NI Holdings, Inc. - Quarter Report: 2024 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Non-accelerated filer | ☐ | Smaller reporting company | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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The number of shares of Registrant’s common stock outstanding on October 31, 2024 was . No preferred shares are issued or outstanding.
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TABLE OF CONTENTS
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CERTAIN IMPORTANT INFORMATION
Unless the context otherwise requires, as used in this Quarterly Report on Form 10-Q (“Form 10-Q”):
| ● | “NI Holdings”, “the Company”, “we”, “us”, and “our” refer to NI Holdings, Inc., together with Nodak Insurance Company and its subsidiaries, Direct Auto Insurance Company, and Westminster American Insurance Company (sold on June 30, 2024), 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; |
| ● | the “Nodak 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 Group” refers to Nodak Mutual Group, Inc., which is the majority shareholder of NI Holdings; |
| ● | “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 or Battle Creek Insurance Company interchangeably. Battle Creek Mutual Insurance Company became affiliated with Nodak Insurance in 2011 and, prior to January 2, 2024, was controlled by Nodak Insurance via a surplus note. The terms of the surplus note allowed Nodak Insurance to appoint two-thirds of the Battle Creek Mutual Insurance Company Board of Directors. As of January 2, 2024, the North Dakota Secretary of State approved the conversion of Battle Creek Mutual Insurance Company from a mutual insurance company to a stock insurance company. In accordance with the approved plan of conversion, the name of Battle Creek Mutual Insurance Company became Battle Creek Insurance Company, the surplus note was considered paid in full as of the conversion date, and Battle Creek became a wholly-owned subsidiary of Nodak Insurance; |
| ● | “Direct Auto” refers to Direct Auto Insurance Company. Direct Auto is a wholly-owned subsidiary of NI Holdings; |
| ● | “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. Westminster was a wholly-owned subsidiary of NI Holdings until it was sold to Scott Insurance Holdings, LLC (“Scott Insurance Holdings”) on June 30, 2024; and |
| ● | “Nodak Agency” refers to Nodak Agency, Inc. Nodak Agency is a wholly-owned subsidiary of Nodak Insurance. |
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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 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 distribution 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 rates, 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 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, 2023 (“2023 Annual Report”). The occurrence of any of the risks identified in the Part I, Item 1A, “Risk Factors” section of the 2023 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.
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PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements
NI Holdings, Inc.
Consolidated Balance Sheets
(dollar amounts in thousands, except par value)
| September 30, 2024 | December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Fixed income securities, at fair value (net of allowance for expected credit losses of $ at September 30, 2024 and December 31, 2023) | ||||||||
| Equity securities, at fair value | ||||||||
| Other investments | ||||||||
| Total cash and investments | ||||||||
| Premiums and agents' balances receivable (net of allowance for expected credit losses of $ at September 30, 2024 and $ at December 31, 2023) | ||||||||
| Deferred policy acquisition costs | ||||||||
| Reinsurance premiums receivable (payable) | ( | ) | ||||||
| Reinsurance recoverables on losses (net of allowance for expected credit losses of $ at September 30, 2024 and December 31, 2023) | ||||||||
| Income tax recoverable | — | |||||||
| Accrued investment income | ||||||||
| Property and equipment, net | ||||||||
| Deferred income taxes | ||||||||
| Receivable from Federal Crop Insurance Corporation | ||||||||
| Goodwill and other intangibles | ||||||||
| Other assets | ||||||||
| Assets of discontinued operations | — | |||||||
| Total assets | $ | $ | ||||||
| Liabilities: | ||||||||
| Unpaid losses and loss adjustment expenses | $ | $ | ||||||
| Unearned premiums | ||||||||
| Income tax payable | — | |||||||
| Accrued expenses and other liabilities | ||||||||
| Liabilities of discontinued operations | — | |||||||
| Total liabilities | ||||||||
| Shareholders’ equity: | ||||||||
| Common stock, $ par value, authorized: shares; issued: shares; and outstanding: 2024 – shares, 2023 – shares | ||||||||
| Additional paid-in capital | ||||||||
| Unearned employee stock ownership plan shares | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss, net of income taxes | ( | ) | ( | ) | ||||
| Treasury stock, at cost, 2024 – shares, 2023 – shares | ( | ) | ( | ) | ||||
| Non-controlling interest | — | |||||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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NI Holdings, Inc.
Consolidated Statements of Operations (Unaudited)
(dollar amounts in thousands, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues: | ||||||||||||||||
| Net premiums earned | $ | $ | $ | $ | ||||||||||||
| Fee and other income | ||||||||||||||||
| Net investment income | ||||||||||||||||
| Net investment gains (losses) | ( | ) | ||||||||||||||
| Total revenues | ||||||||||||||||
| Expenses: | ||||||||||||||||
| Losses and loss adjustment expenses | ||||||||||||||||
| Amortization of deferred policy acquisition costs | ||||||||||||||||
| Other underwriting and general expenses | ||||||||||||||||
| Total expenses | ||||||||||||||||
| Income (loss) from continuing operations before income taxes | ( | ) | ( | ) | ||||||||||||
| Income tax expense (benefit) | ( | ) | ( | ) | ||||||||||||
| Net income (loss) from continuing operations | ( | ) | ( | ) | ||||||||||||
| Net income (loss) attributable to non-controlling interest | — | — | ( | ) | ||||||||||||
| Net income (loss) from continuing operations attributable to NI Holdings, Inc. | ( | ) | ( | ) | ||||||||||||
| Loss from discontinued operations, net of income taxes | — | ( | ) | ( | ) | ( | ) | |||||||||
| Loss on sale of discontinued operations, net of income taxes | — | — | ( | ) | — | |||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Earnings (loss) per common share from continuing operations: | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Earnings (loss) per common share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Share data: | ||||||||||||||||
| Weighted average common shares outstanding used in basic per common share calculations | ||||||||||||||||
| Dilutive securities | — | — | ||||||||||||||
| Weighted average common shares used in diluted per common share calculations | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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NI Holdings, Inc.
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(dollar amounts in thousands)
| Three Months Ended September 30, 2024 | Nine Months Ended September 30, 2024 | |||||||||||||||||||||||
| Attributable to NI Holdings, Inc. | Attributable to Non- Controlling Interest | Total | Attributable to NI Holdings, Inc. | Attributable to Non- Controlling Interest | Total | |||||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | — | $ | ( | ) | $ | ( | ) | $ | — | $ | ( | ) | ||||||||
| Other comprehensive income (loss), before income taxes: | ||||||||||||||||||||||||
| Holding gains (losses) on investments | — | — | ||||||||||||||||||||||
| Reclassification adjustment for net realized losses included in net income (loss) | — | — | ||||||||||||||||||||||
| Other comprehensive income (loss), before income taxes | — | — | ||||||||||||||||||||||
| Income tax (expense) benefit related to items of other comprehensive income (loss) | ( | ) | — | ( | ) | ( | ) | — | ( | ) | ||||||||||||||
| Other comprehensive income (loss), net of income taxes | — | — | ||||||||||||||||||||||
| Comprehensive income (loss) | $ | $ | — | $ | $ | ( | ) | $ | — | $ | ( | ) | ||||||||||||
| Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | |||||||||||||||||||||||
| Attributable to NI Holdings, Inc. | Attributable to Non- Controlling Interest | Total | Attributable to NI Holdings, Inc. | Attributable to Non- Controlling Interest | Total | |||||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||
| Other comprehensive income (loss), before income taxes: | ||||||||||||||||||||||||
| Holding gains (losses) on investments | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Reclassification adjustment for net realized losses included in net income (loss) | — | — | ||||||||||||||||||||||
| Other comprehensive income (loss), before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Income tax (expense) benefit related to items of other comprehensive income (loss) | ||||||||||||||||||||||||
| Other comprehensive income (loss), net of income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Comprehensive income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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NI Holdings, Inc.
