10-Q 1 nodk10q0322.htm 10-Q NI HOLDINGS, INC.
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended March 31, 2022

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

For the transition period from ____ to _____

Commission file number 001-37973

 

 

NI HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

NORTH DAKOTA

(State or other jurisdiction of

incorporation or organization)

81-2683619

(IRS Employer

Identification No.)

 

1101 First Avenue North

Fargo, North Dakota

58102

(Address of principal executive offices)

(Zip Code)

(701) 298-4200

Registrant’s telephone number, including area code

 

Not applicable

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

NODK

Nasdaq Capital Market

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

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

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

The number of shares of Registrant’s common stock outstanding on April 30, 2022 was 21,235,174. No preferred shares are issued or outstanding.




TABLE OF CONTENTS

 

 

FORWARD-LOOKING STATEMENTS

2

Part I. - FINANCIAL INFORMATION

3

Item 1. - Financial Statements

3

Consolidated Balance Sheet – March 31, 2022 (Unaudited) and December 31, 2021

3

Consolidated Statements of Operations (Unaudited) – Three Months Ended March 31, 2022 and 2021

4

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Three Months Ended March 31, 2022 and 2021

5

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) – Three Months Ended March 31, 2022 and 2021

6

Consolidated Statements of Cash Flows (Unaudited) – Three Months Ended March 31, 2022 and 2021

7

Notes to Unaudited Consolidated Financial Statements

8

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

31

Item 3. - Quantitative and Qualitative Disclosures about Market Risk

38

Item 4. - Controls and Procedures

38

Part II. - OTHER INFORMATION

39

Item 1. - Legal Proceedings

39

Item 1A. - Risk Factors

39

Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds

40

Item 3. - Defaults upon Senior Securities

41

Item 4. - Mine Safety Disclosures

41

Item 5. - Other Information

41

Item 6. - Exhibits

41

Signatures

42

CERTAIN IMPORTANT INFORMATION

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

“NI Holdings”, “the Company”, “we”, “us”, and “our” refer to NI Holdings, Inc., together with Nodak Insurance Company and its subsidiaries and its affiliate (Battle Creek Mutual Insurance Company), Direct Auto Insurance Company (acquired August 31, 2018), and Westminster American Insurance Company (acquired January 1, 2020), for periods discussed after completion of the conversion, and for periods discussed prior to completion of the conversion refer to Nodak Mutual Insurance Company and all of its subsidiaries and Battle Creek Mutual Insurance Company;  

“Nodak Mutual Group” refers to Nodak Mutual Group, Inc., which is the majority shareholder of NI Holdings;  

the “conversion” refers to the series of transactions consummated on March 13, 2017 by which Nodak Mutual Insurance Company converted from a mutual insurance company to a stock insurance company, as Nodak Insurance Company, and became a wholly-owned subsidiary of NI Holdings, an intermediate stock holding company formed on the date of conversion;  

“Nodak Mutual” refers to Nodak Mutual Insurance Company, the predecessor company to Nodak Insurance Company prior to the conversion;  

“Nodak Insurance” refers to Nodak Insurance Company or Nodak Mutual Insurance Company interchangeably;  

“members” refers to the policyholders of Nodak Insurance, who are the named insureds under insurance policies issued by Nodak Insurance;  

“Battle Creek” refers to Battle Creek Mutual Insurance Company. Battle Creek became affiliated with Nodak Insurance in 2011, and Nodak Insurance provides underwriting, claims management, policy administration, and other administrative services to Battle Creek. Battle Creek is controlled by Nodak Insurance via a surplus note. The terms of the surplus note allow Nodak Insurance to appoint two-thirds of the Battle Creek Board of Directors;  

“Direct Auto” refers to Direct Auto Insurance Company. On August 31, 2018, NI Holdings completed the acquisition of 100% of the common stock of Direct Auto from the private shareholders of Direct Auto. Direct Auto became a consolidated subsidiary of NI Holdings on this date. Direct Auto is a property and casualty insurance company specializing in non-standard automobile insurance in the state of Illinois;  

