UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021 or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____
Commission file number 001-37973
NI HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
NORTH DAKOTA
(State or other jurisdiction of
incorporation or organization)
1101 First Avenue North
Fargo, North Dakota
(Address of principal executive offices)
81-2683619
(IRS Employer
Identification No.)
58102
(Zip Code)
(701) 298-4200
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
NODK
Nasdaq Capital Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes No ☒
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. ☒ Yes No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of the Securities Act) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files).
☒ Yes No ☐
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☒
☐
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issues its audit report. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes No ☒
Based on the closing sales price of the Class A common stock on NASDAQ on June 30, 2021, the last business day of the Registrant’s second fiscal
quarter, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $160 million. All executive officers and
directors of the Registrant, and all shareholders holding more than 10% of the Registrant’s outstanding voting stock (other than institutional investors, such
as registered investment companies, eligible to file beneficial ownership reports on Schedule 13G), have been deemed, solely for the purpose of the
foregoing calculation, to be “affiliates” of the Registrant.
The number of the Registrant’s common shares outstanding on February 28, 2022 was 21,196,523. No preferred shares are issued or outstanding.
Documents incorporated by Reference
Portions of the definitive proxy statement relating to the annual meeting of shareholders to be held May 24, 2022 are incorporated by reference into Part III
of this report.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
PART I
PART II
PART III
PART IV
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Item 16.
Schedule I – Condensed financial information of registrant – NI Holdings, Inc.
Exhibits and Financial Statement Schedules
Form 10-K Summary
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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 COVID-19 or a future pandemic and related economic conditions, including the potential impact on the Company's
investments;
our ability to enter new markets successfully and capitalize on growth opportunities either through acquisitions or the expansion of our agent
network;
cyclical changes in the insurance industry, competition, and innovation and emerging technologies;
expectations for impact of or changes to existing or new government regulations or laws;
our ability to anticipate and respond to macroeconomic, geopolitical, health and industry trends, pandemics, acts of war, and other large-scale
crises;
developments in general economic conditions, domestic and global financial markets, interest rate, unemployment, or inflation, that could
affect the performance of our insurance operations and/or investment portfolio; and
our ability to effectively manage future growth, including additional necessary capital, systems, and personnel.
Given their nature, we cannot assure that any outcome expressed in these or other forward-looking statements will be realized in whole or in part.
Actual outcomes may vary materially from past results and those anticipated, estimated, implied, or projected. These forward-looking statements may be
affected by underlying assumptions that may prove inaccurate or incomplete, or by known or unknown risks and uncertainties, including those described in
this section and in the Part I, Item 1A., “Risk Factors” section in this Form 10-K. The occurrence of any of the risks identified in the Part I, Item 1A., “Risk
Factors” section in this Form 10-K, or other risks currently unknown, could 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-K. We undertake
no obligation to update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable
securities law. You are advised, however, to consult any further disclosures we make on related subjects.
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Table of Contents
Item 1. Business
PART I
All dollar amounts, except per share amounts, are in thousands.
Overview
NI Holdings, Inc. (“NI Holdings”, “the Company”, “we”, “us”, and “our”) is a North Dakota business corporation that is the stock holding
company of Nodak Insurance Company and became such in connection with the conversion of Nodak Mutual Insurance Company (“Nodak Mutual”) from
a mutual to stock form of organization and the creation of a mutual holding company. The conversion was completed on March 13, 2017. Immediately
following the conversion, all of the outstanding shares of common stock of Nodak Insurance Company (“Nodak Insurance”, the successor to Nodak Mutual
Insurance Company) were issued to Nodak Mutual Group, which then contributed the shares to NI Holdings in exchange for 55% of the outstanding shares
of common stock of NI Holdings. Nodak Insurance then became a wholly-owned stock subsidiary of NI Holdings. Prior to completion of the conversion,
NI Holdings conducted no business and had no assets or liabilities. As a result of the conversion, NI Holdings became the holding company for Nodak
Insurance and its existing subsidiaries. Concurrent with the conversion, on March 13, 2017, the Company completed an initial public offering (“IPO”) of
10,350,000 shares of common stock at a price of $10.00 per share. The Company received net proceeds of $93,145 from the offering, after deducting the
underwriting discounts and offering expenses. The newly issued shares of NI Holdings were available for public trading on March 16, 2017.
These Consolidated Financial Statements include the financial position and results of operations of NI Holdings and seven other entities:
• Nodak Insurance – a wholly-owned subsidiary of NI Holdings;
• Nodak Agency, Inc. (“Nodak Agency”) – a wholly-owned subsidiary of Nodak Insurance;
• American West Insurance Company (“American West”) – a wholly-owned subsidiary of Nodak Insurance;
•
•
Primero Insurance Company (“Primero”) – an indirect wholly-owned subsidiary of Nodak Insurance;
Battle Creek Mutual Insurance Company (“Battle Creek”) – an affiliated company of Nodak Insurance;
• Direct Auto Insurance Company (“Direct Auto”) – a wholly-owned subsidiary of NI Holdings; and
• Westminster American Insurance Company (“Westminster”) – a wholly-owned subsidiary of NI Holdings.
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Table of Contents
A chart of the corporate structure as of December 31, 2021, and a more complete description of each of the NI Holdings subsidiaries, is included
below.
NI HOLDINGS, INC.
ORGANIZATIONAL CHART
Nodak Mutual Group, Inc.
NI Holdings, Inc.
≥ 55%
ownership
100%
ownership
Nodak Insurance Company
100%
ownership
Direct Auto Insurance
Company
100%
ownership
100%
ownership
Nodak Agency, Inc.
American West Insurance
Company
Affiliation
Battle Creek Mutual
Insurance Company
100%
ownership
Westminster American
Insurance Company
100%
ownership
Tri-State, Ltd
100%
ownership
Primero Insurance
Company
The executive offices of NI Holdings and Nodak Insurance are located at 1101 First Avenue North, Fargo, North Dakota 58102, and the main
office phone number is 701-298-4200. NI Holdings’ website address is www.niholdingsinc.com. The Company makes available, free of charge on its
website, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after it electronically files such
material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). Information contained on such website is not incorporated by
reference into this Annual Report on Form 10-K, and such information should not be considered to be part of this Annual Report on Form 10-K.
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Table of Contents
Subsidiary and Affiliate Companies
Intercompany Reinsurance Pooling Arrangement
Effective January 1, 2020, all of our insurance subsidiary and affiliate companies entered into an intercompany reinsurance pooling agreement.
This agreement was finalized, approved, and implemented during the fourth quarter of 2020, retroactive to the January 1 effective date. Nodak Insurance is
the lead company of the pool, and assumes the net premiums, net losses, and underwriting expenses from each of the other five companies. Nodak
Insurance then retrocedes balances back to each company, while retaining its own share of the pool’s net underwriting results, based on individual pool
percentages established in the respective pooling agreement. This arrangement allows each insurance company to rely upon the capacity of the pool’s total
statutory capital and surplus. As a result, they are evaluated by A.M. Best Company, Inc. (“AM Best”) on a group basis and hold a single combined
financial strength rating, long-term issuer credit rating, and financial size category.
In connection with the pooling arrangement, the quota share reinsurance agreement that had been in place since 2011 between Battle Creek and
Nodak Insurance was cancelled. As a result, a portion of the Company’s underwriting results are now allocated to the policyholders of Battle Creek rather
than the shareholders of NI Holdings.
For the years ended December 31, 2021 and 2020, the pooling share percentages by insurance company were:
Nodak Insurance Company
American West Insurance Company
Primero Insurance Company
Battle Creek Mutual Insurance Company
Direct Auto Insurance Company
Westminster American Insurance Company
Total
Nodak Insurance Company
Pool Percentage
66.0%
7.0%
3.0%
2.0%
13.0%
9.0%
100.0%
Nodak Insurance is the largest domestic property and casualty insurance company in North Dakota, offering private passenger auto, homeowners,
farmowners, commercial multi-peril, crop hail, and Federal multi-peril crop insurance coverages through its captive agents in the state.
Nodak Insurance was formed in 1946 to offer property and casualty insurance to members of the North Dakota Farm Bureau (“NDFB”), and
benefits from a strong marketing affiliation with that organization. Nodak Insurance’s bylaws provide that a person must be a member and remain a
member of the NDFB in order to become and remain a policyholder of Nodak Insurance. Nodak Insurance’s bylaws also require that four members of the
Board of Directors of Nodak Insurance must be members of the NDFB. Similarly, one-third of the members of the Board of Directors of Nodak Mutual
Group must be persons designated by the NDFB.
The NDFB has granted Nodak Insurance a nonexclusive, nontransferable license to use the name “Farm Bureau” and the “FB” logo and associated
trademarks to market Nodak Insurance products, including insurance products. Nodak Insurance has held this license since the insurance company’s
inception in 1946, and the current version of the license agreement has been in place since 2002. The current license agreement between the NDFB and
Nodak Insurance renewed on October 1, 2021, with an expiration date of September 30, 2022. The agreement has historically been renewed annually by a
vote of the Nodak Insurance Board of Directors. Under the current license agreement, Nodak Insurance is required to pay to the NDFB an annual royalty
payment equal to 1.3% of Nodak Insurance’s written premiums (excluding multi-peril crop insurance premiums), subject to a minimum annual payment of
$900 and a maximum annual payment of $1,444. The maximum royalty payment is adjusted annually based upon the June index month for the Consumer
Price Index.
As of December 31, 2021, Nodak Insurance distributed its insurance products through 72 exclusive agents appointed by Nodak Insurance.
Nodak Agency, Inc.
Nodak Agency is an inactive shell corporation.
Tri-State, Ltd
Tri-State, Ltd is an inactive shell corporation.
American West Insurance Company
American West is a property and casualty insurance company licensed in eight states in the Midwest and Western regions of the United States.
American West began writing policies in 2002 and primarily writes personal auto, homeowners, and farm coverages in South Dakota. American West also
writes personal auto coverage in North Dakota, as well as crop hail and Federal multi-peril crop insurance coverages in Minnesota and South Dakota. As of
December 31, 2021, American West distributed its products through independent agents located in 122 offices.
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Table of Contents
Primero Insurance Company
Primero is a wholly-owned subsidiary of Tri-State, Ltd. Tri-State, Ltd. is an inactive shell corporation 100% owned by Nodak Insurance. Primero
is a property and casualty insurance company writing non-standard automobile coverage in the states of Nevada, Arizona, North Dakota, and South Dakota.
Primero was acquired by Nodak Insurance in 2014. As of December 31, 2021, Primero distributed its policies through independent agents in 341 contracted
agencies in those four states.
Battle Creek Mutual Insurance Company
Battle Creek is a property and casualty insurance company writing personal auto, homeowners, and farm coverages solely in the state of Nebraska.
As of December 31, 2021, Battle Creek distributed its policies through independent agents located in 280 offices. Battle Creek became affiliated with
Nodak Insurance in 2011, and Nodak Insurance provides underwriting, claims management, policy administration, and other administrative services to
Battle Creek.
Effective January 1, 2020, all of our insurance company subsidiaries entered into an intercompany reinsurance pooling agreement. In conjunction
with this agreement, the previous 100% quota-share reinsurance agreement between Battle Creek and Nodak Insurance was terminated on a cut-off basis as
of January 1, 2020. Upon termination, Nodak Insurance transferred to Battle Creek all liabilities related to outstanding loss and loss adjustment expense
reserves and all liabilities related to the adjusted unearned premium reserve. In exchange, an intercompany cash payment was made to compensate Battle
Creek for the transfer of these liabilities.
The $3.0 million surplus note originally issued by Battle Creek and purchased by Nodak Insurance in connection with their affiliation agreement
remains in place. It bears interest at an annual rate of 1.0% and matures on December 30, 2040. Battle Creek must obtain the prior approval of the Nebraska
Director of Insurance before making any payment of interest or principal on the surplus note.
Pursuant to the affiliation agreement, so long as the surplus note remains outstanding, Nodak Insurance is entitled to appoint two-thirds of the
Board of Directors of Battle Creek. The affiliation agreement can be terminated by mutual written agreement of Battle Creek and Nodak Insurance or by
either party if there is a material breach of the agreement by the other party and such breach is not cured within 15 days after written notice of such breach
is given by the terminating party to the other party.
Direct Auto Insurance Company
Direct Auto is a property and casualty insurance company licensed in Illinois. Direct Auto began writing non-standard automobile coverage in
2007, and was acquired by NI Holdings on August 31, 2018 via a stock purchase agreement. As of December 31, 2021, Direct Auto distributed its policies
through independent agents located in 139 offices, concentrated primarily in the Chicago area.
Westminster American Insurance Company
Westminster is a property and casualty insurance company licensed in seventeen states and the District of Columbia. Westminster is headquartered
in Owings Mills, Maryland and underwrites commercial multi-peril insurance in the states of Delaware, Georgia, Maryland, New Jersey, North Carolina,
Pennsylvania, South Carolina, Virginia, West Virginia, and the District of Columbia. Westminster was acquired by NI Holdings on January 1, 2020 via a
stock purchase agreement. As of December 31, 2021, Westminster distributed its policies through independent agents in 98 contracted agencies in those
nine states and the District of Columbia. The financial results of Westminster have been included in the Consolidated Financial Statements and the
Company’s commercial segment following the acquisition date. See Part II, Item 8, Note 3 “Acquisition of Westminster American Insurance Company”.
General Information
Nodak Insurance markets and distributes its policies through its captive agents, while all other companies utilize the independent agent distribution
channel. Additionally, all of the Company’s insurance subsidiary and affiliate companies are rated “A” Excellent by AM Best.
The same executive management team provides oversight and strategic direction for the entire organization. Nodak Insurance provides common
product oversight, pricing practices, and underwriting standards, as well as underwriting and claims administration, to itself, American West, and Battle
Creek. Primero, Direct Auto, and Westminster personnel manage the day-to-day operations of their respective companies.
The Consolidated Financial Statements of NI Holdings presented herein include the financial position and results of operations of NI Holdings,
Direct Auto, Westminster (after the acquisition date of January 1, 2020), and Nodak Insurance, including Nodak Insurance’s subsidiaries American West
and Primero, and its affiliate Battle Creek. Each of the six insurance companies is subject to examination and comprehensive regulation by the insurance
department of its state of domicile.
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Table of Contents
Market Overview
We market our personal lines products in the upper Midwest states of North Dakota, South Dakota, Nebraska, and Minnesota. We offer non-
standard auto insurance in the states of Nevada, Arizona, North Dakota, South Dakota, and Illinois. We offer commercial multi-peril insurance in the states
of New Jersey, Maryland, Pennsylvania, Virginia, Georgia, North Carolina, Delaware, South Carolina, and West Virginia, North Dakota, South Dakota, and
the District of Columbia. The following chart shows our direct premiums written during the last two years and our relative market share within each of our
states during the year ended December 31, 2020:
North Dakota
Illinois
Nebraska
South Dakota
Maryland
Georgia
New Jersey
Pennsylvania
Nevada
North Carolina
Virginia
District of Columbia
Minnesota
South Carolina
Delaware
Arizona
West Virginia
Total direct premiums written
Year Ended
December 31,
2021
Direct
Premiums
Written
$
$
148,119 $
51,350
43,247
23,047
13,548
13,085
8,294
8,235
8,132
6,641
6,262
4,055
3,350
2,783
1,502
475
90
342,215 $
Year Ended December 31, 2020
Direct
Premiums
Written
Market Size
143,516 $
43,004
41,843
20,790
10,522
5,836
11,065
9,131
8,350
3,123
5,955
3,810
3,624
972
1,653
899
94
314,187
2,651,000
27,432,000
5,427,000
2,609,000
12,968,000
24,002,000
22,872,000
26,422,000
6,395,000
18,073,000
15,426,000
2,127,000
12,804,000
11,134,000
2,918,000
12,825,000
2,994,000
Rank in State
4th
74th
31st
33rd
83rd
152nd
121st
155th
82nd
163rd
125th
59th
133rd
199th
99th
211th
173rd
Market size information is not yet available for the year ended December 31, 2021.
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Table of Contents
Organic Growth Strategy
We believe we have many opportunities to organically grow our business. Strategies we employ to achieve this growth include:
•
•
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•
•
•
•
continued emphasis on our relationship with the NDFB, a key advocacy group for agricultural and rural interests which enjoys a high profile
and favorable reputation throughout North Dakota;
using the cost advantage created by our low expense ratio compared to peers (32.1% expense ratio in 2021 compared to an average expense
ratio of our peers of 34.1% in 2020) to selectively expand market share;
leveraging our AM Best financial strength rating and financial size category to strategically grow Westminster’s commercial business;
expansion and enhancement of independent agency relationships in Nebraska and South Dakota, including the use of technology such as
mobile apps, online quoting, and policy issuance initiatives to make it easy for agents and insureds to do business with us;
selective expansion of our non-standard auto business in Illinois and our other core upper Midwest markets;
excellent claims service for all insureds; and
selective expansion of our insurance products in states where we currently operate, as well as those states where we hold insurance licenses.
External Growth Strategy
We acquired Direct Auto in 2018 with capital raised through our IPO. The acquisition was the initial step in executing our growth strategy
developed at the time of the IPO.
We also acquired Westminster in January 2020 with capital raised through our IPO. This acquisition expanded our commercial insurance business,
geographically diversified our spread of insurance risks, and provided additional expense efficiencies.
Prior to the IPO, we successfully acquired Primero in 2014, acquired control of Battle Creek in 2011, and acquired American West in 2001.
Going forward, we plan to consider other strategic investments and acquisitions that can enhance our businesses and achieve appropriate risk-
adjusted returns over time.
Corporate Capital Strategy
Our philosophy is to deploy capital in a manner that provides long-term protection for our policyholders and creates long-term value for our
shareholders. This philosophy is supported by a number of underlying strategies implemented across the organization that are focused on preservation of
capital, including:
•
prioritizing the use of data and modeling tools to help estimate the frequency and severity of risks within our insurance portfolio;
• maintaining a conservatively managed investment portfolio that supports our insurance operations under a wide range of operating and market
conditions;
•
•
ensuring our reinsurance program is designed to provide sufficient protection against material insurance exposures including, but not limited
to, catastrophes caused by weather-related events; and
relying upon our Enterprise Risk Management framework to identify, quantify, and manage a broad range of risks across the organization.
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Table of Contents
We view our capital position to consist of three layers, each of which has a specific size and purpose:
•
•
•
The first layer of capital, which we refer to as “regulatory capital”, is the amount of capital needed to satisfy state insurance regulatory
requirements while supporting our growth objectives. This capital is held by each of our insurance company subsidiaries.
The second layer of capital is considered “contingency capital”. While our regulatory capital is, by definition, a cushion for absorbing
financial consequences of adverse events, such as loss reserve development, litigation, weather catastrophes, and investment market
corrections, we view that as a base and hold additional capital for even more extreme operating conditions. This capital is generally also held
by each of our insurance company subsidiaries.
The third layer of capital is classified as “excess capital” and represents the excess of the sum of the first two layers. This capital is available
for deployment by NI Holdings in conjunction with our excess capital deployment priorities.
Our excess capital deployment priorities are to (1) invest in existing businesses where we see opportunities for profitable growth, (2) make
strategic investments and acquisitions that enhance our businesses and achieve appropriate risk-adjusted returns over time, and (3) return capital to
shareholders through share repurchases or shareholder dividends.
Insurance Products by Segment
The Company’s consolidated financial results include our Private Passenger Auto, Non-Standard Auto, Home and Farm, Commercial, Crop, and
All Other reporting segments. Information regarding products and services offered in each segment is included below. Additionally, revenues, underwriting
results, and identifiable assets and liabilities for each segment are shown in Part II, Item 8, Note 20 “Segment Information”. The financial performance of
each segment is discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Private Passenger Auto
Nodak Insurance, Battle Creek, and American West each write private passenger auto insurance to provide protection against liability for bodily
injury and property damage arising from automobile accidents and protection against loss from damage to automobiles owned by the insured. Private
passenger auto accounted for $77,277 (22.6%) of direct premiums written by the Company on a consolidated basis during 2021.
Non-standard Auto
Primero and Direct Auto write non-standard auto insurance with a focus on minimum-limit auto liability coverage. Non-standard auto insurance
accounted for $61,374 (17.9%) of direct premiums written by the Company on a consolidated basis during 2021.
Home and Farm
Nodak Insurance, Battle Creek, and American West each write homeowners and farmowners policies to provide coverage for damage to buildings,
equipment, and contents for a variety of perils, including fire, lightning, wind, hail, and theft. These policies also cover liability arising from injury to other
persons or their property while on the insured’s premises. Home and farm accounted for $85,200 (24.9%) of direct premiums written by the Company on a
consolidated basis during 2021.
Crop
Crop hail and multi-peril crop insurance policies are also offered by Nodak Insurance, American West, and Battle Creek. Multi-peril crop
insurance is a federal program that protects against crop yield losses from all types of natural causes including drought, excessive moisture, freeze, and
disease. Crop hail insurance is a private insurance product designed to provide protection against losses to farmer’s crops due primarily to hail damage.
Collectively, crop insurance accounted for $43,540 (12.7%) of direct premiums written by the Company on a consolidated basis during 2021.
Commercial
Nodak Insurance, American West, and Westminster write commercial multi-peril policies. Collectively, commercial insurance accounted for
$69,753 (20.4%) of the direct premiums written by the Company on a consolidated basis during 2021.
All Other
In addition to the products described above, Nodak Insurance and American West write excess liability coverages. Collectively, these other
coverages accounted for $5,071 (1.5%) of the direct premiums written by the Company on a consolidated basis during 2021. This segment also includes an
assumed reinsurance book of business, with $6,076 of assumed premiums written on a consolidated basis during 2021.
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Crop Insurance
Crop insurance is purchased by agricultural producers, including farmers, ranchers, and others to protect themselves against either the loss of their
crops (yield) due to natural disasters, such as hail, drought, and floods, or the loss of revenue due to declines in the prices of agricultural products. The two
general categories of crop insurance are generally referred to as “crop-yield insurance” and “crop-revenue insurance”. Crop-yield insurance protects against
a reduction in the yield per acre from the historical average yield in a specified area, such as a county or National Oceanic and Atmospheric Administration
weather grid, while crop-revenue insurance provides protection against declines in the price of the particular crop. Most of the multi-peril crop insurance
policies written today combine both yield and revenue protection, with the revenue component providing the policyholder with the option to calculate
price-based losses on the higher of the prevailing price when the crop is planted or the price at harvest.
Beginning in 1980, the U.S. Congress expanded the federal crop insurance program to cover more crops and regions of the country. More
importantly, Congress permitted private sector insurers to market and administer federal insurance policies in exchange for an opportunity to earn a profit
while bearing a portion of the insurance risk. Congress also authorized a premium subsidy for the farmers and ranchers. As a result, there was a rapid
increase in the acres insured from approximately 26 million acres in 1980 to 100 million acres in 1990. The Federal Crop Insurance Reform Act of 1994
made participation in the crop insurance program mandatory for farmers to be eligible to participate in other government support programs and provided a
minimum level of free catastrophic risk coverage for insured and noninsured crops.
American Farm Bureau Insurance Services (“AFBIS”) underwrites all of the multi-peril crop and crop hail insurance policies written by Nodak
Insurance, American West, and Battle Creek, as well as several other state Farm Bureau-affiliated insurers. AFBIS also processes and administers all claims
made by policyholders under such policies. We reimburse AFBIS for its actual loss adjustment expense with respect to the policies issued by us and pay
AFBIS a percentage of the premiums we receive with respect to such policies. Nodak Insurance is a shareholder of AFBIS, as is each of the other insurers
for whom AFBIS provides such services. AFBIS targets a three percent return on capital and pays all remaining profits to its shareholders. Nodak
Insurance did not receive any material distributions from AFBIS during the years ended December 31, 2021, 2020, or 2019.
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Marketing and Distribution
Our marketing philosophy is to sell profitable business in our core states, using a focused, cost-effective distribution system. Nodak Insurance
distributes its insurance products through exclusive agents in North Dakota, while American West, Battle Creek, Primero, Direct Auto, and Westminster
rely on independent agents. We view these independent agents as important partners because they are in a position to recommend either our insurance
products or those of a competitor to their customers.
We review our agents with respect to both premium volume and profitability. Our captive agents for Nodak Insurance are hired and trained by our
sales staff in North Dakota, while the independent agents for our other companies are appointed by the underwriting or marketing staff for each respective
company. We hold regular training sessions when we introduce new products or product changes, and we identify specific topics that may help our agents
more effectively market our products.
For the year ended December 31, 2021, no individual agent was responsible for more than 5% of the Company’s direct premiums written.
Agents are compensated through a fixed base commission structure. Agents receive commission as a percentage of premiums as their primary
compensation from us. The Risk Management Agency of the United States Department of Agriculture (“RMA”) establishes the maximum commission that
can be paid to agents with respect to crop insurance policies. Battle Creek and American West pay profit sharing commissions to their agencies based on
various annual agency premium thresholds and the difference between the agency’s loss ratio and the loss ratio goal established by the insurance company.
The commission is paid with respect to all property and casualty (non-crop) business earned within the calendar year. Nodak Insurance pays a profit-
sharing commission to its agents only with respect to farmowners business originated by such agents. Westminster also pays profit-sharing commissions to
its agencies based on annual premium thresholds and profitability.
Our marketing efforts are further supported by our claims philosophy, which is designed to provide prompt and efficient service and claims
processing, resulting in a positive experience for agents and policyholders. We believe that these positive experiences contribute to achieving higher
policyholder retention and new business growth over time. While we rely on our independent agents for distribution and customer support, underwriting
and claim handling responsibilities are retained by us. Many of our agents have had direct relationships with us for a number of years.
Underwriting, Risk Assessment and Pricing
We strive to be disciplined in our pricing by pursuing rate increases to maintain or improve our underwriting profitability while still being able to
attract and retain customers. We utilize pricing reviews that we believe will help us price risks more accurately, improve policyholder retention, and support
the production of profitable new business. These pricing reviews involve evaluating our claims experience and loss trends on a periodic basis to identify
changes in the frequency and severity of our claims. We then consider whether our premium rates are adequate relative to the level of underwriting risk as
well as the sufficiency of our underwriting guidelines.
The nature of our business requires that we remain sensitive to the marketplace and the pricing strategies of our competitors. Using the market
information as a reference point, we typically set our prices based on our estimated future costs. From time to time, we may reduce our discounts or apply a
premium surcharge to achieve an appropriate return. Pricing flexibility allows us to provide a fair rate commensurate with the assumed risk. If our pricing
strategy cannot yield sufficient premium to cover our costs on a particular type of risk, we may determine not to underwrite that risk. It is our philosophy
not to sacrifice profitability for premium growth.
Our competitive strategy in underwriting is to provide very high-quality service to our agents and insureds by responding quickly and effectively
to information requests and policy submissions. We maintain information on all aspects of our business, which is regularly reviewed to determine both
agency and policyholder profitability. Specific information regarding individual insureds is monitored to assist us in making decisions about policy
renewals or modifications.
Our Nodak Insurance underwriting staff includes 19 employees with approximately 270 combined years of experience in property and casualty
underwriting. They are located primarily at our home office in Fargo, North Dakota, as well as our office in Battle Creek, Nebraska, and underwrite
coverage issued by Nodak Insurance, American West and Battle Creek.
Primero and Direct Auto employ 8 underwriters in connection with their non-standard auto insurance businesses. Westminster has a staff of 12 in
the underwriting area consisting of a Vice President, underwriters, and assistant underwriters in connection with its commercial insurance business. All of
our crop insurance is underwritten by AFBIS, as described above.
Enterprise Risk Management
Our Company is subject to significant risks, including the normal risks of a property and casualty insurance company. These risks are discussed in
more detail in Part I, Item 1A, “Risk Factors”.
We consider an enterprise-wide risk management program to be an integral part of managing our business and a key element in our approach to
corporate governance. Our Enterprise Risk Management Committee (the “ERMC”) is responsible for the alignment of operational risk management
strategies as the coordination point for enterprise-level direction setting with regard to risk management issues. The multi-disciplinary ERMC regularly
monitors risk reports and metrics regarding a variety of continuing and emerging risks that may adversely affect the Company, its policyholders, or other
stakeholders. The Audit Committee of the Board of Directors oversees risk management and regularly receives reports from the ERMC.
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Cybersecurity risk is an important and evolving focus for the Company. The increased sophistication and activities of unauthorized parties
attempting to access our systems is an ever-present risk. Cybersecurity risks may also arise from human error, fraud, or malice on the part of employees or
third parties who have authorized access to the Company’s systems or information.
Our cybersecurity strategy employs a variety of tactics to monitor and assess threat levels, remediate our exposures, and enhance our systems and
applications security. The Company collaborates with a third-party cybersecurity advisor to provide periodic penetration tests, system assessments, and
recommendations based on industry best practices. The Company also requires monthly online security training to be completed by all employees. While
we have experienced threats to our data and systems, to date, we have not experienced any known cyber-security breaches.
Reinsurance
We cede and assume certain premiums and losses to and from various companies and associations under a variety of reinsurance agreements. We
seek to limit the maximum net loss that can arise from large risks or risks in concentrated areas of exposure through use of these agreements, either on an
automatic basis under general reinsurance contracts known as treaties or through facultative contracts on substantial individual risks.
Reinsurance contracts do not relieve us from our obligation to policyholders. Additionally, failure of reinsurers to honor their obligations could
result in significant losses to us. There can be no assurance that reinsurance will continue to be available to us at the same extent, and at the same cost, as it
has in the past. The Company may choose in the future to reevaluate the use of reinsurance to increase or decrease the amounts of risk ceded to reinsurers.
For additional information, see Part II, Item 8, Note 7 “Reinsurance”.
Unpaid Losses and Loss Adjustment Expense
We are required by applicable insurance laws and regulations to maintain reserves for unpaid losses and loss adjustment expenses (“LAE”). Our
liability for unpaid losses and LAE consists of (1) case reserves, which are reserves for claims that have been reported to us, and (2) reserves for claims that
have been incurred but not yet been reported and for the future development of case reserves (“IBNR”). The laws and regulations require that provision be
made for the ultimate cost of those claims without regard to how long it takes to settle them or the time value of money. The determination of reserves
involves actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of such claims. The liability for
unpaid losses and LAE is set based on facts and circumstances then known, estimates of future trends in claims severity, and other variable factors such as
inflation and changing judicial theories of liability. Our liability for unpaid losses and LAE is not discounted.
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For additional information, see Part II, Item 7, “Critical Accounting Policies” and Part II, Item 8, Note 9 “Unpaid Losses and Loss Adjustment
Expenses”.
Investments
The majority of funds available for investments are deployed in a widely diversified portfolio of high quality, liquid, taxable U.S. government, tax-
exempt, and taxable U.S. municipal and taxable corporate and U.S. agency mortgage-backed bonds. The Company regularly monitors the effective
duration of its fixed maturity investments, and the Company’s investment purchases and sales are executed with the objective of having adequate funds
available to satisfy its insurance and debt obligations. Generally, the expected principle and interest payments produced by the Company’s fixed maturity
portfolio adequately funds the estimated runoff of the Company’s insurance reserves. The substantial amount by which the fair value of the fixed maturity
portfolio exceeds the value of the net insurance liabilities, as well as the positive cash flow from newly sold policies and the large amount of high-quality
liquid bonds, contributes to the Company’s ability to fund claim payments without having to sell illiquid assets or access its credit facilities.
The Company also invests a much smaller percentage of the portfolio in private placement debt offerings and equity securities, which have the
potential for higher returns but also involve varying degrees of risk, including less stable rates of return and less liquidity.
The Executive Committee of NI Holdings’ Board of Directors reviews and approves the Company’s investment policy periodically. The
investment portfolio is managed by Conning, Inc. and Disciplined Growth Investors.
For additional information, see Part II, Item 7, “Critical Accounting Policies” and Part II, Item 8, Note 5 “Investments”.
Financial Strength
Ratings are an important factor in assessing the Company’s competitive position in the insurance industry. The Company is reviewed regularly by
the independent rating agency AM Best, who assigns a financial strength rating to the Company, which reflects its assessment of an insurer’s ability to meet
its financial obligations to policyholders. An insurer’s financial strength rating is one of the primary factors evaluated by those in the market to purchase
insurance. A poor rating indicates that there is an increased likelihood that the insurer could become insolvent and therefore not able to fulfill its obligations
under the insurance policies it issues. This rating can also affect an insurer’s level of premium writings, the lines of business it can write, and, for insurers
like us that are also public registrants, the market value of its securities.
All of the Company’s insurance subsidiary and affiliate companies are rated “A” Excellent by AM Best, which is the third highest out of 15
possible ratings, under a group rating due to the intercompany pooling reinsurance agreement. AM Best has affirmed a stable financial strength outlook to
the group.
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Competition
The property casualty and crop insurance markets are competitive. We compete with stock insurance companies, mutual companies, and other
underwriting organizations. Our largest competitors in North Dakota for private passenger auto and homeowners include Progressive Casualty Insurance
Company, State Farm Mutual Insurance Company, American Family Insurance, Allstate Corporation, Farmers Union Mutual Insurance Company, and
Auto-Owners Insurance. In South Dakota and Nebraska, we have small market shares and our competitors are the large national and regional companies as
well as Farmers Mutual of Nebraska. In our non-standard auto markets, which are primarily Illinois, Nevada, and Arizona, our primary competitors are
regional carriers.
Westminster’s primary competition comes from regional carriers including Harford Mutual Insurance Company, Greater New York Mutual, and
Millers Capital. We also see competition from national companies like The Travelers Companies and Nationwide Mutual Insurance Company.
Based on 2020 data, Nodak Insurance is the largest writer of farmowners insurance in North Dakota. Our largest competitors include Farmers
Union Mutual Insurance Company, North Star Mutual Insurance Company, American Family Insurance, and Nationwide Mutual Insurance Company. In
Nebraska and South Dakota, we have a small farmowners market share, which is dominated by the large national and regional carriers.
The chart below shows the reported premiums written for multi-peril crop insurance through the federal multi-peril crop insurance program during
the years 2019 through 2021:
Federal multi-peril crop premiums:
Nationwide
North Dakota
South Dakota
Minnesota
Company multi-peril crop premiums:
North Dakota
South Dakota
Minnesota
Year Ended December 31,
2020
2021
2019
$
$
13,571,185
1,083,565
839,310
834,242
$
9,956,185
861,567
597,283
575,232
10,048,685
845,902
654,266
584,093
38,360
283
4,062
32,674
673
2,828
34,598
720
2,686
We also wrote less than $100 in multi-peril crop insurance in Nebraska for each of the last three years. The principal competitors in our markets
for multi-peril crop insurance include Chubb Corporation, QBE Insurance Group, Rural Community Insurance Services, CGB Enterprises, and Great
American Insurance Group.
The premium rates for multi-peril crop insurance are established by the RMA and, accordingly, we compete with other insurance companies on
factors such as agency relationships, claim service, and market reputation in the crop insurance market. We believe that our relationship with the NDFB and
our leading market share are significant factors in maintaining our market share of the crop insurance business in North Dakota.
With respect to writing property and casualty insurance, we compete on a number of factors such as pricing, agency relationships, policy support,
claim service, and market reputation. Like other writers of property and casualty insurance, our policy terms vary from state to state based on state
regulations, competition, pricing, and other factors including the prescribed minimum liability limits in each state. We believe our company differentiates
itself from many larger companies competing for this business by focusing on ease of doing business and providing excellent claims service with local,
knowledgeable employees.
To compete successfully in the property and casualty insurance market, we rely on our ability to identify insureds that are most likely to produce
an underwriting profit, operate with a disciplined underwriting approach, practice prudent claims management, reserve appropriately for unpaid claims, and
provide quality service and competitive commissions to our independent and captive agents.