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(dollar amounts in thousands)
| Three Months Ended September 30, 2024 | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Unearned Employee Stock Ownership Plan Shares | Retained Earnings | Accumulated Other Comprehensive Loss, Net of Income Taxes | Treasury Stock | Non-Controlling Interest | Total Shareholders’ Equity | |||||||||||||||||||||||||
| Balance, July 1, 2024 (As Restated) | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | — | $ | |||||||||||||||||
| Battle Creek demutualization | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||||||
| Impact of Westminster unrealized investment gains/losses | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Other comprehensive income (loss), net of income taxes | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Share-based compensation | — | ( | ) | — | — | — | — | — | ( | ) | ||||||||||||||||||||||
| Issuance of vested award shares | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | — | $ | |||||||||||||||||
| Nine Months Ended September 30, 2024 | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Unearned Employee Stock Ownership Plan Shares | Retained Earnings | Accumulated Other Comprehensive Loss, Net of Income Taxes | Treasury Stock | Non-Controlling Interest | Total Shareholders’ Equity | |||||||||||||||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Battle Creek demutualization | — | — | — | ( | ) | — | ( | ) | — | |||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||||||
| Impact of Westminster unrealized investment gains/losses | — | — | — | ( | ) | — | — | — | ||||||||||||||||||||||||
| Other comprehensive income (loss), net of income taxes | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Issuance of vested award shares | — | ( | ) | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | — | $ | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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NI Holdings, Inc.
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(dollar amounts in thousands)
| Three Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Unearned Employee Stock Ownership Plan Shares | Retained Earnings | Accumulated Other Comprehensive Loss, Net of Income Taxes | Treasury Stock | Non-Controlling Interest | Total Shareholders’ Equity | |||||||||||||||||||||||||
| Balance, July 1, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Battle Creek demutualization | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | |||||||||||||||||||||||||||
| Impact of Westminster unrealized investment gains/losses | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Other comprehensive income (loss), net of income taxes | — | — | — | — | ( | ) | — | ( | ) | ( | ) | |||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Issuance of vested award shares | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Unearned Employee Stock Ownership Plan Shares | Retained Earnings | Accumulated Other Comprehensive Loss, Net of Income Taxes | Treasury Stock | Non-Controlling Interest | Total Shareholders’ Equity | |||||||||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Battle Creek demutualization | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | ) | — | — | ( | ) | ( | ) | |||||||||||||||||||||
| Impact of Westminster unrealized investment gains/losses | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Other comprehensive income (loss), net of income taxes | — | — | — | — | ( | ) | — | ( | ) | ( | ) | |||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Issuance of vested award shares | — | ( | ) | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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NI Holdings, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(dollar amounts in thousands)
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ( | ) | ||
| Less net income (loss) from discontinued operations, net of income taxes | ( | ) | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||
| Net investment gains | ( | ) | ( | ) | ||||
| Deferred income tax expense (benefit) | ( | ) | ||||||
| Depreciation of property and equipment | ||||||||
| Amortization of intangibles | — | |||||||
| Share-based compensation | ||||||||
| Amortization of deferred policy acquisition costs | ||||||||
| Deferral of policy acquisition costs | ( | ) | ( | ) | ||||
| Net amortization of premiums and discounts on investments | ||||||||
| Gain on sale of property and equipment | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Premiums and agents’ balances receivable | ( | ) | ( | ) | ||||
| Reinsurance premiums receivable / payable | ( | ) | ( | ) | ||||
| Reinsurance recoverables on losses | ( | ) | ( | ) | ||||
| Accrued investment income | ( | ) | ||||||
| Federal Crop Insurance Corporation receivable / payable | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Unpaid losses and loss adjustment expenses | ||||||||
| Unearned premiums | ||||||||
| Income tax recoverable / payable | ( | ) | ||||||
| Accrued expenses and other liabilities | ||||||||
| Net cash flows from operating activities – continuing operations | ||||||||
| Net cash flows from operating activities – discontinued operations | ||||||||
| Net cash flows from operating activities – loss on sale of discontinued operations | — | |||||||
| Total adjustments | ||||||||
| Net cash flows from operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Proceeds from maturities and sales of fixed income securities | ||||||||
| Proceeds from sales of equity securities | ||||||||
| Purchases of fixed income securities | ( | ) | ( | ) | ||||
| Purchases of equity securities | ( | ) | ( | ) | ||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from sales of property and equipment | ||||||||
| Proceeds from disposition of Westminster | — | |||||||
| Net cash flows from investing activities – continuing operations | ||||||||
| Net cash flows from investing activities – discontinued operations | ( | ) | ||||||
| Net cash flows from investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Purchases of treasury stock | — | ( | ) | |||||
| Pooling (payments) receipts | ( | ) | ( | ) | ||||
| Principal repayments of finance leases | ( | ) | — | |||||
| Issuance of vested award shares | ( | ) | ( | ) | ||||
| Net cash flows from financing activities – continuing operations | ( | ) | ( | ) | ||||
| Net cash flows from financing activities – discontinued operations | ||||||||
| Net cash flows from financing activities | ( | ) | ( | ) | ||||
| Net change in cash and cash equivalents | ( | ) | ||||||
| (Increase) decrease in cash and cash equivalents – discontinued operations | ( | ) | ( | ) | ||||
| Net increase (decrease) in cash and cash equivalents – continuing operations | ( | ) | ( | ) | ||||
| Cash and cash equivalents at beginning of period – continuing operations | ||||||||
| Cash and cash equivalents at end of period – continuing operations | $ | $ | ||||||
| Federal and state income taxes paid (net of refunds received) | $ | $ | ( | ) | ||||
The accompanying notes are an integral part of these consolidated financial statements.
8
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
These unaudited consolidated financial statements include the financial position and results of operations of NI Holdings and the following 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 (“U.S.”). American West began writing policies in 2002 and primarily writes private passenger auto, homeowners, and farm coverages in South Dakota. American West also writes private passenger 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 % owned by Nodak Insurance. Primero is a property and casualty insurance company writing non-standard auto coverage in the states of Nevada, Arizona, North Dakota, and South Dakota. Primero was acquired by Nodak Insurance in 2014.
Battle Creek Insurance Company
Battle Creek is a property and casualty insurance company writing private passenger auto, homeowners, and farm coverages solely in the state of Nebraska. Battle Creek became affiliated with Nodak Insurance in 2011 and, prior to January 2, 2024, was controlled by Nodak Insurance via a surplus note. On January 2, 2024, Battle Creek issued shares of its common stock to Nodak Insurance at a $ per share par value and became a wholly-owned subsidiary of Nodak Insurance. Because we concluded that we controlled Battle Creek prior to January 2, 2024, we consolidated the financial statements of Battle Creek, and Battle Creek’s policyholders’ interest in Battle Creek was reflected as a non-controlling interest in shareholders’ equity in our Consolidated Balance Sheets for NI Holdings (“Consolidated Balance Sheets”) and its net income or loss was excluded from net income or loss attributed to NI Holdings in our Consolidated Statements of Operations for NI Holdings (“Consolidated Statements of Operations”). Subsequent to January 2, 2024, Battle Creek is fully consolidated in our Consolidated Balance Sheets and Consolidated Statements of Operations and, as such, no longer reflected as a non-controlling interest.
Direct Auto Insurance Company
Direct Auto is a property and casualty insurance company licensed in Illinois. Direct Auto began writing non-standard auto coverage in 2007, and was acquired by NI Holdings on August 31, 2018, via a stock purchase agreement.
9
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
, subject to certain post-closing adjustments, including a post-closing payment to NI Holdings for the amount by which the ending statutory surplus balance for Westminster exceeded $. The post-closing payment received from Scott Insurance Holdings during the third quarter of 2024 was $ and has been included as an adjustment to the purchase price for the calculation of the loss on the sale of Westminster. The sale of Westminster, which represented the majority of our Commercial segment in prior periods, was a strategic shift that has had a major effect on our operations and financial results. Therefore, Westminster has been reported as discontinued operations in the Consolidated Balance Sheets, Consolidated Statements of Operations, and Consolidated Statements of Cash Flows for all periods presented in this Form 10-Q. All current and prior periods reflected in this Form 10-Q have been presented as continuing and discontinued operations, unless otherwise noted. For additional information see Part I, Item 1, Note 19 “Discontinued Operations” of this Form 10-Q.