“American West” refers to American West Insurance Company. American West is a wholly-owned subsidiary of Nodak Insurance;  

“Primero” refers to Primero Insurance Company. Primero is an indirect, wholly-owned subsidiary of Nodak Insurance;  

“Westminster” refers to Westminster American Insurance Company. On January 1, 2020, NI Holdings completed the acquisition of 100% of the common stock of Westminster from the private shareholder of Westminster, and Westminster became a consolidated subsidiary of NI Holdings. Westminster is a property and casualty insurance company specializing in commercial multi-peril insurance in the Mid-Atlantic states; and  

“Nodak Agency” refers to Nodak Agency, Inc. Nodak Agency is a wholly-owned subsidiary of Nodak Insurance.  

FORWARD-LOOKING STATEMENTS

This report contains, and management may make, certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, may be forward-looking statements. Words such as “may”, “will”, “should”, “likely”, “anticipates”, “expects”, “intends”, “plans”, “projects”, “believes”, “views”, “estimates”, and similar expressions are used to identify these forward-looking statements. These statements include, among other things, the Company’s statements about:

our anticipated operating and financial performance, business plans, and prospects;  

strategic reviews, capital allocation objectives, dividends, and share repurchases;  

plans for and prospects of acquisitions, dispositions, and other business development activities, and our ability to successfully capitalize on these opportunities;  

the impact of COVID-19 or a future pandemic and related economic conditions, including the potential impact on the Company's investments;  

our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our agent network;  

cyclical changes in the insurance industry, competition, and innovation and emerging technologies;  

expectations for impact of or changes to existing or new government regulations or laws;  

our ability to anticipate and respond to macroeconomic, geopolitical, health and industry trends, pandemics, acts of war, and other large-scale crises;  

developments in general economic conditions, domestic and global financial markets, interest rate, unemployment, or inflation, that could affect the performance of our insurance operations and/or investment portfolio; and  

our ability to effectively manage future growth, including additional necessary capital, systems, and personnel.  

Given their nature, we cannot assure that any outcome expressed in these or other forward-looking statements will be realized in whole or in part. Actual outcomes may vary materially from past results and those anticipated, estimated, implied, or projected. These forward-looking statements may be affected by underlying assumptions that may prove inaccurate or incomplete, or by known or unknown risks and uncertainties, including those described in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q and in the Part I, Item 1A., “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Annual Report”). The occurrence of any of the risks identified in the Part I, Item 1A, “Risk Factors” section of the 2021 Annual Report, or other risks currently unknown, could have a material adverse effect on our business, financial condition or results of operations, or we may be required to increase our accruals for contingencies. It is not possible to predict or identify all such factors. Consequently, you should not consider such discussion to be a complete discussion of all potential risks or uncertainties.

Therefore, you are cautioned not to unduly rely on forward-looking statements, which speak only as of the date of this Form 10-Q. We undertake no obligation to update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities law. You are advised, however, to consult any further disclosures we make on related subjects.

PART I. - FINANCIAL INFORMATION

Item 1. - Financial Statements

NI Holdings, Inc.

Consolidated Balance Sheets

(dollar amounts in thousands, except par value)

March 31, 2022

December 31, 2021

(Unaudited)

Assets:

Cash and cash equivalents

$

53,942

$

70,623

Fixed income securities, at fair value

353,083

364,651

Equity securities, at fair value

74,678

77,690

Other investments

2,005

2,005

Total cash and investments

483,708

514,969

 

Premiums and agents' balances receivable

54,880

51,452

Deferred policy acquisition costs

26,272

24,947

Reinsurance premiums receivable

663

-

Reinsurance recoverables on losses

19,362

21,200

Income tax recoverable

-

364

Accrued investment income

2,357

2,524

Property and equipment

9,806

9,869

Deferred income taxes

613

-

Goodwill and other intangibles

17,604

17,722

Other assets

8,858

8,735

Total assets

$

624,123

$

651,782

 

Liabilities:

Unpaid losses and loss adjustment expenses

$

133,694

$

139,662

Unearned premiums

130,275

127,789

Reinsurance premiums payable

-

326

Income tax payable

1,563

-

Deferred income taxes

-

5,506

Payable to Federal Crop Insurance Corporation

7,059

4,962

Westminster consideration payable

6,454

13,020

Accrued expenses and other liabilities

12,800

13,104

Total liabilities

291,845

304,369

 

Commitments and contingencies

-

-

 

Shareholders’ equity:

Common stock, $0.01 par value, authorized: 25,000,000 shares;

issued: 23,000,000 shares; and outstanding: 2022 – 21,255,640 shares;

2021 – 21,219,808 shares​​

230

230

Preferred stock, without par value, authorized 5,000,000 shares;

no shares; issued or outstanding​​

-

-

Additional paid-in capital

96,517

98,166

Unearned employee stock ownership plan shares

(1,184

)

(1,184

)

Retained earnings

269,142

267,207

Accumulated other comprehensive income (loss), net of income taxes

(10,402

)

5,237

Treasury stock, at cost, 2022 – 1,625,935 shares, 2021 – 1,661,767 shares

(25,825

)

(26,452

)

Non-controlling interest

3,800

4,209

Total shareholders’ equity

332,278

347,413

 

Total liabilities and shareholders’ equity

$

624,123

$

651,782

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

NI Holdings, Inc.

Consolidated Statements of Operations (Unaudited)

(dollar amounts in thousands, except per share data)

Three Months Ended

March 31,

2022

2021

Revenues:

Net premiums earned

$

69,587

$

63,135

Fee and other income

428

317

Net investment income

1,653

1,536

Net investment gains (losses)

(5,528

)

5,811

 

Total revenues

66,140

70,799

 

Expenses:

Losses and loss adjustment expenses

40,129

36,889

Amortization of deferred policy acquisition costs

15,623

13,587

Other underwriting and general expenses

7,781

7,651

Total expenses

63,533

58,127

 

Income before income taxes

2,607

 

12,672

 

Income tax expense

568

 

2,890

 

Net income

2,039

 

9,782

 

Net income attributable to non-controlling interest

130

113

Net income attributable to NI Holdings, Inc.

$

1,909

 

$

9,669

 

 

Earnings per common share:

Basic

$

0.09

 

$

0.45

 

Diluted

$

0.09

 

$

0.45

 

 

Share data:

Weighted average common shares outstanding used in basic per common share calculations

21,372,753

 

21,462,641

 

Plus: Dilutive securities

239,161

236,358

Weighted average common shares used in diluted per common share calculations

21,611,914

 

21,698,999

 

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

NI Holdings, Inc.

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(dollar amounts in thousands)

Three Months Ended March 31, 2022

Three Months Ended March 31, 2021

Attributable

to NI

Holdings, Inc.

Attributable

to Non-

Controlling Interest

Total

Attributable

to NI

Holdings, Inc.

Attributable

to Non-

Controlling Interest

Total

Net income

$

1,909

 

$

130

$

2,039

 

$

9,669

 

$

113

$

9,782

 

 

Other comprehensive loss, before income taxes:

Holding losses on investments

(20,197

)

(697

)

(20,894

)

(6,763

)

(293

)

(7,056

)

Reclassification adjustment for net realized loss included in net income

(43

)

-

 

(43

)

(101

)

-

 

(101

)

Other comprehensive loss, before income taxes

(20,240

)

(697

)

(20,937

)

(6,864

)

(293

)

(7,157

)

Income tax benefit related to items of other comprehensive income

4,601

158

4,759

1,441

62

1,503

Other comprehensive loss, net of income taxes

(15,639

)

(539

)

(16,178

)

(5,423

)

(231

)

(5,654

)

 

Comprehensive income (loss)

$

(13,730

)

$

(409

)

$

(14,139

)

$

4,246

 

$

(118

)

$

4,128

 

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

NI Holdings, Inc.