Regulation
General
We are subject to extensive regulation, particularly at the state level. The method, extent, and substance of such regulation varies by state, but
generally has its source in statutes and regulations that establish standards and requirements for conducting the business of insurance and that delegate
regulatory authority to state insurance regulatory agencies. In general, such regulation is intended for the protection of those who purchase or use insurance
products, not the companies that write the policies. These laws and regulations have a significant impact on our business and relate to a wide variety of
matters including accounting methods, agent and company licensure, claims procedures, corporate governance, examinations, investing practices, policy
forms, pricing, trade practices, reserve adequacy, and underwriting standards.
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State insurance laws and regulations require our insurance company subsidiaries to file financial statements with state insurance departments
everywhere they do business, and they are subject to examination by the departments they are domiciled in at any time. Our insurance company
subsidiaries prepare statutory-basis financial statements in accordance with accounting practices and procedures prescribed or permitted by the state in
which they are domiciled. Our domiciliary states generally conform to National Association of Insurance Commissioners (“NAIC”) accounting practices
and procedures, so our examination reports and other filings generally are accepted by other states.
The NAIC provides guidance to the states with respect to standardized laws and regulations (including the accounting practices and procedures
discussed above), which represent an effort to standardize insurance industry practices across state lines, oftentimes referred to as “Model Regulations”. It
should be noted that these “model” laws are regulations that have no authority until the individual states pass them as part of the state legislative process,
which may, or may not, be done as suggested, or with modifications.
Premium rate regulation varies greatly among jurisdictions and lines of insurance. In the states in which our insurance company subsidiaries write
insurance, premium rates for the various lines of insurance are subject to either prior approval or limited review upon implementation. The premium rates
for multi-peril crop insurance are established by the RMA. For additional information, see Part I, Item 1, “Crop Insurance”.
Many jurisdictions have laws and regulations that limit an insurer’s ability to withdraw from a particular market. For example, states may limit an
insurer’s ability to cancel or non-renew policies. Laws and regulations that limit cancellation and non-renewal may restrict our ability to exit unprofitable
marketplaces in a timely manner.
Crop Insurance
The multi-peril crop insurance business is overseen by the federal government through the RMA. The RMA outlines policy language, establishes
premium rates, and develops loss adjustment procedures for insurance programs under the federal crop insurance program. In addition, through the Federal
Crop Insurance Corporation (“FCIC”), the RMA provides premium subsidies to farmers and sets the commission percentages that can be paid to agents.
All participating insurance carriers are subject to the same Standard Reinsurance Agreement (“SRA”), which outlines items such as reporting requirements
and claims handling procedures, proportional and non-proportional reinsurance terms, and the level of administrative and operating reimbursement paid to
insurers. The RMA also provides oversight to the approved insurance providers (“AIPs”). The AIPs are required to use the policies, premium rates, and
loss adjustment procedures set by the RMA without modification and are required to issue a policy to any eligible applicant regardless of risk or
profitability. The RMA conducts audits of AIPs with respect to claims and loss adjustment procedures.
American Agricultural Insurance Company is the AIP through which we issue multi-peril crop insurance policies and is the holder of the SRA
with the FCIC.
NAIC Risk-Based Capital Requirements
North Dakota and most other states have adopted the NAIC system of risk-based capital requirements that require insurance companies to
calculate and report information under a risk-based formula. These risk-based capital requirements attempt to measure statutory capital and surplus needs
based on the risks in a company’s mix of products and investment portfolio. Under the formula, a company first determines its “authorized control level”
risk-based capital. This authorized control level takes into account (i) the risk with respect to the insurer’s assets; (ii) the risk of adverse insurance
experience with respect to the insurer’s liabilities and obligations; (iii) the interest rate risk with respect to the insurer’s business; and (iv) all other business
risks and such other relevant risks as are set forth in the risk-based capital instructions. A company’s “total adjusted capital” is the sum of statutory capital
and surplus and such other items as the risk-based capital instructions may provide. The formula is designed to allow state insurance regulators to identify
weakly capitalized companies.
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The requirements provide for four different levels of regulatory attention. The “company action level” is triggered if a company’s total adjusted
capital is less than 2.0 times its authorized control level but greater than or equal to 1.5 times its authorized control level. At the company action level, the
company must submit a comprehensive plan to the regulatory authority that discusses proposed corrective actions to improve the capital position. The
“regulatory action level” is triggered if a company’s total adjusted capital is less than 1.5 times but greater than or equal to 1.0 times its authorized control
level. At the regulatory action level, the regulatory authority will perform a special examination of the company and issue an order specifying corrective
actions that must be followed. The “authorized control level” is triggered if a company’s total adjusted capital is less than 1.0 times but greater than or
equal to 0.7 times its authorized control level. At this level, the regulatory authority may take action it deems necessary, including placing the company
under regulatory control. The “mandatory control level” is triggered if a company’s total adjusted capital is less than 0.7 times its authorized control level.
At this level, the regulatory authority is mandated to place the company under its control. The capital levels of our insurance subsidiary and affiliate
companies all exceed the authorized control level and have never triggered any of these regulatory capital levels. We cannot guarantee, however, that the
capital requirements applicable to such companies will not increase in the future, or that the underlying ratios will not erode.
NAIC Ratios
The NAIC has also developed a set of 13 financial ratios referred to as the Insurance Regulatory Information System (“IRIS”). Based on statutory-
basis financial statements filed with state insurance regulators, the NAIC annually calculates these IRIS ratios to assist state insurance regulators in
monitoring the financial condition of insurance companies. The NAIC has established an acceptable range for each of the IRIS financial ratios. If four or
more of its IRIS ratios fall outside the range deemed acceptable by the NAIC, an insurance company may receive inquiries from individual state insurance
departments. During each of the years ended December 31, 2021, 2020 and 2019, none of our insurance company subsidiaries produced results outside the
acceptable range for more than two of the IRIS tests.
Enterprise Risk Assessment
In 2012, the NAIC adopted various changes to its Model Regulations (the “NAIC Amendments”). The NAIC Amendments, when adopted by the
various states, are designed to respond to perceived gaps in the regulation of insurance holding company systems in the United States. The NAIC
Amendments include a requirement that an insurance holding company system’s ultimate controlling person submit annually to its lead state insurance
regulator an “enterprise risk report”. This enterprise risk report identifies the activities, circumstances, or events involving one or more affiliates of an
insurer that, if not remedied properly, are likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance
holding company system as a whole. The Company files a Form F Enterprise Report annually with each domiciliary state in support of this requirement.
The NAIC Amendments also include provisions requiring a controlling person to submit prior notice to its domiciliary insurance regulator of its divestiture
of control, having detailed minimum requirements for cost sharing and management agreements between an insurer and its affiliates, and expanding of the
agreements between an insurer and its affiliates to be filed with its domiciliary insurance regulator.
In 2012, the NAIC also adopted the Own Risk Solvency Assessment (“ORSA”) Model Act. The ORSA Model Act, when adopted by the various
states, will require an insurance holding company system’s chief risk officer to submit at least annually to its lead state insurance regulator a confidential
report detailing its own internal solvency assessment. Such an assessment is to be tailored to the nature, scale, and complexity of an insurer. This
assessment will include the material and relevant risks identified by the insurer associated with an insurer’s current business plan and the sufficiency of
capital resources to support those risks. Although our insurance company subsidiaries are exempt from ORSA because of their size, we intend to
incorporate those elements of ORSA that it believes constitute “best practices” into its annual internal enterprise risk assessment.
Market Conduct Regulation
State insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers, including
provisions governing the form and content of disclosure to consumers, illustrations, advertising, sales practices, and complaint handling. State regulatory
authorities generally enforce these provisions through periodic market conduct examinations.
Guaranty Fund Laws
All states have guaranty fund laws under which insurers doing business in the state can be assessed to fund policyholder liabilities of insolvent
insurance companies. Under these laws, an insurer is subject to assessment depending upon its market share in the state of a given line of business. For the
years ended December 31, 2021, 2020 and 2019, we paid only minimal assessments pursuant to state insurance guaranty association laws. We establish
reserves relating to insurance companies that are subject to insolvency proceedings when it becomes probable that we will be subject to an assessment and
the amount of such assessment can be estimated. We cannot predict the amount and timing of any future assessments under these laws.
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Federal Regulation
The U.S. federal government generally does not directly regulate the insurance industry except for certain areas of the market, such as insurance
for crops, flood, nuclear, and terrorism risks. However, the federal government has undertaken initiatives or considered legislation in several areas that may
affect the insurance industry, including tort reform, corporate governance, and the taxation of reinsurance companies. The Dodd-Frank Act established the
Federal Insurance Office, which is authorized to study, monitor, and report to Congress on the insurance industry and to recommend that the Financial
Stability Oversight Council designate an insurer as an entity posing risks to the U.S. financial stability in the event of the insurer’s material financial
distress or failure. In December 2013, the Federal Insurance Office issued a report on alternatives to modernize and improve the system of insurance
regulation in the United States, including by increasing national uniformity through either a federal charter or effective action by the states. Changes to
federal legislation and administrative policies in several areas, including changes in federal taxation, can also significantly affect the insurance industry and
us.
We are also subject to the Fair and Accurate Credit Transactions Act of 2003 and the Health Insurance Portability and Accountability Act of 1996,
both of which require us to protect the privacy of our customers’ information, including health and credit information.
Privacy
We are subject to numerous U.S. federal and state laws governing the collection, disclosure, and protection of personal and confidential
information of our clients or employees. These laws and regulations are increasing in complexity and number, change frequently, and may conflict.
Congress, state legislatures, and regulatory authorities are expected to consider additional regulation relating to privacy and other aspects of customer
information.
As mandated by the Gramm-Leach-Bliley Act (“GLBA”), states have promulgated laws and regulations that require financial institutions,
including insurance companies, to take steps to protect the privacy of certain consumer and customer information. The NAIC has adopted several
provisions to facilitate the implementation of the GLBA, including the Privacy of Consumer Financial and Health Information Model Regulation and the
Standards for Safeguarding Customer Information Model Regulation. Several states adopted similar provisions regarding the safeguarding of customer
information. We have implemented procedures to comply with the GLBA’s related privacy requirements.
In October 2017, the NAIC adopted the Insurance Data Security Model Law (“IDSML”), which requires insurers, insurance agents, and other
entities required to be licensed under state insurance laws to develop and maintain a written information security program, conduct risk assessments,
oversee the data security practices of third-party service providers, and other related requirements. It is not clear whether, and to what extent, legislatures or
insurance regulators in the states in which we, or our subsidiaries, operate will enact the IDMSL. Such enactments and regulations could raise compliance
costs and subject us to the risk of regulatory enforcement actions, penalties, and reputational harm. Any such events could potentially have an adverse
impact on our business, financial condition, or results of operations.
Office of Foreign Asset Control
The Treasury Department’s Office of Foreign Asset Control (“OFAC”) maintains a list of “Specifically Designated Nationals and Blocked
Persons” (the "SDN List"). The SDN List identifies persons and entities that the government believes are associated with terrorists, rogue nations, or drug
traffickers. OFAC’s regulations prohibit insurers, among others, from doing business with persons or entities on the SDN List. If the insurer finds and
confirms a match, the insurer must take steps to block or reject the transaction, notify the affected person, and file a report with OFAC.
Jumpstart Our Business Startups Act of 2012
We are an EGC, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we may take advantage of certain
exemptions from various reporting requirements that are applicable to other public companies that are not EGCs, such as reduced public company
reporting, accounting, and corporate governance requirements. However, beginning on December 31, 2022, we will no longer be an EGC and will no
longer have the ability to delay adoption of these new or revised accounting standards, or to take advantage of reduced corporate governance disclosures.
Dividends
As an insurance holding company with no independent operations or source of revenue, our capacity to pay dividends to our shareholders is based
on the ability of our insurance company subsidiaries to pay dividends to us. The ability of our subsidiaries to pay dividends to us is regulated by the laws of
their state of domicile. Under these laws, insurance companies must provide advance informational notice to the domicile state insurance regulatory
authority prior to payment of any dividend or distribution to its shareholders. Prior approval from the state insurance regulatory authority must be obtained
before payment of an “extraordinary dividend” as defined under the state's insurance code. For additional information, see Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”, and Part II, Item 8, Note 21 “Statutory Net
Income, Capital and Surplus, and Dividend Restrictions”.
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Holding Company Laws
Most states, including North Dakota, have enacted legislation that regulates insurance holding company systems. Each insurance company in a
holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish certain information, including
information concerning the operations of companies within the holding company group that may materially affect the operations, management, or financial
condition of the insurers within the group. Pursuant to these laws, the North Dakota Insurance Department requires prior disclosure of material transactions
involving an insurance company and its affiliates. Under these laws, the North Dakota Insurance Department will have the right to examine us at any time.
All transactions within our consolidated group affecting our insurance company subsidiaries must be fair and equitable. Notice of certain material
transactions between NI Holdings and any person or entity in our holding company system will be required to be given to the Department of Insurance of
the applicable domiciliary state. Certain transactions cannot be completed without the prior approval of the various Departments of Insurance.
Approval of the state insurance commissioner is required prior to any transaction affecting the control of an insurer domiciled in that state. In
North Dakota, the acquisition of 10% or more of the outstanding voting securities of an insurer or its holding company is presumed to be a change in
control. North Dakota law also prohibits any person or entity from (i) making a tender offer for, or a request or invitation for tenders of, or seeking to
acquire or acquiring any voting security of a North Dakota insurer if, after the acquisition, the person or entity would be in control of the insurer, or (ii)
effecting or attempting to effect an acquisition of control of or merger with a North Dakota insurer, unless the offer, request, invitation, acquisition,
effectuation, or attempt has received the prior approval of the North Dakota Insurance Department.
Human Capital
The Company’s key human capital management objectives are to attract, retain, and develop talent to deliver on the Company’s strategy. To
support these objectives, the Company’s human resources programs are designed to recruit and retain talented individuals; provide training and
development within the Company and the insurance industry; reward and support employees through competitive pay and benefit programs; keep
employees safe and healthy; and provide opportunities for community involvement.
We offer comprehensive compensation and benefits packages to our employees including a 401k Plan, Employee Stock Ownership Plan
(“ESOP”), healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, and flexible work arrangements. We also offer
stock-based compensation to certain management personnel as a way to attract and retain key talent. For additional information, see Part II, Item 8, Note 13
“Benefit Plans” and Note 19 “Stock-Based Compensation” for further discussion of our benefit plans and stock-based compensation.
As of December 31, 2021, NI Holdings and its subsidiaries had 207 total employees, of which 204 were full-time employees. Employee turnover
averaged 14.7% during 2021, compared to 17.3% during 2020.
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Item 1A. Risk Factors
An investment in the Company’s common shares involves certain risks. The following is a discussion of material risks and uncertainties that may
affect the Company’s business, financial condition, and future results.
Insurance Risks
Catastrophic or other significant natural or man-made losses may negatively affect our financial condition and operating results.
As a property and casualty insurer, we are subject to claims from catastrophes or other natural perils that may have a significant negative impact
on our operating and financial results. We have experienced catastrophe losses and can be expected to experience catastrophe losses in the future.
Catastrophe losses can be caused by various events, including snow storms, ice storms, freezing temperatures, tropical storms and hurricanes, earthquakes,
tornadoes, wind, hail, fires, and other natural or man-made disasters. In addition, longer-term natural catastrophe trends may be changing, and new types of
catastrophe losses may be developing due to climate change, a phenomenon that has been associated with extreme weather events linked to rising
temperatures, and includes effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail and snow. The
frequency, number, and severity of these losses are unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured
exposure in the area affected by the event and the severity of the event. Our ability to effectively manage catastrophe risk is dependent, in part, on the
reliance of various catastrophe models, which may produce unreliable output as a result of inaccurate or incomplete data, along with the inherent
uncertainty of future frequency and severity of losses. The impact of changing climate conditions on the overall insurance industry may also materially
affect the availability and cost of reinsurance to us. In addition, these changes could impact the creditworthiness of issuers of securities in which the
Company invests, subjecting our investment portfolio to increased credit and interest rate risk, with the potential for reduced investment returns and/or
material realized or unrealized losses.
Despite our continued geographic expansion, we write a significant amount of business in North Dakota. As a result, adverse developments from
severe weather events in North Dakota would have a greater effect on our financial condition and results of operations than if our business was less
geographically concentrated. The incidence and severity of such events are inherently unpredictable.
We attempt to reduce our exposure to catastrophe losses through a disciplined underwriting and risk management approach that emphasizes long-
term profitability over short-term gains in premiums or market share, continued geographical diversification of our operations, and the use of reinsurance.
However, there can be no guarantee that our underwriting and risk management efforts will be successful in mitigating our exposure to catastrophe losses
or the impact of such losses when they occur. In addition, while we maintain reinsurance coverage with a catastrophe excess of loss program, such
coverage may be insufficient to cover our losses. Our reinsurance coverage includes a catastrophe excess of loss program, which in 2021 limited our
catastrophe exposure to $10 million retention per event, with $117 million of reinsurance coverage placed in excess of this retention. In 2022, our
catastrophe exposure was increased to $15 million retention per event, with $125 million of reinsurance coverage placed in excess of this retention. If we
are not able to effectively mitigate our exposure to catastrophe losses, whether through our underwriting process or reinsurance coverage, in the event of
such losses our business and results of operations could be adversely affected.
For additional information, see Part II, Item 8, Note 2 “Summary of Significant Accounting Policies” and Note 7 “Reinsurance.”
Changes in the legal, regulatory, and economic environments in which we operate could materially impact our financial results, including
our loss reserves, operating expenses, and investment portfolio.
We maintain reserves to cover estimated unpaid losses and expenses necessary to settle claims. The reserves for losses and loss adjustment
expenses (“LAE”) that we have established are estimates of amounts needed to pay reported and unreported claims and related expenses, based on facts and
circumstances known to us at the time we established the reserves. Reserves are actuarially projected based on historical claims information, industry
statistics, anticipated trends, and other factors. The process of estimating loss reserves involves a high degree of judgment and is subject to a number of
variables. While we believe that our reserves for unpaid losses and LAE are appropriate, to the extent that such reserves prove to be inadequate or
excessive in the future, we would adjust them and recognize the change in earnings in the period the reserves are adjusted. There can be no assurance that
the estimates of such liabilities will not change in the future and any such adjustment could have a material impact on our financial condition and results of
operations. For additional information, see Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”,
“Losses and Loss Adjustment Expenses”, and Part II, Item 8, Note 9 “Unpaid Losses and Loss Adjustment Expenses.”
It is possible that, among other things, past or future steps taken by the federal government and the Federal Reserve to stimulate the U.S. economy,
including actions taken in response to COVID-19 such as fiscal and monetary policy measures, and tax reform, could lead to higher inflation than we had
anticipated, which generally leads to increased loss costs and other operating expenses. However, our relatively high concentration in short tail lines of
business limits the potential impact of this exposure and allows us to price for those increases on a timely basis.
Potential higher interest rates oftentimes correlated to inflation could reduce the carrying value of our fixed maturity and short-term investments,
negatively impacting the Company's book value in the short-term. Over the long-term, however, higher interest rates would provide an incremental benefit
to our net investment income over time as excess cash and proceeds of maturing bonds are reinvested at higher rates. We manage our exposure to interest
rate increases by monitoring the duration within our investment portfolio and maintaining maturities that minimize any forced sales within the portfolio.
However, even with such monitoring efforts, we may be forced to sell securities at a loss, which would adversely affect our results of operations.
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Any downgrade in our A.M. Best Company, Inc. rating could affect our ability to write new business or renew our existing business,
which would lead to a decrease in revenue and net income.
Third-party rating agencies, such as AM Best, periodically assess and rate the claims-paying ability of insurers based on criteria established by the
rating agencies. Ratings assigned by AM Best are an important factor influencing the competitive position of insurance companies. AM Best ratings, which
are reviewed at least annually, represent independent opinions of financial strength and ability to meet obligations to policyholders and are not directed
toward the protection of investors. Therefore, our AM Best rating should not be relied upon as a basis for an investment decision to purchase our common
stock.
All of the Company’s insurance subsidiaries hold a financial strength rating of “A” (Excellent) by AM Best, the third highest rating out of 15
rating classifications. Our most recent rating by AM Best was issued on April 14, 2021. Financial strength ratings are used by agents, customers, lenders,
and other insurance carriers as a means of assessing the financial strength and quality of insurance companies. If our financial position deteriorates, we may
not maintain our favorable financial strength rating from AM Best. A downgrade of our rating could severely limit or prevent us from writing desirable
business or from renewing our existing business. In addition, a downgrade could negatively affect our ability to implement our strategy because it could
cause our current or potential agents to choose other more highly rated competitors or reduce our ability to obtain reinsurance. For additional information,
see Part I, Item 1, “Business” and “Financial Strength.”
Our results may fluctuate as a result of many factors, including cyclical changes in the insurance industry, competition, and innovation
and emerging technologies.
The property and casualty insurance industry has historically been characterized by soft markets (periods of relatively high levels of price
competition, less restrictive underwriting practices, and generally low premium rates) followed by hard markets (periods of capital shortages resulting in a
lack of insurance availability, relatively low levels of price competition, more selective underwriting of risks, and relatively high premium rates). During
soft markets, we may lose business to other carriers offering competitive insurance at lower rates. We may also choose to reduce our premiums or limit
premium increases leading to a reduction in profit margins and revenues. Our industry is also influenced by general economic conditions, which could
reduce overall premium volume for us and our competitors. Additionally, the industry could be impacted by changes in customer preferences, including
customer demand for direct distribution channels, point-of-sale, or other non-traditional distribution channels. Consolidation within the industry also could
influence future growth and profit potential.
We monitor the competitive marketplace on both a geographic and line of business basis. The private passenger marketplace continues to be a very
competitive and challenging pricing environment. Rates for private passenger auto are competitive across the country. The non-standard auto market also
remains competitive with more companies seeking to grow this line of business.
The commercial property market has experienced significant hardening in recent years, allowing us to demand more premium while being more
selective on individual risks. If we do not effectively respond to changes in market conditions, the Company may be adversely affected.
Innovation and emerging technologies are greatly impacting the insurance industry. If we are unable to keep pace with the technological changes
that our competitors implement, we may not be able to attract and maintain customers, adequately price risks, or operate as efficiently as our competitors.
In addition, emerging technologies in the automotive industry such as autonomous vehicles, driver-assistance and accident-avoidance features, sensor
technology, and other forms of automation may reduce the future need for, or decrease the future pricing of, our auto insurance products.
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Our success depends primarily on our ability to underwrite risks effectively and price our insurance products appropriately.
The nature of the insurance business is such that pricing must be determined before the underlying costs are fully known. This requires significant
reliance on estimates and assumptions in setting prices. If we fail to appropriately price the risks we insure or if our claims experience is more frequent or
severe than our underlying risk assumptions, our profitability may be negatively affected. If we overestimate the risks we are exposed to, we may overprice
our products, and new business growth and retention of existing business may be adversely affected. The ability to effectively underwrite risks and price
products appropriately is subject to a number and uncertainties, including:
•
availability of sufficient reliable data and our ability to properly analyze available data;
• market and competitive conditions;
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regulatory or legislative changes;
selection and application of appropriate pricing techniques; and
adverse changes in claims experience, such as distracted driving or a more aggressive tort environment.
Under the federal crop insurance program, each insurer is required to accept every application for multi-peril crop insurance that they receive, and
the premiums and the policy terms are set by the RMA, which is the federal government agency administering the federal crop insurance program.
Accordingly, no policy underwriting is necessary in connection with our multi-peril crop insurance line of business. Unlike the multi-peril crop business,
we have the ability to underwrite and price crop hail insurance. We rely on AFBIS to underwrite our crop hail insurance line of business. If we believe the
policy will expose us to too much risk in a particular geographic area or if we are unwilling to insure the crop, we have the ability to decline to issue the
policy.
Our ability to manage our exposure to underwriting risks depends on the availability and cost of reinsurance coverage.
We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize underwriting results, and to increase underwriting
capacity. The availability and cost of reinsurance are subject to current market conditions and may vary significantly over time. Any decrease in the amount
of reinsurance maintained will increase our risk of loss. We may be unable to maintain our desired reinsurance coverage or to obtain other reinsurance
coverage in adequate amounts and/or favorable rates. If we are unable to maintain appropriate reinsurance coverage, it may be difficult for us to manage
our underwriting risks and operate our business profitably. For additional information, see Part II, Item 8, Note 7 “Reinsurance.”
If we cannot collect loss recoveries from our reinsurers in accordance with our reinsurance agreements, we may incur additional losses.
Although reinsurance creates a contractual liability for reinsurers to the extent the risk is transferred, it does not eliminate our liability to
policyholders because we remain liable as the direct insurer on all reinsured risks. Our reinsurance program strategically spreads exposure among a group
of highly-rated, geographically diverse, and well-capitalized reinsurers. All of our significant reinsurance partners are rated “A-” (Excellent) or better by
AM Best. However, we remain subject to credit risk relating to our ability to collect these recoverables. Our reinsurance recoveries are also subject to the
underlying losses meeting the qualifying conditions and specified limits within the respective contracts. Additionally, we are subject to the risk that
reinsurers may dispute their obligations to pay our claims. Our inability to collect a material recovery from a reinsurer on a timely basis, or at all, could
have material adverse effect on our liquidity, operating results, and financial condition. For additional information, see Part II, Item 8, Note 7
“Reinsurance.”
Business and Operational Risks
The impact of COVID-19 or a future pandemic, and related economic conditions, could materially affect our results of operations,
financial position, and/or liquidity.
We face risks associated with pandemics, including the impact of reduced economic activity and unemployment, government actions, and capital
markets disruption. These risks are unpredictable and difficult to quantify, and could vary significantly depending on the extent and duration of the
pandemic and related economic conditions, along with potentially impacting each of our business segments and geographic markets differently.
Any future federal, state, and local government actions to address the impact of a pandemic may adversely affect us. Regulatory restrictions or
requirements could impact pricing, risk selection, and our rights and obligations with respect to our policies and insureds, including our ability to cancel
policies or our right to collect premiums. It is also possible that changes in economic conditions and steps taken by federal, state, and local governments
could require an increase in taxes at the federal, state, and local levels, which would adversely impact our results of operations. Additionally, potential
capital markets disruption could lead to our fixed income portfolio being adversely impacted by ratings downgrades, increased bankruptcies, declines in
real estate valuations, and/or declines in fixed income yields, along with increased volatility in our equity portfolio.
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Competition for potential acquisitions from other property and casualty insurers could increase the price that we will be required to pay
in connection with future acquisitions.
Over-capacity in the property and casualty market has led other market participants to seek acquisitions in order to generate revenue growth.
These market conditions may cause significant competition for acquisitions and increase the price for acquisitions. This competitive market could impede
execution of our external growth strategy.
We may not be able to grow our business if we cannot retain and expand our captive and independent agent relationships, provide
competitive products for these agents to sell, and/or if consumers seek other distribution methods offered by our competitors.
Our ability to retain existing agents, and to attract new agents, is essential to the continued growth of our business. Nodak Insurance utilizes
captive agents who only sell our Company’s products. Outside of North Dakota, we write business through the independent agent distribution model. If we
are not able to offer competitive products and a competitive compensation structure to our captive agents and/or if our independent agents find it easier to
do business with our competitors, we may be unable to retain existing business or generate sufficient new business.
While our products are sold through either independent or captive agents, our competitors may sell insurance through other distribution models,
including the internet, direct marketing, or other emerging forms of distribution. To the extent that current and potential policyholders change their
insurance shopping preferences, this may have an adverse effect on our ability to grow, our financial position, and our results of operations.
Future acquisitions could disrupt our business and harm our financial condition or results of operations.
As part of our growth strategy, we will continue to evaluate opportunities to acquire other property and casualty insurers. Any potential future
acquisitions involve a number of risks that could materially adversely affect our business and operating results, including:
•
•
•
•
•
•
•
•
•
•
problems integrating the acquired operations into our existing business;
operating and underwriting results of the acquired operations not meeting our expectations;
diversion of management’s time and attention from our existing business;
higher than anticipated capital requirements;
difficulties in retaining business relationships with agents and policyholders of the acquired company;
risks associated with entering markets in which we lack extensive prior experience;
tax issues associated with acquisitions;
acquisition-related disputes, including disputes over contingent consideration and escrows;
potential loss of key employees of the acquired company; and
potential impairment of related goodwill and intangible assets.
We could be adversely affected by the loss of our existing management and/or other key employees.
The success of our business is dependent, to a large extent, on our ability to attract and retain key employees, in particular our senior officers and
key management of our insurance subsidiaries. Our business may be adversely affected if labor market conditions make it difficult for us to retain or, if
needed, replace our current key officers with individuals having equivalent qualifications and experience at compensation levels competitive for our
industry. There is significant competition from within the property and casualty insurance industry and from businesses outside the industry for those in key
management positions, as well as others possessing highly specialized knowledge in areas such as actuarial, accounting, information technology, and data
and analytics. If we are not able to successfully attract, retain, and motivate our employees, our business, financial results, and reputation could be
materially and adversely affected.
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While we believe we offer competitive compensation arrangements with our key employees, there can be no guarantee that we will be able to
retain our key employees. In addition, our employment and other agreements with our key officers do not include covenants not to compete or non-
solicitation provisions because they are unenforceable under North Dakota law.
A failure in our operational systems or infrastructure, or those of our third-party service providers, including operational errors, could
disrupt business, damage our reputation, and cause losses.
Our operations rely on the secure processing, storage, and transmission of confidential information, including in our computer systems and
networks and those of third-party service providers. We rely heavily on our operating systems in connection with issuing policies, paying claims, and
providing the information we need to conduct our business. We also rely on the operating systems of AFBIS in connection with various processes with
respect to our crop lines of business. Our business depends on effective information security and systems, and we place significant reliance on the integrity
and timeliness of the data our information systems process to run our business. A breakdown or disruption of any of these systems could materially
adversely affect our ability to conduct our business and our results of operations.
We are exposed to many other types of operational risk, including the risk of fraud by employees and outsiders, clerical and recordkeeping errors,
and computer or telecommunications systems malfunctions. Our business depends on our ability to process a large number of increasingly complex
transactions. If any of our operational, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially
adversely affected. Similarly, we depend on our employees. We could be materially adversely affected if one or more of our employees cause a significant
operational breakdown or failure, either as a result of human error or intentional sabotage or fraudulent manipulation of our operations or systems.
Cyberattacks, security breaches, or similar events affecting the technologies and systems we rely on to operate our business and to
maintain and protect sensitive Company and customer data could disrupt our operations, harm our reputation, and result in material losses.
We have implemented administrative and technical controls, have taken actions to reduce the risk of cyber incidents and to protect our information
technology and assets, and will continue to modify such procedures as circumstances warrant and negotiate appropriate terms in our agreements with third-
party providers to protect our assets. However, such measures may be insufficient to prevent unauthorized access, computer viruses, malware or other
malicious code or cyber-attack, business compromise attacks, catastrophic events, system failures and disruptions, employee errors or malfeasance, third
party (including outsourced service providers) errors or malfeasance, loss of assets, and other events that could have security consequences. Such an event
may result in data loss or loss of assets which could result in significant losses, reputational damage, or other adverse effects on our operations.
In addition, our technologies, systems, and networks may become the target of cyber-attacks or information security breaches that could result in
the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our insureds’ confidential, proprietary and other information, or
otherwise disrupt our or our insureds’ or other third parties’ business operations, which in turn may result in legal claims, regulatory scrutiny and liability,
reputational damage, the incurrence of costs to eliminate or mitigate further exposure, and the loss of customers. Although to date we are not aware of any
information security breaches or losses relating to cyber-attacks, there can be no assurance that we will not suffer such losses in the future. Our risk and
exposure to these matters remains heightened because of, among other things, the evolving nature and increasing frequency and sophistication of these
threats and the outsourcing of some of our business operations. As a result, cyber-security and the continued development and enhancement of our controls,
processes, and practices designed to protect our systems, computers, software, data, and networks from attack, damage, or unauthorized access remain a
priority. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective
measures or to investigate and remediate any information security vulnerabilities.
The compromise of personal, confidential, or proprietary information could also subject us to legal liability or regulatory action, including fines,
penalties, or intervention, under evolving cyber-security, data protection, and privacy laws and regulations enacted by the U.S. federal and state
governments. Such laws and regulations have become increasingly widespread and demanding in recent years and may result in increased compliance costs
and risk of regulatory actions or penalties. If incurred, such regulatory actions or penalties could harm our reputation. Any such events could have an
adverse impact on our business, financial condition or results of operations.
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Regulatory Risks
A portion of our written premiums and net profits are generated from multi-peril crop insurance business, and the loss of such business
as a result of a termination of or substantial changes to the Federal crop insurance program could have an adverse effect on our revenues and net
income.
In 2021, 2020 and 2019, our direct premiums written generated from the multi-peril crop insurance line of business were 12.0%, 11.5%, and
13.3%, respectively, of total written premiums. Through the FCIC, the United States government subsidizes insurance companies by assuming an
increasingly higher portion of losses incurred by farmers as a result of weather-related and other perils as well as commodity price fluctuations. The United
States government also subsidizes the premium cost to farmers for multi-peril crop yield and revenue insurance. Without this risk assumption, losses
incurred by insurance companies would be higher. Without the premium subsidy, the number of farmers purchasing multi-peril crop insurance would
decline significantly. Periodically, members of the United States Congress propose to significantly reduce the government’s involvement in the federal crop
insurance program in an effort to reduce government spending. If legislation is adopted to reduce the amount of risk the government assumes, the amount
of insurance premium subsidy provided to farmers or otherwise reduce the coverage provided under multi-peril crop insurance policies, losses would
increase and purchases of multi-peril crop insurance could experience a significant decline nationwide and in our market area. Such changes could have an
adverse effect on our revenues and income.
Assessments and premium surcharges for state guaranty funds and other mandatory pooling arrangements may reduce our profitability.
Most states require insurance companies authorized to do business in their state to participate in guaranty funds, which require the insurance
companies to bear a portion of the unfunded obligations of impaired, insolvent, or failed insurance companies. These obligations are funded by
assessments, which are expected to continue in the future. State guaranty associations levy assessments, up to prescribed limits, on all insurance companies
doing business in the state based on their proportionate share of premiums written in the lines of business in which the impaired, insolvent, or failed
insurance companies are engaged. Accordingly, the assessments levied on us may increase as we increase our written premiums. For additional
information, see Part I, Item 1, “Business” and “Regulation.”
In addition, as a condition to conducting business in some states, insurance companies are required to participate in residual market programs to
provide insurance to those who cannot procure coverage from an insurance carrier on a negotiated basis. Insurance companies generally can fulfill their
residual market obligations by, among other things, participating in a reinsurance pool where the results of all policies provided through the pool are shared
by the participating insurance companies. Although we price our insurance to account for our potential obligations under these pooling arrangements, we
may not be able to accurately estimate our liability for these obligations. Accordingly, mandatory pooling arrangements may cause a decrease in our profits.
As we write policies in new states that have mandatory pooling arrangements, we will be required to participate in additional pooling arrangements.
Further, the impairment, insolvency, or failure of other insurance companies in these pooling arrangements would likely increase the liability for other
members in the pool. The effect of assessments and premium surcharges or increases in such assessments or surcharges could reduce our profitability in
any given period or limit our ability to grow our business.
We are subject to insurance industry laws and regulations, as well as claims and legal proceedings, which if determined unfavorably,
could have a material adverse effect on our profitability.
We are subject to extensive supervision and regulation by the states in which we operate. The failure to comply with these regulations could
subject the Company to sanctions and fines, including the cancellation or suspension of our licenses, which could significantly impact our financial
condition and results of operations. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the
filing of annual and other reports relating to financial condition, holding company issues, and other matters.