10
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
11
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
12
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
13
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
Fixed income securities with a fair value of $ at September 30, 2024, and $ at December 31, 2023, were deposited with various state regulatory agencies as required by law. The Company has not pledged any assets to secure any obligations.
14
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
15
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
We, along with our investment advisor, frequently review our investment portfolio for declines in fair value that could be indicative of credit losses. Beginning on December 31, 2022, credit losses are recognized through an allowance account. We consider a number of factors when determining if an allowance for credit losses is necessary, including payment and default history, credit spreads, credit ratings and rating actions, and probability of default. We determine the credit loss component of fixed income investments by utilizing discounted cash flow modeling to determine the present value of the security and comparing the present value with the amortized cost of the security. We did not recognize any credit losses for fixed income securities at the time of adoption of the new credit loss accounting standard and have not recognized any credit losses for fixed income securities since adoption of the credit loss standard. Therefore, there were no beginning or ending balances of credit losses during the nine months ended September 30, 2024 or the year ended December 31, 2023. See Item II, Part 8, Note 3 “Summary of Significant Accounting Policies” section of the 2023 Annual Report for additional information.
16
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
17
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
18
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
19
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
There were no liabilities measured at fair value on a recurring basis at September 30, 2024, or December 31, 2023.
20
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
Effective July 1, 2024, the Company’s reinsurance contracts were modified to exclude any Westminster losses occurring on or after that date, while maintaining all other existing limits, retentions, and attachment points.
For the year ended December 31, 2023, the Company’s catastrophe retention and retention limit were consistent with those for the nine-month period ended September 30, 2024. In addition, limits, retentions, and attachment points in our other reinsurance contracts were also consistent with those for the nine-month period ended September 30, 2024 (with the exception of Westminster for which per risk excess of loss treaties provided coverage of $ in excess of $ for property risks and $ in excess of $ for casualty risks).
The Company actively monitors and evaluates the financial condition of the reinsurers and develops estimates of the uncollectible amounts due from reinsurers. Beginning on December 31, 2022, credit losses are recognized through an allowance account developed using a new credit loss model (current expected credit losses or “CECL”). See the Part II, Item 8, Note 2 “Recent Accounting Pronouncements” section of the 2023 Annual Report for additional information. Credit loss estimates are made based on periodic evaluation of balances due from reinsurers, changes in reinsurer credit standing, 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 by entering into reinsurance arrangements only with reinsurers that have strong credit ratings and statutory surplus above certain levels. At September 30, 2024, and December 31, 2023, management has concluded that it is not necessary to record an allowance for expected credit losses related to reinsurance recoverables. All of our significant reinsurance partners are rated “A-” (Excellent) or better by AM Best, and there is no history of write-offs.
21
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
22
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
Intercompany Reinsurance Pooling Arrangement
Effective January 1, 2020, all of our insurance subsidiary and affiliate companies entered into an intercompany reinsurance pooling agreement. Nodak Insurance is the lead company of the pool, and assumes the net premiums, net losses, and underwriting expenses from each of the other five companies. Nodak Insurance then retrocedes balances back to each company, while retaining its own share of the pool’s net underwriting results, based on individual pool percentages established in the respective pooling agreement. This arrangement allows each insurance company to rely upon the capacity of the pool’s total statutory capital and surplus. As a result, they are evaluated by AM Best on a group basis and hold a single combined financial strength rating, long-term issuer credit rating, and financial size category. Subsequent to the June 30, 2024, date of sale, Westminster is no longer a member of the pool, and the pooling percentages for the remaining insurance subsidiaries were updated based on their respective surplus as a percentage of the pool as of December 31, 2023.
23
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
The tables for current and prior year continuing and discontinued operations showing the deferred policy acquisition costs and assets reconciliation are shown below:
24
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
During the nine months ended September 30, 2024, the Company’s incurred reported losses and loss adjustment expenses included $ of net unfavorable development on prior accident years, primarily attributable to Direct Auto. During the nine months ended September 30, 2023, the Company’s incurred reported losses and loss adjustment expenses included $ of net unfavorable development on prior accident years, primarily attributable to Direct Auto and Westminster.
Changes in unpaid losses and loss adjustment expense reserves are generally the result of ongoing analysis of recent loss development trends. As additional information becomes known regarding individual claims, original estimates are increased or decreased accordingly.
25
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
26
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
Depreciation expense was $ and $ for the three months ended September 30, 2024 and 2023, respectively, and $ and $ for the nine months ended September 30, 2024 and 2023, respectively. Depreciation expense for continuing operations was $ and $ for the three months ended September 30, 2024 and 2023, respectively, and $ and $ for the nine months ended September 30, 2024 and 2023, respectively.
27
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
Based on the qualitative analyses performed for the goodwill related to our Non-Standard Auto segment, we concluded that goodwill was not impaired as of September 30, 2024, or December 31, 2023.
During the fourth quarter of 2023, we performed a quantitative assessment of the goodwill related to the Westminster acquisition, which was allocated to our Commercial segment, and concluded that the goodwill was fully impaired as of December 31, 2023, resulting in a non-cash impairment charge of $. See the Part II, Item 8, Note 10 “Goodwill and Other Intangibles” section of the 2023 Annual Report for additional information.
Other Intangible Assets
28
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
We determined during our reviews that other indefinite-lived intangible assets and finite-lived intangible assets were not impaired as of September 30, 2024, or December 31, 2023.
Amortization expense was $ and $ for the three months ended September 30, 2024 and 2023, respectively, and $ and $ for the nine months ended September 30, 2024 and 2023, respectively. Amortization expense for continuing operations was $ and $ for the three months ended September 30, 2024 and 2023, respectively, and $ and $ for the nine months ended September 30, 2024 and 2023, respectively.
29
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
Dividends
State insurance laws require our insurance subsidiaries to maintain certain minimum capital and surplus amounts on a statutory basis. Our insurance subsidiaries are subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval from their domiciliary insurance regulatory authorities. Our insurance subsidiaries are also subject to risk-based capital requirements that may further affect their ability to pay dividends. Our insurance subsidiaries statutory capital and surplus at December 31, 2023, exceeded the amount of statutory capital and surplus necessary to satisfy risk-based capital requirements by a significant margin. For information regarding the availability of subsidiaries to pay dividends to NI Holdings during 2024, see Item II, Part 8, Note 12 “Related Party Transactions” section of the 2023 Annual Report.
Battle Creek
Prior to January 2, 2024, we consolidated the financial statements of Battle Creek, and Battle Creek’s policyholders’ interest in Battle Creek was reflected as a non-controlling interest in shareholders’ equity in our Consolidated Balance Sheets. Subsequent to January 2, 2024, Battle Creek is fully consolidated in our Consolidated Balance Sheets.
30
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
All fees associated with the plans are deducted from the eligible employee accounts.
The Company also offers a non-qualified deferred compensation plan to key executives of the Company (as designated by the Board of Directors). The Company’s policy is to fund the plan by amounts that represent the excess of the maximum contribution allowed by the Employee Retirement Income Security Act over the key executives’ allowable 401(k) contribution. The plan also allows employee-directed deferral of key executives’ compensation or incentive payments. The Company reported expenses related to this plan totaling $ and $ during the three months ended September 30, 2024 and 2023, respectively, and $ and $ during the nine months ended September 30, 2024 and 2023, respectively.
In connection with our initial public offering (“IPO”) in March 2017, the Company established its Employee Stock Ownership Plan (the “ESOP”) within the meaning of Internal Revenue Code Section 4975(e)(7) and invests solely in common stock of the Company.