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(dollar amounts in thousands)

Three Months Ended March 31, 2022

Common

Stock

Additional

Paid-in

Capital

Unearned

Employee

Stock

Ownership

Plan

Shares

Retained

Earnings

Accumulated

Other

Comprehensive

Income (Loss),

Net of Income

Taxes

Treasury

Stock

Non-Controlling

Interest

Total Shareholders’ Equity

Balance, Beginning of Period

$

230

$

98,166

$

(1,184

)

$

267,207

$

5,237

$

(26,452

)

$

4,209

$

347,413

 

Net income

-

-

-

1,909

-

-

130

2,039

Other comprehensive loss, net of income taxes

-

-

-

-

(15,639

)

-

(539

)

(16,178

)

Purchase of treasury stock

-

-

-

-

-

(997

)

-

(997

)

Share-based compensation

-

565

-

-

-

-

-

565

Issuance of vested award shares

-

(2,214

)

-

26

-

1,624

-

(564

)

Balance, End of Period

$

230

$

96,517

$

(1,184

)

$

269,142

$

(10,402

)

$

(25,825

)

$

3,800

$

332,278

 

Three Months Ended March 31, 2021

Common

Stock

Additional

Paid-in

Capital

Unearned

Employee

Stock

Ownership

Plan Shares

Retained

Earnings

Accumulated

Other

Comprehensive

Income, Net of

Income Taxes

Treasury

Stock

Non-Controlling

Interest

Total Shareholders’ Equity

Balance, Beginning of Period

$

230

$

97,911

$

(1,427

)

$

258,741

$

12,840

$

(23,968

)

$

4,545

$

348,872

 

Net income

-

-

-

9,669

-

-

113

9,782

Other comprehensive loss, net of income taxes

-

-

-

-

(5,423

)

-

(231

)

(5,654

)

Purchase of treasury stock

-

-

-

-

-

(596

)

-

(596

)

Share-based compensation

-

672

-

-

-

-

-

672

Issuance of vested award shares

-

(2,072

)

-

34

 

-

1,552

-

(486

)

Balance, End of Period

$

230

$

96,511

$

(1,427

)

$

268,444

$

7,417

$

(23,012

)

$

4,427

$

352,590

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

NI Holdings, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(dollar amounts in thousands)

Three Months Ended March 31,

2022

2021

Cash flows from operating activities:

Net income

$

2,039

 

$

9,782

 

Adjustments to reconcile net income to net cash flows from operating activities:

Net investment (gains) losses

5,528

(5,811

)

Deferred income tax expense (benefit)

(1,360

)

597

 

Depreciation of property and equipment

168

170

Amortization of intangibles

118

118

Share-based compensation

565

672

Amortization of deferred policy acquisition costs

15,623

13,587

Deferral of policy acquisition costs

(16,948

)

(16,194

)

Net amortization of premiums and discounts on investments

470

482

(Gain) loss on sale of property and equipment

(160

)

4

Changes in operating assets and liabilities:

Premiums and agents’ balances receivable

(3,428

)

(802

)

Reinsurance premiums receivable / payable

(989

)

793

Reinsurance recoverables on losses

1,838

(560

)

Accrued investment income

167

(140

)

Federal Crop Insurance Corporation receivable / payable

2,097

1,464

Income tax recoverable / payables

1,927

 

1,163

 

Other assets

(123

)

(302

)

Unpaid losses and loss adjustment expenses

(5,968

)

5,772

 

Unearned premiums

2,486

4,095

Accrued expenses and other liabilities

(201

)

(4,096

)

Net cash flows from operating activities

3,849

10,794

 

Cash flows from investing activities:

Proceeds from maturities and sales of fixed income securities

14,966

13,079

Proceeds from sales of equity securities

4,383

8,246

Purchases of fixed income securities

(24,761

)

(61,536

)

Purchases of equity securities

(6,943

)

(11,946

)

Purchases of property and equipment

(571

)

(117

)

Proceeds from sale of other investments and other

624

835

Net cash flows from investing activities

(12,302

)