In addition, regulatory authorities have relatively broad discretion to deny or revoke licenses for various reasons, including the violation of
regulations. Further, changes in the level of regulation of the insurance industry or changes in laws or regulations themselves or interpretations by
regulatory authorities could adversely affect our ability to operate our business. Federal laws and regulations, and the influence of international laws and
regulations, may have adverse effects on our business, potentially including a change from a state-based system of regulation to a system of federal
regulation, the repeal of the McCarran Ferguson Act, and/or measures under the Dodd-Frank Act that establish the Federal Insurance Office and provide for
a determination that a non-bank financial company presents systemic risk and therefore should be subject to heightened supervision by the Federal Reserve
Board. It is not known how this federal office will coordinate and interact with the NAIC and state insurance regulators. Adoption or implementation of any
of these measures may restrict our ability to conduct our insurance business, govern our corporate affairs, or effectively manage our cost of doing business.
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We also face a risk of litigation in the ordinary course of operating our businesses including the risk of class action lawsuits. We may become
subject to class actions and individual suits alleging breach of fiduciary or other duties, including our obligations to indemnify directors and officers in
connection with certain legal matters. We are also subject to litigation arising out of our general business activities such as contractual and employment
relationships and claims regarding the infringement of the intellectual property of others. Plaintiffs in class action and other lawsuits against us may seek
large or indeterminate amounts of damages, including punitive and treble damages, which may remain unknown for substantial periods of time.
Risks Related to Our Common Stock
Additional expenses from new stock-based benefit plans may adversely affect our profitability.
During 2020, our shareholders approved the adoption of our 2020 Stock and Incentive Plan (the “Plan”). Under the Plan, we may award
participants restricted shares of our common stock, options to purchase shares of our common stock, or other forms of awards. Restricted stock awards will
be made at no cost to the participants. The maximum number of shares of common stock that may be issued is set forth in the Plan. In addition, as part of
our initial public offering in 2017, the Company established its ESOP. The ESOP is intended to be an employee stock ownership plan within the meaning
of Internal Revenue Code Section 4975(e)(7) and invests solely in common stock of the Company.
In addition, any additional compensation expense resulting from the ESOP and the Plan may adversely affect our profitability. We cannot
determine the actual future amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices
require that they be based on the fair market value of the shares of common stock at specific points in the future; however, we expect them to be material.
We will recognize expenses for our ESOP when shares are committed to be released to participants’ accounts and will recognize expenses for restricted
stock awards and stock options over the vesting period of awards made to recipients. See Part II, Item 8, Note 13 “Benefit Plans” and Note 19 “Stock-
Based Compensation” for the actual amount of expenses to date.
Nodak Mutual Group’s majority control of our common stock will enable it to exercise voting control over most matters put to a vote of
shareholders.
Nodak Mutual Group owns a majority of our outstanding common stock and, through its Board of Directors, is able to exercise voting control over
most matters put to a vote of shareholders. The votes cast by Nodak Mutual Group may not be in the best interests of all shareholders. For example, Nodak
Mutual Group may exercise its voting control to defeat a shareholder nominee for election to the Board of Directors of NI Holdings. Moreover, Nodak
Mutual Group’s ability to elect the Board of Directors of NI Holdings restricts the ability of the minority shareholders of NI Holdings to effect a change of
control of management or engage in certain transactions. For example, some shareholders may desire a sale or merger transaction, since shareholders
typically receive a premium for their shares, or a second-step conversion transaction, since fully converted institutions tend to trade at higher multiples than
mutual holding companies.
In addition, certain provisions of our Articles of Incorporation, such as the existence of a classified Board of Directors, the prohibition of
cumulative voting for the election of directors, and the prohibition on any person or group acquiring and having the right to vote in excess of 10% of our
outstanding stock without the prior approval of the Board of Directors will make removal of the Company’s management difficult.
Our status as an insurance holding company with no direct operations could adversely affect our ability to fund operations, execute
future share repurchases, or meet potential future shareholder dividend and/or debt obligations.
We are an insurance holding company. A significant source of funds available to us for the payment of operating expenses, share repurchases, and
potential future dividends to shareholders and/or debt servicing are net proceeds from our initial public offering retained at the holding company,
management fees, and dividends from our subsidiaries. The payment of dividends by Nodak Insurance, Direct Auto, and Westminster to NI Holdings will
be restricted by North Dakota’s insurance law. If we are unable to obtain dividends from our subsidiaries as needed to fund our operations, our business and
financial results could be adversely affected.
Statutory provisions and provisions of our Articles of Incorporation and Bylaws may discourage takeover attempts of NI Holdings that
shareholders may believe are in their best interests.
We are subject to provisions of North Dakota corporate and insurance law that hinder a change of control. North Dakota law requires the North
Dakota Insurance Department’s prior approval of a change of control of an insurance holding company. Under North Dakota law, the acquisition of 10% or
more of the outstanding voting stock of an insurer or its holding company is presumed to be a change in control. Approval by the North Dakota Insurance
Department may be withheld even if the transaction would be in the shareholders’ best interest if the North Dakota Insurance Department determines that
the transaction would be detrimental to policyholders.
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Our Articles of Incorporation and Bylaws also contain provisions that may discourage a change in control. These provisions may serve to entrench
management and may discourage a takeover attempt that shareholders may consider to be in their best interest or in which they would receive a substantial
premium over the current market price. These provisions may make it extremely difficult for any one person, entity, or group of affiliated persons or
entities to acquire voting control of NI Holdings, with the result that it may be extremely difficult to bring about a change in the Board of Directors or
management. Some of these provisions also may perpetuate present management because of the additional time required to cause a change in the control of
the Board of Directors. Other provisions make it difficult for shareholders owning less than a majority of the voting stock to be able to elect even a single
director.
Beginning December 31, 2022, we will face expanded public company reporting requirements as a result of losing EGC status.
We will no longer qualify as an EGC as defined by the JOBS Act as of December 31, 2022. Effective with the 2022 Annual Report on Form 10-K
to be filed in 2023, we will no longer have the ability to take advantage of exemptions from various public company reporting requirements, including (i)
exemption from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”), (ii) reduced disclosure obligations
regarding executive compensation in our periodic reports, proxy statements, and registration statements, and (iii) exemptions from the requirements of
holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In
this Annual Report on Form 10-K, we have elected to take advantage of certain of the reduced disclosure obligations regarding financial statements and
executive compensation.
In addition, Section 107(b) of the JOBS Act provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)
(B) of the Exchange Act for complying with new or revised accounting standards. We have chosen to “opt in” to such extended transition period election
under Section 107(b). Therefore, we have elected to delay adoption of certain new or revised accounting standards, and as a result, could choose to not
comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-EGC companies. As a
result of such election, our financial statements may not be comparable to the financial statements of other public companies. However, beginning
December 31, 2022, we will no longer have the ability to delay adoption of these new or revised accounting standards. See Part II, Note 8, Note 4 “Recent
Accounting Pronouncements” for more information regarding new or revised accounting standards.
Our adoption of Section 404(b) of SOX will require our external auditor to attest to, and report on, our management’s assessment of internal
controls. A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be
met. If our controls are not designed appropriately or operating effectively, it could lead to financial loss, unanticipated risk exposure (including
underwriting, credit, and investment risk), errors in financial reporting, litigation, regulatory proceedings, or damage to our reputation.
General Risks
Our investment portfolio is subject to credit and interest rate risk, and therefore our revenues and financial results may fluctuate with
interest rates, investment results, equity market fluctuations, and developments in the capital markets.
The Company relies on the investment income produced by its investment portfolio to contribute to its profitability. Changes in interest rates and
credit quality may result in fluctuations in the income derived from, the valuation of, and in the case of declines in credit quality, payment defaults on our
fixed income securities. Such conditions could give rise to significant realized and unrealized investment losses or the impairment of securities whose
decreases in value are deemed other-than-temporary.
We also invest a portion of our assets in equity securities, which are subject to greater volatility in their investment returns than fixed maturity
investments. Unlike fixed income securities, the changes in the fair value of our equity securities are recognized in net income. General economic
conditions and stock market volatility, changes in applicable tax laws, and many other factors beyond our control can adversely affect the value of our non-
fixed maturity investments and the realization of net investment income, changes to the unrealized gains or losses, and/or result in realized investment
losses. As a result of these factors, we may realize reduced returns on these investments, incur losses on sales of these investments, and be required to write
down the value of these investments, which could reduce our net investment income and result in realized investment losses. In addition, the changes to the
fair value of equity securities that are recognized in net income will result in greater volatility to net income than investments in fixed income securities.
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Any significant or long-running negative changes in the fixed income or equity markets could have a material adverse effect on our financial
condition, results of operations, or cash flows. The Company’s investment portfolio is also subject to credit and cash flow risk, including risks associated
with its investments in asset-backed and mortgage-backed securities. Because the Company’s investment portfolio is the largest component of its assets and
a multiple of its shareholders’ equity, adverse changes in economic conditions could result in other-than-temporary impairments that are material to our
financial condition and operating results. Such economic changes could arise from overall changes in the financial markets or specific changes to
industries, companies, or municipalities in which we maintain investment holdings. See Part II, Item 7, “Quantitative and Qualitative Disclosures About
Market Risk.”
We may not be able to manage our growth effectively.
We intend to grow our business in the future, which could require additional capital, systems development, and skilled personnel. However, there
are inherent risks associated with this strategy, including the risks of unsuccessfully identifying profitable business opportunities, managing capital
requirements, expanding systems and internal controls, maintaining innovative products and technologies, allocating human capital resources, identifying
qualified employees and/or agents, and integrating future acquisitions. The failure to manage our growth effectively could have a material adverse effect on
our business, financial condition, and results of operations.
We could be adversely affected by a future unexpected business interruption involving our office buildings, operational systems and
infrastructure, key external vendors, and/or workforce.
Our business operations could be substantially interrupted by flooding, snow, ice, wind, and other weather-related incidents, or from fire,
pandemics, power loss, telecommunications failures, terrorism, or other such events. Despite successfully operating in a remote environment during the
COVID-19 pandemic, our business continuity plans may not sufficiently remediate all risks associated with another future significant business interruption.
Any damage caused by such a failure or loss may cause interruptions in our business operations that may adversely affect our service levels and business.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our headquarters is located at 1101 First Avenue North, Fargo, North Dakota, which is also the headquarters of Nodak Insurance. Nodak
Insurance owns this building and leases a portion of the building to the NDFB and to AFBIS.
Battle Creek owns the building in which its offices are located at 603 South Preece Street, Battle Creek, Nebraska.
On December 30, 2021, Primero entered into a new lease at 9950 West Cheyenne Ave, Las Vegas, Nevada, and sold its owned portion of the
building at 2640 South Jones Blvd, Suite 2, Las Vegas, Nevada on January 5, 2022. Tri-State Ltd. leases the building at 506 5th Street, Spearfish, South
Dakota.
Direct Auto leases office space at 8700 West Bryn Mawr Avenue, Chicago, Illinois under a lease that expires on August 31, 2029.
Westminster owns a portion of the building in which its offices are located at 8890 McDonogh Road, Suite 310, Owings Mills, Maryland.
We believe that the offices currently occupied by each of our subsidiaries are sufficient for their needs and any expected internal growth in the
near future.
Item 3. Legal Proceedings
We are party to litigation in the normal course of business. Based upon information presently available to us, we do not consider any litigation to
be material. However, given the inherent uncertainties of litigation, we cannot assure you that our results of operations and financial condition will not be
materially adversely affected by any litigation.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities
Market Information
The Company’s common shares trade on the NASDAQ Capital Market under the symbol “NODK”. As of February 28, 2022, there were
approximately 575 shareholders of record for the Company’s common stock.
Stock Performance Graph
The following graph shows the cumulative total shareholder return (stock price increase plus dividends) on our common stock from March 16,
2017 (the first date that shares of our common stock were available for trading) through December 31, 2021, along with the corresponding returns for the
Russell 2000 Index (as the broad stock market index) and the Dow Jones US P&C Insurance Index (as the published industry index). The graph assumes
that the value of the investment in the common stock and each index was $100 on March 16, 2017 and that all dividends were reinvested.
Dividend Policy
Our Board of Directors continues to evaluate a potential policy of paying regular cash dividends, but has not decided on the amounts that may be
paid, the frequency of any payment, or when any payments may begin. Therefore, the timing and the amount of cash dividends that may be paid to
shareholders in the future is uncertain. In addition, the Board of Directors may declare and pay periodic special cash dividends in addition to, or in lieu of,
regular cash dividends. In determining whether to declare or pay any dividends, whether regular or special, the Board of Directors will take into account
our financial condition and results of operations, income tax considerations, capital requirements, industry standards, and economic conditions. We cannot
guarantee that we will pay dividends or that, if paid, we will not reduce or eliminate dividends in the future.
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If we pay dividends to our shareholders, we also will be required to pay dividends to Nodak Mutual Group, unless Nodak Mutual Group elects to
waive the receipt of dividends. Because Nodak Mutual Group has no current plans to utilize any cash dividends that it may receive from us, we anticipate
that it will waive its right to receive substantially all of the dividends that are paid to it by us or immediately return substantially all of such funds to us as
an equity contribution. However, because the Board of Directors of Nodak Mutual Group includes persons who are not members of our Board of Directors,
we cannot provide any assurance that they will take such action with respect to any cash dividend that we may declare. If we are unable to obtain a
commitment from the Board of Directors of Nodak Mutual Group that it will waive its right to receive any cash dividend that we intend to declare or that it
will return the funds from such dividend to the Company as an equity contribution, our Board of Directors may decide not to declare a cash dividend.
We are not currently subject to regulatory restrictions on the payment of dividends to our shareholders. However, any future dividends may be
restricted to those received from our insurance subsidiaries, as our income is limited to earnings from the invested capital remaining from our initial IPO.
North Dakota law limits the amount of dividends and other distributions that Nodak Insurance, Direct Auto, and Westminster may pay to us. For
information regarding the regulatory restrictions on dividends our insurance subsidiaries can pay, refer to Part II, Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”, “Liquidity and Capital Resources”, and Part II, Item 8, Note 21 “Statutory Net Income, Capital
and Surplus, and Dividend Restrictions”.
Even if we receive dividends from Nodak Insurance, Direct Auto, or Westminster, we may not declare any dividends to our shareholders due to
working capital requirements. We are not subject to regulatory restrictions on the payment of dividends to shareholders, but we are subject to the
requirements of the North Dakota Business Corporation Act. This law generally permits dividends or distributions to be paid, to the extent we still have the
ability to pay our debts in the ordinary course of business after making the dividend or distribution payments. This law requires our total assets to exceed
our total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of holders of stock with senior liquidation rights
if we were to be dissolved at the time the dividend or distribution is paid.
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Unregistered Securities
The Company has not sold any unregistered securities within the past three years.
Use of Proceeds from Initial Public Offering
On January 17, 2017, 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 the underwriting discounts and offering expenses. Griffin Financial Group, LLC acted as our placement agent in
connection with the IPO.
Direct Auto was acquired on August 31, 2018 with $17,000 of the net proceeds from the IPO.
Westminster was acquired on January 1, 2020 for a purchase price of $40,000, subject to certain adjustments. The Company paid $20,000 from the
net proceeds from the IPO at time of closing. The terms of the acquisition agreement included payment of the remaining $20,000, subject to certain
adjustments, in three equal installments on each of the first and second anniversaries of the closing, and on the first business day of the month preceding the
third anniversary of the closing. The first two installments were paid in January 2021 and January 2022. The Company anticipates using the net proceeds
from the IPO to satisfy this obligation in December 2022.
From time to time, the Company may also repurchase its own stock. These repurchases may be used to satisfy its obligations under the equity
incentive plans or may be done for other reasons. To date, the Company has used net proceeds from the IPO to fund these buyback programs. For more
information, see Part II, Item 5, “Issuer Stock Purchases”.
There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on January
17, 2017.
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Issuer Stock Purchases
The Company had no common shares outstanding prior to March 13, 2017.
During 2017, our Board of Directors approved an authorization for the repurchase of up to $8,000 of the Company’s outstanding common stock.
We purchased 446,671 shares of our common stock for $8,037 during the three months ended June 30, 2017.
On February 28, 2018, our Board of Directors approved an authorization for the repurchase of up to approximately $10,000 of the Company’s
outstanding common stock. We completed the repurchase of 191,265 shares of our common stock for $2,966 during 2018, and an additional 116,034 shares
for $2,006 during 2019. During the six months ended June 30, 2020, we completed the repurchase of 402,056 shares of our common stock for $4,996 to
close out this authorization.
On May 4, 2020, our Board of Directors approved an additional authorization for the repurchase of up to approximately $10,000 of the Company’s
outstanding common stock. During the year ended December 31, 2020, we completed the repurchase of 454,443 shares of our common stock for $7,238
under this authorization. During the nine months ended September 30, 2021, we repurchased an additional 144,110 shares of our common stock for $2,762
to close out this authorization.
On August 11, 2021, our Board of Directors approved an additional authorization for the repurchase of up to approximately $5,000 of the
Company’s outstanding common stock. During the six months ended December 31, 2021, we completed the repurchase of 81,095 shares of our common
stock for $1,554 under this new authorization.
In total during the year ended December 31, 2021, we completed the repurchase of 225,205 shares of our common stock for $4,316. The
repurchases made in the three months ended December 31, 2021 are shown below:
Period in 2021
October 1 – 31, 2021
November 1 – 30, 2021
December 1 – 31, 2021
Total
Total Number of
Shares Purchased
19,329
17,899
19,584
56,812
$
$
Average Price
Paid Per Share
19.40
19.81
19.15
19.44
Maximum
Approximate
Dollar Value of
Shares
That May Yet Be
Purchased Under the
Plans or Programs (1)
(in thousands)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
19,329
17,899
19,584
56,812
$
$
4,176
3,821
3,446
3,446
(1)
Shares purchased pursuant to the August 11, 2021 publicly announced share repurchase authorization of up to approximately $5,000 of the
Company’s outstanding common stock.
Item 6. [Reserved]
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Item 7. 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 Consolidated Financial Statements alone. The discussion should be read in conjunction with the Consolidated Financial
Statements and the notes thereto included in Part II, Item 8, “Financial Statements and Supplementary Data.” Some of the information contained in this
discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K constitutes forward-looking information that involves risks and
uncertainties. Please see “Forward-Looking Statements” and Part I, Item 1A, “Risk Factors” for a discussion of important factors that could cause actual
results to differ materially from the results described, or implied by, the forward-looking statements contained herein.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2021
and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019
that are not included in this document can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part
II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 10, 2021.
All dollar amounts, except per share amounts, are in thousands.
Marketplace Conditions and Trends
The private passenger auto marketplace was impacted by increased loss severity throughout the year, as driving habits and miles driven returned to
pre-pandemic levels. Loss severity trends also continued to increase due to numerous factors, including the impacts that supply chain issues, inflation, and
technological advancements have had on the automobile market. As a result, elevated loss experience was common across much of the industry during
2021.
The non-standard auto market also remains competitive with many companies seeking growth in this line as a result of the challenging private
passenger auto market and the opportunity to cross-sell additional insurance products, such as homeowners or renters insurance, to the growing non-
standard auto market.
As opposed to most personal lines, the commercial multi-peril market continued to benefit from significant positive rate changes throughout 2021.
Unlike property and casualty insurance, the total crop insurance premiums written each year vary mainly based on prevailing commodity prices
for the type of crops planted, because the aggregate number of acres planted usually does not vary much from year to year. Because the premiums that are
charged for crop insurance are established by the RMA, and the policy forms and terms are also established by the RMA, insurers do not compete on price
or policy terms and conditions. Moreover, because participation in other federal farm programs by a farmer is conditioned upon participation in the federal
crop insurance program, most commercial farmers obtain crop insurance on their plantings each year.
Changing Climate Conditions
Longer-term natural catastrophe trends may be changing, and new types of catastrophe losses may be developing due to climate change, a
phenomenon that has been associated with extreme weather events linked to rising temperatures, and includes effects on global weather patterns,
greenhouse gases, sea, land and air temperatures, sea levels, rain, hail, and snow. The frequency, number, and severity of these losses are unpredictable. The
extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event.
Our ability to effectively manage catastrophe risk is dependent, in part, on the reliance of various catastrophe models, which may produce unreliable output
as a result of inaccurate or incomplete data, along with the inherent uncertainty of future frequency and severity of losses. The impact of changing climate
conditions on the overall insurance industry may also materially affect the availability and cost of reinsurance to us. In addition, these changes could impact
the creditworthiness of issuers of securities in which the Company invests, subjecting our investment portfolio to increased credit and interest rate risk,
with the potential for reduced investment returns and/or material realized or unrealized losses.
Principal Revenue Items
The Company derives its revenue primarily from net premiums earned, net investment income, and net capital gain on investments.
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Gross and net premiums written
Gross premiums written is equal to direct premiums written and assumed premiums before the effect of ceded reinsurance. Gross premiums
written are recognized upon sale of new insurance contracts or renewal of existing contracts. Net premiums written is equal to gross premiums written less
premiums ceded to reinsurers.
Premiums earned
Premiums earned is the earned portion of net premiums written. Gross premiums written include all premiums recorded by an insurance company
during a specified policy period. Insurance premiums on property and casualty policies are recognized in proportion to the underlying risk insured and are
earned ratably over the duration of the policies or, in the case of crop insurance, over the period of risk to the Company. At the end of each accounting
period, the portion of the premiums that is not yet earned is included in unearned premiums and is realized as revenue in subsequent periods over the
remaining term of the policy or period of risk. The Company’s property and casualty policies, other than some of our auto lines and the non-standard auto
policies, typically have a term of twelve months.
Due to the nature of the crop planting and harvesting cycle and the deadlines for filing and processing claims under the federal crop insurance
program, insurance premiums for crop insurance are recognized and earned during the period of risk, which usually begins in spring and ends with harvest
in the fall. In the case of prevented planting claims, the period of risk is shortened to the date a valid prevented planting claim is filed, as the Company
believes the period of risk has ended. Under the federal crop insurance program, farmers must purchase crop insurance with respect to spring planted crops
by March 15. By July 15, the farmer must report the number of acres he has planted in each crop. On September 1, the insurer bills the farmer for the
insurance premium, which is due and payable by the farmer by October 1. If the farmer does not pay the premium by such date, the insurer must essentially
provide a loan to the farmer in an amount equal to the premium at an annual interest rate of 15% because the insurer is required to pay the farmer’s portion
of the premium to the FCIC by November 15, regardless of whether the farmer pays the premium to the insurer. Except for claims occurring in the spring
(primarily for prevented planting and required replanting claims), claims are required to be filed with the FCIC by December 15. A different cycle exists
for crops planted in the fall, such as winter wheat, but the vast majority of crop insurance written by the Company covers crops planted in the spring.
Net investment income and net capital gain (loss) on investments
The Company invests its excess cash in fixed income and equity securities. Investment income includes interest and dividends earned on invested
assets, and is reported net of investment-related expenses. Net capital gains and losses on investments are reported separately from net investment income.
The Company recognizes realized capital gains when investments are sold for an amount greater than their cost or amortized cost (in the case of fixed
income securities) and realized capital losses when investments are written down as a result of an other-than-temporary impairment or are sold for an
amount less than their cost or amortized cost, as applicable. The Company recognizes changes in unrealized gains and losses of equity securities in net
income as part of net capital gains and losses on investments. These gains and losses may be significant given the fair market value of the equity portfolio
and the inherent volatility in equity markets. The changes in unrealized gains and losses on fixed income securities are recorded in other comprehensive
income (loss), net of income taxes. Therefore, these change have no impact on net income, but do impact shareholders’ equity.
The portfolio of investments for NI Holdings and its insurance subsidiaries is managed by Conning, Inc. and Disciplined Growth Investors. These
investment managers have discretion to buy and sell securities in accordance with the investment policy approved by our Board of Directors.
Principal Expense Items
The Company’s expenses consist primarily of losses and LAE, amortization of deferred policy acquisition costs, other underwriting and general
expenses, and income taxes.
Losses and Loss Adjustment Expenses
Losses and LAE represent the largest expense item and include (1) claim payments made, (2) estimates for future claim payments and changes in
those estimates from prior periods, and (3) costs associated with investigating, defending, and adjusting claims, including legal fees.
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Amortization of deferred policy acquisition costs and other underwriting and general expenses
Expenses incurred to underwrite risks are referred to as policy acquisition costs. Policy acquisition costs consist of commission expenses, state
premium taxes, and certain other underwriting expenses that vary with and are primarily related to the writing and acquisition of new and renewal business.
These policy acquisition costs are deferred and amortized over the effective period of the related insurance policies. Other underwriting and general
expenses consist of salaries, professional fees, office supplies, depreciation, and all other operating expenses not otherwise classified separately.
Income taxes
Current income taxes represent amounts paid to the federal government and certain states whose payment is based upon net income (subject to
regulatory adjustments) generated by the Company. As noted above, it does not include state premium taxes that are based purely on the collection of
policyholder premiums.
We use the asset and liability method of accounting for deferred income taxes. Deferred income taxes arise from the recognition of temporary
differences between financial statement carrying amounts and the income tax bases of its assets and liabilities. A valuation allowance is provided when it is
more likely than not that some portion of the deferred income tax asset will not be realized. The effect of a change in tax rates is recognized in the period of
the enactment date. Total income taxes reflect both current income taxes and the change in the net deferred income tax asset or liability, excluding amounts
attributed to accumulated other comprehensive income.
Critical Accounting Policies
General
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
requires both the use of estimates and judgment relative to the application of appropriate accounting policies. The Company is required to make estimates
and assumptions in certain circumstances that affect amounts reported in its 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 and that reported
results of operations would not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and
assumptions from time to time. We believe the following policies are the most sensitive to estimates and judgments.
Unpaid Losses and Loss Adjustment Expenses
How reserves are established
With respect to its traditional property and casualty insurance products, the Company maintains reserves for the payment of claims (indemnity
losses) and expenses related to adjusting those claims (LAE). The Company’s liability for unpaid losses and LAE consists of (1) case reserves, which are
reserves for claims that have been reported to it, and (2) IBNR, which are reserves for claims that have been incurred but have not yet been reported and for
the future development of case reserves.
LAE consist of two components – allocated loss adjustment expenses (“ALAE”) and unallocated loss adjustment expenses (“ULAE”). ALAE are
defense and cost containment expenses, including legal fees, court costs, and investigation fees, which are linked to the settlement of specific individual
claims or losses. ULAE are expenses that generally cannot be associated with a specific claim, including internal costs such as salaries and other overhead
costs, and also represent estimates of future costs to administer claims.
When a claim is reported to one of the insurance companies, its claims personnel establish a case reserve for the estimated amount of the ultimate
payment to the extent it can be determined or estimated. The amount of the loss reserve for the reported claim is based primarily upon an evaluation of
coverage, liability, damages suffered, and any other information considered pertinent to estimating the exposure presented by the claim. Each claim is
contested or settled individually based upon its merits, and some property and casualty claims may take years to resolve, especially in the unusual situation
that legal action is involved. Case reserves are reviewed on a regular basis and are updated as new information becomes available.
When a catastrophe occurs, which in the Company’s case usually involves the weather perils of wind and hail, we utilize mapping technology
through geographic coding of its property risks to overlay the path of the storm. This enables the Company to establish estimated damage amounts based on
the wind speed and size of the hail for case or per claim loss amounts. This process allows us to determine within a reasonable time (5 – 7 days) an
estimated number of claims and estimated losses from the storm. If we estimate the damages to be in excess of the retained catastrophe amount, reinsurers
are notified immediately of a potential loss so that the Company can quickly recover reinsurance payments once the retention is exceeded.
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In addition to case reserves, the Company maintains estimates of reserves for losses and LAE incurred but not reported. These reserves include
estimates for the future development of case reserves. Some claims may not be reported for several years. As a result, the liability for unpaid losses and
LAE includes significant estimates for IBNR.
The Company estimates multi-peril crop insurance losses on a quarterly basis based upon historical loss patterns, current crop conditions, current
weather patterns, and input from crop loss adjusters. These estimates have proven to be reasonably accurate indicators of the Company’s anticipated losses
for this line of business.
We utilize an independent actuary to assist with the estimation of the liability for unpaid losses and LAE. This actuary prepares estimates by first
deriving an actuarially based estimate of the ultimate cost of total losses and LAE incurred as of the financial statement date based on established actuarial
methods as described below. We then reduce the estimated ultimate loss and LAE by loss and LAE payments and case reserves carried as of the financial
statement date. The actuarially determined estimate is based upon indications from one of the following actuarial methodologies or uses a weighted average
of these results. The specific method used to estimate the ultimate losses varies depending on the judgment of the actuary as to what is the most appropriate
method for the property and casualty business. Management reviews these estimates and supplements the actuarial analysis with information not fully
incorporated into the actuarially based estimate, such as changes in the external business environment and internal company processes. We may adjust the
actuarial estimates based on this supplemental information in order to arrive at the amount recorded in the Consolidated Financial Statements.
The Company determines its ultimate liability for unpaid losses and LAE by using the following actuarial methodologies:
Bornhuetter-Ferguson Method — The Bornhuetter-Ferguson Method is a blended method that explicitly considers both actual loss development
to date and expected future loss emergence. This method is applied on both a paid loss basis and an incurred loss basis. This method uses selected loss
development patterns to calculate the expected percentage of losses unpaid (or unreported). The expected future loss component of the method is calculated
by multiplying earned premium for the given exposure period by a selected a priori (i.e. deductive) loss ratio. The resulting dollars are then multiplied by
the expected percentage of unpaid (or unreported) losses described above. This provides an estimate of future paid (or reported) losses that is then added to
actual paid (or incurred) loss data to produce the estimated ultimate loss.
Paid and Case Incurred Loss Development Method — The Paid and Case Incurred Loss Development Method utilizes ratios of cumulative
paid or case incurred losses or LAE at each age of development as a percent of the preceding development age. Selected ratios are then multiplied together
to produce a set of loss development factors which when applied to the most current data value, by accident year, develop the estimated ultimate losses or
LAE. Ultimate losses or LAE are then selected for each accident year from the various methods employed.
Ratio of Paid ALAE to Paid Loss Method — The Ratio of Paid ALAE to Paid Loss Method utilizes the ratio of paid ALAE to paid losses and is
similar to the Paid and Case Incurred Loss Development Method described above, except that the data projected are the ratios of paid ALAE to paid losses.
The projected ultimate ratio is then multiplied by the selected ultimate losses, by accident year, to yield the ultimate ALAE. ALAE reserves are calculated
by subtracting paid losses from ultimate ALAE.
The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected
by both internal and external events, such as changes in claims handling procedures, inflation, legal trends, increases in the state-dictated minimum liability
limits in the recent cases of nonstandard auto insurance, and legislative changes, among others. The impact of many of these items on ultimate costs for
losses and loss adjustment expenses is difficult to estimate. Loss reserve estimation is also affected by the volume of claims, the potential severity of
individual claims, the determination of occurrence date for a claim, and reporting lags (the time between the occurrence of the policyholder event and when
it is actually reported to the insurer). Informed judgment is applied throughout the process, including the application of various individual experiences and
expertise to multiple sets of data and analyses. We continually refine our estimates of unpaid losses and LAE in a regular ongoing process as historical loss
experience develops, and additional claims are reported and settled. We consider all significant facts and circumstances known at the time the liabilities for
unpaid losses and LAE are established.
There is an inherent amount of uncertainty in the establishment of liabilities for unpaid losses and LAE. This uncertainty is greatest in the current
and most recent accident years due to the relative newness of the claims being reported and the relatively small percentage of these claims that have been
reported, investigated, and adjusted by the Company’s claims staff. Therefore, the reserves carried in these more recent accident years are generally more
conservative than those carried for older accident years. As the Company has the opportunity to investigate and adjust the reported claims, both the case
and IBNR reserves are adjusted to more closely reflect the ultimate expected loss.
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Other factors that have or can have an impact on the Company’s case and IBNR reserves include but are not limited to those described below.
Changes in liability law and public attitudes regarding damage awards
Laws governing liability claims and judicial interpretations thereof can change over time, which can expand the scope of coverage anticipated by
insurers when initially establishing reserves for claims. In addition, public attitudes regarding damage awards can result in judges and juries granting higher
recoveries for damages than expected by claims personnel when claims are presented. In addition, these changes can result in both increased claim
frequency and severity as both plaintiffs and their legal counsel perceive the opportunity for higher damage awards. Reserves established for claims that
occurred in prior years would not have anticipated these legal changes and, therefore, could prove to be inadequate for the ultimate losses paid by the
Company, causing the Company to experience adverse development and higher loss payments in future years.
Change in claims handling and/or setting case reserves
Changes in Company personnel and/or the approach to how claims are reported, adjusted, and reserved may affect the reserves established by the
Company. As discussed above, the setting of IBNR reserves is not an exact science and involves the expert judgment of an actuary. One actuary’s reserve
opinion may differ slightly from another actuary’s opinion. This is the primary reason why the IBNR reserve estimate is customarily reported as a range by
a company’s actuary, which provides a company with an acceptable “range” to use in establishing its best estimate for IBNR reserves.
Economic inflation
A sudden and extreme increase in the economic inflation rate could have a significant impact on the Company’s case and IBNR reserves. When
establishing case reserves, claims personnel generally establish an amount that in their opinion will provide a conservative amount to settle the loss. If the
time to settle the claim extends over a period of years, which is possible but unlikely as the Company usually settles claims in less than 50 days on average,
the initial reserve may not anticipate an economic inflation rate that is significantly higher than the current inflation rate. This can also apply to IBNR
reserves. Should the economic inflation rate increase significantly, it is likely that the Company may not anticipate the need to adjust the IBNR reserves
accordingly, which could lead to the Company being deficient in its IBNR reserves.
Increases or decreases in claim severity for reasons other than inflation
Factors exist that can drive the cost to settle claims for reasons other than standard inflation. For example, demand surge caused by a very large
catastrophe, as in the case of a hurricane, has an impact on not only the availability and cost of building materials such as roofing and other materials, but
also on the availability and cost of labor. Other factors such as increased vehicle traffic in an area not designed to handle the increased congestion and
increased speed limits on busy roads are examples of changes that could cause claim severity to increase beyond what the Company’s historic reserves
would reflect. In addition, unexpected increases in the labor costs and healthcare costs that underlie insured risks, changes in costs of building materials, or
changes in commodity prices for insured crops may cause fluctuations in the ultimate development of the case reserves.
Actual settlement experience different from historical data trends
When establishing IBNR reserves, the Company’s actuary takes into account many of the factors discussed above. One of the more important
factors that is considered when setting reserves is the past or historical claim settlement experience. Our actuary considers factors such as the number of
files entering litigation, payment patterns, length of time it takes Company claims personnel to settle the claims, and average payment amounts when
estimating reserve amounts. Should future settlement patterns change due to the legal environment, Company claims handling philosophy, or personnel, it
may have an impact on the future claims payments, which could cause existing reserves to either be redundant (excessive) or deficient (below) compared to
the actual loss amount.
Change in Reporting Lag
As discussed above, NI Holdings and its actuary utilize historical patterns to provide an accurate estimate of what will take place in the future.
Should we experience an unexpected delay in reporting time (claims are slower to be reported than in the past), our actuary or we may underestimate the
anticipated number of future claims, which could cause the ultimate loss we may experience to be underestimated. A lag in reporting may be caused by
changes in how claims are reported (online vs. through company personnel), the type of business or lines of business the Company is writing, the
Company’s distribution system (direct writer, independent agent, or captive agent), and the geographic area where the Company chooses to insure risk.