Upon establishment of the ESOP, Nodak Insurance loaned $ to the ESOP’s related trust (the “ESOP Trust”). The ESOP loan was for a period of , bearing interest at the long-term Applicable Federal Rate effective on the closing date of the offering (% annually). The ESOP Trust used the proceeds of the loan to purchase shares in our IPO, which resulted in the ESOP Trust owning approximately % of the Company’s authorized shares. The ESOP has purchased the shares for investment and not for resale.
The shares purchased by the ESOP Trust in the offering are held in a suspense account as collateral for the ESOP loan. Nodak Insurance makes semi-annual cash contributions to the ESOP in amounts no smaller than the amounts required for the ESOP Trust to make its loan payments to Nodak Insurance. While the ESOP makes two loan payments per year, a pre-determined portion of the shares are released from the suspense account and allocated to participant accounts at the end of the calendar year. This release and allocation occurs on an annual basis over the ten-year term of the ESOP loan. Nodak Insurance has a lien on the shares of common stock of the Company held by the ESOP to secure repayment of the loan from the ESOP to Nodak Insurance. If the ESOP is terminated as a result of a change in control of the Company, the ESOP may be required to pay the costs of terminating the plan.
It is anticipated that the only assets held by the ESOP will be shares of the Company’s common stock. Participants in the ESOP cannot direct the investment of any assets allocated to their accounts. The ESOP participants are employees of Nodak Insurance. The employees of Primero, Direct Auto, and Westminster do not participate in the ESOP.
Each employee of Nodak Insurance automatically becomes a participant in the ESOP if such employee is at least 21 years old, has completed a minimum of one thousand hours of service with Nodak Insurance, and has completed an Eligibility Computation Period. Employees are not permitted to make any contributions to the ESOP. Participants in the ESOP receive annual reports from the Company showing the number of shares of common stock of the Company allocated to the participants’ accounts and the market value of those shares. The shares are allocated to participants based on compensation as provided for in the ESOP.
In connection with the establishment of the ESOP, the Company created a contra-equity account on the Consolidated Balance Sheet equal to the ESOP’s basis in the shares. The basis of those shares was set at $ per share as part of the IPO. As shares are released from the ESOP suspense account, the contra-equity account is credited, which reduces the impact of the contra-equity account on the Company’s Consolidated Balance Sheets over time. The Company records compensation expense related to the shares released, equal to the number of shares released from the suspense account multiplied by the average market value of the Company’s stock during the period.
The Company recognized compensation expense related to the ESOP of $ and $ during the three months ended September 30, 2024 and 2023, respectively, and $ and $ during the nine months ended September 30, 2024 and 2023, respectively.
Through September 30, 2024, and December 31, 2023, the Company had released and allocated ESOP shares to participants, with a remainder of ESOP shares in suspense at September 30, 2024, and December 31, 2023. Using the Company’s quarter-end market price of $ per share, the fair value of the unearned ESOP shares was $ at September 30, 2024.
31
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
At September 30, 2024, and December 31, 2023, we had no unrecognized income tax benefits, no accrued interest and penalties, and no significant uncertain income tax positions. No interest and penalties were recognized during the nine-month period ended September 30, 2024, or the year ended December 31, 2023.
Federal income taxes were allocated to discontinued operations at a % effective tax rate at the date of sale. Our effective tax rate for continuing operations for the nine months ended September 30, 2024, was % which was impacted by the $ valuation allowance on net operating loss carryforwards established as a result of the Battle Creek demutualization. The effective tax rate, including the loss on the sale of Westminster, was % for the nine months ended September 30, 2024.
Effective for the year ended December 31, 2022, the Company adopted the updated guidance for leases. See Part II, Item 8, Note 2 “Recent Accounting Pronouncements” section of the 2023 Annual Report for additional information. We determine whether a contract is or contains a lease at the inception of the contract. A contract will be deemed to be or contain a lease if the contract conveys the right to control and directs the use of identified property or equipment for a period of time in exchange for consideration. We generally must also have the right to obtain substantially all of the economic benefits from the use of the property and equipment. Lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. To determine the present value of lease payments not yet paid, we estimate incremental borrowing rates based on the floating interest rate on our Line of Credit with Wells Fargo Bank, N.A. at the lease commencement date, as rates are not implicitly stated in most leases. Lease liabilities are included in accrued expenses and other liabilities and right-of-use assets are included in other assets in the Consolidated Balance Sheets.
There were expenses of $ and $ related to these leases during the three months ended September 30, 2024 and 2023, respectively, and $ and $ during the nine months ended September 30, 2024 and 2023.
32
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
33
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
The changes in the number of common shares outstanding excludes certain non-forfeitable stock award shares that are included in the weighted average common shares outstanding used in basic earnings per common share calculations. The net loss per diluted common share for the three- and nine-month periods ended September 30, 2024, excluded the weighted average effects of and shares, respectively, of stock awards since the impacts of these potential shares of common stock were anti-dilutive. The net loss per diluted common share for the nine-month period ended September 30, 2023, excluded the weighted average effects of shares of stock awards since the impacts of these potential shares of common stock were anti-dilutive.
On May 9, 2022, our Board of Directors approved an authorization for the repurchase of up to approximately $ of the Company’s outstanding common stock. During the nine months ended September 30, 2024, we did not repurchase any shares of our common stock. During the nine months ended September 30, 2023, we repurchased shares of our common stock for $, under our share repurchase authorization. Included in the cost of treasury stock acquired pursuant to common share repurchases is the % excise tax imposed on common share repurchase activity, net of common share issuances, as part of the Inflation Reduction Act of 2022. At September 30, 2024, $ remains available under this authorization.
The cost of this treasury stock is a reduction of shareholders’ equity within our Consolidated Balance Sheets.
Preferred Stock
The Company’s Articles of Incorporation provide authority to issue up to five million shares of preferred stock. No preferred shares are issued or outstanding.
34
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
The Company recognizes stock-based compensation costs for RSUs 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.
At September 30, 2024, there was $ of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized over a weighted-average period of years.
Performance Share 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 are based on salary and, prior to 2024, include a three-year adjusted book value cumulative growth target with threshold and stretch goals. Effective for grants made in 2024, the performance metric is calculated based on an adjusted return on equity over a three-year period, with annual resets. 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 for PSUs based on the grant date fair value over the performance period of the awards. Estimated forfeitures are included in the determination of compensation costs. The current cost estimates represent the Company’s forecasted performance against cumulative growth targets.
35
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
The cost estimates for PSU grants represent initial target awards until we can reasonably forecast the financial performance of each PSU award grant. At the end of the performance period, we will reflect a performance adjustment, which may be either an increase or decrease from the initial target awards. The actual number of shares to be issued at the end of the performance period will range from % to % of the initial target awards. As of December 31, 2023, the previously recognized compensation expense related to the PSU awards granted during 2022 and 2021 was eliminated due to the Company's expectation that the threshold performance goal will not be met.
At September 30, 2024, there was $ of unrecognized compensation cost related to outstanding PSUs. That cost is expected to be recognized over a weighted-average period of years.
36
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
37
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
38
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
The assets and liabilities associated with discontinued operations prior to the closing of the sale have been presented separately in our Consolidated Balance Sheets.
39
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
For purposes of evaluating profitability of the Non-Standard Auto segment, we combine the policy fees paid by the insured with the underwriting gain or loss as its primary measure. As a result, these fees are allocated to the Non-Standard Auto segment (included in fee and other income) in the tables below. The remaining fee and other income amounts are not allocated to any segment.
We do not assign or allocate all line items in our Consolidated Statement of Operations or Consolidated Balance Sheets to our operating segments. Those line items include net investment income, net investment gains, fee and other income excluding Non-Standard Auto, and income tax expense (benefit) within the Unaudited Consolidated Statement of Operations.