(51,439

)

 

Cash flows from financing activities:

Purchases of treasury stock

(997

)

(596

)

Installment payment on Westminster consideration payable

(6,667

)

(6,667

)

Issuance of restricted stock awards

(564

)

(486

)

Net cash flows from financing activities

(8,228

)

(7,749

)

 

Net decrease in cash and cash equivalents

(16,681

)

(48,394

)

 

Cash and cash equivalents at beginning of period

70,623

101,077

 

Cash and cash equivalents at end of period

$

53,942

$

52,683

 

 

Federal and state income taxes paid

$

-

$

1,130

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

NI Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(dollar amounts in thousands, except per share amounts)

1.Organization

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

These Consolidated Financial Statements include the financial position and results of NI Holdings and seven other entities:

Nodak Insurance Company

Nodak Insurance is the largest domestic property and casualty insurance company in North Dakota, offering private passenger auto, homeowners, farmowners, commercial multi-peril, crop hail, and Federal multi-peril crop insurance coverages through its captive agents in the state.

Nodak Agency, Inc.

Nodak Agency is an inactive shell corporation.

American West Insurance Company

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

Primero Insurance Company

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

Battle Creek Mutual Insurance Company

Battle Creek is a property and casualty insurance company writing personal auto, homeowners, and farm coverages solely in the state of Nebraska. Battle Creek became affiliated with Nodak Insurance in 2011, and Nodak Insurance provides underwriting, claims management, policy administration, and other administrative services to Battle Creek. Because we have concluded that we control Battle Creek, we consolidate the financial statements of Battle Creek, and Battle Creek’s policyholders’ interest in Battle Creek is reflected as a non-controlling interest in shareholders’ equity in our Consolidated Balance Sheets and its net income or loss is excluded from net income attributed to NI Holdings in our Consolidated Statements of Operations.

Direct Auto Insurance Company

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

Westminster American Insurance Company

Westminster is a property and casualty insurance company licensed in seventeen states and the District of Columbia. Westminster underwrites commercial multi-peril insurance in the states of Delaware, Georgia, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina, Virginia, West Virginia, and the District of Columbia. Westminster was acquired by NI Holdings on January 1, 2020 via a stock purchase agreement.

NI Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(dollar amounts in thousands, except per share amounts)

Nodak Insurance markets and distributes its policies through its captive agents, while all other companies utilize the independent agent distribution channel. Additionally, all of the Company’s insurance subsidiary and affiliate companies are rated “A” Excellent by A.M. Best Company, Inc. (“AM Best”).

The same executive management team provides oversight and strategic direction for the entire organization. Nodak Insurance provides common product oversight, pricing practices, and underwriting standards, as well as underwriting and claims administration, to itself, American West, and Battle Creek. Primero, Direct Auto, and Westminster personnel manage the day-to-day operations of their respective companies.

2.Basis of Presentation and Accounting Policies

Basis of Presentation

The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and are unaudited. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All material intercompany transactions and balances have been eliminated. These financial statements should be read in conjunction with the financial statements and notes thereto included in our 2021 Annual Report.

The Consolidated Balance Sheet at December 31, 2021, has been derived from the Audited Consolidated Financial Statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

The preparation of the interim Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim Consolidated Financial Statements and the reported amounts of revenues, claims, and expenses during the reporting period. Actual results could differ from those estimates. Operating results for the interim period ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ended December 31, 2022.

Our 2021 Annual Report describes the accounting policies and estimates that are critical to the understanding of our results of operations, financial condition, and liquidity. The accounting policies and estimation processes described in the 2021 Annual Report were consistently applied to the Unaudited Consolidated Financial Statements as of and for the three months ended March 31, 2022 and 2021.

NI Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(dollar amounts in thousands, except per share amounts)

Recent Accounting Pronouncements

As an emerging growth company (“EGC”), we have elected to use the extended transition period for complying with any new or revised financial accounting standards from the Financial Accounting Standards Board (“FASB”) pursuant to Section 13(a) of the Exchange Act. The following discussion includes effective dates for both public business entities and EGCs, as well as whether specific guidance may be adopted early.