Due to the inherent uncertainty underlying loss reserve estimates, final resolution of the estimated liability for unpaid losses and LAE may be
higher or lower than the related loss reserves at the reporting date. Therefore, actual paid losses, as claims are settled in the future, may be materially higher
or lower in amount than current loss reserves. The Company reflects adjustments to the liability for unpaid losses and LAE in the results of operations
during the period in which the estimates are changed.
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Table of Contents
Investments
NI Holdings’ fixed income securities and equity securities are classified as available-for-sale and carried at estimated fair value as determined by
management based upon quoted market prices or a recognized pricing service at the reporting date for those or similar investments. Changes in unrealized
investment gains or losses on the fixed income securities, net of applicable income taxes, are reflected directly in shareholders’ equity as a component of
other comprehensive income (loss) and, accordingly, have no effect on net income (loss). Changes in unrealized investments gains or losses on equity
securities are reported in net income (loss). Investment income is recognized when earned, and realized capital gains and losses on investments are
recognized when investments are sold, or other-than-temporary impairments are recognized.
For additional information on the Company’s investments, see Part II, Item 8, Note 5 “Investments” and Note 6 “Fair Value Measurements”.
Deferred Policy Acquisition Costs and Value of Business Acquired
Certain direct policy acquisition costs consisting of commissions, state premium taxes, and other direct underwriting expenses that vary with and
are primarily related to the production of business are deferred and amortized over the effective period of the related insurance policies as the underlying
policy premiums are earned.
As in the case of previous acquisitions, no deferred policy acquisition costs (“DAC”) were recorded in the acquisition of Westminster in
accordance with purchase accounting guidance. Rather, a separate intangible asset representing the value of business acquired (“VOBA”) was valued at
$4,750 and established at the closing date. This VOBA intangible asset was amortized into expense as the acquired unearned premiums were reported into
income, in the same way as DAC, and was fully amortized at December 31, 2020. Policy acquisition costs relating to new business written by Westminster
were deferred following the closing date. The release of the VOBA asset and the establishment of new DAC generally offset each other over the twelve
months following the acquisition of Westminster.
At December 31, 2021 and 2020, deferred policy acquisition costs and the related liability for unearned premiums were as follows:
Deferred policy acquisition costs
Liability for unearned premiums
There were no VOBA intangible assets remaining at December 31, 2021 or 2020.
December 31,
2021
2020
$
24,947
127,789
$
23,968
119,363
The method followed in computing DAC limits the amount of deferred costs to their estimated realizable value, which gives effect to the premium
to be earned, related investment income, losses and LAE, and certain other costs expected to be incurred as the premium is earned. Future changes in
estimates, the most significant of which is expected losses and LAE, may require adjustments to DAC. If the estimation of net realizable value indicates
that DAC are not recoverable, they would be written off or a premium deficiency reserve would be established.
Income Taxes
Current income taxes represent amounts paid to the federal government and certain states whose payment is based upon net income (subject to
regulatory adjustments) generated by the Company. The Company uses the asset and liability method of accounting for deferred income taxes. Deferred
income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the income tax bases of our assets and
liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred income tax asset will not be realized. Total
income taxes reflect both current income taxes and the change in the net deferred income tax asset or liability, excluding amounts attributed to accumulated
other comprehensive income.
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Table of Contents
The Company had gross deferred income tax assets of $10,070 at December 31, 2021 and $8,603 at December 31, 2020, arising primarily from
unearned premiums, loss reserve discounting, and net operating loss carryforwards. A valuation allowance is required to be established for any portion of
the deferred income tax asset for which the Company believes it is more likely than not that it will not be realized. A valuation allowance of $1,008 and
$931 was maintained at December 31, 2021 and December 31, 2020, respectively.
The Company had gross deferred income tax liabilities of $14,568 at December 31, 2021 and $16,429 at December 31, 2020, arising primarily
from deferred policy acquisition costs, net unrealized capital gains on investments, and other intangible assets.
The Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets.
These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining its deferred income tax
assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future
taxable income may require the Company to record a valuation allowance against its deferred income tax assets.
As of December 31, 2021, the Company had no material unrecognized income tax benefits or accrued interest and penalties. Federal income tax
returns for the years 2018 through 2020 are open for examination.
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Table of Contents
Results of Operations
Our results of operations are influenced by factors affecting the property and casualty insurance and crop insurance industries in general. The
operating results of the United States property and casualty industry and crop insurance industry are subject to significant variations due to competition,
weather, catastrophic events, changes in regulations, general economic conditions, rising medical expenses, judicial trends, fluctuations in interest rates,
and other changes in the investment environment.
Our premium levels and underwriting results have been, and will continue to be, influenced by market conditions. Pricing in the property and
casualty insurance industry historically has been cyclical. During a soft market cycle, price competition is more significant than during a hard market cycle
and makes it difficult to attract and retain properly priced business. During a hard market cycle, it is more likely that insurers will be able to increase their
rates or profit margins. A hard market typically has a positive effect on premium growth. The markets that we serve are diversified, which requires
management to regularly monitor our performance and competitive position by line of business and geographic market to schedule appropriate rate actions.
Premiums in the multi-peril crop insurance business are primarily influenced by the number of acres, commodity prices, and types of crops
insured because the rates are established by the RMA rather than individual insurance carriers. The expected experience of this business for the calendar
year may also significantly affect the reported net earned premiums and losses due to the risk-sharing arrangement with the federal government. Multi-peril
crop insurance premiums are generally written in the second quarter, and earned ratably over the period of risk, which generally extends into the fourth
quarter. However, as was the case in 2020, if we experience a higher-than-average number of prevented planting claims early in the season, recognition of
earned premiums may be accelerated due to a shortened risk period.
Premiums in the crop hail insurance business are also generally written in the second quarter, but earned over a shorter period of risk than multi-
peril crop insurance.
Premiums in our other lines of business are written and earned throughout the year based on their coverage periods. Losses on this business are
also incurred throughout the year, but usually are more frequent and/or severe during periods of elevated weather-related activity.
For more information on the Company’s results of operations by segment, see Part II, Item 8, Note 20 “Segment Information”.
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Table of Contents
Years ended December 31, 2021, 2020, and 2019
The consolidated net income for the Company was $8,332 for the year ended December 31, 2021, compared to $41,344 for the year ended
December 31, 2020 and $26,500 for the year ended December 31, 2019.
The major components of our operating revenues and net income for the three periods are shown below:
Revenues:
Net premiums earned
Fee and other income
Net investment income
Net capital gain on investments
Total revenues
Components of net income:
Net premiums earned
Losses and loss adjustment expenses
Amortization of deferred policy acquisition costs and other underwriting and general
expenses
Underwriting gain (loss)
Fee and other income
Net investment income
Net capital gain on investments
Income before income taxes
Income taxes
Net income
40
Year Ended December 31,
2020
2021
2019
299,589
1,775
7,131
15,479
323,974
299,589
216,379
96,289
(13,079)
1,775
7,131
15,479
11,306
2,974
8,332
$
$
$
$
283,661 $
1,801
7,271
13,624
306,357 $
246,438
2,125
7,433
14,783
270,779
283,661 $
168,473
246,438
169,710
85,068
30,120
1,801
7,271
13,624
52,816
11,472
41,344 $
67,258
9,470
2,125
7,433
14,783
33,811
7,311
26,500
$
$
$
$
Table of Contents
Net Premiums Earned
Net premiums earned:
Direct premium
Assumed premium
Ceded premium
Total net premiums earned
Year Ended December 31,
2020
2021
2019
$
$
333,254
8,035
(41,700)
299,589
$
$
301,061
6,459
(23,859)
283,661
$
$
257,661
5,897
(17,120 )
246,438
Net premiums earned for the year ended December 31, 2021 increased $15,928, or 5.6%, to $299,589, compared to $283,661 for the year ended
December 31, 2020.
Net premiums earned for the year ended December 31, 2020 increased $37,223, or 15.1%, to $283,661, compared to $246,438 for the year ended
December 31, 2019.
Net premiums earned:
Private passenger auto
Non-standard auto
Home and farm
Crop
Commercial
All other
Total net premiums earned
Year Ended December 31,
2020
2021
2019
$
$
72,533
58,585
73,792
26,848
57,285
10,546
299,589
$
$
72,009
53,737
74,879
35,718
38,288
9,030
283,661
$
$
67,983
57,114
71,171
38,019
4,097
8,054
246,438
Below are comments regarding significant changes in net premiums earned, by business segment:
Private passenger auto – Net premiums earned for 2021 increased $524, or 0.7%, from 2020. Premiums were impacted by continued soft market
conditions in this segment throughout the year.
Non-standard auto – Net premiums earned for 2021 increased $4,848, or 9.0%, from 2020. The segment has benefited from the improved
economic environment in the Chicago market where our non-standard auto business is concentrated.
Home and farm – Net premiums earned for 2021 decreased $1,087, or 1.5%, from 2020. The modest decrease was due to competitive market
conditions and the related rate reduction taken in early 2021 in the Nodak Insurance farmowners line of business, and a year-over-year increase in ceded
written premiums for this business.
Crop – Net premiums earned for 2021 decreased $8,870, or 24.8%, from 2020. Direct earned premiums increased by $3,648 primarily due to
higher commodity prices on multi-peril crop business. However, this increase was offset by a large increase in ceded earned premiums as a result of
significant multi-peril crop losses from this year’s extreme drought conditions across North and South Dakota. We also placed a higher number of multi-
peril crop policies in the assigned risk fund of the SRA for 2021, resulting in higher levels of premiums and losses being ceded to the federal government.
Commercial – Net premiums earned for 2021 increased $18,997, or 49.6%, from 2020. The increase was primarily driven by growth in our
Westminster commercial business as a result of a continuation of favorable market conditions, the positive impact of Westminster’s financial size category,
and the 2020 AM Best rating upgrade.
All other – Net premiums earned for 2021 increased $1,516, or 16.8%, from 2020. Net premiums earned increased related to our participation in
an assumed domestic and international reinsurance pool of business. As of January 1, 2022, the Company made the decision to non-renew its participation
in these pools.
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Table of Contents
Losses and Loss Adjustment Expenses
Net losses and LAE:
Direct losses and LAE
Assumed losses and LAE
Ceded losses and LAE
Total net losses and LAE
Year Ended December 31,
2020
2021
2019
$
$
280,998
6,899
(71,518 )
216,379
$
$
185,370
3,308
(20,205 )
168,473
$
$
173,943
4,032
(8,265 )
169,710
Net losses and LAE for the year ended December 31, 2021 increased $47,906, or 28.4%, to $216,379, compared to $168,473 for the year ended
December 31, 2020.
Net losses and LAE for the year ended December 31, 2020 decreased $1,237, or 0.7%, to $168,473, compared to $169,710 for the year ended
December 31, 2019.
Net losses and LAE:
Private passenger auto
Non-standard auto
Home and farm
Crop
Commercial
All other
Total net losses and LAE
Loss and LAE ratio:
Private passenger auto
Non-standard auto
Home and farm
Crop
Commercial
All other
Total loss and LAE ratio
Year Ended December 31,
2020
2021
2019
$
$
59,721
34,453
52,145
27,831
34,779
7,450
216,379
$
$
45,511
30,347
36,745
31,379
20,430
4,061
168,473
$
$
52,696
32,654
45,601
32,091
2,489
4,179
169,710
Year Ended December 31,
2020
2021
2019
82.3%
58.8%
70.7%
103.7%
60.7%
70.6%
72.2%
63.2%
56.5%
49.1%
87.9%
53.4%
45.0%
59.4%
77.5%
57.2%
64.1%
84.4%
60.8%
51.9%
68.9%
Below are comments regarding significant changes in net losses and LAE, and the net loss and LAE ratios, by business segment:
Private passenger auto – The net loss and LAE ratio deteriorated 19.1 percentage points in 2021 compared to 2020. The increase was a result of
a return to average loss frequency due to increased miles driven by our insureds compared to 2020 when pandemic-related restrictions were still in place.
Loss experience in 2021 has also been adversely impacted by an increase in uninsured/underinsured motorist liability claims frequency, as well as increased
severity due to inflationary factors. We are assessing necessary future rate actions as a result of the increased loss activity.
Non-standard auto – The net loss and LAE ratio deteriorated 2.3 percentage points in 2021 compared to 2020. Direct Auto has experienced
modest elevations in loss frequency and severity compared to 2020 despite increased miles being driven compared to 2020. Overall net losses and LAE
increased due to strong year-to-date direct written premium growth at Direct Auto. These profitable results have been offset by Primero’s higher loss
frequency and severity due largely to the continued economic challenges in the Las Vegas market.
Home and farm – The net loss and LAE ratio deteriorated 21.6 percentage points in 2021 compared to 2020. This increase was driven by above
average weather-related losses in 2021. These losses included a severe weather-related catastrophe event in North Dakota during June, along with
additional significant weather-related losses in Nebraska and South Dakota during the second half of the year.
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Table of Contents
Crop – The net loss and LAE ratio deteriorated 15.8 percentage points in 2021 compared to 2020. The extreme drought conditions across North
Dakota, South Dakota, and Minnesota resulted in significantly elevated multi-peril crop losses. However, in anticipation of the dry weather, we placed a
higher number of multi-peril crop policies in the assigned risk fund of the SRA for 2021, resulting in increased premiums and losses ceded to the federal
government.
Commercial – The net loss and LAE ratio deteriorated 7.3 percentage points in 2021 compared to 2020. This increase was primarily due to
increased fire loss frequency in the Westminster book of business during the first and second quarters. Westminster had a strong second half of the year as
the Company continued to benefit from favorable market conditions, along with improved loss frequency and severity.
All other – The net loss and LAE ratio deteriorated 25.6 percentage points in 2021 compared to 2020. The increase was primarily due to elevated
loss severity in our assumed domestic and international reinsurance pool of business, in particular anticipated losses associated with Hurricane Ida.
Amortization of Deferred Policy Acquisition Costs and Other Underwriting and General Expenses
Underlying expenses
Deferral of policy acquisition costs
Other underwriting and general expenses
Amortization of deferred policy acquisition costs
Total reported expenses
Year Ended December 31,
2020
2021
2019
97,269
(65,554)
31,715
64,574
96,289
$
$
93,637
(60,041)
33,596
51,472
85,068
$
$
69,791
(48,721)
21,070
46,188
67,258
$
$
Underlying expenses for the year ended December 31, 2021 decreased $3,632, or 3.9%, compared to the year ended December 31, 2020.
Underlying expenses for the year ended December 31, 2020 increased $23,846, or 34.2%, compared to the year ended December 31, 2019, primarily due to
the acquisition of Westminster.
Expense deferrals were $5,513 higher in the year ended December 31, 2021 compared to 2020, while amortization of those costs was $13,102
higher in 2021. This increase in net expense was primarily due to strong year-over-year growth in our commercial and non-standard auto segments which
generally pay higher agent commissions than our other lines, as well as growth in our other segments. In addition, under acquisition accounting, there were
no deferred policy acquisition costs reported on the acquisition balance sheet of Westminster, which had the impact of decreasing 2020 amortization of
deferred policy acquisition costs relative to future years. Offsetting this impact, the Company recorded an intangible asset, referred to as the VOBA, on its
acquisition balance sheet which was amortized during 2020 as a component of other underwriting and general expenses. As our mix of business has shifted
and these premiums continue to be earned, the related deferral and amortization of expenses have also changed.
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Table of Contents
Underwriting Gain (Loss)
Underwriting gain (loss):
Private passenger auto
Non-standard auto
Home and farm
Crop
Commercial
All other
Total underwriting gain (loss)
Combined ratio:
Private passenger auto
Non-standard auto
Home and farm
Crop
Commercial
All other
Total combined ratio
Year Ended December 31,
2020
2021
2019
$
$
(7,704) $
1,362
(475)
(9,195)
2,506
427
(13,079) $
6,512
2,651
17,260
(468 )
1,500
2,665
30,120
$
$
(3,599)
3,383
5,464
1,532
745
1,945
9,470
Year Ended December 31,
2020
2021
2019
110.6%
97.7%
100.6%
134.2%
95.6%
96.0%
104.4%
91.0%
95.1%
76.9%
101.3%
96.1%
70.5%
89.4%
105.3%
94.1%
92.3%
96.0%
81.8%
75.9%
96.2%
Underwriting gain (loss) measures the pre-tax profitability of our insurance operations. It is derived by subtracting losses and LAE, amortization
of deferred policy acquisition costs, and other underwriting and general expenses from net premiums earned. The combined ratio represents the sum of
these losses and expenses as a percentage of net premiums earned, and measures our overall underwriting profit. A combined ratio below 100% generally
indicates a profitable line of business.
The results from underwriting operations decreased $43,199 for the year ended December 30, 2021 compared to the year ended December 31,
2020. The overall combined ratio deteriorated 15.0 percentage points.
The primary drivers behind the elevated combined ratio for the year ended December 31, 2021 were the extreme drought conditions across North
Dakota, South Dakota, and Minnesota on our multi-peril crop business; above average weather-related losses in North Dakota, South Dakota, and
Nebraska; the return to average frequency, and increased severity due to inflationary factors, of private passenger and non-standard auto physical damage
claims; and higher levels of uninsured/underinsured motorist liability claims in private passenger auto.
These elevated losses were partially offset by profitable and strong growth from Direct Auto in the non-standard segment, along with continued
profitability and growth from Westminster’s commercial business, particularly during the second half of the year.
Fee and Other Income
The Company had fee and other income of $1,775 for the year ended December 31, 2021, compared to $1,801 for the year ended December 31,
2020, and $2,125 for the year ended December 31, 2019.
Fee income attributable to Primero’s non-standard auto business is a key component in measuring its profitability. Fee income on this business
decreased slightly during 2021 compared to 2020 due to a decreased policy count.
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Table of Contents
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:
Average cash and invested assets
Gross investment income
Investment expenses
Net investment income
Gross return on average cash and invested assets
Net return on average cash and invested assets
$
$
$
Year Ended December 31,
2020
2021
$
$
$
502,375
10,339
3,208
7,131
2.1%
1.4%
$
$
$
449,148
10,519
3,248
7,271
2.3%
1.6%
2019
394,403
9,826
2,393
7,433
2.5%
1.9%
Investment income, net of investment expense, decreased $140 for the year ended December 31, 2021 compared to the year ended December 31,
2020. This decrease was primarily driven by the continued impact of lower reinvestment rates in the fixed income securities portfolio.
The Company’s net return on average cash and invested assets declined year-over-year, driven by a combination of factors. Interest income
decreased primarily due to a persistent low reinvestment rate environment, ongoing maturities of existing holdings with higher embedded yields, and
significant cash inflows to the investment portfolio from the Company's business operations. These decreases were partially offset by an increased
allocation to high dividend equities within our equity portfolio, which increased the portfolio’s dividend yield compared to the prior year.
Net Capital Gain on Investments
Net capital gain on investments consisted of the following:
Gross realized gains
Gross realized losses, excluding other-than-temporary impairment losses
Net realized gain on investments
Change in net unrealized gain on equity securities
Net capital gain on investments
Year Ended December 31,
2020
2021
2019
18,130
(362)
17,768
(2,289)
15,479
$
$
9,740
(1,969)
7,771
5,853
13,624
$
$
4,652
(1,406)
3,246
11,537
14,783
$
$
The Company had realized capital gains on investment of $17,768 for the year ended December 31, 2021, compared to $7,771 for the year ended
December 31, 2020 and $3,246 for the year ended December 31, 2019. The Company reported no other-than-temporary losses during any of the periods
presented.
The Company’s equity portfolio experienced a decrease in net unrealized gains of $2,289 during the year ended December 31, 2021. The net
decrease is included in net capital gain on investments in the Company’s Consolidated Statements of Operations. It was primarily driven by $17,118 in net
realized gains taken throughout the year, as a result of ongoing portfolio rebalancing as well as a strategic reallocation of equity investment strategies
designed to increase exposure to income-oriented equities in order to maintain yield in the portfolio. The resulting net appreciation in the equity securities
portfolio of $14,289 in 2021 is indicative of a strong rally in U.S. equity markets during the year.
The Company’s fixed income securities are classified as available for sale because it will, from time to time, make sales of securities that are not
impaired, consistent with our investment goals and policies. The fixed income portion of the portfolio experienced a decrease in net unrealized gains of
$9,796 during the year ended December 31, 2021. The decrease was primarily the result of an increase in U.S. interest rates, with 5-year and 10-year U.S.
Treasury yields increasing during the year by 90 basis points and 60 basis points, respectively. The rise in rates was partially mitigated by a tightening of
credit spreads across fixed-income sectors, given an improvement in capital markets following the volatility affecting invested assets in 2020 due to the
impact of the COVID-19 pandemic.
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Table of Contents
Income before Income Taxes
For the year ended December 31, 2021, the Company had pre-tax income of $11,306, compared to $52,816 and $33,811 for the years ended
December 31, 2020 and 2019, respectively. The decrease in pre-tax results was largely attributable to the significant increase in loss experience during
2021.
Income Taxes
The Company recorded income tax expense of $2,974 for the year ended December 31, 2021, compared to $11,472 and $7,311 for the years ended
December 31, 2020 and 2019, respectively. Our effective tax rate for 2021 was 26.3% compared to an effective tax rate of 21.7% and 21.6% for 2020 and
2019, respectively.
A portion of the effective tax rate is due to Illinois state income taxes, which led to the increased effective tax rate in 2021 given the higher
proportion of these taxes relative to the Company’s overall income tax expense in comparison with 2020 and 2019.
The valuation against certain deferred income tax assets was $1,008 as of December 31, 2021 compared to $931 as of December 31, 2020.
Net Income
For the year ended December 31, 2021, net income before non-controlling interest was $8,332, compared to $41,344 and $26,500 for the years
ended December 31, 2020 and 2019, respectively. This decrease in net income was largely attributable to the significant increase in loss experience during
2021.
Return on Average Equity
For the year ended December 31, 2021, the Company had annualized return on average equity, after non-controlling interest, of 2.4%, compared to
annualized return on average equity, after non-controlling interest, of 12.4% and 9.1% for the years ended December 31, 2020 and 2019, respectively.
Average equity is calculated as the average between beginning and ending shareholders’ equity excluding non-controlling interest for the period.
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Liquidity and Capital Resources
The Company generates sufficient funds from its operations and maintains a high degree of liquidity in its investment portfolio to meet the
demands of claim settlements and operating expenses. The primary sources of funds are premium collections, investment earnings, and maturing
investments. In 2017, we raised $93,145 in net proceeds from our IPO, which we planned to use for strategic acquisitions.
In 2018, we used $17,000 for the acquisition of Direct Auto. On January 1, 2020, we acquired Westminster for $40,000. We paid $20,000 at the
time of closing. The terms of the acquisition agreement included payment of the remaining $20,000, subject to certain adjustments, in three equal
installments on each of the first and second anniversaries of the closing, and on the first business day of the month preceding the third anniversary of the
closing. The first two installments were paid in January 2021 and January 2022. The Company anticipates using the net proceeds from the IPO to satisfy
this obligation in December 2022.
We currently anticipate that cash generated from our operations and available from our investment portfolio, along with the remaining IPO net
proceeds, will be sufficient to fund our operations.
The Company’s philosophy is to provide sufficient cash flows from operations to meet its obligations in order to minimize the forced sales of
investments. The Company maintains a portion of its investment portfolio in relatively short-term and highly liquid assets to ensure the availability of
funds.
The changes in cash and cash equivalents for the years ended December 31, 2021, 2020, and 2019 were as follows:
Net cash flows from operating activities
Net cash flows from investing activities
Net cash flows from financing activities
Net increase (decrease) in cash and cash equivalents
Year Ended December 31,
2020
2021
2019
$
$
$
29,168
(48,151)
(11,471)
(30,454) $
51,010
200
(12,265)
38,945
$
$
25,665
(30,458)
(2,025)
(6,818 )
For the year ended December 31, 2021, net cash provided by operating activities totaled $29,168 compared to $51,010 a year ago. Consolidated
net income of $8,332 for the year ended December 31, 2021 compared to consolidated net income of $41,344 for the same period a year ago. The decrease
in consolidated net income, along with changes in reinsurance recoverables on losses, other assets, and unearned premiums, were offset by changes to the
FCIC receivable/payable and unpaid losses and LAE.
For the year ended December 31, 2021, net cash used by investing activities totaled $48,151 compared to $200 net cash provided by investing
activities a year ago. In 2021, the Company invested excess cash generated from operations and the implementation of the intercompany reinsurance
pooling agreement into longer term investments.
For the year ended December 31, 2021, net cash used by financing activities totaled $11,471 compared to $12,265 a year ago. The Company paid
the first installment of $6,667 of the additional consideration for Westminster during the first quarter of 2021. The Company repurchased shares of its own
common stock for $4,316 during 2021, compared to $12,234 during 2020.
For the year ended December 31, 2020, net cash provided by operating activities totaled $51,010 compared to $25,665 for the year ended
December 31, 2019. The consolidated net income of $41,344 for the year ended December 31, 2020 compared to consolidated net income of $26,500 for
the year ended December 31, 2019. The increase in cash flows from operating activities also reflected differences in the activity between the Company and
the FCIC during 2020 and 2019, growth in unearned premiums due to increasing sales of the Westminster commercial business, and lower levels of loss
and loss adjustment expenses. During 2019, unrealized gains on investments were offset by increases in unpaid losses and LAE and unearned premiums to
serve as the primary reconciling items between net income and net cash flows from operating activities.
For the year ended December 31, 2020, net cash provided by investing activities totaled $200 compared to $30,458 used by investing activities for
the year ended December 31, 2019. In 2020, the initial cash payment made at the time of the Westminster acquisition was $703 more than the cash and cash
equivalents received in the acquisition. During 2020, the sales and maturities of securities approximated the purchase of new securities. Normally, the
excess cash generated from operations would be invested in longer term investments. However, the implementation of the intercompany pooling
reinsurance agreement necessitated substantial cash transfers between the insurance company subsidiaries during December 2020, which were not fully
reinvested in longer-term investments by year-end. The prior year reflects the impact of investing excess cash generated from operations into longer term
investments, partially offset by sales and maturities of fixed income securities.
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Table of Contents
For the year ended December 31, 2020, net cash used by financing activities totaled $12,265 compared to $2,025 for the year ended December 31,
2019. The Company repurchased shares of its own common stock for $12,234 and $2,006 during 2020 and 2019, respectively.
As a standalone entity, and outside of the net proceeds from the IPO, the Company’s principal source of long-term liquidity will be dividend
payments from its directly-owned subsidiaries.
Nodak Insurance is restricted by the insurance laws of North Dakota as to the amount of liquid or other distributions it may pay to NI Holdings.
North Dakota law sets the maximum amount of dividends that may be paid by Nodak Insurance during any twelve-month period after notice to, but without
prior approval of, the North Dakota Insurance Department. This amount cannot exceed the lesser of (i) 10% of the Company’s surplus as regards
policyholders as of the preceding December 31, or (ii) the Company’s statutory net income for the preceding calendar year (excluding realized capital
gains), less any prior dividends paid during such twelve-month period. In addition, any insurance company other than a life insurance company may carry
forward net income from the preceding two calendar years, not including realized capital gains, less any dividends actually paid during those two calendar
years. Dividends in excess of this amount are considered “extraordinary” and are subject to the approval of the North Dakota Insurance Department.
The amount available for payment of dividends from Nodak Insurance to us during 2022 without the prior approval of the North Dakota Insurance
Department is approximately $21,493 based upon the surplus of Nodak Insurance at December 31, 2021. Prior to its payment of any dividend, Nodak
Insurance will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota
Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North
Dakota Insurance Department has the power to limit or prohibit dividend payments if an insurance company is in violation of any law or regulation. These
restrictions or any subsequently imposed restrictions may affect our future liquidity. The Nodak Insurance Board of Directors declared and paid a $6,000
dividend to NI Holdings during the year ended December 31, 2020. No dividends were declared or paid by Nodak Insurance during the years ended
December 31, 2021 or 2019.
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 us during 2022 without the prior approval of the North Dakota Insurance Department
is approximately $3,796 based upon the surplus of Direct Auto at December 31, 2021. No dividends were declared or paid by Direct Auto during the years
ended December 31, 2021, 2020, or 2019.
Westminster re-domesticated from Maryland to North Dakota during 2021, and is now subject to the same dividend restrictions as Nodak
Insurance. The amount available for payment of dividends from Westminster to us during 2022 without the prior approval of the North Dakota Insurance
Department is approximately $2,471 based upon the surplus of Westminster at December 31, 2021. No dividends were declared or paid by Westminster
during the years ended December 31, 2021 or 2020.
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Table of Contents
Contractual Obligations
The primary contractual obligations of the Company include gross loss and LAE payments, consideration due relating to the acquisition of
Westminster, and operating lease obligations.
The Company’s unpaid losses and LAE were $139,662 as of December 31, 2021. Historical payment experience indicates that approximately 57%
of this amount will be paid during 2022 and another 30% will be paid over the subsequent two years. The actual timing and amounts of these payments in
the future may vary.
Westminster was acquired on January 1, 2020 for a purchase price of $40,000, subject to certain adjustments. The Company paid $20,000 from the
net proceeds from the IPO at time of closing, with another $20,000 payable in three equal installments. We paid the first two installments on the first two
anniversaries of the closing, in January 2021 and January 2022. We will pay the final installment, plus or minus any adjustments, in December 2022.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Part II, Item 8, Note 4 “Recent Accounting Pronouncements”.
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Table of Contents
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Market risk is the risk that a company will incur losses due to adverse changes in the fair value of financial instruments. The Company has
exposure to three principal types of market risk through its investment activities: interest rate risk, credit risk, and equity risk. Our primary market risk
exposure is to changes in interest rates. We have not entered, and do not plan to enter, into any derivative financial instruments for hedging, trading, or
speculative purposes.
Interest Rate Risk
Interest rate risk is the risk that a company will incur economic losses due to adverse changes in interest rates. Our exposure to interest rate
changes primarily results from our significant holdings of fixed income securities. Fluctuations in interest rates have a direct impact on the fair value of
these securities.
The portfolio duration of the fixed income securities in the Company’s investment portfolio at December 31, 2021 was 4.35 years. These fixed
income securities include U.S. government bonds, securities issued by government agencies, obligations of state and local governments and governmental
authorities, and corporate bonds, most of which are exposed to changes in prevailing interest rates and which may experience moderate fluctuations in fair
value resulting from changes in interest rates, and are carried as available for sale. We manage the exposure to risks associated with interest rate
fluctuations through active management and Board of Directors review of the portfolio and consultation with our outside investment manager.
Potential higher interest rates oftentimes correlated to inflation would also reduce the carrying value of our fixed maturity and short-term
investments, negatively impacting the Company’s book value in the short-term. Over the long-term, however, higher interest rates would provide an
incremental benefit to our net investment income over time as excess cash and proceeds of maturing bonds are reinvested at higher rates. We manage our
exposure to interest rate increases by monitoring the duration within our investment portfolio and maintaining maturities that minimize any forced sales
within the portfolio.
Additionally, we hold certain fixed income securities that have call features. In a declining interest rate environment, these securities may be called
by their issuer and replaced with securities bearing lower interest rates.
If we are required to sell fixed income securities in a rising interest rate environment, the Company may recognize investment losses.
As a general matter, we attempt to match the durations of assets with liabilities. The Company’s investment objectives include maintaining
adequate liquidity to meet its operational needs, optimizing its after-tax investment income, and its after-tax total return, all of which are subject to
management’s tolerance for risk.
The table below shows the interest rate sensitivity of the Company’s fixed income securities measured in terms of fair value (which is equal to the
carrying value for all of its investment securities that are subject to interest rate changes) at December 31, 2021 and 2020:
Hypothetical Change in Interest Rate
200 basis point increase
100 basis point increase
No change
100 basis point decrease
200 basis point decrease
As of December 31, 2021
As of December 31, 2020
Estimated
Change
in Fair Value
Estimated
Change
in Fair Value
Fair Value
$
(31,975) $
(16,116)
—
16,018
32,119
332,676 $
348,535
364,651
380,669
396,770
(23,122) $
(11,438)
—
11,279
23,046
Fair Value
297,288
308,972
320,410
331,689
343,456
The interest rate exposure of the Company’s portfolio increased this year compared to last year, as measured by the increased duration of our
portfolio. The increase in interest rate exposure was intended to better align the Company’s portfolio with the long-term asset/liability matching target
derived from periodic financial modeling of the Company’s business and liabilities. Significant further increases in the portfolio’s interest rate exposure are
not expected, aside from normal ongoing fluctuations due to changes in the capital market and interest rate environment.
50
Table of Contents
Credit Risk
Credit risk is the potential economic loss principally arising from adverse changes in the financial condition of a specific debt issuer. We address
this risk by investing primarily in fixed income securities that are rated at least investment grade by Moody’s or an equivalent rating quality. We also
independently, and through our outside investment manager, monitor the financial condition of all of the issuers of fixed income securities in the portfolio.
To limit its exposure to risk, the Company employs diversification rules that limit the credit exposure to any single issuer or asset class.
Equity Risk
Equity price risk is the risk that we will incur economic losses due to adverse changes in equity prices.
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Table of Contents
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of NI Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of NI Holdings, Inc. and Subsidiaries (collectively, the “Company”) as of December 31,
2021 and 2020, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2021, and the related notes and the schedule listed in Item 15(a)(2) (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial
position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal controls over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our
opinion.
/s/ Mazars USA LLP
We have served as the Company’s auditor since 2016.
Fort Washington, Pennsylvania
March 9, 2022
52
Table of Contents
NI Holdings, Inc.
Consolidated Balance Sheets
December 31, 2021 and 2020
(dollar amounts in thousands, except par value)
Assets:
Cash and cash equivalents
Fixed income securities, at fair value
Equity securities, at fair value
Other investments
Total cash and investments
Premiums and agents' balances receivable
Deferred policy acquisition costs
Reinsurance premiums receivable
Reinsurance recoverables on losses
Income tax recoverable
Accrued investment income
Property and equipment, net
Receivable from Federal Crop Insurance Corporation
Goodwill and other intangibles
Other assets
Total assets
Liabilities:
Unpaid losses and loss adjustment expenses
Unearned premiums
Reinsurance premiums payable
Income tax payable
Deferred income taxes
Payable to Federal Crop Insurance Corporation
Westminster consideration payable
Accrued expenses and other liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.01 par value, authorized 25,000,000 shares, issued: 23,000,000 shares; and outstanding: 2021
– 21,219,808 shares, 2020 – 21,318,638 shares
Preferred stock, without par value, authorized 5,000,000 shares, no shares issued or outstanding
Additional paid-in capital
Unearned employee stock ownership plan shares
Retained earnings
Accumulated other comprehensive income, net of income taxes
Treasury stock, at cost, 2021 – 1,661,767 shares, 2020 – 1,538,622 shares
Non-controlling interest
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
53
$
$
$
2021
2020
$
$
$
70,623
364,651
77,690
2,005
514,969
51,452
24,947
-
21,200
364
2,524
9,869
-
17,722
8,735
651,782
139,662
127,789
326
-
5,506
4,962
13,020
13,104
304,369
101,077
320,410
69,952
2,924
494,363
48,523
23,968
93
8,710
-
2,141
9,899
6,646
18,194
5,066
617,603
105,750
119,363
—
754
8,757
-
19,287
14,820
268,731
-
-
230
—
98,166
(1,184)
267,207
5,237
(26,452)
4,209
347,413
230
—
97,911
(1,427)
258,741
12,840
(23,968)
4,545
348,872
$
651,782
$
617,603
Table of Contents
NI Holdings, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2021, 2020 and 2019
(dollar amounts in thousands, except per share data)
Revenues:
Net premiums earned
Fee and other income
Net investment income
Net capital gain on investments
Total revenues
Expenses:
Losses and loss adjustment expenses
Amortization of deferred policy acquisition costs
Other underwriting and general expenses
Total expenses
Income before income taxes
Income taxes
Net income
Net income (loss) attributable to non-controlling interest
Net income attributable to NI Holdings, Inc.