40
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
41
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
42
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
43
NI Holdings, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollar amounts in thousands, except per share amounts)
44
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 our operating results and financial condition than can be obtained from reading the unaudited consolidated financial statements alone. Unless otherwise noted, the information in the following discussion is being presented for our continuing operations. 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 Form 10-Q constitutes forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” included elsewhere in this Form 10-Q. Part I, Item 1A, “Risk Factors” included in our 2023 Annual Report should also be reviewed 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, except per share data, are in thousands.
Financial Highlights
2024 Third Quarter Consolidated Results of Continuing Operations
| ● | Net loss of $2,705, or $0.13 per share basic and diluted | |
| ● | Net premiums earned of $83,270 | |
| ● | Net investment income of $2,811 | |
| ● | Net unfavorable prior year reserve development of $5,329 | |
| ● | Underwriting loss of $9,170 | |
| ● | Combined ratio of 111.0% | |
| ● | Operating cash flows of $3,204 |
2024 Third Quarter Consolidated Financial Condition
| ● | Total cash and investments of $373,403 | |
| ● | Total assets of $559,897 | |
| ● | Unpaid losses and loss adjustment expenses of $159,069 | |
| ● | Total liabilities of $318,526 | |
| ● | Shareholders’ equity of $241,371 |
45
Results of Continuing Operations
Our consolidated net loss from continuing operations was $2,705 for the three months ended September 30, 2024, compared to net income from continuing operations of $805 for the three months ended September 30, 2023. Our consolidated net loss from continuing operations was $3,248 for the nine months ended September 30, 2024, compared to net income from continuing operations of $43 for the nine months ended September 30, 2023.
The major components of revenues and net loss are shown below:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues: | ||||||||||||||||
| Net premiums earned | $ | 83,270 | $ | 76,418 | $ | 238,323 | $ | 218,124 | ||||||||
| Fee and other income | 491 | 445 | 1,590 | 1,196 | ||||||||||||
| Net investment income | 2,811 | 2,121 | 8,089 | 5,735 | ||||||||||||
| Net investment gains (losses) | 2,412 | (955 | ) | 3,288 | 275 | |||||||||||
| Total revenues | 88,984 | 78,029 | 251,290 | 225,330 | ||||||||||||
| Components of net income (loss): | ||||||||||||||||
| Net premiums earned | 83,270 | 76,418 | 238,323 | 218,124 | ||||||||||||
| Losses and loss adjustment expenses | 65,100 | 53,157 | 174,602 | 154,359 | ||||||||||||
| Amortization of deferred policy acquisition costs and other underwriting and general expenses | 27,340 | 23,853 | 80,381 | 70,917 | ||||||||||||
| Underwriting loss | (9,170 | ) | (592 | ) | (16,660 | ) | (7,152 | ) | ||||||||
| Fee and other income | 491 | 445 | 1,590 | 1,196 | ||||||||||||
| Net investment income | 2,811 | 2,121 | 8,089 | 5,735 | ||||||||||||
| Net investment gains (losses) | 2,412 | (955 | ) | 3,288 | 275 | |||||||||||
| Income (loss) from continuing operations before income taxes | (3,456 | ) | 1,019 | (3,693 | ) | 54 | ||||||||||
| Income tax expense (benefit) | (751 | ) | 214 | (445 | ) | 11 | ||||||||||
| Net income (loss) from continuing operations | $ | (2,705 | ) | $ | 805 | $ | (3,248 | ) | $ | 43 | ||||||
Net Premiums Earned
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net premiums earned: | ||||||||||||||||
| Direct premium | $ | 90,125 | $ | 85,600 | $ | 257,024 | $ | 238,892 | ||||||||
| Assumed premium | 1,880 | 2,045 | 2,684 | 3,448 | ||||||||||||
| Ceded premium | (8,735 | ) | (11,227 | ) | (21,385 | ) | (24,216 | ) | ||||||||
| Total net premiums earned | $ | 83,270 | $ | 76,418 | $ | 238,323 | $ | 218,124 | ||||||||
Our net premiums earned for the three months ended September 30, 2024, increased $6,852, or 9.0%, compared to the three months ended September 30, 2023. Net premiums earned for the nine months ended September 30, 2024, increased $20,199, or 9.3%, compared to the nine months ended September 30, 2023.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net premiums earned: | ||||||||||||||||
| Private Passenger Auto | $ | 22,612 | $ | 21,235 | $ | 67,185 | $ | 61,431 | ||||||||
| Non-Standard Auto | 23,001 | 21,231 | 74,733 | 63,754 | ||||||||||||
| Home and Farm | 23,479 | 21,309 | 66,817 | 61,714 | ||||||||||||
| Crop | 10,885 | 9,746 | 20,315 | 22,358 | ||||||||||||
| All Other | 3,293 | 2,897 | 9,273 | 8,867 | ||||||||||||
| Total net premiums earned | $ | 83,270 | $ | 76,418 | $ | 238,323 | $ | 218,124 | ||||||||
46
Below are comments regarding net premiums earned by business segment:
Private Passenger Auto – Net premiums earned for the third quarter of 2024 increased $1,377, or 6.5%, compared to the same period in 2023. Net premiums earned for the first nine months of 2024 increased $5,754, or 9.4% from the first nine months of 2023. Results were driven by new business growth in North Dakota as well as significant rate increases in North Dakota, South Dakota, and Nebraska, partially offset by lower new business and retention levels in South Dakota and Nebraska as a result of underwriting actions taken to improve profitability.
Non-Standard Auto – Net premiums earned for the third quarter of 2024 increased $1,770, or 8.4%, compared to the same period in 2023. Net premiums earned for the first nine months of 2024 increased $10,979, or 17.2% from the first nine months of 2023. Results were driven by prior period new business growth in Illinois and Arizona as well as significant rate increases in the Chicago market where our non-standard auto business is concentrated, partially offset by lower retention compared to prior year periods.
Home and Farm – Net premiums earned for the third quarter of 2024 increased $2,170, or 10.2%, compared to the same period in 2023. Net premiums earned for the first nine months of 2024 increased $5,103, or 8.3% from the first nine months of 2023. Results were driven by new business growth in North Dakota, rate increases, and increased insured property values, which were primarily the result of higher inflationary factors. These increases were partially offset by lower retention rates and new business levels in Nebraska and South Dakota as a result of underwriting actions taken to improve profitability.
Crop – Net premiums earned for the third quarter of 2024, increased $1,139, or 11.7%, compared to the same period in 2023. Net premiums earned for the first nine months of 2024 decreased $2,043, or 9.1% from the first nine months of 2023. The increase in the third quarter of 2024 was driven by the recognition during the prior year quarter of a reduction in the acres insured for the prior year. The year-to-date decrease was driven by lower commodity prices in the current year.
All Other – Net premiums earned for the third quarter of 2024, increased $396, or 13.7%, compared to the same period in 2023. Net premiums earned for the first nine months of 2024 increased $406, or 4.6%, from the first nine months of 2023. Results were driven by rate and insured value increases for the commercial and excess lines of business, partially offset by the continued run-off of our participation in an assumed domestic and international reinsurance pool of business.