Not Yet Adopted

In February 2016, the FASB issued new guidance that requires lessees to recognize leases, including operating leases, on the lessee’s Consolidated Balance Sheet, unless a lease is considered a short-term lease. The new guidance also requires entities to make new judgments to identify leases. In July 2018, the FASB issued additional guidance to allow an optional transition method. An entity may apply the new leases guidance at the beginning of the earliest period presented in the financial statements, or at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The new guidance was effective for annual and interim reporting periods beginning after December 15, 2018 for public business entities. For private companies and EGCs, this guidance is effective for annual reporting periods beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. We will adopt this guidance in the fourth quarter of the year ended December 31, 2022, as we will lose our EGC status beginning December 31, 2022. We do not expect the adoption of this new guidance to have a significant impact on our financial position, results of operations, or cash flows. Upon adoption, the Company will recognize a right of use asset and operating lease liability on its Consolidated Balance Sheet. The cumulative adjustment to retained earnings is not expected to be significant.

In June 2016, the FASB issued a new standard that requires timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance also requires financial institutions and other organizations to use forward-looking information to better form their credit loss estimates. Many of the loss estimation techniques applied prior to adoption of this standard are still permitted, although the inputs to those techniques have changed to reflect the full amount of expected credit losses. Organizations are to continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Finally, the guidance amends the accounting for credit losses on available-for-sale fixed income securities and purchased financial assets with credit deterioration. The guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 for filers with the Securities and Exchange Commission (“SEC”) excluding smaller reporting companies, and EGCs that did not relinquish private company relief. For all other entities, this guidance will be effective for annual reporting periods beginning after December 15, 2022 and interim periods within those fiscal years. We will adopt this guidance in the fourth quarter of the year ended December 31, 2022, as we will lose our EGC status beginning December 31, 2022. Based on our evaluation, adoption of this new standard will not have a significant impact on our financial position, results of operations, and cash flows.

In December 2019, the FASB issued amended guidance to simplify the accounting for income taxes. The amended guidance was effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, for public business entities. For private companies and EGCs, the amended guidance will be effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. We will adopt this guidance in the fourth quarter of the year ended December 31, 2022, as we will lose our EGC status beginning December 31, 2022. Based on our evaluation, adoption of this new standard will not have a significant impact on our financial position, results of operations, and cash flows.

NI Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(dollar amounts in thousands, except per share amounts)

3.Investments

The amortized cost and estimated fair value of fixed income securities as of March 31, 2022 and December 31, 2021, were as follows:

March 31, 2022

Cost or Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

Fixed income securities:

U.S. Government and agencies

$

13,017

$

212

$

(360

)

$

12,869

Obligations of states and political subdivisions

68,773

305

(2,648

)

66,430

Corporate securities

150,071

742

(6,486

)

144,327

Residential mortgage-backed securities

45,967

92

(2,279

)

43,780

Commercial mortgage-backed securities

35,319

115

(1,760

)

33,674

Asset-backed securities

49,910

17

(1,882

)

48,045

Redeemable preferred stocks

4,253

-

(295

)

3,958

Total fixed income securities

$

367,310

$

1,483

$

(15,710

)

$

353,083

 

December 31, 2021

Cost or Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

Fixed income securities:

U.S. Government and agencies

$

13,118

$

467

$

(87

)

$

13,498

Obligations of states and political subdivisions

84,668

2,979

(353

)

87,294

Corporate securities

144,476

4,214

(1,069

)

147,621

Residential mortgage-backed securities

26,190

266

(300

)

26,156

Commercial mortgage-backed securities

32,878

815

(161

)

33,532

Asset-backed securities

52,604

131

(313

)

52,422

Redeemable preferred stocks

4,008

136

(16

)

4,128

Total fixed income securities

$

357,942

$

9,008

$

(2,299

)

$

364,651

The amortized cost and estimated fair value of fixed income securities by contractual maturity are shown below. Actual maturities could differ from contractual maturities because issuers may have the right to call or prepay these securities.