Earnings per common share:
Basic
Diluted
Share data:
2021
2020
2019
299,589
1,775
7,131
15,479
323,974
216,379
64,574
31,715
312,668
11,306
2,974
8,332
(84 )
8,416
0.39
0.39
$
$
$
$
283,661
1,801
7,271
13,624
306,357
168,473
51,472
33,596
253,541
52,816
11,472
41,344
955
40,389
1.86
1.84
$
$
$
$
246,438
2,125
7,433
14,783
270,779
169,710
46,188
21,070
236,968
33,811
7,311
26,500
99
26,401
1.19
1.19
$
$
$
$
Weighted average common shares outstanding used in basic per common share calculations
Plus: Dilutive securities
Weighted average common shares used in diluted per common share calculations
21,424,060
232,366
21,656,426
21,772,475
169,995
21,942,470
22,179,747
85,601
22,265,348
The accompanying notes are an integral part of these consolidated financial statements.
54
Table of Contents
NI Holdings, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2021, 2020 and 2019 (dollar amounts in thousands)
Net income (loss)
Other comprehensive loss, before income taxes:
Holding losses on investments
Reclassification adjustment for net realized capital gain included in net income
Other comprehensive loss, before income taxes
Income tax benefit related to items of other comprehensive loss
Other comprehensive loss, net of income taxes
Comprehensive income (loss)
Net income
Other comprehensive income, before income taxes:
Holding gains on investments
Reclassification adjustment for net realized capital gain included in net income
Other comprehensive income, before income taxes
Income tax expense related to items of other comprehensive income
Other comprehensive income, net of income taxes
Comprehensive income
$
Net income
Other comprehensive income, before income taxes:
Holding gains on investments
Reclassification adjustment for net realized capital gain included in net income
Other comprehensive income, before income taxes
Income tax expense related to items of other comprehensive income
Other comprehensive income, net of income taxes
Comprehensive income
$
The accompanying notes are an integral part of these consolidated financial statements.
55
Attributable to
NI Holdings, Inc.
8,416
$
(8,827)
(648)
(9,475)
1,872
(7,603)
813
$
Attributable to
NI Holdings, Inc.
40,389
$
10,051
(902)
9,149
(1,921)
7,228
47,617
9,583
(191)
9,392
(1,972)
7,420
33,821
Attributable to
NI Holdings, Inc.
26,401
$
2021
Attributable to
Non-Controlling
Interest
Total
$
$
(84) $
8,332
(319)
(2)
(321)
69
(252)
(336) $
(9,146)
(650)
(9,796)
1,941
(7,855)
477
2020
Attributable to
Non-Controlling
Interest
Total
$
$
955
$
41,344
116
(1)
115
(24)
91
1,046
$
10,167
(903)
9,264
(1,945)
7,319
48,663
2019
Attributable to
Non-Controlling
Interest
Total
$
$
99
$
26,500
177
(3)
174
(37)
137
236
$
9,760
(194)
9,566
(2,009)
7,557
34,057
Table of Contents
NI Holdings, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2021, 2020 and 2019
(dollar amounts in thousands)
Common
Stock
Additional
Paid-in
Capital
Unearned
Employee
Stock
Ownership
Plan
Shares
Balance, January 1, 2019
$
230
$
94,486
$
(1,914)
Accumulated
Other
Comprehensive
Income,
Net of
Income
Taxes
$
6,376
Treasury
Stock
$ (10,634)
Non-
Controlling
Interest
Total
Shareholders’
Equity
$
3,263
$
275,753
(8,184)
-
7,420
-
-
-
-
-
-
-
-
(2,006)
332
-
-
99
137
-
-
-
-
-
26,500
7,557
1,613
(2,006)
(19)
405
Retained
Earnings
183,946
$
8,184
26,401
-
-
-
(51)
-
-
-
-
-
-
-
-
-
-
-
1,613
-
(300)
-
-
-
-
-
-
162
243
230
95,961
(1,671)
218,480
5,612
(12,308)
3,499
309,803
40,389
-
-
-
-
-
-
-
-
-
2,297
-
(477)
-
-
-
-
-
-
-
-
(128)
130
244
-
-
-
-
(12,234)
574
-
955
91
-
-
-
41,344
7,319
2,297
(12,234)
(31)
374
7,228
-
-
-
-
230
97,911
(1,427)
258,741
12,840
(23,968)
4,545
348,872
-
-
-
-
-
-
-
-
2,408
-
(2,370)
-
-
-
-
-
217
243
8,416
-
-
-
50
-
-
(7,603)
-
-
-
-
-
-
-
(4,316)
1,832
-
(84)
(252)
-
-
-
-
8,332
(7,855)
2,408
(4,316)
(488)
460
$
230
$
98,166
$
(1,184) $
267,207
$
5,237
$
(26,452) $
4,209
$
347,413
Cumulative effect of
change in accounting for
equity securities
Net income
Other comprehensive
income, net of income
taxes
Share-based
compensation
Purchase of treasury
stock
Issuance of vested award
shares
Distribution of employee
stock ownership plan
shares
Balance, December 31,
2019
Net income
Other comprehensive
income, net of income
taxes
Share-based
compensation
Purchase of treasury
stock
Issuance of vested award
shares
Distribution of employee
stock ownership plan
shares
Balance, December 31,
2020
Net income (loss)
Other comprehensive
loss, net of income taxes
Share-based
compensation
Purchase of treasury
stock
Issuance of vested award
shares
Distribution of employee
stock ownership plan
shares
Balance, December 31,
2021
The accompanying notes are an integral part of these consolidated financial statements.
56
Table of Contents
NI Holdings, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2021, 2020 and 2019
(dollar amounts in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash flows from operating activities:
2021
2020
2019
$
8,332
$
41,344
$
26,500
Net capital gain on investments
Deferred income tax (benefit) expense
Depreciation of property and equipment
Amortization of intangibles
Distribution of employee stock ownership plan shares
Share-based incentive compensation
Amortization of deferred policy acquisition costs
Deferral of policy acquisition costs
Net amortization of premiums and discounts on investments
Loss 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
Income tax recoverable / payable
Accrued investment income
Federal Crop Insurance Corporation receivable / payable
Other assets
Unpaid losses and loss adjustment expenses
Unearned premiums
Accrued expenses and other liabilities
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
Acquisition of Westminster American Insurance Company (cash consideration paid net of
cash and cash equivalents acquired)
Proceeds from sale of other investments and other
Net cash flows from investing activities
Cash flows from financing activities:
Purchases of treasury stock
Installment payment on Westminster consideration payable
Issuance of restricted stock awards
Net cash flows from financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Non-cash item: Present value of installment payable issued in connection with acquisition of
Westminster American Insurance Company
Federal and state income taxes paid
The accompanying notes are an integral part of these consolidated financial statements.
57
(15,479)
(1,310)
694
472
460
2,408
64,574
(65,553)
2,080
31
(2,929)
419
(12,490)
(1,118)
(383)
11,608
(3,669)
33,912
8,426
(1,317)
29,168
73,015
44,600
(128,480)
(37,491)
(696)
-
901
(48,151)
(4,316)
(6,667)
(488)
(11,471)
(30,454)
101,077
(13,624)
638
709
5,224
373
2,297
51,472
(60,041)
1,460
6
(3,325)
(828)
(3,902)
(753)
17
7,584
186
3,932
13,476
4,765
51,010
87,874
27,718
(91,559)
(22,312)
(543)
(703)
(275)
200
(12,234)
-
(31)
(12,265)
38,945
62,132
(14,783)
1,871
538
1,711
405
1,613
46,188
(48,721)
1,146
37
(2,404)
170
(1,813)
889
(191)
1,939
(109)
6,129
4,509
41
25,665
59,649
20,174
(92,012)
(17,042)
(1,290)
-
63
(30,458)
(2,006)
-
(19)
(2,025)
(6,818)
68,950
$
$
$
70,623
$
101,077
$
62,132
-
5,402
$
$
18,787
11,586
$
$
-
4,000
Table of Contents
1.
Organization
NI Holdings, Inc.
Notes to Consolidated Financial Statements
December 31, 2021, 2020 and 2019
(dollar amounts in thousands)
NI Holdings is a North Dakota business corporation that is the stock holding company of Nodak Insurance and became such in connection with
the conversion of Nodak Mutual from a mutual to stock form of organization and the creation of a mutual holding company. The conversion was completed
on March 13, 2017. Immediately following the conversion, all of the outstanding shares of common stock of Nodak Insurance were issued to Nodak
Mutual Group, which then contributed the shares to NI Holdings in exchange for 55% of the outstanding shares of common stock of NI Holdings. Nodak
Insurance then became a wholly-owned stock subsidiary of NI Holdings. Prior to completion of the conversion, NI Holdings conducted no business and
had no assets or liabilities. As a result of the conversion, NI Holdings became the holding company for Nodak Insurance and its existing subsidiaries.
These Consolidated Financial Statements include the financial position and results of operations of NI Holdings and seven other entities:
Nodak Insurance Company
Nodak Insurance is the largest domestic property and casualty insurance company in North Dakota, offering private passenger auto, homeowners,
farmowners, commercial multi-peril, crop hail, and Federal multi-peril crop insurance coverages through its captive agents in the state.
Nodak Agency, Inc.
Nodak Agency is an inactive shell corporation.
American West Insurance Company
American West is a property and casualty insurance company licensed in eight states in the Midwest and Western regions of the United States.
American West began writing policies in 2002 and primarily writes personal auto, homeowners, and farm coverages in South Dakota. American West also
writes personal auto coverage in North Dakota, as well as crop hail and Federal multi-peril crop insurance coverages in Minnesota and South Dakota.
Primero Insurance Company
Primero is a wholly-owned subsidiary of Tri-State, Ltd. Tri-State, Ltd. is an inactive shell corporation 100% owned by Nodak Insurance. Primero
is a property and casualty insurance company writing non-standard automobile coverage in the states of Nevada, Arizona, North Dakota, and South Dakota.
Battle Creek Mutual Insurance Company
Battle Creek is a property and casualty insurance company writing personal auto, homeowners, and farm coverages solely in the state of Nebraska.
Battle Creek became affiliated with Nodak Insurance in 2011, and Nodak Insurance provides underwriting, claims management, policy administration, and
other administrative services to Battle Creek. Because we have concluded that we control Battle Creek, we consolidate the financial statements of Battle
Creek, and Battle Creek’s policyholders’ interest in Battle Creek is reflected as a non-controlling interest in shareholders’ equity in our Consolidated
Balance Sheets and its net income or loss is excluded from net income attributed to NI Holdings in our Consolidated Statements of Operations.
Direct Auto Insurance Company
Direct Auto is a property and casualty insurance company licensed in Illinois. Direct Auto began writing non-standard automobile coverage in
2007, and was acquired by NI Holdings on August 31, 2018 via a stock purchase agreement.
Westminster American Insurance Company
Westminster is a property and casualty insurance company licensed in seventeen states and the District of Columbia. Westminster is headquartered
in Owings Mills, Maryland and underwrites commercial multi-peril insurance in the states of Delaware, Georgia, Maryland, New Jersey, North Carolina,
Pennsylvania, South Carolina, Virginia, West Virginia, and the District of Columbia. Westminster was acquired by NI Holdings on January 1, 2020 via a
stock purchase agreement.
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Nodak Insurance markets and distributes its policies through its captive agents, while all other companies utilize the independent agent distribution
channel. Additionally, all of the Company’s insurance subsidiary and affiliate companies are rated “A” Excellent by AM Best.
The same executive management team provides oversight and strategic direction for the entire organization. Nodak Insurance provides common
product oversight, pricing practices, and underwriting standards, as well as underwriting and claims administration, to itself, American West, and Battle
Creek. Primero, Direct Auto, and Westminster personnel manage the day-to-day operations of their respective companies.
2.
Summary of Significant Accounting Policies
Basis of Consolidation:
Our Consolidated Financial Statements, which we have prepared in accordance with GAAP, include our accounts and those of our wholly-owned
subsidiaries, as well as Battle Creek, an entity we control via a surplus note agreement. We have eliminated all significant inter-company accounts and
transactions in consolidation.
Use of Estimates:
In preparing our Consolidated Financial Statements, management makes estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the balance sheet, and revenues and expenses for the periods then ended. Actual results could differ significantly from those
estimates.
We make estimates and assumptions that can have a significant effect on amounts and disclosures we report in our Consolidated Financial
Statements. The most significant estimates relate to our reserves for unpaid losses and loss adjustment expenses, earned premiums for crop insurance,
valuation of investments, determination of other-than-temporary impairments, valuation allowances for deferred income tax assets, deferred policy
acquisition costs, and the valuations used to establish intangible assets acquired related to business combinations. While we believe our estimates are
appropriate, the ultimate amounts may differ from the estimates provided. We regularly review our methods for making these estimates as well as the
continued appropriateness of the estimated amounts, and we reflect any adjustment we consider necessary in our current results of operations.
Variable-Interest Entities:
Any company deemed to be a variable interest entity (“VIE”) is required to be consolidated by the primary beneficiary of the VIE.
We assess our investments in other entities at inception to determine if any meet the qualifications of a VIE. We consider an investment in another
company to be a VIE if: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated
financial support, (b) the characteristics of a controlling financial interest are missing (either the ability to make decisions through voting or other rights, the
obligation to absorb expected losses of the entity or the right to receive the expected residual returns of the entity), or (c) the voting rights of the equity
holders are not proportional to their obligations to absorb the expected losses of the entity and/or the rights to receive the expected residual returns of the
entity, and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights.
Upon the occurrence of certain events, we would reassess our initial determination of whether the investment is a VIE.
We evaluate whether we are the primary beneficiary of each VIE and we consolidate the VIE if we have both (1) the power to direct the
economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity. We consider the
contractual agreements that define the ownership structure, distribution of profits and losses, risks, responsibilities, indebtedness, voting rights, and board
representation of the respective parties in determining whether we qualify as the primary beneficiary. Our assessment of whether we are the primary
beneficiary of a VIE is performed at least annually.
We control Battle Creek via a surplus note which provides us with the ability to appoint two-thirds of the Board of Directors of Battle Creek.
Under the quota share reinsurance agreement that existed through December 31, 2019, Battle Creek’s operating results included only net investment
income, bad debt expense, and income taxes. Effective January 1, 2020, the Company implemented an intercompany pooling reinsurance agreement, and
Battle Creek’s operating results now include its participation in the underwriting results of the pool (2% during 2021 and 2020). For more information, see
Part II, Item 8, Note 12 “Related Party Transactions”. Because we have concluded that we control Battle Creek, we consolidate the financial statements of
Battle Creek, and Battle Creek’s policyholders’ interest in Battle Creek is reflected as a non-controlling interest in shareholders’ equity in our Consolidated
Balance Sheet and its net income or loss is excluded from net income or loss attributed to NI Holdings in our Consolidated Statement of Operations.
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Cash and Cash Equivalents:
Cash and cash equivalents include certain investments in highly liquid debt instruments with original maturities of three months or less. Cost
approximates fair value for these short-term investments.
Investments:
The Company’s fixed income securities and equity securities are classified as available-for-sale and carried at estimated fair value as determined
by management based upon quoted market prices or a recognized independent pricing service at the reporting date for those or similar investments.
Changes in unrealized investment gains or losses on the fixed income securities, net of applicable income taxes, are reflected directly in shareholders’
equity as a component of other comprehensive income (loss) and, accordingly, have no effect on net income (loss). Changes in unrealized investments
gains or losses on equity securities are reported in net income (loss). Investment income is recognized when earned, and realized capital gains and losses on
investments are recognized when investments are sold, or an other-than-temporary impairment is recognized.
Fair values are based on quoted market prices or independent pricing services, if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities. Amortization of premium and accretion of discount are computed using an effective interest
method. Net investment income includes interest and dividend income together with amortization of purchase premiums and discounts, and is net of
investment management and custody fees. Realized gains and losses on investments are determined using the specific identification method and are
included in net capital gain on investments, along with the change in unrealized gains and losses on equity securities.
We frequently review our investment portfolio for declines in fair value. Our process for identifying declines in the fair value of investments that
are other-than-temporary involves consideration of several factors. These factors include (i) the time period in which there has been a significant decline in
value, (ii) an analysis of the liquidity, business prospects, and overall financial condition of the issuer, (iii) the significance of the decline, and (iv) our
intent and ability to hold the investment for a sufficient period of time for the value to recover. When our analysis of the above factors results in the
conclusion that declines in fair values are other-than-temporary, the credit loss component of the impairment is reflected in net income (loss) as a realized
capital loss on investment if the Company does not intend to sell the security, and the remaining portion of the other-than-temporary loss is recognized in
other comprehensive income (loss), net of income taxes. If the Company intends to sell the security, or determines that it is more likely than not that it will
be required to sell the security prior to recovering its cost or amortized cost basis less any current-period credit losses, the full amount of the other-than-
temporary loss is recognized in net income (loss). Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing
interest rates that generally translate, respectively, into decreases and increases in fair values of fixed income securities. The fair values of interest rate
sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of
the instrument, and other general market conditions. For more information on investment valuation measurements, see Part II, Item 8, Note 6 “Fair Value
Measurements”.
Fair Value of Other Financial Instruments:
Our other financial instruments, aside from investments, are cash and cash equivalents, premiums and agents’ balances receivable, and accrued
expenses and accounts payable. The carrying amounts for cash and cash equivalents, premiums and agents’ balances receivable, and accrued expenses and
accounts payable approximate their fair value based on their short-term nature. Other invested assets that do not have observable inputs and little or no
market activity are carried on a cost basis, which approximates fair value. All other invested assets have been assessed for impairment. The carrying value
of these other invested assets was $2,005 at December 31, 2021 and $2,924 at December 31, 2020.
Revenue Recognition:
We record premiums written at policy inception and recognize them as revenue on a pro rata basis over the policy term or, in the case of crop
insurance, over the period of risk. The portion of premiums that could be earned in the future is deferred and reported as unearned premiums. When
policies lapse, the Company reverses the unearned portion of the written premium and removes the applicable unearned premium. Policy-related fee
income is recognized when collected.
The period of risk for our crop insurance program, which comprise primarily spring-planted crops, typically runs from April 1 (the approximate
time when farmers can begin to work their fields) through December 15 (last date claims can be made for the most recent planting season). The crop
insurance program provides indemnification for acreage that cannot be planted because of excess moisture (known as “prevented planting”). In these
situations, recognition of the remaining unearned premium may be accelerated if it is determined that the risk period has ended when these types of claims
are filed.
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The Company uses the direct write-off method for recognizing bad debts. Accounts billed directly to the policyholder are provided grace payment
and cancellation notice periods per state insurance regulations. Any earned but uncollected premiums are written off within 90 days after the effective date
of policy cancellation.
Direct Auto also provides for agency billing for a portion of their agents. Accounts billed to agents are due within 60 days of the statement date.
The balances are carried as agents’ balances receivable until it is determined the amount is not collectible from the agent. At that time, the balance is
written off as uncollectible. The agent is responsible for all past due balances. As part of its agent appointment, Direct Auto requires a personal guarantee
for all balances due to Direct Auto from the principal of the contracted agency.
Policy Acquisition Costs:
We defer our policy acquisition costs, consisting primarily of commissions, premium taxes, and certain other underwriting costs, reduced by
ceding commissions, which vary with and relate directly to the production of business. We amortize these deferred policy acquisition costs over the period
in which we earn the premiums. The method we follow in computing deferred policy acquisition costs limits the amount of such deferred costs to their
estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and loss adjustment expenses, and certain
other costs we expect to incur as we earn the premium.
Property and Equipment:
We report property and equipment at cost less accumulated depreciation. Depreciation is computed using the straight-line method based upon
estimated useful lives of the assets.
Losses and Loss Adjustment Expenses:
Liabilities for unpaid losses and loss adjustment expenses are estimates at a given point in time of the amounts we expect to pay with respect to
policyholder claims based on facts and circumstances then known. At the time of establishing our estimates, we recognize that our ultimate liability for
losses and loss adjustment expenses may differ from these estimates. We base our estimates of liabilities for unpaid losses and loss adjustment expenses on
assumptions as to future loss trends, expected claims severity, judicial theories of liability, and other factors. During the loss adjustment period, we may
learn additional facts regarding certain claims, and, consequently, it often becomes necessary for us to refine and adjust our estimates of the liability. We
reflect any adjustments to our liabilities for unpaid losses and loss adjustment expenses in our operating results in the period in which we determine the
need for a change in the estimates.
We maintain liabilities for unpaid losses and loss adjustment expenses with respect to both reported and unreported claims. We establish these
liabilities for the purpose of covering the ultimate costs of settling all losses, including investigation and litigation costs. We base the amount of our liability
for reported losses primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim, and the
insurance policy provisions relating to the type of loss our policyholder incurred. We determine the amount of our liability for unreported losses and loss
adjustment expenses on the basis of historical information by line of insurance. Inflation is not explicitly selected in the loss reserve analysis. However,
historical inflation is embedded in the estimated loss development factors. We closely monitor our liabilities and update them periodically using new
information on reported claims and a variety of statistical techniques. We do not discount our liabilities for unpaid losses and loss adjustment expenses.
Reserve estimates can change over time because of unexpected changes in assumptions related to our external environment and, to a lesser extent,
assumptions as to our internal operations. Assumptions related to our external environment include the potential impact of significant changes in tort law
and the legal environment which may impact liability exposure, the trends in judicial interpretations of insurance coverage and policy provisions, and the
rate of loss cost inflation. Internal assumptions include consistency in the recording of premium and loss statistics, consistency in the recording of claims,
payment and case reserving methodologies, accurate measurement of the impact of rate changes and changes in policy provisions, consistency in the
quality and characteristics of business written within a given line of business, and consistency in reinsurance coverage and collectability of reinsured losses,
among other items. To the extent we determine that underlying factors impacting our assumptions have changed, we attempt to make appropriate
adjustments for such changes in our reserves. Accordingly, our ultimate liability for unpaid losses and loss adjustment expenses will likely differ from the
amount recorded.
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Income Taxes:
With the exception of Battle Creek, which files a stand-alone federal income tax return, we currently file a consolidated federal income tax return
which includes NI Holdings and its wholly-owned subsidiaries.
Insurance companies typically pay state premium taxes rather than state income taxes. However, Direct Auto is subject to state income taxes in the
state of Illinois, in addition to state premium taxes. Additionally, NI Holdings, on a stand-alone basis, pays state income taxes to the state of North Dakota
for income or losses generated as a separate financial entity. State premium taxes are included as a part of amortization of deferred policy acquisition costs.
State income taxes are reported along with federal income taxes as income tax expense (benefit).
The Company did not have any material uncertain tax positions. The Company’s policy is to recognize tax-related interest and penalties accrued
related to unrecognized benefits as a component of income tax expense. The Company did not recognize any tax-related interest and penalties, nor did it
have any tax-related interest or penalties accrued as of December 31, 2021 and 2020.
We account for deferred income taxes using the asset and liability method. The objective of the asset and liability method is to establish deferred
income tax assets and liabilities for the temporary differences between the financial reporting basis and the income tax basis of our assets and liabilities at
enacted tax rates expected to be in effect when we realize or settle such amounts.
We re-measure existing deferred income tax assets (including loss carryforwards) and liabilities when a change in tax rate occurs, and record an
offset for the net amount of the change as a component of income tax expense from continuing operations in the period of enactment. We also record any
change to a previously recorded valuation allowance as a result of re-measuring existing temporary differences and loss carryforwards as a component of
income tax expense from continuing operations.
The Company has elected to reclassify any tax effects stranded in accumulated other comprehensive income as a result of a change in income tax
rates to retained earnings.
Earnings Per Share:
Earnings per share are computed by dividing net income available to common shareholders for the period by the weighted average number of
common shares outstanding for the same period. Unearned shares related to the Company’s ESOP are not considered outstanding until they are released
and allocated to plan participants. Unearned shares related to the Company’s Restricted Stock Units (“RSUs”) and Performance Share Units (“PSUs”) are
not considered outstanding until they are earned by award participants. See Part II, Item 8, Note 13 “Benefit Plans” and Note 19 “Share Based
Compensation”.
Credit Risk:
Our primary investment objective is to earn competitive returns by investing in a diversified portfolio of securities. Our portfolio of fixed income
securities and, to a lesser extent, short-term investments, is subject to credit risk. We define this risk as the potential loss in fair value resulting from adverse
changes in the borrower’s ability to repay the debt. We manage this risk by performing an analysis of prospective investments and through regular reviews
of our portfolio by our management team and investment advisors. We also limit the amount of our total investment portfolio that we invest in any one
security.
Property and liability insurance coverages are marketed through captive agents in North Dakota and through independent insurance agencies
located throughout all other operating areas. All business, except for the majority of Direct Auto’s business, is billed directly to the policyholders.
We maintain cash balances primarily at one bank, which are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250. During
the normal course of business, balances are maintained above the FDIC insurance limit. The Company maintains short-term investment balances in
investment grade money market accounts that are insured by the Securities Investor Protection Corporation (“SIPC”) up to $500. On occasion, balances for
these accounts are maintained in excess of the SIPC insurance limit.
Reinsurance:
The Company limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain
levels of risks to other insurers or reinsurers, either on an automatic basis under general reinsurance contracts known as “treaties” or by negotiation on
substantial individual risks. Ceded reinsurance is treated as the risk and liability of the assuming companies.
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Reinsurance contracts do not relieve the Company from its obligations to policyholders. In the event that all or any of the reinsuring companies
might be unable to meet their obligations under existing reinsurance agreements, the Company would be liable for such defaulted amounts.
Goodwill and Other Intangibles:
Goodwill represents the excess of the purchase price over the underlying fair value of acquired entities. When completing acquisitions, we seek to
identify separately identifiable intangible assets that we have acquired. We assess goodwill and other intangibles with an indefinite useful life for
impairment annually. We also assess goodwill and other intangibles for impairment upon the occurrence of certain events. In making our assessment, we
consider a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and current market data.
Inherent uncertainties exist with respect to these factors and to our judgment in applying them when we make our assessment. Impairment of goodwill and
other intangibles could result from changes in economic and operating conditions in future periods. We did not record any impairments of goodwill or other
intangibles during the years ended December 31, 2021, 2020, or 2019.
Goodwill arising from the acquisition of Primero in 2014 represents the excess of the purchase price over the fair value of the net assets acquired.
The purchase price in excess of the fair value of net assets acquired was negotiated at arms-length with an unrelated party and was based upon the strategic
decision by Company management to expand both the geographic footprint and product lines of the Company. The nature of the business acquired was
such that there were limited intangibles not reflected in the net assets acquired. The purchase price was paid with a combination of cash and cancellation of
obligations owed to the acquired company by the sellers. The goodwill that arose from this transaction is included in the basis of the net assets acquired and
is not deductible for income tax purposes.
Intangible assets arising from the acquisition of Direct Auto in 2018 represent the estimated fair values of certain intangible assets, including a
favorable lease contract, a state insurance license, the value of the Direct Auto trade name, and the VOBA. The state insurance license asset has an
indefinite life, while the Direct Auto trade name is being amortized over five years from the August 31, 2018 acquisition/valuation date. The favorable
lease contract and VOBA assets have been fully amortized.
Goodwill arising from the acquisition of Westminster in January 2020 represents the excess of the purchase price over the fair value of the net
assets acquired. The purchase price in excess of the fair value of net assets acquired was negotiated at arms-length with an unrelated party and was based
upon the strategic decision by Company management to expand both the geographic footprint and commercial business product line of the Company. Other
intangible assets arising from the acquisition of Westminster represent the estimated fair values of certain intangible assets, including state insurance
licenses, the value of Westminster’s distribution network, the value of the Westminster trade name, and the VOBA. The state insurance license asset has an
indefinite life, while the distribution networks asset and Westminster trade name are being amortized over twenty years and ten years, respectively, from the
January 1, 2020 acquisition/valuation date. The VOBA asset has been fully amortized.
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3.
Acquisition of Westminster American Insurance Company
On January 1, 2020, the Company completed the acquisition of 100% of the common stock of Westminster from the private shareholder of
Westminster, and Westminster became a consolidated subsidiary of the Company. Westminster is a property and casualty insurance company specializing in
multi-peril commercial insurance in nine states and the District of Columbia.
Westminster is headquartered in Owings Mills, Maryland, and continues to be led by its president and other key management in place at the time
of the acquisition. The financial results of Westminster have been included in the Consolidated Financial Statements and the Company’s commercial
business segment following the acquisition close date.
We account for business acquisitions in accordance with the acquisition method of accounting, which requires that most assets acquired, liabilities
assumed, and contingent consideration be recognized at their fair values as of the acquisition date, which is the closing date for the Westminster transaction.
During the measurement period, adjustments to provisional purchase price allocations are recognized if new information is obtained about the facts and
circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. The
measurement period ends as soon as it is determined that no more information is obtainable, but in no case shall the measurement period exceed one year
from the acquisition date. The measurement period for the Westminster acquisition ended December 31, 2020.
The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on
January 1, 2019:
Revenues
Net income attributable to NI Holdings, Inc.
Basic earnings per common share attributable to NI Holdings, Inc.
Pro Forma
Year Ended
December 31,
2019
$
292,858
24,394
1.10
The Company did not reflect any material, non-recurring pro forma adjustments directly attributable to the business combination in the above pro
forma revenue and earnings.
These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting Westminster’s results to reflect the
deferral and amortization of policy acquisition costs and the additional amortization that would have been charged assuming the fair value adjustments to
intangible assets had been applied from January 1, 2019, with the related income tax effects.
The Company incurred acquisition-related costs of $828 and $83 during the years ended December 31, 2020 and 2019, respectively. These
expenses were reclassified into first quarter 2019 in the pro forma amounts presented above.
The Company paid $20,000 in cash consideration to the private shareholder of Westminster as of the closing date, and an additional $20,000 to be
paid in three equal annual installments. The acquisition of Westminster did not include any contingent consideration other than a provision regarding future
changes to federal income tax rates. The first two installments were paid in January 2021 and January 2022. The final installment is due to be paid in
December 2022.
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The following table summarizes the consideration transferred to acquire Westminster and the amounts of identified assets acquired and liabilities
assumed at the acquisition date:
Fair Value of Consideration:
Cash consideration transferred
Present value of future cash consideration
Total cash consideration
Fair Value of Identifiable Assets Acquired and Liabilities Assumed:
Identifiable net assets:
Cash and cash equivalents
Fixed income securities
Equity securities
Other investments
Premiums and agents' balances receivable
Reinsurance recoverables on losses
Accrued investment income
Property and equipment
Federal income tax recoverable
State insurance licenses (included in goodwill and other intangibles)
Distribution network (included in goodwill and other intangibles)
Trade name (included in goodwill and other intangibles)
Value of business acquired (included in goodwill and other intangibles)
Other assets
Unpaid losses and loss adjustment expenses
Unearned premiums
Deferred income taxes, net
Reinsurance premiums payable
Accrued expenses and other liabilities
Total identifiable net assets
Goodwill
$
$
$
$
$
20,000
18,787
38,787
19,297
12,073
2,705
735
8,507
763
70
2,376
138
1,800
6,700
500
4,750
76
(8,568)
(16,611)
(1,583)
(565)
(1,132)
32,031
6,756
The fair value of the assets acquired included premiums and agents’ balances receivable of $8,507 and reinsurance recoverables on losses of $763.
These are the gross amounts due from policyholders and reinsurers, respectively, none of which were anticipated to be uncollectible. The Company did not
acquire any other material receivables as a result of the acquisition of Westminster.
The fair values of the acquired distribution network, state insurance licenses, Westminster trade name, and VOBA intangible assets were $6,700,
$1,800, $500, and $4,750, respectively. The state insurance license intangible has an indefinite life, while the other intangible assets are being amortized
over their useful lives of up to twenty years. The goodwill is not deductible for income tax purposes.
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4.
Recent Accounting Pronouncements
As an EGC, we have elected to use the extended transition period for complying with any new or revised financial accounting standards from the
Financial Accounting Standards Board (“FASB”) pursuant to Section 13(a) of the Exchange Act. The following discussion includes effective dates for both
public business entities and emerging growth companies, as well as whether specific guidance may be adopted early.
Adopted
In January 2019, the Company adopted amended guidance from the FASB that generally requires entities to measure equity securities at fair value
and recognize changes in fair value in their results of operations. The FASB issued other impairment, disclosure, and presentation improvements related to
financial instruments within the guidance. Effective January 1, 2019, we applied this guidance, which resulted in a cumulative-effect reclassification of
after-tax unrealized net capital gains aggregating $8,184, from accumulated other comprehensive income to retained earnings. This reclassification had no
impact to the Company’s results of operations at the date of adoption. The after-tax change in accounting for equity securities did not affect the Company’s
total shareholders’ equity; however, the unrealized net capital gains reclassified at the transition date to retained earnings will never be recognized in net
income. Prior year financial statements were not restated. Going forward, the accounting used for equity securities will record the market fluctuations
attributed to equity securities through our results of operations rather than as a component of other comprehensive income, which will add a level of
volatility to our net income.
In December 2019, the Company adopted guidance from the FASB that establishes the manner in which an entity recognizes the amount of
revenue to which it expects to be entitled for the transfer of promised goods or services to customers. While the guidance replaces most existing GAAP
revenue recognition guidance, the scope of the guidance excludes insurance contracts. The Company has reviewed its sources of revenues, and has
determined that no material revenues are derived from non-insurance contracts and thus subject to the new revenue recognition guidance. As a result, there
was no impact to the Company’s financial position, results of operations, or cash flows.
In December 2019, the Company adopted amended guidance from the FASB that addressed diversity in how certain cash receipts and cash
payments are presented and classified in the Consolidated Statement of Cash Flows, and the presentation of restricted cash in the Consolidated Statement of
Cash Flows. The amendments provided clarity on the treatment of eight specifically defined types of cash inflows and outflows, and requires entities to
explain the changes during a reporting period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents. There was no impact to the Company’s financial position, results of operations, or cash flows.
In January 2020, the Company adopted amended guidance from the FASB that shortened the amortization period of premiums on certain fixed
income securities held at a premium to the earliest call date rather than through the maturity date of the callable security. The adoption of this guidance did
not materially impact the Company’s financial position, results of operations, or cash flows.
In March 2020, the Company adopted modified disclosure requirements from the FASB relating to the fair value of assets and liabilities. The
modifications primarily related to Level 3 fair value measurements. The Company does not currently carry any Level 3 assets or liabilities. As a result,
there was no impact to the Company’s financial statement disclosures.
Not Yet Adopted
In February 2016, the FASB issued new guidance that requires lessees to recognize leases, including operating leases, on the lessee’s Consolidated
Balance Sheet, unless a lease is considered a short-term lease. The new guidance also requires entities to make new judgments to identify leases. In July
2018, the FASB issued additional guidance to allow an optional transition method. An entity may apply the new leases guidance at the beginning of the
earliest period presented in the financial statements, or at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained
earnings in the period of adoption. The new guidance was effective for annual and interim reporting periods beginning after December 15, 2018 for public
business entities. For private companies and emerging growth companies, this guidance is effective for annual reporting periods beginning after December
15, 2021 and interim periods within fiscal years beginning after December 15, 2022. We will adopt this guidance for the year ended December 31, 2022.
We do not expect the adoption of this new guidance to have a significant impact on our financial position, results of operations, or cash flows. Upon
adoption, the Company will recognize a right of use asset and operating lease liabilities on its Consolidated Balance Sheet. The cumulative adjustment to
retained earnings is not expected to be significant.