Losses and Loss Adjustment Expenses
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net losses and loss adjustment expenses: | ||||||||||||||||
| Direct losses and loss adjustment expenses | $ | 69,692 | $ | 53,863 | $ | 184,561 | $ | 162,027 | ||||||||
| Assumed losses and loss adjustment expenses | 617 | 725 | 886 | 882 | ||||||||||||
| Ceded losses and loss adjustment expenses | (5,209 | ) | (1,431 | ) | (10,845 | ) | (8,550 | ) | ||||||||
| Total net losses and loss adjustment expenses | $ | 65,100 | $ | 53,157 | $ | 174,602 | $ | 154,359 | ||||||||
Our net losses and loss adjustment expenses for the three months ended September 30, 2024, increased $11,943, or 22.5%, compared to the three months ended September 30, 2023. Our net losses and loss adjustment expenses for the nine months ended September 30, 2024, increased $20,243, or 13.1%, compared to the nine months ended September 30, 2023.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net losses and loss adjustment expenses: | ||||||||||||||||
| Private Passenger Auto | $ | 14,070 | $ | 16,603 | $ | 45,292 | $ | 51,094 | ||||||||
| Non-Standard Auto | 20,504 | 18,838 | 56,687 | 50,015 | ||||||||||||
| Home and Farm | 22,023 | 14,052 | 56,230 | 40,686 | ||||||||||||
| Crop | 6,190 | 3,690 | 11,944 | 11,127 | ||||||||||||
| All Other | 2,313 | (26 | ) | 4,449 | 1,437 | |||||||||||
| Total net losses and loss adjustment expenses | $ | 65,100 | $ | 53,157 | $ | 174,602 | $ | 154,359 | ||||||||
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| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Loss and loss adjustment expenses ratio: | ||||||||||||||||
| Private Passenger Auto | 62.2% | 78.2% | 67.4% | 83.2% | ||||||||||||
| Non-Standard Auto | 89.1% | 88.7% | 75.9% | 78.5% | ||||||||||||
| Home and Farm | 93.8% | 65.9% | 84.2% | 65.9% | ||||||||||||
| Crop | 56.9% | 37.9% | 58.8% | 49.8% | ||||||||||||
| All Other | 70.2% | (0.9% | ) | 48.0% | 16.2% | |||||||||||
| Total loss and loss adjustment expenses ratio | 78.2% | 69.6% | 73.3% | 70.8% | ||||||||||||
Below are comments regarding significant changes in the net losses and loss adjustment expenses, and the net loss and loss adjustment expense ratios, by business segment:
Private Passenger Auto – The net loss and loss adjustment expense ratio decreased 16.0 percentage points and 15.8 percentage points in the three- and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023. The decrease in the third quarter of 2024 was driven by improved loss frequency in Nebraska and South Dakota during the current year quarter. The year-to-date decrease was driven by the improved loss frequency in the current year quarter as well as lower levels of weather-related losses in the current year due to the mild winter in the Midwest compared to elevated winter weather-related losses in the prior year. Both periods were positively affected by earned premium growth.
Non-Standard Auto – The net loss and loss adjustment expense ratio increased 0.4 percentage points in the three-month period ended September 30, 2024, compared to the same period in 2023. Although the year-over-year ratios were relatively consistent, the current year quarter was impacted by unfavorable prior year reserve development related to elevated bodily injury losses. The net loss and loss adjustment expense ratio decreased 2.6 percentage points in the nine-month period ended September 30, 2024, compared to the same period in 2023. This decrease was primarily driven by earned premium growth resulting from new business growth and significant rate increases.
Home and Farm – The net loss and loss adjustment expense ratio increased 27.9 percentage points and 18.3 percentage points in the three- and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023. These increases in net loss and loss adjustment expense ratios were driven by higher non-catastrophe weather-related losses in North Dakota and Nebraska during 2024 compared to the prior year partially offset by earned premium growth in the current year.
Crop – The net loss and loss adjustment expense ratio increased 19.0 percentage points and 9.0 percentage points in the three- and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023. These increases were driven by slightly less favorable crop growing conditions compared to the prior year.
All Other – The net loss and loss adjustment expense ratio increased 71.1 percentage points and 31.8 percentage points in the three- and nine-month period ended September 30, 2024, compared to the same period in 2023. These increases were driven by elevated large loss experience compared to the prior year. The negative loss and loss adjustment expense ratio for the third quarter of 2023 was the result of an inter-segment reclassification of a large loss during the quarter.
Underwriting and General Expenses and Expense Ratio
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Underwriting and general expenses: | ||||||||||||||||
| Amortization of deferred policy acquisition costs | $ | 17,616 | $ | 16,523 | $ | 53,723 | $ | 48,311 | ||||||||
| Other underwriting and general expenses | 9,724 | 7,330 | 26,658 | 22,606 | ||||||||||||
| Total underwriting and general expenses | 27,340 | 23,853 | 80,381 | 70,917 | ||||||||||||
| Expense Ratio | 32.8% | 31.2% | 33.7% | 32.5% | ||||||||||||
The expense ratio is calculated by dividing other underwriting and general expenses and amortization of deferred policy acquisition costs by net premiums earned. The expense ratio measures a company’s operational efficiency in producing, underwriting, and administering its insurance business. The overall expense ratio increased 1.6 percentage points and 1.2 percentage points in the three-and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023. The increase in the amortization of deferred policy acquisition costs is due to higher deferrable costs resulting from significant premium growth compared to the prior year, including significant growth in the Non-Standard Auto segment which generally pays higher agent commissions than our other segments. The increase in the other underwriting and general expenses is due to the costs incurred in the current quarter associated with the execution of the separation agreement with our former Chief Executive Officer.
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Underwriting Gain (Loss) and Combined Ratio
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Underwriting gain (loss): | ||||||||||||||||
| Private Passenger Auto | $ | 1,072 | $ | (1,494 | ) | $ | 566 | $ | (8,069 | ) | ||||||
| Non-Standard Auto | (7,830 | ) | (6,326 | ) | (12,846 | ) | (12,772 | ) | ||||||||
| Home and Farm | (6,162 | ) | 1,050 | (10,974 | ) | 2,356 | ||||||||||
| Crop | 2,912 | 4,083 | 4,877 | 6,544 | ||||||||||||
| All Other | 838 | 2,095 | 1,717 | 4,789 | ||||||||||||
| Total underwriting loss | $ | (9,170 | ) | $ | (592 | ) | $ | (16,660 | ) | $ | (7,152 | ) | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Combined ratio: | ||||||||||||||||
| Private Passenger Auto | 95.2% | 107.0% | 99.1% | 113.2% | ||||||||||||
| Non-Standard Auto | 134.0% | 129.8% | 117.2% | 120.1% | ||||||||||||
| Home and Farm | 126.2% | 95.0% | 116.5% | 96.2% | ||||||||||||
| Crop | 73.3% | 58.1% | 76.0% | 70.8% | ||||||||||||
| All Other | 74.5% | 27.7% | 81.5% | 46.0% | ||||||||||||
| Combined ratio | 111.0% | 100.8% | 107.0% | 103.3% | ||||||||||||
Underwriting gain (loss) measures the pre-tax profitability of our insurance operations. It is derived by subtracting losses and loss adjustment expenses, amortization of deferred policy acquisition costs, and other underwriting and general expenses from net premiums earned. The combined ratio represents the sum of these losses and expenses as a percentage of net premiums earned and measures our overall underwriting profit.
The total underwriting loss increased $8,578 for the three-month period ended September 30, 2024, compared to the same period in 2023. The total underwriting loss increased $9,508 for the nine-month period ended September 30, 2024, compared to the same period in 2023. These results were driven by the factors discussed in the Loss and Loss Adjustment Expenses as well as the Underwriting and General Expenses and Expense Ratio sections above.
The overall combined ratio increased 10.2 percentage points in the three-month period ended September 30, 2024, compared to the same period in 2023. The overall combined ratio increased 3.7 percentage points in the nine-month period ended September 30, 2024, compared to the same period in 2023. These results were driven by the factors discussed in the Loss and Loss Adjustment Expenses as well as the Underwriting and General Expenses and Expense Ratio sections above.
Fee and Other Income
We had fee and other income of $491 and $1,590 for the three and nine months ended September 30, 2024, respectively, compared to $445 and $1,196 for the three and nine months ended September 30, 2023, respectively. Fee income is largely attributable to the Non-Standard Auto segment and is a key component in measuring its profitability. Fee and other income on this business increased to $281 and $971 for the three and nine months ended September 30, 2024, respectively, from $278 and $748 for the three and nine months ended September 30, 2023, respectively, driven by growth in this segment.