March 31, 2022

Amortized Cost

Fair Value

Due to mature:

One year or less

$

18,024

$

18,117

After one year through five years

90,659

89,417

After five years through ten years

77,896

73,920

After ten years

45,282

42,172

Mortgage / asset-backed securities

131,196

125,499

Redeemable preferred stocks

4,253

3,958

Total fixed income securities

$

367,310

$

353,083

 

December 31, 2021

Amortized Cost

Fair Value

Due to mature:

One year or less

$

14,457

$

14,586

After one year through five years

82,429

84,760

After five years through ten years

82,270

84,173

After ten years

63,106

64,894

Mortgage / asset-backed securities

111,672

112,110

Redeemable preferred stocks

4,008

4,128

Total fixed income securities

$

357,942

$

364,651

Fixed income securities with a fair value of $7,527 at March 31, 2022 and $7,977 at December 31, 2021, were deposited with various state regulatory agencies as required by law. The Company has not pledged any assets to secure any obligations.

NI Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(dollar amounts in thousands, except per share amounts)

The investment category and duration of the Company’s gross unrealized losses on fixed income securities are shown below. Investments with unrealized losses are categorized with a duration of greater than 12 months when all positions of a security have continually been in a loss position for at least 12 months.

 

 

March 31, 2022

 

 

 

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

$

4,969

$

(110

)

$

2,436

$

(250

)

$

7,405

$

(360

)

Obligations of states and political subdivisions

 

 

43,281

 

 

 

(2,456

)

 

 

1,601

 

 

 

(192

)

 

 

44,882

 

 

 

(2,648

)

Corporate securities

 

 

76,700

 

 

 

(4,673

)

 

 

16,766

 

 

 

(1,813

)

 

 

93,466

 

 

(6,486

)

Residential mortgage-backed securities

 

 

33,527

 

 

 

(1,798

)

 

 

4,882

 

 

 

(481

)

 

 

38,409

 

 

 

(2,279

)

Commercial mortgage-backed securities

 

 

25,160

 

 

 

(1,721

)

 

 

844

 

 

 

(39

)

 

 

26,004

 

 

 

(1,760

)

Asset-backed securities

 

 

40,922

 

 

 

(1,819

)

 

 

2,366

 

 

 

(63

)

 

 

43,288

 

 

 

(1,882

)

Redeemable preferred stocks

3,712

(295

)

-

-

3,712

(295

)

Total fixed income securities

 

$

228,271

 

 

$

(12,872

)

 

$

28,895

 

 

$

(2,838

)

 

$

257,166

 

 

$

(15,710

)

December 31, 2021

Less than 12 Months

Greater than 12 months

Total

Fair

Value

Unrealized Losses

Fair

Value

Unrealized Losses

Fair

Value

Unrealized Losses

Fixed income securities:

U.S. Government and agencies

$

3,125

$

(87

)

$

-

$

-

$

3,125

$

(87

)

Obligations of states and political subdivisions

19,769

(350

)

222

(3

)

19,991

(353

)

Corporate securities

46,816

(1,015

)

1,895

(54

)

48,711

(1,069

)

Residential mortgage-backed securities

17,407

(261

)

1,434

(39

)

18,841

(300

)

Commercial mortgage-backed securities

11,287

(160

)

216

(1

)

11,503

(161

)

Asset-backed securities

28,797

(308

)

995

(5

)

29,792

(313

)

Redeemable preferred stocks

1,493

(16

)

-

-

1,493

(16

)

Total fixed income securities

$

128,694

$

(2,197

)

$

4,762

$

(102

)

$

133,456

$

(2,299

)