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In June 2016, the FASB issued a new standard that requires timelier recording of credit losses on loans and other financial instruments held by
financial institutions and other organizations. The guidance requires the measurement of all expected credit losses for financial assets held at the reporting
date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance also requires financial institutions and other
organizations to use forward-looking information to better form their credit loss estimates. Many of the loss estimation techniques applied prior to adoption
of this standard are still permitted, although the inputs to those techniques have changed to reflect the full amount of expected credit losses. Organizations
are to continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the guidance requires
enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit
losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative
requirements that provide additional information about the amounts recorded in the financial statements. Finally, the guidance amends the accounting for
credit losses on available-for-sale fixed income securities and purchased financial assets with credit deterioration. The guidance was effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2019 for filers with the SEC excluding smaller reporting companies, and
emerging growth companies that did not relinquish private company relief. For all other entities, this guidance will be effective for annual reporting periods
beginning after December 15, 2022 and interim periods within those fiscal years. Early adoption is permitted for all entities. We will adopt this guidance
for the year ended December 31, 2022, as we will lose our EGC status beginning December 31, 2022. Based on our evaluation, adoption of this new
standard will not have a significant impact on our financial position, results of operations, and cash flows.
In December 2019, the FASB issued amended guidance to simplify the accounting for income taxes. The amended guidance was effective for
fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, for public business entities. For private companies and
emerging growth companies, the amended guidance will be effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal
years beginning after December 15, 2022. We will adopt this guidance for the year ended December 31, 2022. Based on our evaluation, adoption of this
new standard will not have a significant impact on our financial position, results of operations, and cash flows.
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5.
Investments
The amortized cost and estimated fair value of fixed income securities as of December 31, 2021 and 2020 were as follows:
Fixed income securities:
U.S. Government and agencies
Obligations of states and political subdivisions
Corporate securities
Residential mortgage-backed securities
Commercial mortgage-backed securities
Asset-backed securities
Redeemable preferred stocks
Total fixed income securities
Fixed income securities:
U.S. Government and agencies
Obligations of states and political subdivisions
Corporate securities
Residential mortgage-backed securities
Commercial mortgage-backed securities
Asset-backed securities
Redeemable preferred stocks
Total fixed income securities
Cost or
Amortized
Cost
December 31, 2021
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
$
$
$
13,118
84,668
144,476
26,190
32,878
52,604
4,008
357,942
Cost or
Amortized
Cost
13,334
61,001
117,628
35,017
23,976
50,751
2,198
303,905
$
$
$
$
467
2,979
4,214
266
815
131
136
9,008
$
$
(87) $
(353)
(1,069)
(300)
(161)
(313)
(16)
(2,299) $
13,498
87,294
147,621
26,156
33,532
52,422
4,128
364,651
December 31, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
1,055
3,278
8,549
1,478
1,700
535
206
16,801
$
$
(6) $
(35)
(147)
(1)
(21)
(86)
-
(296) $
14,383
64,244
126,030
36,494
25,655
51,200
2,404
320,410
The amortized cost and estimated fair value of fixed income securities by contractual maturity are shown below. Actual maturities could differ
from contractual maturities because issuers may have the right to call or prepay these securities.
Due to mature:
One year or less
After one year through five years
After five years through ten years
After ten years
Mortgage / asset-backed securities
Redeemable preferred stocks
Total fixed income securities
Due to mature:
One year or less
After one year through five years
After five years through ten years
After ten years
Mortgage / asset-backed securities
Redeemable preferred stocks
Total fixed income securities
68
December 31, 2021
Amortized Cost
Fair Value
$
$
14,457
82,429
82,270
63,106
111,672
4,008
357,942
$
$
14,586
84,760
84,173
64,894
112,110
4,128
364,651
December 31, 2020
Amortized Cost
Fair Value
$
$
17,722
86,709
59,408
28,124
109,744
2,198
303,905
$
$
17,933
91,457
64,987
30,280
113,349
2,404
320,410
Table of Contents
Fixed income securities with a fair value of $7,977 at December 31, 2021 and $6,093 at December 31, 2020 were deposited with various state
regulatory agencies as required by law. The Company has not pledged any assets to secure any obligations.
The investment category and duration of the Company’s gross unrealized losses on fixed income securities were as follows:
Fixed income securities:
U.S. Government and agencies
Obligations of states and political subdivisions
Corporate securities
Residential mortgage-backed securities
Commercial mortgage-backed securities
Asset-backed securities
Redeemable preferred stocks
Total fixed income securities
Fixed income securities:
U.S. Government and agencies
Obligations of states and political subdivisions
Corporate securities
Residential mortgage-backed securities
Commercial mortgage-backed securities
Asset-backed securities
Total fixed income securities
Less than 12 Months
Fair
Value
Unrealized
Losses
December 31, 2021
Greater than 12 months
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
$
$
$
$
3,125
19,769
46,816
17,407
11,287
28,797
1,493
128,694
$
$
(87)
(350)
(1,015)
(261)
(160)
(308)
(16)
(2,197)
Less than 12 Months
Fair
Value
Unrealized
Losses
931
1,806
3,215
68
1,103
5,785
12,908
$
$
(6)
(35)
(97)
(1)
(21)
(31)
(191)
$
$
$
$
-
222
1,895
1,434
216
995
-
4,762
$
$
$
-
(3)
(54)
(39)
(1)
(5)
-
(102) $
3,125
19,991
48,711
18,841
11,503
29,792
1,493
133,456
$
$
(87)
(353)
(1,069)
(300)
(161)
(313)
(16)
(2,299)
December 31, 2020
Greater than 12 months
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
— $
—
734
—
—
4,188
4,922
$
— $
—
(50)
—
—
(55)
(105) $
931
1,806
3,949
68
1,103
9,973
17,830
$
$
(6)
(35)
(147)
(1)
(21)
(86)
(296)
Investments with unrealized losses are categorized with a duration of greater than 12 months when all positions of a security have continually been
in a loss position for at least 12 months.
We frequently review our investment portfolio for declines in fair value. Our process for identifying declines in the fair value of investments that
are other-than-temporary involves consideration of several factors. These factors include (i) the time period in which there has been a significant decline in
value, (ii) an analysis of the liquidity, business prospects, and overall financial condition of the issuer, (iii) the significance of the decline, and (iv) our
intent and ability to hold the investment for a sufficient period of time for the value to recover. When our analysis of the above factors results in the
conclusion that declines in fair values are other-than-temporary, the credit loss component of the impairment is reflected in net income (loss) as a realized
capital loss on investment if the Company does not intend to sell the security, and the remaining portion of the other-than-temporary loss is recognized in
other comprehensive income (loss), net of income taxes. If the Company intends to sell the security, or determines that it is more likely than not that it will
be required to sell the security prior to recovering its cost or amortized cost basis less any current-period credit losses, the full amount of the other-than-
temporary loss is recognized in net income (loss). The Company did not record any other-than-temporary impairments in 2021, 2020, or 2019.
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Table of Contents
In conjunction with our outside investment advisors, we analyzed the credit ratings of the securities as well as the historical monthly amortized
cost to fair value ratio of securities in an unrealized loss position. This analysis yielded no fixed income securities that had fair values less than 80% of
amortized cost for the preceding 12-month period.
Net investment income consisted of the following:
Fixed income securities
Equity securities
Real estate
Cash and cash equivalents
Total gross investment income
Investment expenses
Net investment income
Net realized capital gain on investments consisted of the following:
Gross realized gains:
Fixed income securities
Equity securities
Total gross realized gains
Gross realized losses, excluding other-than-temporary impairment losses:
Fixed income securities
Equity securities
Total gross realized losses, excluding other-than-temporary impairment losses
Net realized gain on investments
Change in net unrealized gain on equity securities
Net capital gain on investments
70
Year Ended December 31,
2020
2021
2019
8,489
1,221
625
4
10,339
3,208
7,131
$
$
8,682
1,220
587
30
10,519
3,248
7,271
$
$
8,394
996
365
71
9,826
2,393
7,433
Year Ended December 31,
2020
2021
2019
$
677
17,453
18,130
$
1,035
8,705
9,740
(27)
(335)
(362)
17,768
(132)
(1,837)
(1,969)
7,771
(2,289)
15,479
$
5,853
13,624
$
341
4,311
4,652
(147)
(1,259)
(1,406)
3,246
11,537
14,783
$
$
$
$
Table of Contents
6.
Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain assets to determine fair value disclosures. Investment
securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets or
liabilities at fair value on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market
accounting or write-downs of individual assets. Accounting guidance on fair value measurements and disclosures establishes a fair value hierarchy that
prioritizes the inputs to valuation methods used to measure fair value. The three levels of the fair value hierarchy are as follows:
Level I: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level II: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term
of the asset or liability. Level II includes fixed income securities with quoted prices that are traded less frequently than exchange
traded instruments. Valuation techniques include matrix pricing which is a mathematical technique used widely in the industry to
value fixed income securities without relying exclusively on quoted market prices for the specific securities but rather by relying on
the securities’ relationship to other benchmark quoted prices.
Level III: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e.,
supported with little or no market activity).
The Company bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs
when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets where there exists limited or no
observable market data and, therefore, are based primarily upon the estimates of the Company or other third-parties, and are often calculated based on the
characteristics of the asset, the economic and competitive environment, and other such factors. Management uses its best judgment in estimating the fair
value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial
instruments, the fair value estimates herein are not necessarily indicative of the amounts which we could have realized in a sale transaction on the dates
indicated. The estimated fair value amounts have been measured as of their respective period-end and have not been re-evaluated or updated for purposes
of our financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the
respective reporting dates may be different than the amounts reported at each period-end. Additionally, changes in the underlying assumptions used,
including discount rates and estimates of future cash flows, could significantly affect the results of current or future valuations.
The Company uses quoted values and other data provided by an independent pricing service in its process for determining fair values of its
investments. The evaluations of such pricing services represent an exit price and a good faith opinion as to what a buyer in the marketplace would pay for a
security in a current sale. This pricing service provides us with one quote per instrument. For fixed income securities that have quoted prices in active
markets, market quotations are provided. For fixed income securities that do not trade on a daily basis, the independent pricing service prepares estimates
of fair value using a wide array of observable inputs including relevant market information, benchmark curves, benchmarking of like securities, sector
groupings, and matrix pricing. The observable market inputs that the Company’s independent pricing service utilizes may include (listed in order of priority
for use) benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and other
reference data on markets, industry, and the economy. Additionally, the independent pricing service uses an option-adjusted spread model to develop
prepayment and interest rate scenarios. The pricing service did not use broker quotes in determining fair values for any of the Company’s investments at
December 31, 2021, 2020, or 2019.
Should the independent pricing service be unable to provide a fair value estimate, we would attempt to obtain a non-binding fair value estimate
from a number of broker-dealers and would review this estimate in conjunction with a fair value estimate reported by an independent business news service
or other sources. In instances where only one broker-dealer provides a fair value for a fixed income security, we would use that estimate. In instances where
the Company would be able to obtain fair value estimates from more than one broker-dealer, we would review the range of estimates and select the most
appropriate value based on the facts and circumstances. Should neither the independent pricing service nor a broker-dealer provide a fair value estimate, we
would develop a fair value estimate based on cash flow analyses and other valuation techniques that utilize certain unobservable inputs. Accordingly, the
Company classifies such a security as a Level III investment.
The fair value estimates of our investments provided by the independent pricing service at each period-end were utilized, among other resources,
in reaching a conclusion as to the fair value of its investments.
71
Table of Contents
Management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures.
Management reviews all securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to
other similar securities. This will include looking for relative consistency across securities in common sectors, durations, and credit ratings. This review
will also include all fixed income securities rated lower than “A” by Moody’s Investors Service, Inc. or Standard & Poor’s Financial Services LLC. If, after
this review, management does not believe the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy
through discussions with the independent pricing service. In its review, management did not identify any such discrepancies, and no adjustments were made
to the estimates provided by the independent pricing service, for the years ended December 31, 2021, 2020, or 2019. The classification within the fair value
hierarchy is then confirmed based on the final conclusions from the pricing review.
The valuation of cash equivalents and equity securities are generally based on Level I inputs, which use the market-approach valuation technique.
The valuation of our fixed income securities generally incorporates significant Level II inputs using the market and income approach techniques. We may
assign a lower level to inputs typically considered to be Level II based on our assessment of liquidity and relative level of uncertainty surrounding inputs.
There were no assets or liabilities classified at Level III at December 31, 2021 or 2020.
The following tables set forth our assets which are measured on a recurring basis by the level within the fair value hierarchy in which fair value
measurements fall:
Total
Level I
Level II
Level III
December 31, 2021
Fixed income securities:
U.S. Government and agencies
Obligations of states and political subdivisions
Corporate securities
Residential mortgage-backed securities
Commercial mortgage-backed securities
Asset-backed securities
Redeemable preferred stocks
Total fixed income securities
Equity securities:
Basic materials
Communications
Consumer, cyclical
Consumer, non-cyclical
Energy
Financial
Industrial
Technology
Perpetual preferred stocks
Total equity securities
Cash and cash equivalents
Total assets at fair value
$
13,498
87,294
147,621
26,156
33,532
52,422
4,128
364,651
653
4,379
12,685
16,075
2,477
4,694
16,658
17,522
2,547
77,690
$
-
-
-
-
-
-
-
-
$
13,498
87,294
147,621
26,156
33,532
52,422
4,128
364,651
653
4,379
12,685
16,075
2,477
4,694
16,658
17,522
2,547
77,690
-
-
-
-
-
-
-
-
-
-
45,741
488,082
$
45,741
123,431
$
-
364,651
$
$
$
72
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Table of Contents
Fixed income securities:
U.S. Government and agencies
Obligations of states and political subdivisions
Corporate securities
Residential mortgage-backed securities
Commercial mortgage-backed securities
Asset-backed securities
Redeemable preferred stocks
Total fixed income securities
Equity securities:
Basic materials
Communications
Consumer, cyclical
Consumer, non-cyclical
Energy
Financial
Industrial
Technology
Utility
Total equity securities
Cash equivalents
Total assets at fair value
Total
Level I
Level II
Level III
December 31, 2020
$
$
14,383
64,244
126,030
36,494
25,655
51,200
2,404
320,410
1,285
7,455
9,929
14,633
1,499
6,235
12,733
16,145
38
69,952
$
-
-
-
-
-
-
-
-
$
14,383
64,244
126,030
36,494
25,655
51,200
2,404
320,410
1,285
7,455
9,929
14,633
1,499
6,235
12,733
16,145
38
69,952
-
-
-
-
-
-
-
-
-
-
65,354
455,716
$
65,354
135,306
$
-
320,410
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
There were no liabilities measured at fair value on a recurring basis at December 31, 2021 or 2020.
73
Table of Contents
7.
Reinsurance
The Company cedes and assumes certain premiums and losses to and from various companies and associations under a variety of reinsurance
agreements. The Company seeks to limit the maximum net loss that can arise from large risks or risks in concentrated areas of exposure through use of
these agreements, either on an automatic basis under general reinsurance contracts known as treaties or through facultative contracts on substantial
individual risks. Reinsurance contracts do not relieve the Company from its obligations to policyholders.
During the year ended December 31, 2021, the Company retained the first $10,000 of weather-related losses from catastrophic events and had
reinsurance under various reinsurance agreements up to $117,000 in excess of its $10,000 retained risk. The Company experienced one catastrophe event
during 2021 in excess of the retention level, resulting in a reinsurance recovery of $5,612.
During the year ended December 31, 2020, the Company retained the first $10,000 of weather-related losses from catastrophic events and had
reinsurance under various reinsurance agreements up to $97,000 in excess of its $10,000 retained risk. During the year ended December 31, 2019, the
Company retained the first $10,000 of weather-related losses from catastrophic events and had reinsurance under various reinsurance agreements up to
$78,600 in excess of its $10,000 retained risk. The Company did not experience any catastrophe events during 2020 or 2019 which exceeded the retention
level.
For 2022, the catastrophe retention amount will increase to $15,000 while the overall catastrophic reinsurance program limit increased to $125,000
in excess of the $15,000 retention.
The Company actively monitors and evaluates the financial condition of the reinsurers and develops estimates of the uncollectible amounts due
from reinsurers. Such estimates are made based on periodic evaluation of balances due from reinsurers, judgments regarding reinsurers’ solvency, known
disputes, reporting characteristics of the underlying reinsured business, historical experience, current economic conditions, and the state of reinsurer
relations in general. Collection risk is mitigated from reinsurers by entering into reinsurance arrangements only with reinsurers that have strong credit
ratings and statutory surplus above certain levels. The Company’s reinsurance recoverables on paid and unpaid losses were due from reinsurance
companies with AM Best ratings of “A” or higher.
A reconciliation of direct to net premiums on both a written and an earned basis is as follows:
2021
Year Ended December 31,
2020
2019
Premiums
Written
Premiums
Earned
Premiums
Written
Premiums
Earned
Premiums
Written
Premiums
Earned
$
$
342,215
8,183
(42,629)
307,769
$
$
333,254
8,035
(41,700)
299,589
$
$
314,187
6,590
(23,633)
297,144
$
$
301,061
6,459
(23,859)
283,661
$
$
262,145
5,921
(17,120)
250,946
$
$
257,661
5,897
(17,120)
246,438
Direct premium
Assumed premium
Ceded premium
Net premiums
A reconciliation of direct to net losses and loss adjustment expenses is as follows:
Direct losses and loss adjustment expenses
Assumed losses and loss adjustment expenses
Ceded losses and loss adjustment expenses
Net losses and loss adjustment expenses
Year Ended December 31,
2020
2021
2019
$
$
280,998
6,899
(71,518)
216,379
$
$
185,370
3,308
(20,205)
168,473
$
$
173,943
4,032
(8,265)
169,710
If 100% of our ceded reinsurance was cancelled as of December 31, 2021, no ceded commissions would need to be returned to the reinsurers.
Reinsurance contracts are typically effective from January 1 through December 31 each year.
74
Table of Contents
8.
Deferred Policy Acquisition Costs
Expenses directly related to successfully acquire insurance policies, primarily commissions, premium taxes and underwriting costs, are deferred
and amortized over the terms of the policies. We update our acquisition cost assumptions periodically to reflect actual experience, and we evaluate the costs
for recoverability. The table below shows the deferred policy acquisition costs and asset reconciliation:
Balance, beginning of year
Deferral of policy acquisition costs
Amortization of deferred policy acquisition costs
Balance, end of year
9.
Unpaid Losses and Loss Adjustment Expenses
Activity in the liability for unpaid losses and LAE is summarized as follows:
Balance at beginning of year:
Liability for unpaid losses and LAE
Reinsurance recoverables on losses
Net balance at beginning of year
Acquired unpaid losses and LAE related to:
Current year
Prior years
Total acquired
Incurred related to:
Current year
Prior years
Total incurred
Paid related to:
Current year
Prior years
Total paid
Balance at end of year:
Liability for unpaid losses and LAE
Reinsurance recoverables on losses
Net balance at end of year
$
$
$
Year Ended December 31,
2020
2021
2019
23,968
65,553
(64,574)
24,947
$
$
15,399
60,041
(51,472)
23,968
$
$
12,866
48,721
(46,188)
15,399
Year Ended December 31,
2020
2021
2019
$
105,750
8,710
97,040
$
93,250
4,045
89,205
87,121
2,232
84,889
-
-
-
220,517
(4,138)
216,379
150,278
44,679
194,957
-
8,568
8,568
165,181
3,292
168,473
116,755
52,451
169,206
139,662
21,200
118,462
$
105,750
8,710
97,040
$
$
-
-
-
176,219
(6,509)
169,710
125,940
39,454
165,394
93,250
4,045
89,205
During the year ended December 31, 2021, the Company’s incurred reported losses and LAE included $4,138 of net favorable development on
prior accident years, primarily attributable to the Direct Auto non-standard auto business. During the year ended December 31, 2020, incurred reported
losses and LAE included $3,292 of net unfavorable development on prior accident years, primarily attributable to our 2019 multi-peril crop business.
During the year ended December 31, 2019, incurred reported losses and LAE included $6,509 of net favorable development on prior accident years,
primarily attributable to the Direct Auto non-standard auto business.
Increases and decreases are generally the result of ongoing analysis of recent loss development trends. As additional information becomes known
regarding individual claims, original estimates are increased or decreased accordingly.
75
Table of Contents
The tables on the following pages present information, organized by our primary operating segments, about incurred and paid claims development
as of December 31, 2021, net of reinsurance, as well as cumulative claim frequency and the total of IBNR reserves plus expected development on reported
claims. The cumulative number of reported claims represents open claims, claims closed with payment, and claims closed without payment. It does not
include an estimated amount for unreported claims. The number of claims is measured by claim event (such as a car accident or storm damage) and an
individual claim event may result in more than one reported claim (such as a car accident with both property and liability damages). The Company
considers a claim that does not result in a liability as a claim closed without payment. The segment information presented in the tables is prior to the effects
of the intercompany reinsurance pooling arrangement.
The tables include unaudited information about incurred and paid claims development (a) for the years ended December 31, 2012 through 2015
for the Private Passenger Auto, Primero Non-Standard Auto, Home and Farm, and Crop segments, (b) through 2017 for the Direct Auto Non-Standard
Auto information, and (c) through 2019 for the Westminster Commercial information, which we present as supplementary information.
Private
Passenger
Auto
Accident
Year
(in
thousands,
except claim
counts)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1)
2013 (1)
2014 (1)
2015 (1)
2016
2017
2018
2019
2020
2021
At December 31, 2021
Total IBNR
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
$ 26,962 $ 24,787 $ 24,323 $ 24,098 $ 24,133 $ 23,298 $ 23,621 $ 23,651 $22,523
26,077
29,479
30,455
38,535
40,427
43,641
53,328
— 46,247
—
—
Total
27,840
— 32,548
—
—
—
—
—
—
—
27,363
31,349
— 32,438
—
—
—
—
—
—
— 29,079
—
—
—
—
—
—
—
—
26,105
29,298
30,679
39,314
40,120
43,428
— 53,769
—
—
27,334
30,427
31,532
— 40,227
—
—
—
—
—
26,138
29,144
30,503
39,057
40,199
— 44,925
—
—
—
26,014
29,099
30,461
39,260
— 40,779
—
—
—
—
$
$ 22,570
26,096
29,423
30,379
38,416
40,488
43,575
53,364
48,519
57,316
$390,146
5
11
16
24
93
159
353
881
1,546
3,819
9,727
10,826
11,745
11,688
14,325
13,753
14,675
16,540
13,541
14,064
(1) Prior years unaudited
Private Passenger Auto
Accident Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(1) Prior years unaudited
Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1)
$ 18,681
2020
2021
2013 (1)
$ 21,434
— 20,077
—
—
—
—
—
—
—
—
2014 (1)
$ 21,888
23,576
— 22,744
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2015 (1)
$ 22,640
24,765
25,727
23,401
—
—
—
—
—
—
2016
$ 22,726
24,918
27,076
27,171
29,009
—
—
—
—
—
$ 22,490 $ 22,555
26,073
29,407
30,355
38,173
40,111
42,820
50,370
42,585
— 42,326
Total $ 364,775
18
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance $ 25,389
26,019
29,239
30,120
37,833
39,738
41,479
48,414
35,495
All outstanding liabilities prior to 2012, net of reinsurance
2019
$ 23,324
26,035
28,765
29,795
38,108
38,331
40,213
42,414
—
—
2018
$ 23,271
25,843
28,281
29,598
37,307
37,050
34,358
—
—
—
2017
$ 23,073
25,718
27,443
28,933
35,845
31,033
—
—
—
—
76
Table of Contents
Non-Standard
Auto
(Primero)
Accident
Year
(in thousands,
except claim
counts)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(1) Prior years unaudited
Non-Standard
Auto (Primero)
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(1) Prior years unaudited
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1) 2013 (1) 2014 (1)
2015 (1)
2016
2017
2018
2019
2020
2021
At December 31, 2021
Total IBNR
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
$ 8,749 $ 8,491 $ 8,369 $ 8,361 $ 8,302 $ 8,312 $ 8,324 $ 8,324 $ 8,323 $ 8,324 $
— 11,063
—
—
—
—
—
—
—
—
10,823
— 7,297
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10,800
7,619
9,727
—
—
—
—
—
—
10,804
7,591
9,806
9,967
—
—
—
—
—
10,843
7,577
9,655
10,048
8,722
10,833
7,612
9,691
10,054
8,654
— 10,445
—
—
—
10,828
7,625
9,641
10,033
8,556
11,804
— 12,264
—
—
10,844
7,606
9,622
10,008
8,541
11,763
11,391
— 9,018
—
10,844
7,606
9,623
9,976
8,543
11,766
11,236
8,824
— 10,073
Total $96,815
—
—
—
—
—
9
12
58
129
1,006
Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1)
4,377
$
—
—
—
—
—
—
—
—
—
2013 (1)
7,522
$
6,320
—
—
—
—
—
—
—
—
$
$
$
$
$
2014 (1)
7,983
$
9,675
3,733
—
—
—
—
—
—
—
2016
2017
2018
2019
2020
2015 (1)
8,276
$
10,508
6,707
5,335
—
—
—
—
—
—
8,302
10,717
7,423
8,685
5,409
—
—
—
—
—
8,323
10,844
7,606
9,622
9,974
8,460
11,616
10,007
4,111
—
Total
All outstanding liabilities prior to 2012, net of reinsurance
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance
8,324
10,818
7,605
9,620
9,912
8,204
10,536
6,309
—
—
8,312
10,805
7,521
9,479
8,882
4,348
—
—
—
—
8,324
10,815
7,579
9,557
9,790
7,660
5,492
—
—
—
77
2,048
2,617
1,838
1,793
1,740
1,460
1,794
1,502
950
933
2021
$ 8,324
10,844
7,606
9,623
9,976
8,506
11,730
10,971
7,645
4,869
$ 90,094
—
$ 6,721
Table of Contents
Non-Standard
Auto (Direct
Auto)
Accident
Year
(in thousands,
except claim
counts)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(1) Prior years unaudited
Non-Standard
Auto
(Direct Auto)
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(1) Prior years unaudited
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1) 2013 (1) 2014 (1) 2015 (1) 2016 (1) 2017 (1)
2018
2019
2020
2021
At December 31, 2021
Total IBNR
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
$ 7,164 $ 4,159 $ 3,927 $ 3,916 $ 4,215 $ 4,643 $ 4,909 $ 4,930 $ 5,009 $
5,261
6,224
14,498
— 20,547
—
—
—
—
—
5,049
6,476
10,704
13,956
15,858
22,662
— 24,932
—
—
5,160
6,745
10,538
13,552
18,621
— 25,791
—
—
—
5,131
6,672
10,945
12,876
14,648
21,980
25,473
— 24,036
—
—
— 10,596
—
—
—
—
—
—
—
—
5,278
8,381
13,043
14,660
— 23,376
—
—
—
—
6,020
— 14,010
—
—
—
—
—
—
—
5,869
9,068
— 17,917
—
—
—
—
—
—
4,998 $
5,106
6,524
10,576
12,291
13,678
20,541
24,574
22,919
30,579
Total $151,786
12
22
34
92
(638)
28
(282)
395
(2,387)
(4,381)
3,357
3,373
4,776
9,057
11,137
11,720
14,917
10,918
13,623
14,784
Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1)
$ 1,696
—
—
—
—
—
—
—
—
—
2013 (1)
$ 2,421
1,944
—
—
—
—
—
—
—
—
$
$
$
2018
2019
2020
2014 (1)
$ 3,041
3,123
2,201
—
—
—
—
—
—
—
2015 (1)
3,587
$
3,796
3,573
2,967
—
—
—
—
—
—
2016 (1)
4,081
$
4,291
4,452
5,202
3,526
—
—
—
—
—
4,915
4,960
6,327
10,057
11,058
11,366
15,204
16,214
9,964
—
Total
All outstanding liabilities prior to 2012, net of reinsurance
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance
4,730
4,890
6,151
9,560
10,603
10,034
12,285
10,203
—
—
4,671
4,808
5,781
8,327
8,559
6,981
6,034
—
—
—
2017 (1)
4,503
$
4,602
5,369
7,057
6,272
4,385
—
—
—
—
2021
$
4,946
5,000
6,364
10,176
11,519
12,098
16,759
18,982
15,401
13,767
$ 115,012
20
$ 36,794
78
Table of Contents
Home and Farm
Accident
Year
(in thousands,
except claim
counts)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(1) Prior years unaudited
Home and
Farm
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(1) Prior years unaudited
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1) 2013 (1) 2014 (1) 2015 (1)
2016
2017
2018
2019
2020
2021
At December 31, 2021
Total IBNR
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
$ 25,179 $ 24,439 $ 24,320 $ 24,091 $ 24,081 $ 24,079 $ 24,088 $ 24,086 $24,324 $ 24,325 $
— 29,976
—
—
—
—
—
—
—
—
29,217
— 36,663
—
—
—
—
—
—
—
28,531
36,001
— 32,789
—
—
—
—
—
—
28,315
35,770
31,818
— 45,825
—
—
—
—
—
28,286
35,589
31,297
44,510
— 42,110
—
—
—
—
28,315
35,684
31,577
44,945
41,593
— 42,515
—
—
—
27,593
35,534
31,446
44,602
41,886
43,846
— 45,438
—
—
27,588
35,497
31,612
44,728
41,779
43,747
45,828
— 36,264
—
—
27,595
35,503
31,600
44,745
41,804
43,682
45,471
35,668
53,079
Total $383,472
—
—
—
3
45
109
107
375
674
4,413
3,631
4,189
5,243
3,923
6,348
4,943
4,580
5,483
4,070
4,837
Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1)
$ 21,761
—
—
—
—
—
—
—
—
—
2013 (1)
$ 23,863
23,354
—
—
—
—
—
—
—
—
2014 (1)
$ 24,029
26,934
32,207
—
—
—
—
—
—
—
2015 (1)
$ 24,168
27,183
35,199
27,204
—
—
—
—
—
—
2016
$ 24,075
27,221
35,219
30,164
37,656
—
—
—
—
—
2020
$ 24,324
27,583
35,485
31,597
44,583
40,941
43,178
43,253
29,274
—
Total
All outstanding liabilities prior to 2012, net of reinsurance
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance
2019
$ 24,086
27,560
35,482
31,383
44,530
40,442
42,814
38,709
—
—
2018
$ 24,087
27,495
35,481
30,573
44,270
38,928
37,881
—
—
—
2017
$ 24,076
27,456
35,371
30,350
44,942
34,657
—
—
—
—
2021
$ 24,325
27,590
35,503
31,597
44,650
41,414
43,549
44,119
33,988
41,043
$ 367,778
—
$ 15,694
79
Table of Contents
Crop
Accident
Year
(in thousands,
except claim
counts)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(1) Prior years unaudited
Crop
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(1) Prior years unaudited
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1) 2013 (1) 2014 (1) 2015 (1)
2016
2017
2018
2019
2020
2021
At December 31, 2021
Total IBNR
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
$ 13,546 $ 13,676 $ 13,673 $ 13,673 $ 13,673 $ 13,673 $ 13,673 $ 13,673 $13,673 $ 13,673 $
— 40,976
—
—
—
—
—
—
—
—
39,665
— 22,686
—
—
—
—
—
—
—
39,665
20,333
— 13,813
—
—
—
—
—
—
39,665
20,333
13,849
— 20,209
—
—
—
—
—
39,665
20,333
13,849
19,582
— 33,733
—
—
—
—
39,665
20,333
13,849
19,487
34,181
— 12,506
—
—
—
39,665
20,333
13,849
19,487
34,181
11,730
— 33,913
—
—
39,665
20,333
13,849
19,487
34,181
11,730
37,629
— 28,688
—
—
39,665
20,333
13,849
19,487
34,181
11,730
37,629
28,759
28,574
Total $247,880
—
—
—
—
—
—
—
—
—
314
2,137
2,097
2,268
2,427
2,806
2,968
2,147
3,101
2,442
2,620
Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1)
$ 13,078
—
—
—
—
—
—
—
—
—
2013 (1)
$ 13,673
35,511
—
—
—
—
—
—
—
—
2014 (1)
$ 13,673
39,665
17,788
—
—
—
—
—
—
—
2015 (1)
$ 13,673
39,665
20,333
12,866
—
—
—
—
—
—
2016
$ 13,673
39,665
20,333
13,849
16,444
—
—
—
—
—
2020
$ 13,673
39,665
20,333
13,849
19,487
34,181
11,730
37,629
28,038
—
Total
All outstanding liabilities prior to 2012, net of reinsurance
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance
2019
$ 13,673
39,665
20,333
13,849
19,487
34,181
11,730
26,332
—
—
2017
$ 13,673
39,665
20,333
13,849
19,487
32,767
—
—
—
—
2018
$ 13,673
39,665
20,333
13,849
19,487
34,181
10,764
—
—
—
2021
$ 13,673
39,665
20,333
13,849
19,487
34,181
11,730
37,629
28,759
29,525
$ 248,831
—
(951)
$
80
Table of Contents
Commercial
(Westminster)
Accident
Year
(in thousands, except
claim
counts)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(1) Prior years unaudited
Commercial
(Westminster)
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(1) Prior years unaudited
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1) 2013 (1) 2014 (1) 2015 (1)
2016
(1)
2017 (1)
2018 (1)
2019 (1)
2020
2021
At December 31, 2021
Total IBNR
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
$ 2,795 $ 2,492 $ 2,539 $ 2,583 $ 2,666 $ 2,680 $ 2,680 $ 2,680 $ 2,680 $
— 2,214
—
—
—
—
—
—
—
—
1,982
— 4,385
—
—
—
—
—
—
—
2,000
4,274
— 3,082
—
—
—
—
—
—
1,935
4,286
3,258
— 4,661
—
—
—
—
—
2,058
4,428
4,019
5,719
— 5,552
—
—
—
—
2,053
4,450
4,218
6,200
6,249
— 10,358
—
—
—
2,037
4,443
4,293
6,091
6,838
11,177
— 11,658
—
—
2,036
4,445
4,238
6,248
7,347
12,414
13,051
— 14,774
—
—
2,680 $
2,036
4,443
4,294
6,354
7,905
12,769
14,564
14,063
30,911
Total $100,019
—
—
—
7
16
249
378
1,659
1,944
5,437
Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1)
1,634
$
—
—
—
—
—
—
—
—
—
2013 (1)
2,364
$
1,494
—
—
—
—
—
—
—
—
$
2020
2014 (1)
2,442
$
1,727
3,330
—
—
—
—
—
—
—
2015 (1)
2,537
$
1,829
3,921
2,126
—
—
—
—
—
—
2016 (1)
2,591
$
1,889
4,151
2,794
3,172
—
—
—
—
—
2,680
2,036
4,410
4,231
6,112
6,576
10,591
9,925
8,146
—
Total
All outstanding liabilities prior to 2012, net of reinsurance
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance
2018 (1)
2,680
$
2,035
4,395
3,950
5,630
4,927
6,494
—
—
—
2019 (1)
2,680
$
2,036
4,403
4,206
5,693
5,865
9,472
6,294
—
—
2017 (1)
2,680
$
1,949
4,269
3,332
5,289
3,573
—
—
—
—
81
133
138
272
278
264
320
479
415
465
520
2021
$ 2,680
2,036
4,443
4,287
6,338
7,206
11,911
11,056
10,853
16,269
$ 77,079
—
$ 22,940
Table of Contents
Commercial (non-
Westminster)
Accident
Year
(in thousands, except
claim
counts)
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(1) Prior years unaudited
Commercial
(non-Westminster)
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
(1) Prior years unaudited
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1) 2013 (1) 2014 (1) 2015 (1)
2016
2017
2018
2019
2020
2021
At December 31, 2021
Total IBNR
Plus
Expected
Development
on Reported
Claims
Cumulative
Number of
Reported
Claims
$ 1,600 $ 1,125 $ 1,001 $
988 $
985 $
970 $
— 2,690
—
—
—
—
—
—
—
—
2,637
— 2,180
—
—
—
—
—
—
—
2,566
1,732
— 1,695
—
—
—
—
—
—
2,548
1,694
1,643
— 2,683
—
—
—
—
—
2,508
1,675
1,637
2,526
— 2,530
—
—
—
—
$
969
2,511
1,650
1,582
2,515
2,513
— 1,652
—
—
—
969
2,511
1,650
1,580
2,516
2,510
1,576
— 2,607
—
—
$ 970
2,511
1,650
1,580
2,512
2,497
1,609
2,782
— 2,293
—
—
Total
$
$
969
2,511
1,650
1,580
2,512
2,494
1,555
2,777
2,054
2,726
$20,828
—
—
—
—
—
—
1
15
29
220
Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Year Ended December 31,
2012 (1)
776
$
—
—
—
—
—
—
—
—
—
2013 (1)
932
$
2,520
—
—
—
—
—
—
—
—
2014 (1)
985
$
2,751
1,782
—
—
—
—
—
—
—
$
$
$
$
$
2016
2017
2018
2019
2020
2015 (1)
969
$
2,530
1,925
1,274
—
—
—
—
—
—
969
2,504
1,563
1,796
1,822
—
—
—
—
—
970
2,511
1,650
1,580
2,512
2,497
1,240
2,712
1,543
—
Total
All outstanding liabilities prior to 2012, net of reinsurance
Liabilities for Unpaid Losses and Loss Adjustment Expenses, net of reinsurance
969
2,511
1,650
1,580
2,498
2,465
1,049
—
—
—
969
2,511
1,650
1,580
2,512
2,497
1,213
1,917
—
—
970
2,508
1,640
1,818
2,806
1,530
—
—
—
—
82
142
227
163
135
288
167
147
189
129
177
2021
$
969
2,511
1,650
1,580
2,512
2,494
1,554
2,717
1,892
1,687
$ 19,566
—
$ 1,262
Table of Contents
The following table presents a reconciliation of the net incurred and paid claims development tables to the liability for unpaid losses and loss
adjustment expenses in our Consolidated Balance Sheet:
December 31, 2021
Liabilities for unpaid losses and loss adjustment expenses:
Private passenger auto
Non-standard auto (Primero)
Non-standard auto (Direct Auto)
Home and farm
Crop
Commercial (Westminster)
Commercial (non-Westminster)
All other
Total liabilities for unpaid losses and loss adjustment expenses
Reinsurance recoverables on losses:
Private passenger auto
Non-standard auto (Primero)
Non-standard auto (Direct Auto)
Home and farm
Crop
Commercial (Westminster)
Commercial (non-Westminster)
All other
Total reinsurance recoverables on losses
$
26,390
6,721
36,794
19,161
6,002
31,662
1,262
11,670
139,662
1,001
-
-
3,467
6,953
8,722
-
1,057
21,200
Net liability for unpaid losses and loss adjustment expenses
$
118,462
The following table presents required supplementary information about average historical claims duration as of December 31, 2021:
Years
Private Passenger Auto
Non-Standard Auto (Primero)
Non-Standard Auto (Direct Auto)
Home and Farm
Crop
Commercial (Westminster)
Commercial (non-Westminster)
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
1
54.4%
78.2%
35.4%
68.1%
100.0%
70.4%
87.3%
2
20.4%
16.6%
25.1%
14.5%
—
23.6%
3.7%
3
10.6%
3.8%
16.2%
9.4%
—
6.0%
2.6%
83
4
5.9%
0.9%
9.9%
4.9%
—
—
3.0%
5
4.7%
0.2%
6.1%
2.4%
—
—
2.9%
6
3.2%
0.2%
2.9%
0.5%
—
—
0.5%
7
0.8%
0.1%
2.1%
0.2%
—
—
—
8
—
—
1.5%
—
—
—
—
9
—
—
0.6%
—
—
—
—
10
—
—
0.2%
—
—
—
—
Table of Contents
10.
