    3,215    74,427 
                               
Gross margin   10,751    10,886    12,573    4,271    2,712    41,193 
                               
Underwriting and general expenses   9,659    10,637    10,435    1,108    1,795    33,634 
Underwriting gain   1,092    249    2,138    3,163    917    7,559 
                               
Fee and other income        976                   1,110 
         1,225                     
Net investment income                            3,521 
Net capital gain on investments                            8,969 
Income before income taxes                            21,159 
Income taxes                            4,848 
Net income                            16,311 
Net income attributable to non-controlling interest                            60 
Net income attributable to NI Holdings, Inc.                           $16,251 
                               
Non-GAAP Ratios:                              
Loss and LAE ratio   67.2%    63.5%    63.1%    67.2%    54.2%    64.4% 
Expense ratio   29.5%    35.6%    30.7%    8.5%    30.3%    29.1% 
Combined ratio   96.7%    99.2%    93.7%    75.7%    84.5%    93.5% 
                               
                               
Balances at June 30, 2019:                              
Premiums and agents’ balances receivable  $18,950   $9,086   $10,599   $32,552   $1,716   $72,903 
Deferred policy acquisition costs   4,231    4,968    6,056    794    672    16,721 
Reinsurance recoverables   326        1,441    407    1,192    3,366 
Receivable from Federal Crop Insurance Corporation               29,668        29,668 
Goodwill and other intangibles       3,036                3,036 
                               
Unpaid losses and LAE   17,544    48,379    13,762    9,948    9,176    98,809 
Unearned premiums   29,115    18,139    41,191    28,233    5,266    121,944 

 

38 

Table of Contents 

NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

 

   Six Months Ended June 30, 2018 
   Private
Passenger
Auto
   Non-
Standard
Auto
   Home and
Farm
   Crop   All Other   Total 
Direct premiums earned  $31,718   $6,467   $33,862   $15,084   $4,048   $91,179 
Assumed premiums earned   8        (8)   2,283    2,205    4,488 
Ceded premiums earned   (1,591)       (3,115)   (3,825)   (347)   (8,878)
Net premiums earned   30,135    6,467    30,739    13,542    5,906    86,789 
                               
Direct losses and LAE   21,364    4,937    21,958    10,063    1,436    59,758 
Assumed losses and LAE   47        (49)   164    914    1,076 
Ceded losses and LAE   (114)       (60)   (905)   (185)   (1,264)
Net losses and LAE   21,297    4,937    21,849    9,322    2,165    59,570 
                               
Gross margin   8,838    1,530    8,890    4,220    3,741    27,219 
                               
Underwriting and general expenses   9,122    1,925    10,092    651    1,889    23,679 
Underwriting gain (loss)   (284)   (395)   (1,202)   3,569    1,852    3,540 
                               
Fee and other income        651                   847 
         256                     
Net investment income                            2,892 
Net capital gain on investments                            719 
Income before income taxes                            7,998 
Income taxes                            1,590 
Net income                            6,408 
Net income attributable to non-controlling interest                            60 
Net income attributable to NI Holdings, Inc.                           $6,348 
                               
Non-GAAP Ratios:                              
Loss and LAE ratio   70.7%    76.3%    71.1%    68.8%    36.7%    68.6% 
Expense ratio   30.3%    29.8%    32.8%    4.8%    32.0%    27.3% 
Combined ratio   100.9%    106.1%    103.9%    73.6%    68.6%    95.9% 
                               
                               
Balances at June 30, 2018:                              
Premiums and agents’ balances receivable  $17,365   $1,126   $9,819   $44,397   $1,468   $74,175 
Deferred policy acquisition costs   3,754    322    5,250    2,267    597    12,190 
Reinsurance recoverables   432        589    899    1,681    3,601 
Receivable from Federal Crop Insurance Corporation               11,130        11,130 
Goodwill and other intangibles       2,628                2,628 
                               
Unpaid losses and LAE   18,592    5,942    18,838    10,020    9,984    63,376 
Unearned premiums   27,248    1,860    37,473    28,310    5,063    99,954 

 

39 

Table of Contents 

NI Holdings, Inc.
Notes to Unaudited Consolidated Financial Statements
(dollar amounts in thousands, except per share amounts)
 

For purposes of evaluating profitability of the non-standard auto segment, management combines the policy fees paid by the insured with the underwriting gain or loss as its primary measure. As a result, these fees are allocated to the non-standard auto segment (included in fee and other income) in the above tables. The remaining fee and other income amounts are not allocated to any segment.