Net Investment Income
The following table shows our average cash and invested assets, net investment income, and return on average cash and invested assets for the reported periods for continuing operations:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Average cash and invested assets | $ | 376,594 | $ | 322,813 | $ | 367,614 | $ | 331,170 | ||||||||
| Net investment income | $ | 2,811 | $ | 2,121 | $ | 8,089 | $ | 5,735 | ||||||||
| Gross return on average cash and invested assets | 3.9% | 3.6% | 3.9% | 3.3% | ||||||||||||
| Net return on average cash and invested assets | 3.0% | 2.6% | 2.9% | 2.3% | ||||||||||||
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Net investment income increased $690 for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. Net investment income increased $2,354 for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. These increases were primarily driven by the higher interest rate environment which resulted in higher reinvestment rates in our fixed income portfolio.
Gross and net return on average cash and invested assets increased year-over-year, primarily driven by the favorable interest rate environment that resulted in significantly higher net investment income on an increased average balance of fixed income securities as well as cash and cash equivalents (measured at fair value). In addition, the increase in investments in high dividend yield equities resulted in relatively consistent year-over-year dividend income despite a reduction in the average equities balance (measured at fair value). The increase in average cash and invested assets was driven by changes in the fair value of fixed income securities due to the interest rate environment as well as higher operating cash flows during the first nine months of 2024.
Net Investment Gains (Losses)
Net investment gains (losses) consisted of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Gross realized gains | $ | 272 | $ | 689 | $ | 662 | $ | 13,707 | ||||||||
| Gross realized losses, excluding credit impairment losses | (227 | ) | (180 | ) | (699 | ) | (1,661 | ) | ||||||||
| Net realized gains (losses) | 45 | 509 | (37 | ) | 12,046 | |||||||||||
| Change in net unrealized gains on equity securities | 2,367 | (1,464 | ) | 3,325 | (11,771 | ) | ||||||||||
| Net investment gains (losses) | $ | 2,412 | $ | (955 | ) | $ | 3,288 | $ | 275 | |||||||
We had net realized gains of $45 and losses of $37 for the three and nine months ended September 30, 2024, respectively, compared to net realized gains of $509 and $12,046 for the three and nine months ended September 30, 2023, respectively. The elevated net realized gains in the nine months ended September 30, 2023, were the result of a strategic liquidation of a portfolio of equity securities. The gross realized gains from the sale of these securities were largely offset by the elimination of the unrealized gain position of these securities. No credit impairment losses were reported during any of the periods presented.
We experienced an increase of $2,367 and $3,325 in net unrealized gains on equity securities during the three and nine months ended September 30, 2024, respectively, attributable to overall favorable equity markets during the current quarter and year-to-date. We experienced a decrease in net unrealized gains on equity securities of $1,464 and $11,771 during the three and nine months ended September 30, 2023, respectively. The decrease in unrealized gains on equity securities during the nine months ended September 30, 2023, was driven by the equity portfolio liquidation noted above and the impact of changes in fair value attributable to equity market volatility.
Our fixed income securities are classified as available for sale because we will, from time to time, make sales of securities that are not impaired, consistent with our investment goals and policies. The fixed income portion of the portfolio experienced net unrealized gains of $11,138 and $8,848 during the three and nine months ended September 30, 2024, respectively, compared to net unrealized losses of $8,718 and $5,741 during the three and nine months ended September 30, 2023, respectively. The changes were primarily the result of changes in U.S. interest rates. The change in the fair value of fixed income securities is not reflected in net income; rather it is reflected as a separate component (net of income taxes) of other comprehensive income.
Income (Loss) before Income Taxes
For the three months ended September 30, 2024, we had a pre-tax loss of $3,456 compared to a pre-tax income of $1,019 for the three months ended September 30, 2023. The year-over-year change was largely attributable to higher non-catastrophe weather-related losses for Home and Farm in the states of North Dakota and Nebraska, unfavorable prior year loss reserve development for Non-Standard Auto, and expenses incurred related to the separation agreement with our former Chief Executive Officer, partially offset by net earned premium growth, improved loss experience for Private Passenger Auto, and higher net investment income.
For the nine months ended September 30, 2024, we had a pre-tax loss of $3,693 compared to pre-tax income of $54 for the nine months ended September 30, 2023. The year-over-year change was largely attributable to higher non-catastrophe weather-related losses for Home and Farm in the states of North Dakota and Nebraska, unfavorable prior year loss reserve development for Non-Standard Auto, and expenses incurred related to the separation agreement with our former Chief Executive Officer, partially offset by net earned premium growth, improved loss experience for Private Passenger Auto, and higher net investment income.
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Income Tax Expense (Benefit)
We recorded an income tax benefit of $751 for the three months ended September 30, 2024, compared to an income tax expense of $214 for the three months ended September 30, 2023. Our effective tax rate for the third quarter of 2024 was 21.7% compared to an effective tax rate of 21.0% for the third quarter of 2023.
We recorded an income tax benefit of $445 for the nine months ended September 30, 2024, compared to income tax expense of $11 for the nine months ended September 30, 2023. Our effective tax rate for the first nine months of 2024 (excluding tax effects related to the loss on the sale of Westminster) was 12.0% compared to an effective tax rate of 20.4% for the first nine months of 2023. The effective tax rate for the first nine months of 2024 was impacted by a $346 valuation allowance on net operating loss carryforwards established as a result of the Battle Creek demutualization.
Net Income (Loss)
For the three months ended September 30, 2024, we had a net loss before non-controlling interest of $2,705 compared to net income of $805 for the three months ended September 30, 2023. The year-over-year change was largely attributable to higher non-catastrophe weather-related losses for Home and Farm in the states of North Dakota and Nebraska, unfavorable prior year loss reserve development for Non-Standard Auto, and expenses incurred related to the separation agreement with our former Chief Executive Officer, partially offset by net earned premium growth, improved loss experience for Private Passenger Auto, and higher net investment income.
For the nine months ended September 30, 2024, we had a net loss before non-controlling interest of $3,248 compared to net income of $43 for the nine months ended September 30, 2023. The year-over-year change was largely attributable to higher non-catastrophe weather-related losses for Home and Farm in the states of North Dakota and Nebraska, unfavorable prior year loss reserve development for Non-Standard Auto, and expenses incurred related to the separation agreement with our former Chief Executive Officer, partially offset by net earned premium growth, improved loss experience for Private Passenger Auto, and higher net investment income.
Return on Average Equity
For the three months ended September 30, 2024, we had annualized return on average equity, after non-controlling interest, of (4.5)% compared to annualized return on average equity, after non-controlling interest, of 1.3% for the three months ended September 30, 2023.
For the nine months ended September 30, 2024, we had annualized return on average equity, after non-controlling interest, of (1.9)% compared to annualized return on average equity, after non-controlling interest, of 0.2% for the nine months ended September 30, 2023.
Average equity is calculated as the average between beginning and ending equity, excluding non-controlling interest, for the period.
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Critical Accounting Policies
The preparation of financial statements in accordance with GAAP requires both the use of estimates and judgment relative to the application of appropriate accounting policies. We are required to make estimates and assumptions in certain circumstances that affect amounts reported in the unaudited consolidated financial statements and related footnotes. We evaluate these estimates and assumptions on an ongoing basis based on historical developments, market conditions, industry trends, and other information that we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to these estimates and assumptions or that reported results of operations will not be materially and adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. Our critical accounting policies are more fully described in Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” presented in our 2023 Annual Report. There have been no changes in our critical accounting policies from December 31, 2023.
Liquidity and Capital Resources
We expect to generate sufficient funds from our operations and maintain a high degree of liquidity in our investment portfolio to meet the demands of claim settlements and operating expenses for the foreseeable future. Our primary sources of funds are premium collections, investment earnings, and fixed income maturities.
The change in cash and cash equivalents for continuing and discontinued operations for the nine months ended September 30, 2024 and 2023, were as follows:
| Nine Months Ended September 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash flows from operating activities | $ | 16,780 | $ | 9,458 | ||||
| Net cash flows from investing activities | 5,327 | (2,021 | ) | |||||
| Net cash flows from financing activities | (3,613 | ) | (7,454 | ) | ||||
| Net change in cash and cash equivalents | $ | 18,494 | $ | (17 | ) | |||
For the nine months ended September 30, 2024, net cash provided by operating activities totaled $16,780 compared to $9,458 a year ago. This change was primarily driven by lower levels of loss and loss adjustment payments in the current year partially offset by higher levels of tax payments (net of refunds) in the current year.