Property and Equipment
Property and equipment consisted of the following:
Cost:
Land
Building and improvements
Electronic data processing equipment
Furniture and fixtures
Automobiles
Gross cost
Accumulated depreciation
Total property and equipment, net
December 31,
2021
2020
$
$
$
1,403
14,193
1,518
2,885
1,228
21,227
1,401
13,912
1,271
2,867
1,275
20,726
(11,358)
9,869
$
(10,827)
9,899
Estimated
Useful Life
indefinite
10 – 43 years
5 – 7 years
5 – 7 years
2 – 3 years
Depreciation expense was $694, $709, and $538 during the years ended December 31, 2021, 2020 and 2019, respectively.
11.
Goodwill and Other Intangibles
Goodwill
The following table presents the carrying amount of the Company’s goodwill by segment:
Non-standard auto from acquisition of Primero
Commercial from acquisition of Westminster
Total
Other Intangible Assets
December 31,
2021
2020
$
$
2,628 $
6,756
9,384 $
2,628
6,756
9,384
The following table presents the carrying amount of the Company’s other intangible assets:
December 31, 2021
Subject to amortization:
Trade names
Distribution network
Total subject to amortization
Not subject to amortization – state insurance licenses
Total
December 31, 2020
Subject to amortization:
Trade names
Distribution network
Total subject to amortization
Not subject to amortization – state insurance licenses
Total
Gross Carrying
Amount
Accumulated
Amortization
Net
$
$
748 $
6,700
7,448
1,900
9,348 $
265 $
745
1,010
-
1,010 $
Gross Carrying
Amount
Accumulated
Amortization
Net
$
$
748 $
6,700
7,448
1,900
9,348 $
166 $
372
538
-
538 $
483
5,955
6,438
1,900
8,338
582
6,328
6,910
1,900
8,810
Amortization expense was $472, $5,224, and $1,711 during the years ended December 31, 2021, 2020 and 2019, respectively. The VOBA
intangible asset of $4,750 acquired in the Westminster transaction was fully amortized during 2020.
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Other intangible assets that have finite lives, including trade names and distribution networks, are amortized over their useful lives. As of
December 31, 2021, the estimated amortization of other intangible assets with finite lives for the next five years in the period ended December 31, 2026,
and thereafter is as follows:
Year ending December 31,
2022
2023
2024
2025
2026
Thereafter
Total other intangible assets with finite lives
12.
Related Party Transactions
Intercompany Reinsurance Pooling Arrangement
$
$
Amount
472
455
422
422
422
4,245
6,438
Effective January 1, 2020, all of our insurance subsidiary and affiliate companies entered into an intercompany reinsurance pooling agreement.
This agreement was finalized, approved, and implemented during the fourth quarter of 2020, retroactive to the January 1 effective date. Nodak Insurance is
the lead company of the pool, and assumes the net premiums, net losses, and underwriting expenses from each of the other five companies. Nodak
Insurance then retrocedes balances back to each company, while retaining its own share of the pool’s net underwriting results, based on individual pool
percentages established in the respective pooling agreement. This arrangement allows each insurance company to rely upon the capacity of the pool’s total
statutory capital and surplus. As a result, they are evaluated by AM Best on a group basis and hold a single combined financial strength rating, long-term
issuer credit rating, and financial size category.
In connection with the pooling agreement, the quota share agreement between Battle Creek and Nodak Insurance was cancelled. As a result, the
Company’s consolidated financial position and results of operations are impacted by the portion of Battle Creek’s underwriting results that are allocated to
the policyholders of Battle Creek rather than the shareholders of NI Holdings.
For the years ended December 31, 2021 and 2020, the pooling share percentages by insurance company were:
Nodak Insurance Company
American West Insurance Company
Primero Insurance Company
Battle Creek Mutual Insurance Company
Direct Auto Insurance Company
Westminster American Insurance Company
Total
North Dakota Farm Bureau
Pool Percentage
66.0%
7.0%
3.0%
2.0%
13.0%
9.0%
100.0%
We were organized by the NDFB to provide insurance protection for its members. We have a royalty agreement with the NDFB that recognizes
the use of their trademark and provides royalties to the NDFB based on the premiums written on Nodak Insurance’s insurance policies. Royalties paid to
the NDFB were $1,369, $1,370, and $1,352 during the years ended December 31, 2021, 2020, and 2019 respectively. Royalty amounts payable of $113 and
$113 were accrued as a liability to the NDFB at December 31, 2021 and 2020, respectively.
During 2020, Nodak Insurance paid $1,129 of membership dues on behalf of its NDFB members in North Dakota in response to the COVID-19
pandemic.
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Dividends
State insurance laws require our insurance subsidiaries to maintain certain minimum capital and surplus amounts on a statutory basis. Our
insurance subsidiaries are subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval from their
domiciliary insurance regulatory authorities. Our insurance subsidiaries are also subject to risk-based capital (“RBC”) requirements that may further affect
their ability to pay dividends. Our insurance subsidiaries statutory capital and surplus at December 31, 2021 exceeded the amount of statutory capital and
surplus necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin.
The amount available for payment of dividends from Nodak Insurance to NI Holdings during 2022 without the prior approval of the North Dakota
Insurance Department is $21,493 based upon the surplus of Nodak Insurance at December 31, 2021. Prior to its payment of any dividend, Nodak Insurance
will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota Insurance
Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North Dakota
Insurance Department has the power to limit or prohibit dividend payments if Nodak Insurance is in violation of any law or regulation. These restrictions or
any subsequently imposed restrictions may affect our future liquidity. The Board of Directors of Nodak Insurance declared and paid a $6,000 dividend to
NI Holdings during the year ended December 31, 2020. No dividends were declared or paid by Nodak Insurance during the years ended December 31,
2021 or 2019.
Direct Auto was re-domesticated from Illinois to North Dakota during 2021, and is now subject to the same dividend restrictions as Nodak
Insurance. The amount available for payment of dividends from Direct Auto to NI Holdings during 2022 without the prior approval of the North Dakota
Insurance Department is $3,796 based upon the surplus of Direct Auto at December 31, 2021. No dividends were declared or paid by Direct Auto during
the years ended December 31, 2021, 2020, or 2019.
Westminster was re-domesticated from Maryland to North Dakota during 2021, and is now subject to the same dividend restrictions as Nodak
Insurance. The amount available for payment of dividends from Westminster to NI Holdings during 2022 without the prior approval of the North Dakota
Insurance Department is $2,471 based upon the surplus of Westminster at December 31, 2021. No dividends were declared or paid by Westminster during
the years ended December 31, 2021 or 2020.
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Battle Creek Mutual Insurance Company
The following tables disclose the standalone balance sheets and statements of operations of Battle Creek, prior to intercompany eliminations, to
illustrate the impact of including Battle Creek in our Consolidated Balance Sheets and Statements of Operations:
Assets:
Cash and cash equivalents
Investments
Premiums and agents’ balances receivable
Deferred policy acquisition costs
Pooling receivable (1)
Reinsurance recoverables on losses (2)
Accrued investment income
Deferred income taxes
Property and equipment
Other assets
Total assets
Liabilities:
Unpaid losses and LAE
Unearned premiums
Notes payable (1)
Pooling payable (1)
Reinsurance losses payable (2)
Accrued expenses and other liabilities
Total liabilities
Equity:
Non-controlling interest
Total equity
Total liabilities and equity
(1) Amount fully eliminated in consolidation.
(2) Amount partly eliminated in consolidation.
Revenues:
Net premiums earned
Fee and other income
Net investment income
Net capital gain on investments
Total revenues
Expenses:
Losses and loss adjustment expenses
Amortization of deferred policy acquisition costs
Other underwriting and general expenses
Total expenses
Income (loss) before income taxes
Income taxes
Net income (loss)
$
$
$
December 31,
2021
2020
$
$
$
4,398
10,610
5,038
499
-
10,173
51
142
325
52
31,288
2,937
2,544
3,000
5,580
12,754
264
27,079
4,209
4,209
6,055
5,543
4,738
479
920
5,646
27
101
337
49
23,895
2,445
2,381
3,000
-
11,221
303
19,350
4,545
4,545
$
31,288
$
23,895
Year Ended December 31,
2020
2021
2019
$
$
$
5,992
(11)
49
2
6,032
4,328
1,291
470
6,089
(57)
27
(84) $
$
5,673
(23)
(3)
1
5,648
3,369
1,029
77
4,475
1,173
218
955
$
-
(9)
139
3
133
-
-
-
-
133
34
99
87
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13.
Benefit Plans
Nodak Insurance sponsors a 401(k) plan with an automatic and matching contribution for eligible employees at Nodak Insurance, Primero, and
Direct Auto. Westminster also sponsors a separate 401(k) plan. The Company reported expenses related to the 401(k) plans totaling $722, $651, and $516
during the years ended December 31, 2021, 2020, and 2019, respectively.
Nodak Insurance also contributes an additional elective amount of employee compensation as a profit-sharing contribution for eligible employees
that is invested in a portfolio of investments directed by the Company. The reported expenses related to this profit-sharing contribution were $697, $900,
and $618 during years ended December 31, 2021, 2020, and 2019 respectively.
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 (“ERISA”) over the key executives’ allowable 401(k) contribution. The plan also allows employee-directed deferral of key executive’s
compensation or incentive payments. The Company reported expenses related to this plan totaling $914, $308, and $458 during the years ended December
31, 2021, 2020, and 2019, respectively.
In connection with our initial public offering in March 2017, the Company established its ESOP. The ESOP is intended to be an employee stock
ownership plan within the meaning of Internal Revenue Code Section 4975(e)(7) and invests solely in common stock of the Company.
Upon establishment of the plan, Nodak Insurance loaned $2,400 to the ESOP’s related trust (the “ESOP Trust”). The ESOP loan was for a period
of ten years, bearing interest at the long-term Applicable Federal Rate effective on the closing date of the offering (2.79% annually). The ESOP Trust used
the proceeds of the loan to purchase shares in our initial public offering, which resulted in the ESOP Trust owning approximately 1.0% of the Company’s
authorized shares. The ESOP has purchased the shares for investment and not for resale.
The shares purchased by the ESOP Trust in the offering are held in a suspense account as collateral for the ESOP loan. 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. American West and Battle Creek have no employees.
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 $10.00 per share as part of the initial public offering. 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
Sheet 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 of $460, $373, and $405 during the years ended December 31, 2021, 2020, and 2019,
respectively, related to the ESOP.
Through December 31, 2021, the Company had released and allocated 121,575 ESOP shares to participants, with a remainder of 118,425 ESOP
shares in suspense at December 31, 2021. Using the Company’s year-end market price of $18.91 per share, the fair value of the unearned ESOP shares was
$2,239 at December 31, 2021.
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14.
Line of Credit
Nodak Insurance has a $5,000 line of credit with Wells Fargo Bank, N.A. The terms of the line of credit include a floating interest rate with a floor
rate of 3.25%. There were no outstanding amounts during the years ended December 31, 2021, 2020, or 2019. This line of credit is scheduled to expire on
January 30, 2023.
15.
Income Taxes
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted, implementing numerous changes to
tax law including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations
on interest deductions, and the creation of certain refundable employee retention credits. There has been no impact to the Company’s income taxes due to
this legislation.
The components of our provision for income tax expense (benefit) were as follows:
Current tax provision
Federal
State
Total current
Deferred tax (benefit) provision
Total provision for income taxes
Year Ended December 31,
2020
2021
2019
$
$
3,930
354
4,284
(1,310)
2,974
$
$
10,109
725
10,834
638
11,472
$
$
5,116
324
5,440
1,871
7,311
The provision for income taxes differs from the amount that would be computed by applying the statutory federal rate to income before provision
for income taxes as a result of the following:
Income before income taxes
Expected provision for federal income taxes at 21%
State income taxes, net of federal impact
Tax-exempt interest
Dividends received deduction
Compensation-related expenses
Change in valuation allowance
Other
Total provision for income taxes
Year Ended December 31,
2020
2021
11,306
2,374
474
(197)
(122)
326
77
42
2,974
$
$
$
52,816
11,091
570
(209)
(104)
130
(17)
11
11,472
$
$
$
2019
33,811
7,100
224
(235)
(89)
151
7
153
7,311
$
$
$
We re-measure existing deferred income tax assets (including loss carryforwards) and liabilities when a change in tax rate occurs and record an
offset for the net amount of the change as a component of income tax expense from continuing operations in the period of enactment. We record any
change to a previously recorded valuation allowance as a result of re-measuring existing temporary differences and loss carryforwards as a component of
income tax expense from continuing operations. The valuation allowance against certain deferred income tax assets was $1,008, $931, and $594 at
December 31, 2021, 2020, and 2019, respectively.
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The income tax effects of temporary differences that give rise to significant portions of our deferred income tax assets and deferred income tax
liabilities at December 31, 2021 and 2020 were as follows:
Deferred income tax assets:
Unearned premium
Unpaid losses and LAE
Net operating loss carryovers
Other
Total deferred income tax assets
Deferred income tax liabilities:
Deferred policy acquisition costs
Net unrealized gains on investments
Intangibles
Other
Total deferred income tax liabilities
Net deferred income tax liability
Valuation allowance
Deferred income tax liability, net
December 31,
2021
2020
$
5,783
1,096
1,224
1,967
10,070
5,670
7,382
1,464
52
14,568
(4,498)
(1,008)
(5,506) $
5,013
792
1,260
1,538
8,603
5,033
9,897
1,451
48
16,429
(7,826)
(931)
(8,757)
$
$
At December 31, 2021 and 2020, we had no unrecognized tax benefits, no accrued interest and penalties, and no significant uncertain tax
positions. No interest and penalties were recognized during the years ended December 31, 2021, 2020, or 2019.
At December 31, 2021 and 2020, the Company, other than Battle Creek and Westminster, had no income tax related carryovers for net operating
losses, alternative minimum tax credits, or capital losses.
Battle Creek, which files its federal income tax returns on a stand-alone basis, had net operating loss carryovers of $3,215 and $3,390 at December
31, 2021 and 2020, respectively. The net operating loss carryforward began expiring in 2021 and will continue through 2032 due to limitations on the use
of this net operating loss carryforward.
Westminster, which became part of the Company’s consolidated federal income tax return beginning in 2020, had $2,122 and $2,340 of net
operating loss carryover at December 31, 2021 and 2020, respectively. This net operating loss carryforward expires in 2023 due to limitations on the use of
this net operating loss carryforward.
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16.
Operating Leases
Primero leases a facility in Spearfish, South Dakota under a non-cancellable operating lease expiring in 2023, and leases a facility in Las Vegas,
Nevada on a month-to-month basis. Direct Auto leases a facility in Chicago, Illinois under a non-cancellable operating lease expiring in 2029. Nodak
Insurance leases a facility in Fargo, North Dakota under a non-cancellable operating lease expiring in 2024. There were expenses of $250, $370, and $316
related to these leases during the years ended December 31, 2021, 2020, and 2019, respectively.
As of December 31, 2021, we have minimum future commitments under non-cancellable leases for the next five years in the period ended
December 31, 2026, and thereafter as follows:
Year ending December 31,
2022
2023
2024
2025
2026
Thereafter
17.
Contingencies
$
Estimated Future
Minimum
Commitments
319
358
320
286
291
775
We have been named as a defendant in various lawsuits relating to our insurance operations. Contingent liabilities arising from litigation, income
taxes, and other matters are not considered to be material to our financial position.
18.
Common Stock
Changes in the number of common stock shares outstanding were as follows:
Shares outstanding, beginning
Treasury shares repurchased through stock repurchase authorization
Issuance of treasury shares for vesting of stock awards
Issuance of shares related to employee stock ownership plan
Shares outstanding, ending
Year Ended December 31,
2020
22,119,380
(856,499)
31,442
24,315
21,318,638
2021
21,318,638
(225,205)
102,060
24,315
21,219,808
2019
22,192,894
(116,034)
18,205
24,315
22,119,380
On February 28, 2018, our Board of Directors approved an authorization for the repurchase of up to approximately $10,000 of the Company’s
outstanding common stock. We completed the repurchase of 191,265 shares of our common stock for $2,966 during 2018, and an additional 116,034 shares
for $2,006 during 2019. During the six months ended June 30, 2020, we completed the repurchase of 402,056 shares of our common stock for $4,996 to
close out this authorization.
On May 4, 2020, our Board of Directors approved an additional authorization for the repurchase of up to approximately $10,000 of the Company’s
outstanding common stock. During the year ended December 31, 2020, we completed the repurchase of 454,443 shares of our common stock for $7,238
under this authorization. During the nine months ended September 30, 2021, we completed the repurchase of 144,110 shares of our common stock for
$2,762 to close out this authorization.
On August 11, 2021, our Board of Directors approved an additional authorization for the repurchase of up to approximately $5,000 of the
Company’s outstanding common stock. During the six months ended December 31, 2021, we completed the repurchase of 81,095 shares of our common
stock for $1,554 under this new authorization.
The cost of this treasury stock is a reduction of shareholders’ equity within our Consolidated Balance Sheets.
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19.
Stock-Based Compensation
At its 2020 Annual Shareholders’ Meeting, the NI Holdings, Inc. 2020 Stock and Incentive Plan (the “Plan”) was approved by shareholders. The
purpose of the Plan is to promote the interests of the Company and its shareholders by aiding the Company in attracting and retaining employees, officers,
consultants, independent contractors, advisors, and non-employee directors capable of assuring the future success of the Company, to offer such persons
incentives to put forth maximum efforts for the success of the Company’s business and to afford such persons an opportunity to acquire an ownership
interest in the Company, thereby aligning the interests of such persons with the Company’s shareholders.
The Plan provides for the grant of nonqualified stock options, incentive stock options, RSUs, stock appreciation rights, dividend equivalents, and
PSUs to employees, officers, consultants, advisors, non-employee directors, and independent contractors designated by the Compensation Committee of the
Board of Directors (the “Compensation Committee”). Awards made under the Plan are based upon, among other things, a participant’s level of
responsibility and performance within the Company.
The total aggregate number of shares of common stock that awards may be issued under all awards made under the Plan shall not exceed
1,000,000 shares of common stock, subject to adjustments as provided in the Plan. No eligible participant may be granted any awards for more than
100,000 shares in the aggregate in any calendar year, subject to adjustment in accordance with the Plan. The aggregate amount payable pursuant to all
performance awards denominated in cash to any eligible person in any calendar year is limited to $1,000 in value. Directors who are not also employees of
the Company may not be granted awards denominated in shares that exceed $150 in any calendar year.
Restricted Stock Units
The Compensation Committee has awarded RSUs to non-employee directors and select executives. RSUs are promises to issue actual shares of
common stock at the end of a vesting period. The RSUs granted to executives under the Plan were based on salary and vest 20% per year over a five-year
period, while RSUs granted to non-employee directors vest 100% on the date of the next annual meeting of shareholders following the grant date. Dividend
equivalents on RSUs are accrued during the vesting period and paid in cash at the end of the vesting period, but are subject to forfeiture until the underlying
shares become vested. Participants do not have voting rights with respect to RSUs.
The Company recognizes stock-based compensation costs based on the grant date fair value. The compensation costs are normally expensed over
the vesting periods to each vesting date; however, the cost of RSUs granted to executives are expensed immediately if the executive has met certain
retirement criteria and the RSUs become non-forfeitable. Estimated forfeitures are included in the determination of compensation costs. No forfeitures are
currently estimated.
A summary of the Company’s outstanding RSUs is presented below:
Units outstanding and unearned at January 1, 2019
RSUs granted during 2019
RSUs earned during 2019
Units outstanding and unearned at December 31, 2019
RSUs granted during 2020
RSUs earned during 2020
Units outstanding and unearned at December 31, 2020
RSUs granted during 2021
RSUs earned during 2021
Units outstanding and unearned at December 31, 2021
Shares
$
73,880
57,100
(34,440)
96,540
66,000
(46,760)
115,780
58,700
(66,100)
108,380
$
The following table shows the impact of RSU activity to the Company’s financial results:
RSU compensation expense
Income tax benefit
RSU compensation expense, net of income taxes
Total grant-date fair value of vested RSUs at end of period
Year Ended December 31,
2020
2021
2019
$
$
$
1,065
(242)
823
1,042
$
$
$
1,035
(217)
818
764
$
$
$
At December 31, 2021, there was $718 of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized
over a weighted-average period of 2.04 years.
92
Weighted-Average
Grant-Date
Fair Value
Per Share
16.87
15.81
16.24
16.47
14.27
16.33
15.27
18.76
15.77
16.86
792
(166)
626
568
Table of Contents
Performance Stock Units
The Compensation Committee has awarded PSUs to select executives. PSUs are promises to issue actual shares of common stock at the end of a
vesting period, if certain performance conditions are met. The PSUs granted to employees under the Plan were based on salary and include a three-year
book value cumulative growth target with threshold and stretch goals. They will vest on the third anniversary of the grant date, subject to the participant’s
continuous employment through the vesting date and the level of performance achieved. Dividend equivalents on PSUs are accrued and paid in cash at the
end of the performance period in accordance with the level of performance achieved, but are subject to forfeiture until the underlying shares become
vested. Participants do not have voting rights with respect to PSUs.
The Company recognizes stock-based compensation costs based on the grant date fair value over the performance period of the awards. Estimated
forfeitures are included in the determination of compensation costs. No forfeitures are currently estimated. The current cost estimate assumes that the
cumulative growth targets will be achieved or exceeded.
A summary of the Company’s outstanding PSUs is presented below:
Units outstanding and unearned at January 1, 2019
PSUs granted during 2019 (at target)
Units outstanding and unearned at December 31, 2019
PSUs granted during 2020 (at target)
Units outstanding and unearned at December 31, 2020
PSUs granted during 2021 (at target)
PSUs earned during 2021
Performance adjustment (1)
Forfeitures
Units outstanding and unearned at December 31, 2021
Performance
Share
Units
Weighted-Average
Grant-Date
Fair Value
Per Share
48,600
62,400
111,000
63,600
174,600
64,600
(70,363 )
24,300
(2,537 )
190,600
$
$
16.25
15.21
15.27
14.26
15.15
18.64
16.25
16.25
16.25
16.06
(1) Represents the change in PSUs issued based upon the attainment of performance goals established by the Company.
The following table shows the impact of PSU activity to the Company’s financial results:
PSU compensation expense
Income tax benefit
PSU compensation expense, net of income taxes
Total grant-date fair value of vested PSUs at end of period
Year Ended December 31,
2020
2021
2019
$
$
$
1,344
(305)
1,039
1,143
$
$
$
1,262
(265)
997
-
$
$
$
822
(173)
649
-
The PSU grants above represent initial target awards and do not reflect potential increases or decreases resulting from financial performance
objectives to be determined at the end of the performance period. The actual number of shares to be issued at the end of the performance period will range
from 0% to 150% of the initial target awards.
At December 31, 2021, there was $1,125 of unrecognized compensation cost related to outstanding PSUs. That cost is expected to be recognized
over a weighted-average period of 1.74 years.
93
Table of Contents
20.
Segment Information
We have five primary reportable operating segments, which consist of private passenger auto insurance, non-standard auto insurance, home and
farm insurance, crop insurance, and commercial insurance. A sixth segment captures all other insurance coverages we sell, including our assumed
reinsurance lines of business. We operate only in the United States, and no single customer or agent provides 10 percent or more of our revenues. The
following tables provide available information of these segments for the years ended December 31, 2021, 2020, and 2019.
For purposes of evaluating profitability of the non-standard auto segment, management combines the policy fees paid by the insured with the
underwriting gain or loss as its primary measure. As a result, these fees are allocated to the non-standard auto segment (included in fee and other income) in
the tables below. The remaining fee and other income amounts are not allocated to any segment.
We do not assign or allocate all Consolidated Statement of Operations or Consolidated Balance Sheet line items to our operating segments. Those
line items include investment income, net capital gain on investments, other income excluding non-standard auto insurance fees, and income taxes within
the Consolidated Statement of Operations. For the Consolidated Balance Sheet, those items include cash and investments, property and equipment, other
assets, accrued expenses, income taxes recoverable or payable, and shareholders’ equity.
94
Table of Contents
Direct premiums earned
Assumed premiums earned
Ceded premiums earned
Net premiums earned
Direct losses and LAE
Assumed losses and LAE
Ceded losses and LAE
Net losses and LAE
Year Ended December 31, 2021
Private
Passenger
Auto
Non-
Standard
Auto
Home and
Farm
$
$
76,749
-
(4,216)
72,533
61,358
-
(1,637)
59,721
$
58,842
-
(257)
58,585
34,453
-
-
34,453
84,102
-
(10,310)
73,792
59,380
-
(7,235)
52,145
$
Crop
43,541
2,106
(18,799)
26,848
79,177
617
(51,963)
27,831
45,621
-
(10,842)
34,779
Commercial
65,104
$
-
(7,819)
57,285
All Other
4,916
$
5,929
(299)
10,546
$
Total
333,254
8,035
(41,700)
299,589
Gross margin
12,812
24,132
21,647
(983)
22,506
Underwriting and general expenses
Underwriting gain (loss)
20,516
(7,704)
22,122
(475)
8,212
(9,195)
20,000
2,506
22,770
1,362
1,280
2,642
1,009
6,282
159
7,450
3,096
2,669
427
280,998
6,899
(71,518)
216,379
83,210
96,289
(13,079)
1,775
7,131
15,479
11,306
2,974
8,332
(84)
$
8,416
82.3%
28.3%
110.6%
58.8%
38.9%
97.7%
70.7%
30.0%
100.6%
103.7%
30.6%
134.2%
60.7%
34.9%
95.6%
70.6%
25.3%
96.0%
72.2%
32.1%
104.4%
$
$
19,039
4,949
1,001
-
26,390
28,820
8,143
5,978
-
2,810
43,515
18,679
$
8,914
7,271
3,467
-
19,161
42,399
-
-
-
95
-
-
6,953
-
6,002
-
4,962
$
$
14,687
6,328
8,722
14,912
32,924
34,672
669
421
1,057
-
11,670
3,219
$
51,452
24,947
21,200
17,722
139,662
127,789
-
-
4,962
Fee and other income
Net investment income
Net capital gain on investments
Income before income taxes
Income taxes
Net income
Net loss attributable to non-controlling
interest
Net income attributable to NI
Holdings, Inc.
Operating Ratios:
Loss and LAE ratio
Expense ratio
Combined ratio
Balances at December 31, 2021:
Premiums and agents’ balances
receivable
$
Deferred policy acquisition costs
Reinsurance recoverables
Goodwill and other intangibles
Unpaid losses and LAE
Unearned premiums
Payable to Federal Crop Insurance
Corporation
Table of Contents
Direct premiums earned
Assumed premiums earned
Ceded premiums earned
Net premiums earned
Direct losses and LAE
Assumed losses and LAE
Ceded losses and LAE
Net losses and LAE
Year Ended December 31, 2020
Private
Passenger
Auto
Non-
Standard
Auto
Home and
Farm
Crop
$
$
74,998
-
(2,989)
72,009
45,423
-
88
45,511
$
53,909
-
(172)
53,737
30,347
-
-
30,347
$
82,036
-
(7,157)
74,879
38,700
(116)
(1,839)
36,745
39,893
1,896
(6,071)
35,718
36,022
1,070
(5,713)
31,379
Commercial
45,557
$
-
(7,269)
38,288
All Other
4,668
$
4,563
(201)
9,030
$
32,620
-
(12,190)
20,430
2,258
2,354
(551)
4,061
Total
301,061
6,459
(23,859)
283,661
185,370
3,308
(20,205)
168,473
Gross margin
26,498
23,390
38,134
4,339
17,858
4,969
115,188
Underwriting and general expenses
Underwriting gain (loss)
19,986
6,512
Fee and other income
Net investment income
Net capital gain on investments
Income before income taxes
Income taxes
Net income
Net income attributable to non-controlling
interest
Net income attributable to NI
Holdings, Inc.
Operating Ratios:
Loss and LAE ratio
Expense ratio
Combined ratio
Balances at December 31, 2020:
Premiums and agents’ balances
receivable
Deferred policy acquisition costs
Reinsurance recoverables
Receivable from Federal Crop
Insurance Corporation
Goodwill and other intangibles
Unpaid losses and LAE
Unearned premiums
20,874
17,260
4,807
(468)
16,358
1,500
2,304
2,665
20,739
2,651
1,337
3,988
85,068
30,120
1,801
7,271
13,624
52,816
11,472
41,344
955
$
40,389
63.2%
27.8%
91.0%
56.5%
38.6%
95.1%
49.1%
27.9%
76.9%
87.9%
13.5%
101.3%
53.4%
42.7%
96.1%
45.0%
25.5%
70.5%
59.4%
30.0%
89.4%
$
$
18,540
5,461
412
-
-
20,311
28,293
6,543
4,649
-
-
2,860
43,336
16,147
$
$
9,072
7,828
588
-
-
11,737
41,301
96
$
-
-
121
6,646
-
771
-
13,732
5,588
5,374
-
15,334
19,089
30,705
$
$
636
442
2,215
-
-
48,523
23,968
8,710
6,646
18,194
10,506
2,917
105,750
119,363
Table of Contents
Direct premiums earned
Assumed premiums earned
Ceded premiums earned
Net premiums earned
Direct losses and LAE
Assumed losses and LAE
Ceded losses and LAE
Net losses and LAE
Year Ended December 31, 2019
Private
Passenger
Auto
Non-
Standard
Auto
Home and
Farm
Crop
$
$
71,297
-
(3,314)
67,983
53,022
63
(389)
52,696
$
57,278
-
(164)
57,114
32,654
-
-
32,654
$
77,832
-
(6,661)
71,171
47,282
-
(1,681)
45,601
Gross margin
15,287
24,460
25,570
Underwriting and general expenses
Underwriting gain (loss)
18,886
(3,599)
20,106
5,464
21,077
3,383
1,638
5,021
42,277
2,072
(6,330)
38,019
35,148
1,582
(4,639)
32,091
5,928
4,396
1,532
Commercial
4,546
$
1
(450)
4,097
All Other
4,431
$
3,824
(201)
8,054
$
2,541
-
(52)
2,489
1,608
863
745
3,296
2,387
(1,504)
4,179
3,875
1,930
1,945
Total
257,661
5,897
(17,120)
246,438
173,943
4,032
(8,265)
169,710
76,728
67,258
9,470
2,125
7,433
14,783
33,811
7,311
26,500
99
77.5%
27.8%
105.3%
57.2%
36.9%
94.1%
64.1%
28.3%
92.3%
84.4%
11.6%
96.0%
60.8%
21.1%
81.8%
51.9%
24.0%
75.9%
68.9%
27.3%
96.2%
$
26,401
$
$
18,194
4,108
500
-
-
19,892
27,949
7,876
4,711
-
-
2,912
43,978
16,364
$
$
9,088
5,945
1,068
$
-
-
998
-
-
10,503
39,945
14,230
-
8,579
-
97
940
315
6
-
-
1,076
2,334
$
$
593
320
1,473
-
-
9,222
2,684
36,691
15,399
4,045
14,230
2,912
93,250
89,276
Fee and other income
Net investment income
Net capital gain on investments
Income before income taxes
Income taxes
Net income
Net income attributable to non-controlling
interest
Net income attributable to NI
Holdings, Inc.
Operating Ratios:
Loss and LAE ratio
Expense ratio
Combined ratio
Balances at December 31, 2019:
Premiums and agents’ balances
receivable
Deferred policy acquisition costs
Reinsurance recoverables
Receivable from Federal Crop
Insurance Corporation
Goodwill and other intangibles
Unpaid losses and LAE
Unearned premiums
Table of Contents
21.