We frequently review our investment portfolio for declines in fair value. Our process for identifying declines in the fair value of investments that are other-than-temporary involves consideration of several factors. These factors include (i) the time period in which there has been a significant decline in value, (ii) an analysis of the liquidity, business prospects, and overall financial condition of the issuer, (iii) the significance of the decline, and (iv) our intent and ability to hold the investment for a sufficient period of time for the value to recover. When our analysis of the above factors results in the conclusion that declines in fair values are other than temporary, the credit loss component of the impairment is reflected in net income (loss) as a realized loss on investment if the Company does not intend to sell the security, and the remaining portion of the other-than-temporary loss is recognized in other comprehensive income (loss), net of income taxes. If the Company intends to sell the security, or determines that it is more likely than not that it will be required to sell the security prior to recovering its cost or amortized cost basis less any current-period credit losses, the full amount of the other-than-temporary loss is recognized in net income (loss). The Company did not record any other-than-temporary impairments during the three-month period ending March 31, 2022 or the year ended December 31, 2021.

In conjunction with our third-party 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.

NI Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(dollar amounts in thousands, except per share amounts)

Net investment income consisted of the following:

Three Months Ended March 31,

2022

2021

Fixed income securities

$

2,161

$

2,011

Equity securities

329

265

Real estate

166

156

Cash and cash equivalents

2

1

Total gross investment income

2,658

2,433

Investment expenses

1,005

897

Net investment income

$

1,653

$

1,536

Net investment gains (losses) consisted of the following:

Three Months Ended March 31,

2022

2021

Gross realized gains:

Fixed income securities

$

46

$

110

Equity securities

1,073

3,915

Total gross realized gains

1,119

4,025

 

Gross realized losses, excluding other-than-temporary impairment losses:

Fixed income securities

(3

)

(9

)

Equity securities

(178

)

(114

)

Total gross realized losses, excluding other-than-temporary impairment losses

(181

)

(123

)

 

Net realized gains

938

3,902

 

Change in net unrealized gains on equity securities

(6,466

)

1,909

Net investment gains (losses)

$

(5,528

)

$

5,811

NI Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(dollar amounts in thousands, except per share amounts)

4.Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Investment securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets or liabilities at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets. Accounting guidance on fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The three levels of the fair value hierarchy are as follows:

 

Level I:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

 

 

Level II:

Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level II includes fixed income securities with quoted prices that are traded less frequently than exchange traded instruments. Valuation techniques include matrix pricing which is a mathematical technique used widely in the industry to value fixed income securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

 

 

 

Level III:

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

The Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon the estimates of the Company or other third-parties, are often calculated based on the characteristics of the asset, the economic and competitive environment, and other such factors. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts which could have been realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-end and have not been re-evaluated or updated for purposes of our financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end. Additionally, changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations.

The Company uses quoted values and other data provided by an independent pricing service in its process for determining fair values of its investments. The evaluations of such pricing services represent an exit price and a good faith opinion as to what a buyer in the marketplace would pay for a security in a current sale. This independent pricing service provides us with one quote per instrument. For fixed income securities that have quoted prices in active markets, market quotations are provided. For fixed income securities that do not trade on a daily basis, the independent pricing service prepares estimates of fair value using a wide array of observable inputs including relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The observable market inputs that the Company’s independent pricing service utilizes may include (listed in order of priority for use) benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and other reference data on markets, industry, and the economy. Additionally, the independent pricing service uses an option-adjusted spread model to develop prepayment and interest rate scenarios. The independent pricing service did not use broker quotes in determining any fair values of the Company’s investments at March 31, 2022 or December 31, 2021.

Should the independent pricing service be unable to provide a fair value estimate, we would attempt to obtain a non-binding fair value estimate from a number of broker-dealers and would review this estimate in conjunction with a fair value estimate reported by an independent business news service or other sources. In instances where only one broker-dealer provides a fair value for a fixed income security, we would use that estimate. In instances where we would be able to obtain fair value estimates from more than one broker-dealer, we would review the range of estimates and select the most appropriate value based on the facts and circumstances. Should neither the independent pricing service nor a broker-dealer provide a fair value estimate, we would develop a fair value estimate based on cash flow analyses and other valuation techniques that utilize certain unobservable inputs. Accordingly, the Company classifies such a security as a Level III investment.