We do not assign or allocate all Consolidated Statement of Operations or Consolidated Balance Sheet line items to our operating segments. Those line items include investment income, net capital gain on investments, other income excluding non-standard auto insurance fees, and income taxes within the Consolidated Statement of Operations. For the Consolidated Balance Sheet, those items include cash and investments, property and equipment, other assets, accrued expenses, federal income taxes recoverable or payable, and equity.

22.Subsequent Events

We have evaluated subsequent events through August 7, 2019, the date these consolidated financial statements were available for issuance.

 

40 

Item 2. - Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition than can be obtained from reading the Unaudited Consolidated Financial Statements alone. This discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto included in “Part I. Item 1. Financial Statements.” Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q constitutes forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” and “Part II. Item 1A. Risk Factors” included elsewhere in this Quarterly Report. You should also review “Risk Factors” included in the Company’s Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described, or implied by, the forward-looking statements contained herein.

All dollar amounts included in Item 2 herein are in thousands.

Overview

NI Holdings is a North Dakota business corporation that is the stock holding company of Nodak Insurance Company and became such in connection with the conversion of Nodak Mutual Insurance Company from a mutual to stock form of organization and the creation of a mutual holding company. The conversion was consummated on March 13, 2017. Immediately following the conversion, all of the outstanding shares of common stock of Nodak Insurance Company were issued to Nodak Mutual Group, which then contributed the shares to NI Holdings in exchange for 55% of the outstanding shares of common stock of NI Holdings. Nodak Insurance 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.

These consolidated financial statements of NI Holdings include the financial position and results of operations of NI Holdings and six other entities:

·Nodak Insurance – a wholly-owned subsidiary of NI Holdings;
·Nodak Agency – a wholly-owned subsidiary of Nodak Insurance;
·American West – a wholly-owned subsidiary of Nodak Insurance;
·Primero – an indirect, wholly-owned subsidiary of Nodak Insurance;
·Battle Creek – an affiliated company of Nodak Insurance; and
·Direct Auto – a wholly-owned subsidiary of NI Holdings.

Battle Creek is managed by Nodak Insurance, and Nodak Insurance reinsures 100% of the risk on all insurance policies issued by Battle Creek. Nodak Agency is an inactive shell corporation.

On August 31, 2018, NI Holdings completed the acquisition of 100% of the common stock of Direct Auto from the private shareholders of Direct Auto, and Direct Auto became a consolidated subsidiary of the Company. Direct Auto is a property and casualty insurance company specializing in non-standard automobile insurance in the state of Illinois. Direct Auto remains headquartered in Chicago, Illinois and the current president of Direct Auto continues to manage the Direct Auto insurance operations along with the staff and management team in place at the time of acquisition. The results of Direct Auto are included as part of the Company’s non-standard auto business segment following the closing date.

Nodak Insurance offers property and casualty insurance, crop hail, and multi-peril crop insurance to members of the North Dakota Farm Bureau through captive agents in North Dakota. American West and Battle Creek offer similar insurance coverage through independent agents in South Dakota and Minnesota, and Nebraska, respectively. Primero offers limited nonstandard auto insurance coverage in Arizona, Nevada, North Dakota, and South Dakota. Direct Auto offers limited nonstandard auto insurance coverage in Illinois. Nodak Insurance and Battle Creek are rated “A” by A.M. Best, which is the third highest out of a possible 15 ratings. American West is rated “A-”. Primero and Direct Auto are unrated.

41 

 

A chart of the corporate structure follows:

  NI HOLDINGS, INC.
ORGANIZATIONAL CHART
 
                         
        Nodak Mutual Group, Inc.        
                         
        ≥ 55%                
        ownership                
        NI Holdings, Inc.        
                         
        100%           100%    
        ownership           ownership    
        Nodak Insurance Company   Direct Auto Insurance Company  
                         
                         
                         
  100%     100%           100%    
  ownership     ownership     Affiliation     ownership    
  Nodak Agency, Inc.   American West Insurance Company   Battle Creek Mutual Insurance Company   Tri-State, Ltd  
                         
                    100%    
                    ownership    
                    Primero Insurance Company  
                         

 

The following tables provide selected amounts from the Company’s Unaudited Consolidated Statements of Operations and Balance Sheets. Additional information can be found later in this section.

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
Direct premiums written  $103,243