For the nine months ended September 30, 2024, net cash provided by investing activities totaled $5,327 compared to net cash used of $2,021 a year ago. This change was primarily attributable to the proceeds from the sale of Westminster in the current year partially offset by an increase in net cash outflows for investment activities in the current year.
For the nine months ended September 30, 2024, net cash used by financing activities totaled $3,613 compared to $7,454 a year ago. This decrease in cash used was attributable to a reduction in share repurchases in the current year partially offset by the final pooling settlement between Nodak Insurance and Westminster.
As a holding company, a principal source of long-term liquidity will be dividend payments from our directly-owned subsidiaries.
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Nodak Insurance is restricted by the insurance laws of North Dakota as to the amount of dividends or other distributions it may pay to NI Holdings. North Dakota law sets the maximum amount of dividends that may be paid by Nodak Insurance during any twelve-month period after notice to, but without prior approval of, the North Dakota Insurance Department. This amount cannot exceed the lesser of (i) 10% of the Company’s surplus as regards policyholders as of the preceding December 31, or (ii) the Company’s statutory net income for the preceding calendar year (excluding realized investment gains), less any prior dividends paid during such twelve-month period. In addition, any insurance company other than a life insurance company may carry forward net income from the preceding two calendar years, not including realized investment gains, less any dividends actually paid during those two calendar years. Dividends in excess of this amount are considered “extraordinary” and are subject to the approval of the North Dakota Insurance Department.
There is no amount available for payment of dividends from Nodak Insurance to NI Holdings during 2024 without the prior approval of the North Dakota Insurance Department. Prior to its payment of any dividend, Nodak Insurance will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North Dakota Insurance Department has the power to limit or prohibit dividend payments if an insurance company is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Nodak Insurance during the nine months ended September 30, 2024, or the year ended December 31, 2023.
Direct Auto re-domesticated from Illinois to North Dakota during 2021 and is now subject to the same dividend restrictions as Nodak Insurance. The amount available for payment of dividends from Direct Auto to NI Holdings during 2024 without the prior approval of the North Dakota Insurance Department is approximately $90 as of December 31, 2023. No dividends were declared or paid by Direct Auto during the nine months ended September 30, 2024, or the year ended December 31, 2023.
Westminster re-domesticated from Maryland to North Dakota during 2021 and was subject to the same dividend restrictions as Nodak Insurance. Westminster was sold on June 30, 2024. No dividends were declared or paid by Westminster to NI Holdings during the nine months ended September 30, 2024, or the year ended December 31, 2023. For additional information see Part I, Item 1, Note 19 “Discontinued Operations” of this Quarterly Report on Form 10-Q.
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Item 3. - Quantitative and Qualitative Disclosures about Market Risk
The Company’s assessment of market risk as of September 30, 2024, indicates there have been no material changes in the quantitative and qualitative disclosures from those in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our 2023 Annual Report.
Item 4. - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Interim Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (“DCPs”), as required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act, as of the end of the period covered by this report. As a result of the material weakness in the Company's internal control over financial reporting ("ICFR") discussed below, the Interim Chief Executive Officer and Chief Financial Officer have concluded that the Company’s DCPs, as of the end of the period covered by this report, were not effective in ensuring information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such material information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosures. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Material Weakness in Internal Control Over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
As previously disclosed in our Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2024, the Company did not design and maintain effective controls over its accounting for intercompany reinsurance pooling activity. Specifically, it lacked an effectively designed internal control related to the evaluation of pooling payable/receivable balances, including when a pool member is sold. This material weakness resulted in a material error and the restatement of the Company's consolidated financial statements for the three- and six-month periods ended June 30, 2024. Additionally, this material weakness could result in misstatements of the aforementioned accounts or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Plan for Material Weakness
Upon identification of the material weakness, management developed a remediation plan, which included designing and implementing a new quarterly intercompany pooling reconciliation and review process to fully evaluate pooling payable/receivable balances in support of financial reporting for GAAP purposes. The material weakness will not be considered remediated until the remediation plan has been implemented and there has been sufficient time for the Company to conclude through testing that the controls are operating effectively. As the Company's management, under the oversight of the Audit Committee, continues to evaluate and improve the Company's ICFR, management may decide to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures identified. We can offer no assurance that these initiatives will ultimately have the intended effects.
Changes in Internal Control over Financial Reporting
In the ordinary course of business, we periodically review our system of internal control over financial reporting to identify opportunities to improve our controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Except for the identified material weakness above, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Part
II. -
OTHER INFORMATION
Item 1. - Legal Proceedings
We are, from time to time, party to routine litigation incidental to the normal course of our business. Based upon information presently available to us, we do not consider any litigation to be material. However, given the uncertainties attendant to litigation, we cannot assure you that our results of operations and financial condition will not be materially adversely affected by any litigation.
Item 1A. - Risk Factors
There have been no material changes in our assessment of our risk factors from those set forth in Part I, Item 1A, “Risk Factors” in our 2023 Annual Report.
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Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds
All dollar amounts included in Item 2 herein, except per share data, are in thousands.
The Company has not sold any unregistered securities within the past three years.
On January 17, 2017, our registration statement on Form S-1 registering our common stock was declared effective by the SEC. On March 13, 2017, the Company completed the IPO of 10,350,000 shares of common stock at a price of $10.00 per share. The Company received net proceeds of $93,145 from the offering, after deducting underwriting discounts and offering expenses.
From time to time, the Company may also repurchase its own stock. To date, the Company has used the net proceeds from the IPO to fund these share repurchases.
There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on January 17, 2017.
On May 9, 2022, our Board of Directors approved an authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock. During the year ended December 31, 2022, we completed the repurchase of 54,223 shares of our common stock for $734 under this authorization. During the year ended December 31, 2023, we repurchased an additional 548,549 shares of our common stock for $7,278, including the effect from applicable excise taxes. During the nine months ended September 30, 2024, we did not repurchase any shares of our common stock. At September 30, 2024, $2,052 remains available under this authorization.
Share repurchase activity during the three months ended September 30, 2024, is presented below:
| Period in 2024 | Total Number of Shares Purchased | Average Price Per Share (3) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Approximate (in thousands) | ||||||||||||
| July 1-31, 2024 | — | $ | — | — | $ | 2,052 | ||||||||||
| August 1-31, 2024 | — | — | — | 2,052 | ||||||||||||
| September 1-30, 2024 | — | — | — | 2,052 | ||||||||||||
| Total | — | $ | — | — | $ | 2,052 | ||||||||||
| (1) | Shares purchased pursuant to the May 9, 2022, publicly announced share repurchase authorization of up to approximately $10,000 of the Company’s outstanding common stock. |
| (2) | Maximum dollar value of shares that may yet be purchased consist of up to approximately $2,052 under the May 9, 2022, publicly announced share repurchase authorization. |
| (3) | The Inflation Reduction Act of 2022 imposed a 1% excise tax on the net value of certain share repurchases made after December 31, 2022. All dollar amounts presented exclude such excise taxes, as applicable. |
Item 3. - Defaults upon Senior Securities
Not Applicable
Item 4. - Mine Safety Disclosures
Not Applicable
56
Item 5. - Other Information
10b5-1 Trading Plans
During the third quarter of 2024, none of our directors or executive officers (as defined in Rule 16a-1(f) under the Exchange Act) or any “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408(a) of Regulation S-K).
Item 6. - Exhibits
57
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 7, 2024.
|
NI HOLDINGS, INC.
| |
| /s/ Cindy L. Launer | |
| Cindy L. Launer | |
|
Interim President and Chief Executive Officer (Principal Executive Officer) | |
| /s/ Seth C. Daggett | |
| Seth C. Daggett | |
|
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |
58
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