Statutory Net Income, Capital and Surplus, and Dividend Restrictions
The following table presents selected information, as filed with insurance regulatory authorities, for our insurance subsidiaries as determined in
accordance with accounting practices prescribed or permitted by such insurance regulatory authorities as of and for the years ended December 31, 2021,
2020, and 2019:
2021
2020
2019
Nodak Insurance:
Statutory capital and surplus
Statutory unassigned surplus
Statutory net income
American West:
Statutory capital and surplus
Statutory unassigned surplus
Statutory net income (loss)
Primero:
Statutory capital and surplus
Statutory unassigned surplus (deficit)
Statutory net income (loss)
Battle Creek:
Statutory capital and surplus
Statutory unassigned surplus
Statutory net income (loss)
Direct Auto:
Statutory capital and surplus
Statutory unassigned surplus
Statutory net income
Westminster:
Statutory capital and surplus
Statutory unassigned surplus
Statutory net income
$
$
221,761
216,761
5,311
$
216,278
211,278
24,529
18,400
12,399
(54)
10,138
879
127
6,821
3,821
(77)
37,960
34,960
6,451
24,706
19,706
1,723
18,368
12,367
2,158
9,818
559
1,023
6,875
3,875
693
35,819
32,819
7,898
23,592
18,592
2,719
189,836
184,836
9,398
16,168
10,167
2,232
8,727
(532)
(1,256 )
6,189
3,189
133
28,683
25,683
7,377
20,897
15,897
225
State insurance laws require our insurance subsidiaries to maintain certain minimum capital and surplus amounts on a statutory basis. Our
insurance subsidiaries are subject to regulations that restrict the payment of dividends from statutory surplus and may require prior approval from their
domiciliary insurance regulatory authorities. Our insurance subsidiaries are also subject to RBC requirements that may further affect their ability to pay
dividends. Our insurance subsidiaries statutory capital and surplus at December 31, 2021 and 2020 exceeded the amount of statutory capital and surplus
necessary to satisfy regulatory requirements, including the RBC requirements, by a significant margin.
Amounts available for distribution in 2022 to Nodak Insurance as dividends from its insurance subsidiaries without prior approval of insurance
regulatory authorities are $1,840 from American West and $0 from Primero. No dividends were paid to Nodak Insurance from either entity during the years
ended December 31, 2021, 2020, or 2019.
The amount available for payment of dividends from Nodak Insurance to NI Holdings during 2022 without the prior approval of the North Dakota
Insurance Department is $21,493 based upon the surplus of Nodak Insurance at December 31, 2021. Prior to its payment of any dividend, Nodak Insurance
will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota Insurance
Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North Dakota
Insurance Department has the power to limit or prohibit dividend payments if Nodak Insurance is in violation of any law or regulation. These restrictions or
any subsequently imposed restrictions may affect our future liquidity. The Board of Directors of Nodak Insurance declared and paid a $6,000 dividend
during the year ended December 31, 2020. No dividends were declared or paid in the years ended December 31, 2021 or 2019.
Direct Auto was re-domesticated from Illinois to North Dakota during 2021, and is now subject to the same dividend restrictions as Nodak
Insurance. The amount available for payment of dividends from Direct Auto to NI Holdings during 2022 without the prior approval of the North Dakota
Insurance Department is $3,796 based upon the surplus of Direct Auto at December 31, 2021. No dividends were declared or paid by Direct Auto during
the years ended December 31, 2021, 2020, or 2019.
Westminster was re-domesticated from Maryland to North Dakota during 2021, and is now subject to the same dividend restrictions as Nodak
Insurance. The amount available for payment of dividends from Westminster to NI Holdings during 2022 without the prior approval of the North Dakota
Insurance Department is $2,471 based upon the surplus of Westminster at December 31, 2021. No dividends were declared or paid by Westminster during
the years ended December 31, 2021 or 2020.
98
Table of Contents
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes or disagreements with accountants on accounting and financial disclosure.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure
controls and procedures (as required by Exchange Act Rules 240.13a-15(b) and 15d-14(a)) as of December 31, 2021. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective.
Evaluation of Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Rule
13a-15(f) under the Exchange Act. Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, our
management has reviewed and evaluated the effectiveness of our internal control over financial reporting based on the framework and criteria established
in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO
Framework”). Based on our evaluation under the COSO Framework, the Chief Executive Officer and Chief Financial Officer have concluded that the
Company’s current internal control over financial reporting is effective, and that our Consolidated Financial Statements we include in this Annual Report
on Form 10-K present fairly, in all material respects, our financial position, results of operations, and cash flows in conformity with accounting principles
generally accepted in the United States of America.
Changes in Internal Controls
In the ordinary course of business, we periodically review our system of internal control over financial reporting to identify opportunities to
improve our controls and increase efficiency, while ensuring that we maintain an effective internal control environment. In addition, when we acquire new
businesses, we incorporate our controls and procedures into the acquired business as part of our integration activities. Since 2018, we have invested
significant resources to comprehensively document and analyze our system of internal control over financial reporting. We have identified areas requiring
improvement, and continue to make selected improvements to processes and controls to address issues identified through this review. These improvements
may include such activities as implementing new, more efficient systems, automating manual processes, formalizing policies and procedures, increasing
monitoring controls, and updating existing systems. We plan to continue this initiative as well as prepare for the first audit of our internal control over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 for the annual period ending December 31, 2022, which may result in
changes to our internal control over financial reporting.
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-
15(f) under the Exchange Act) during the year ended December 31, 2021, to which this report relates that have materially affected, or are reasonably likely
to materially affect the Company’s internal control over financial reporting.
Item 9B.
Other Information
On March 7, 2022, the Board of Directors of the Company appointed Seth Daggett as the Company's Principal Accounting Officer. Mr. Daggett
will replace Timothy Milius as the Company's Principal Accounting officer. Mr. Daggett will continue to serve as the Company's Chief Financial Officer
and Treasurer. Mr. Milius will continue to serve as the Secretary of the Company. Further information about Mr. Daggett may be found in the Company's
Proxy Statement and Form 8-K filed on November 13, 2020, as amended on March 4, 2021.
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
99
Table of Contents
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
We incorporate the response to this Item 10 by reference to our proxy statement we will file with the SEC on or about April 12, 2022 relating to
our Annual Meeting of Shareholders that we will hold on May 24, 2022 (our “Proxy Statement”).
We have posted a copy of our Code of Ethics and Business Conduct on the Governance Highlights page of the Corporate Governance section of
our website, www.niholdingsinc.com, which you can access free of charge. Information contained on the website is not incorporated by reference in, or
considered part of, this Form 10-K. We intend to disclose on our website any amendments to, or waivers from, our Code of Ethics and Business Conduct
that are required to be disclosed by law or NASDAQ Listing Rules.
Item 11.
Executive Compensation
We incorporate the response to this Item 11 by reference to our Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
We incorporate the response to this Item 12 by reference to our Proxy Statement.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
We incorporate the response to this Item 13 by reference to our Proxy Statement.
Item 14.
Principal Accountant Fees and Services
We incorporate the response to this Item 14 by reference to our Proxy Statement.
100
Table of Contents
PART IV
Item 15.
Exhibits and Financial Statement Schedules
List of Financial Statements and Financial Statement Schedules
(a)
(1)
(2)
The following documents are filed as a part of this report:
Financial Statements and
Financial Statement schedules required to be filed by Item 8 of this report.
Schedule I Condensed financial information of registrant – NI Holdings, Inc.
All other financial schedules are not required under the related instructions, as they are inapplicable or the information has been included in the
Consolidated Financial Statements, and therefore have been omitted.
(3)
The following exhibits are required by Item 601 of Regulation S-K and are included as part of this Form 10-K:
2.1
3.1
3.2
3.3
3.4
4.1
4.2
Plan of Mutual Property and Casualty Insurance Company Conversion and Minority Offering of Nodak Mutual Insurance Company,
dated as of January 21, 2016 (1)
Articles of Incorporation of NI Holdings, Inc. (1)
Bylaws of NI Holdings, Inc. (1)
Amendment to the Bylaws of NI Holdings, Inc. (4)
Amendment No. 2 to the Bylaws of NI Holdings, Inc. (6)
Form of certificate evidencing shares of common stock of NI Holdings, Inc. (1)
Description of Securities Registered Under Section 12 of the Exchange Act (8)
10.1
2017 NI Holdings, Inc. Equity Incentive Plan (5)
10.2
Nodak Mutual Insurance Company Nonqualified Deferred Compensation Plan (1)
10.3#
Employment Agreement dated as of April 28, 2016, between Michael J. Alexander and Nodak Mutual Insurance Company and NI
Holdings, Inc. (1)
10.5#
Employment Agreement dated as of April 28, 2016, between Patrick W. Duncan and Nodak Mutual Insurance Company and NI Holdings,
Inc. (1)
10.6
10.7
Trademark License Agreement dated as of October 1, 2016 between North Dakota Farm Bureau and Nodak Mutual Insurance Company
(1)
Multiple Peril Crop/Livestock Insurance Full Service Agency Agreement among American Farm Bureau Insurance Services, Inc. and
Nodak Mutual Insurance Company, American West Insurance Company and Battle Creek Mutual Insurance Company for Crop Year 2016
(1)
10.8
Crop Hail Insurance Full Service Agency Agreement among American Farm Bureau Insurance Services, Inc. and Nodak Mutual
Insurance Company, American West Insurance Company and Battle Creek Mutual Insurance Company for Crop Year 2016 (1)
10.9# Nodak Mutual Insurance Company Cash Incentive Bonus Plan (3)
10.10# NI Holdings, Inc. Employee Stock Ownership Plan (1)
10.11 Affiliation Agreement dated as of December 30, 2010 between Nodak Mutual Insurance Company and Battle Creek Mutual Insurance
Company (2)
101
Table of Contents
10.12
Form of Time-Based Restricted Stock Unit Agreement for Non-Employee Directors (7)
10.13 NI Holdings, Inc. 2020 Stock and Incentive Plan (7)
10.14* Form of Time-Based Restricted Stock Unit Agreement for Executives
10.15* Form of NI Holdings, Inc. Growth in Book Value Per Share Performance Share Unit Agreement
21.1*
Subsidiaries of NI Holdings, Inc.
23.1*
Consent of Mazars USA LLP, Fort Washington, PA, PCAOB 339
31.1*
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File
because its XBRL tags are embedded within the Inline XBRL document
101.SCH**
Inline XBRL Taxonomy Extension Schema Linkbase Document
101.CAL**
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
Filed herewith.
Inline XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for
**
purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, and otherwise is not subject to liability under these sections.
#
Management contract or compensatory plan or arrangement.
Filed as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-214057) filed with the SEC on October 11, 2016, and
(1)
incorporated herein by reference.
Filed as an exhibit to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (File No. 333-214057) filed with the SEC on
(2)
November 14, 2016, and incorporated herein by reference.
Filed as an exhibit to Amendment No. 4 to the Company’s Registration Statement on Form S-1 (File No. 333-214057) filed with the SEC on
(3)
January 12, 2017, and incorporated herein by reference.
(4)
Filed as Exhibit 3.1 to the Company’s Form 8-K (File No. 001-37973) filed with the SEC on March 2, 2020, and incorporated herein by reference.
Filed as Exhibit 10.1 to the Company’s Form 8-K (File No. 001-37973) filed with the SEC on September 18, 2017, and incorporated herein by
(5)
reference.
(6)
(7)
Filed as Exhibit 3.1 to the Company’s Form 8-K (File No. 001-37973) filed with the SEC on April 22, 2020, and incorporated herein by reference.
Filed as an Exhibit to the Company’s Form 8-K (File No. 001-37973) filed with the SEC on May 29, 2020, and incorporated herein by reference.
Filed as an Exhibit to the Company’s Form 10-K (File No. 001-37973) filed with the SEC on March 10, 2021, and incorporated herein by
(8)
reference.
102
Table of Contents
Item 16.
Form 10-K Summary
None.
103
Table of Contents
Schedule I – Condensed financial information of registrant – NI Holdings, Inc.
Condensed Balance Sheets
Assets:
Cash and cash equivalents
Fixed income securities, at fair value
Equity securities, at fair value
Total cash and investments
Income tax recoverable
Accrued investment income
Investment in wholly-owned subsidiaries
Deferred income taxes
Total assets
Liabilities:
Westminster consideration payable
Accrued expenses and other liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity
Total liabilities and equity
104
December 31,
2021
2020
8,743
11,247
8,912
28,902
423
94
327,340
861
357,620
13,020
1,396
14,416
-
343,204
357,620
$
$
$
$
8,838
20,979
9,646
39,463
1,036
134
324,305
529
365,467
19,287
1,853
21,140
-
344,327
365,467
$
$
$
$
Condensed Statements of Operations
Table of Contents
Revenues:
Fee and other income
Net investment income
Net capital gain on investments
Total revenues
Expenses:
Other underwriting and general expenses
Total expenses
Year Ended December 31,
2020
2021
2019
$
$
-
396
2,119
2,515
4,543
4,543
(2,028)
(156)
(1,872)
10,288
8,416
$
$
(31) $
717
425
1,111
5,711
5,711
(4,600)
(1,190)
(3,410)
43,799
40,389
$
2
1,342
3,067
4,411
3,383
3,383
1,028
163
865
25,536
26,401
Income (loss) before income taxes and equity in undistributed net income of subsidiaries
Income tax (benefit) expense
Income (loss) before equity in undistributed net income of subsidiaries
Equity in undistributed net income of subsidiaries
Net income attributable to NI Holdings, Inc.
Condensed Statements of Comprehensive Income
Net income attributable to NI Holdings, Inc.
Other comprehensive income (loss), net of income taxes:
Unrealized gain (loss) on investments
Unrealized gain (loss) attributed to subsidiaries
Other comprehensive income (loss), net of income taxes
Comprehensive income
105
Year Ended December 31,
2020
2021
2019
8,416
$
40,389
$
26,401
(346)
(7,257)
(7,603)
813
$
127
7,101
7,228
47,617
$
846
6,574
7,420
33,821
$
$
Table of Contents
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income attributable to NI Holdings, Inc.
Adjustments:
Equity in undistributed net income of subsidiaries
Other
Net 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
Acquisition of Westminster American Insurance Company
Net cash flows from investing activities
Cash flows from financing activities:
Dividend from subsidiaries
Purchase of treasury stock
Installment payment on Westminster consideration payable
Issuance of restricted stock awards
Net cash flows from financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Year Ended December 31,
2020
2021
2019
$
8,416
$
40,389
$
26,401
(10,288)
1,159
(9,129)
(713)
10,103
7,306
(808)
(4,512)
—
12,089
—
(4,316)
(6,667)
(488)
(11,471)
(43,799)
1,395
(42,404)
(2,015)
16,238
4,174
(1,550)
(4,139)
(20,000)
(5,277)
6,000
(12,234)
—
(31)
(6,265)
(95)
(13,557)
8,838
22,395
(25,536)
(1,079)
(26,615)
(214)
26,612
9,672
(12,918)
(4,618)
—
18,748
—
(2,006)
—
(19)
(2,025)
16,509
5,886
Cash and cash equivalents at end of period
$
8,743
$
8,838
$
22,395
Note A – Basis of presentation
In the parent-company-only financial statements, the Company’s investment in subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since inception. The parent-company-only financial statements should be read in conjunction with the Company’s Consolidated Financial
Statements.
Note B – Dividends from subsidiaries
The Company received a cash dividend of $6,000 from Nodak Insurance during the year ended December 31, 2020. No dividends from its
subsidiaries were received during the years ended December 31, 2021 or 2019.
106
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) 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 March 9, 2022.
SIGNATURES
NI HOLDINGS, INC.
/s/ Michael J. Alexander
Michael J. Alexander
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 9, 2022, by the following persons on
behalf of the registrant and in the capacities indicated.
Signature
/s/ Michael J. Alexander
Michael J. Alexander
/s/ Seth C. Daggett
Seth C. Daggett
/s/ Eric K. Aasmundstad
Eric K. Aasmundstad
/s/ William R. Devlin
William R. Devlin
/s/ Duaine C. Espegard
Duaine C. Espegard
/s/ Cindy L. Launer
Cindy L. Launer
/s/ Stephen V. Marlow
Stephen V. Marlow
/s/ Jeffrey R. Missling
Jeffrey R. Missling
Capacity
President and Chief Executive Officer (Principal Executive
Officer), Director
Date
March 9, 2022
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
March 9, 2022
Director
Director
Director
Director
Director
Director
107
March 9, 2022
March 9, 2022
March 9, 2022
March 9, 2022
March 9, 2022
March 9, 2022
NI HOLDINGS, INC.
Time Based Restricted Stock Unit Agreement for Executives
Exhibit 10.14
Name of Participant: [___________]
Date of Grant:
No. of Units Covered: [___________]
Vesting Commencement Date: [___________]
Vesting Dates:
THIS RESTRICTED STOCK UNIT AGREEMENT (this “Agreement”) governs the Stock Unit Award granted by NI HOLDINGS, INC., a North
Dakota corporation (the “Company”) to the above named individual (the “Participant”), in accordance with and subject to the provisions of the Company’s
2020 Stock and Incentive Plan (the “Plan”). A copy of the Plan has been made available to the Participant. Unless the context indicates otherwise,
capitalized terms that are not defined in this Agreement shall have the meaning set forth in the Plan.
1. Grant of Restricted Stock Units.
(a) In accordance with the Plan, and effective as of the Date of Grant specified above, the Company has granted to the Participant the number of Stock
Units specified at the beginning of this Agreement (collectively, the “Restricted Stock Units,” and each a “Restricted Stock Unit.”). Each Restricted Unit
represents the right to receive a share of Common Stock (a “Share”) and dividend equivalent amounts corresponding to the Share, subject to the terms and
conditions of this Agreement and the Plan.
(b) The Restricted Stock Units granted to the Participant shall be credited to an account in the Participant’s name. This account shall be a record of book
keeping entries only and shall be utilized solely as a device for the measurement and determination of the number of Shares to be issued to or in respect of
the Participant pursuant to this Agreement. Restricted Stock Units may not be transferred by the Participant without the Committee’s prior written consent
other than by will or the laws of descent and distribution.
2. Vesting of the Shares.
(a) The Participant’s interest in the Restricted Stock Units shall vest and become non-forfeitable on each of the vesting dates set forth above (each a
“Vesting Date”) if the Participant remains in continuous service with the Company or an Affiliate from the Vesting Commencement Date through each
applicable Vesting Date. Except as provided in paragraphs 2(b) through (e) below, if the Participant’s service with the Company or an Affiliate is
terminated prior to a Vesting Date, any Restricted Stock Units that remain unvested as of the date of such termination shall be forfeited.
(b) If the Participant remains in continuous service with the Company or an Affiliate from the Vesting Commencement Date until the date the
Participant’s service is terminated due to Disability or death that occurs before the last Vesting Date, then any Restricted Stock Units that remain unvested
will vest in full and become non-forfeitable as of the date of such termination.
(c) If the Participant remains in continuous service with the Company or an Affiliate from the Vesting Commencement Date until the Participant’s
Retirement Age, then any Restricted Stock Units that remain unvested upon attainment of Retirement Age shall be subject to forfeiture solely in the event
that the Participant’s subsequent separation from service is for Cause. In the absence of a for Cause separation, such Units shall remain outstanding and
continue to vest upon the applicable Vesting Date(s); provided, that if the Participant separates from services (other than for Cause) prior to a Vesting Date,
any unvested Units remaining as of the date that is six months after the Participant’s separation from service shall vest at such time (or, if earlier, upon the
Participant’s death). The term “separation from service” shall have the meaning ascribed to that term in Treasury Regulations promulgated under section
409A of the Code.
(d) If the Participant remains in continuous service with the Company or an Affiliate from the Vesting Commencement Date until the Participant incurs
an Involuntary Termination Due to Position Elimination or Reorganization that occurs before the last Vesting Date, then any Restricted Stock Units that
remain unvested will vest in a pro rata number of the Restricted Stock Units. The pro rata number of Restricted Stock Units that vest shall be determined by
multiplying the unvested Restricted Stock Units corresponding to a particular Vesting Date by a fraction, the numerator of which is the number of full and
partial calendar months of the Participant’s service with the Company or an Affiliate from the first day of the Vesting Commencement Date to the date of
termination, and the denominator of which is the number of full calendar months from the Vesting Commencement Date to the Vesting Date. A partial
month of service shall count as a full month.
108
(e) If the Participant remains in continuous service with the Company or an Affiliate from the Vesting Commencement Date until a Change in Control
that occurs before the last Vesting Date, and the Participant’s Restricted Stock Units are neither assumed nor substituted or replaced with similar rights (or
cash equivalent value thereof), then any Restricted Stock Units that remain unvested will vest in full and become non-forfeitable upon the Change in
Control. If the Participant’s Restricted Stock Units are assumed (or substituted or replaced with an award of equivalent value), then, in addition to the
circumstances described in paragraphs (a) through (d) above, if the Participant is involuntarily terminated without Cause or resigns for Good Reason within
twenty four (24) months following the Change in Control but prior to a Vesting Date, any Restricted Stock Units (or replacement award) that remains
unvested will vest in full and become non-forfeitable as of the date of such termination.
3. Issuance and Settlement.
(a) After any Restricted Stock Units vest in accordance with Section 2, the Company shall cause to be issued to the Participant, or to the Participant’s
designated beneficiary or estate in the event of the Participant’s death, one Share in payment and settlement of each vested Restricted Stock Unit, subject to
applicable required tax withholding. The Committee shall cause the Shares issuable in connection with the vesting of any such Restricted Stock Units to be
issued as soon as practicable after vesting, but in all events no later than 30 days after vesting, and the Participant shall have no power to affect the timing
of such issuance. Such issuance shall be evidenced by a stock certificate or appropriate entry on the books of the Company or a duly authorized transfer
agent of the Company and shall be in complete settlement and satisfaction of such vested Restricted Stock Units.
(b) Notwithstanding the foregoing, if the Participant has attained or will attain Retirement Age prior to the last Vesting Date under this Agreement, such
Units shall be treated as “deferred compensation” subject to section 409A of the Internal Revenue Code (the “Code”). In such case, the following special
provisions shall apply to the payment of the underlying Shares:
(i) if any Restricted Stock Units vest and become payable on account of a Change in Control, the Restricted Stock Units shall not become payable (even
though non forfeitable) unless the Change in Control constitutes a “change in control event” as defined in Treasury Regulations promulgated under section
409A of the Code; and
(ii) if any Restricted Stock Units vest and become payable on account of the Participant’s (A) Involuntary Termination Due to Position Elimination or
Reorganization or (B) involuntary termination without Cause or resignation for Good Reason on or after a Change in Control, the Restricted Stock Units
shall not become payable (even though non forfeitable) unless the termination constitutes a “separation from service” as defined in Treasury Regulations
promulgated under section 409A of the Code. In addition, if the Participant is a Specified Employee, payment on account of separation from service
hereunder shall be made as of the date that is six months following the Participant’s separation from service (or, if earlier, upon the Participant’s death).
(c) The Participant may elect to satisfy any applicable required tax arising in relation to the Restricted Stock Units by (i) delivering cash (including
check, draft, money order or wire transfer made payable to the order of the Company) or (ii) having the Company withhold a portion of the Shares
otherwise to be delivered having a Fair Market Value equal to the amount of such tax liability (subject to any limitations required under applicable financial
accounting standards to avoid liability accounting for the Award). In the case of clause (ii), the Company will not deliver to the Participant any fractional
Shares (or equivalent cash value) remaining after reduction for taxes; rather, any remaining fractional Shares will be cancelled without payment.
4. Shareholder Rights. The Restricted Stock Units do not entitle the Participant to any rights of a shareholder of the Company. Notwithstanding the
foregoing, the Participant shall accumulate an unvested right to payment of cash dividend equivalents on the Shares underlying Restricted Stock Units if
cash dividends are declared by the Company on the Shares on or after the Date of Grant. Such dividend equivalents will be in an amount of cash per
Restricted Stock Unit equal to the cash dividend paid with respect to one Share, subject to applicable required tax withholding. The Participant shall be
entitled solely to payment of accumulated dividend equivalents with respect to the number of Restricted Stock Units equal to the number of Shares that
become issuable to the Participant pursuant to this Agreement. Dividend equivalents will be paid to the Participant as soon as administratively possible
following the date that the Shares are issued to the Participant. The Participant shall not be entitled to dividend equivalents with respect to dividends
declared prior to the Date of Grant. All dividend equivalents accumulated with respect to forfeited Restricted Stock Units shall also be irrevocably
forfeited. As of the date of issuance of Shares underlying Restricted Stock Units, the Participant shall have all of the rights of a shareholder of the Company
with respect to any Shares issued pursuant hereto.
5. Definitions. For purposes of this Agreement, the following shall have the following meanings:
(a) “Cause” means (i) the Participant’s willful conduct that is demonstrably and materially injurious to the Company or an Affiliate, monetarily or
otherwise; (ii) the Participant’s material breach of written agreement between the Participant and the Company; (iii) the Participant’s breach of the
Participant’s fiduciary duties to the Company or an Affiliate; (iv) the Participant’s conviction of any crime (or entering a plea of guilty or nolo contendre to
any crime) constituting a felony; or (v) the Participant’s entering into an agreement or consent decree or being the subject of any regulatory order that in
any of such cases prohibits the Participant from serving as an officer or director of a company that has publicly traded securities. A termination of the
Participant shall not be for “Cause” unless the decision to terminate the Participant is set forth in a resolution of the Board to that effect and which specifies
the particulars thereof and that is approved by a majority of the members of the Board (exclusive of the Participant if the Participant is a member of the
Board) adopted at a meeting called and held for such purpose (after reasonable notice to the Participant and an opportunity for the Participant to be heard
before the Board). No act or failure to act by the Participant will be deemed “willful” if it was done or omitted to be done by the Participant in good faith or
with a reasonable belief on the part of the Participant that the action or omission was in the best interests of the Company or an Affiliate. Any act or failure
to act by the Participant based upon authority given pursuant to a resolution duly adopted by the Board or based on the advice of counsel to the Company
shall be conclusively presumed to be done or omitted to be done by the Participant in good faith and in the best interest of the Company and its Affiliates.
109
(b) “Change in Control” means:
(i) the approval of the shareholders of the Company, and consummation, of (A) any consolidation, merger or statutory share exchange of the Company
with any person in which the surviving entity would not have as its directors at least a majority of the Incumbent Board and as a result of which those
persons who were shareholders of the Company immediately prior to such transaction would not hold, immediately after such transaction, at least 50% of
the Voting Power of the Company then outstanding or the combined voting power of the surviving entity’s then outstanding voting securities; (B) any sale,
lease, exchange or other transfer in one transaction or series of related transactions substantially all of the assets of the Company; or (C) the adoption of any
plan or proposal for the complete or partial liquidation or dissolution of the Company. For purposes of this Section 5(a), “Voting Power” when used with
reference to the Company shall mean the voting power of all classes and series of capital stock of the Company now or hereafter authorized; or
(ii) the individuals who, as of the date of this Agreement, are members of the Board of Directors of the Company (the “Incumbent Board”) cease for
any reason to constitute at least a majority of the Board (provided, however, that if the election or nomination for election by the Company’s shareholders
of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered to be a member of the
Incumbent Board).
(c) “Disability” means the Participant has been determined, by a physician selected by the Company and reasonably acceptable to the Participant, to be
unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in
death or can be expected to last for a continuous period of not less than 12 months.
(d) “Good Reason” means, without the express written consent of the Participant (i) a change in the Participant’s position with the Company or an
Affiliate which results in a material diminution of the Participant’s authority, duties or responsibilities; (ii) a material reduction by the Company or an
Affiliate in the annual rate of the Participant’s base salary; or (iii) a change in the location of the Participant’s principal office to a different place that is
more than fifty miles from the Participant’s principal office immediately prior to such change. A reduction in the Participant’s rate of annual base pay shall
be material if the rate of annual base salary on any date is less than ninety percent (90%) of the Participant’s highest rate of annual base pay as in effect on
any date in the preceding thirty-six (36) months. Notwithstanding the two preceding sentences, a change in the Participant’s duties or responsibilities shall
not constitute Good Reason, and the Participant shall not have Good Reason to resign, solely because the Company does not have common shares or other
securities that are publicly traded. A resignation by the Participant shall not be with “Good Reason” unless the Participant gives the Company written
notice specifying the event or condition that the Participant asserts constitutes Good Reason, the notice is given no more than ninety days after the
occurrence of the event or initial existence of the condition that the Participant asserts constitutes Good Reason and the Company has failed to remedy or
cure the event or condition during the thirty day period after such written notice is given to the Company.
(e) “Involuntary Termination Due to Position Elimination or Reorganization” means an involuntary termination of the Participant’s service with the
Company or its Affiliates due to a job elimination, reduction in force, business restructuring or other circumstances the Committee deems appropriate, in its
sole discretion, as qualifying as an Involuntary Termination Due to Position Elimination or Reorganization.
(f) “Retirement Age” means the Participant has both attained age sixty (60) and accumulated at least seventy (70) points. The Participant’s points shall
equal the sum of the participant’s age (in years) plus completed full years of employment with the Company and its Affiliates.
6. No Right to Continued Employment or Service. This Agreement and the grant of the Stock Unit Award do not give the Participant any rights with
respect to continued employment by or other service with the Company or an Affiliate. This Agreement and the grant of the Stock Unit Award shall not
interfere with the right of the Company or an Affiliate to terminate the Participant’s employment or other service.
110
7. Change in Capital Structure. In accordance with the terms of the Plan, the terms of this Agreement and the number and kind of Shares shall be
adjusted as the Board determines to be equitably required in the event the Company effects one or more stock dividends, stock split ups, subdivisions or
consolidations of shares or other similar changes in capitalization.
8. Governing Law; Venue. The laws of the State of North Dakota shall govern all matters arising out of or relating to this Agreement including,
without limitation, its validity, interpretation, construction and performance but without giving effect to the conflict of laws principles that may require the
application of the laws of another jurisdiction. Any party bringing a legal action or proceeding against any other party arising out of or relating to this
Agreement may bring the legal action or proceeding in the United States District Court for the District of North Dakota or in any court of the State of North
Dakota sitting in Fargo, North Dakota. Each party waives, to the fullest extent permitted by law (i) any objection it may now or later have to the laying of
venue of any legal action or proceeding arising out of or relating to this Agreement brought in a court described in the preceding sentence and (ii) any claim
that any legal action or proceeding brought in any such court has been brought in an inconvenient forum.
9. Conflicts. In the event of any conflict between the provisions of the Plan as in effect on the Date of Grant and this Agreement, the provisions of the
Plan shall govern. All references herein to the Plan shall mean the Plan as in effect on the Date of Grant.
10. Participant Bound by Plan. The Participant hereby acknowledges that a copy of the Plan has been made available to the Participant and the
Participant agrees to be bound by all of the terms and provisions of the Plan.
11. Binding Effect. Subject to the limitations stated above and in the Plan, this Agreement shall be binding upon the Participant and the Participant’s
successors in interest and the Company and any successors of the Company.
12. Recoupment. The Participant acknowledges and agrees that the Participant’s rights in the Restricted Stock Units, the Shares and any dividends,
dividend equivalents or other distributions paid or payable with respect to the Restricted Stock Units and the Shares are subject to recoupment or repayment
if, and to the extent that, such action is required under applicable law or any Company recoupment or “clawback” policy.
IN WITNESS WHEREOF, the Company and the Participant have executed this Restricted Stock Unit Agreement as of the date first set forth
above.
NI HOLDINGS, INC.
[NAME OF PARTICIPANT]
By:
Name:
Title:
111
NI HOLDINGS, INC.
Growth in Book Value Per Share Performance Share Unit Agreement
Exhibit 10.15
Name of Participant: [___________]
Target No. of Performance Share Units Covered:
[___________]
Maximum No. of Performance Share Units Covered:
[___________]
Date of Grant:
[___________]
THIS PERFORMANCE SHARE UNIT AGREEMENT (this “Agreement”) governs the Stock Unit Award granted by NI HOLDINGS, INC., a
North Dakota corporation (the “Company”) to the above named individual (the “Participant”), in accordance with and subject to the provisions of the
Company’s 2020 Stock and Incentive Plan (the “Plan”). A copy of the Plan has been made available to the Participant. Unless the context indicates
otherwise, capitalized terms that are not defined in this Agreement shall have the meaning set forth in the Plan.
1. Grant of Performance Share Units.
(a) In accordance with the Plan, and effective as of the Date of Grant specified above, the Company has granted to the Participant the number of
Performance Share Units specified at the beginning of this Agreement (collectively, the “Performance Share Units,” and each a “Performance Share
Unit.”). Each Performance Share Unit represents the right to receive a share of Common Stock (a “Share”) and dividend equivalent amounts corresponding
to the Share, subject to the terms and conditions of this Agreement and the Plan.
(b) The Performance Share Units granted to the Participant shall be credited to an account in the Participant’s name. This account shall be a record of
bookkeeping entries only and shall be utilized solely as a device for the measurement and determination of the number of Shares to be issued to or in
respect of the Participant pursuant to this Agreement. Performance Share Units may not be transferred by the Participant without the Committee’s prior
written consent other than by will or the laws of descent and distribution.
2. Earned and Vested Performance Share Units.
(a) Except as provided in paragraphs 2(b) through 2(e) below, if the Participant remains in continuous service with the Company or an Affiliate from
the Date of Grant until the last day of the Measurement Period, the Participant shall earn the number of Performance Share Units determined by taking the
percentage earned in the table shown in Exhibit 1, and multiplying the percentage times the target number of Performance Share Units specified at the
beginning of this Agreement. The number of Performance Share Units that will be earned pursuant to this Section 2 will be determined by reference to the
Company Growth in Book Value per Share for the Measurement Period in Exhibit 1.
(b) As soon as practicable after the end of the Measurement Period, but in all events no later than March 15, 2025 (the “Determination Date”), the
Committee shall certify the number of Performance Share Units (if any) that are earned and vested pursuant to the terms and conditions hereof, and the
Company shall cause the Shares issuable in connection with the vesting of any such Performance Share Units to be issued in accordance with Section 3;
provided, however, that if the Measurement Period ends on account of the Participant’s death or a Change in Control, the Committee’s determination and
certification shall not be necessary.
(c) If the Participant dies while in service with the Company or an Affiliate prior to the last day of the Measurement Period, then the target number of
Performance Share Units shall vest and become immediately payable.
(d) If the Participant remains in continuous service with the Company or an Affiliate from the Date of Grant until the date of a Qualifying Termination
that occurs before the last day of the Measurement Period, then (i) the Performance Share Units will remain outstanding until the last day of the
Measurement Period, (ii) the number of earned Performance Share Units shall be determined in accordance with Section 2(a) (except, if the Measurement
Period ends due to a Change in Control, the target number of Performance Share Units shall be earned) and (iii) the Participant will have a fully vested and
non-forfeitable interest in a pro rata number of the earned Performance Share Units as of the last day of the Measurement Period. The pro rata number of
earned Performance Share Units that vest shall be determined by multiplying the total number of earned Performance Share Units by a fraction, the
numerator of which is the number of full and partial calendar months of the Participant’s service with the Company or an Affiliate from the first day of the
Measurement Period to the date of a Qualifying Termination and the denominator of which is the number of full calendar months in the Measurement
Period. A partial month of service shall count as a full month.
112
(e) If the Participant remains in continuous service with the Company or an Affiliate from the Date of Grant until a Change in Control that occurs
before the last day of the Measurement Period, then the target number of Performance Share Units shall be earned and converted into time based Restricted
Stock Units. If the Participant’s Restricted Stock Units are assumed (or substituted or replaced with an award of equivalent value), then the converted
Restricted Stock Units shall become fully vested if the Participant remains in continuous service with the Company or an Affiliate until December 31, 2024
or dies while in service or terminates on account of Disability or Involuntary Termination Due to Position Elimination or Reorganization. If the Participant
resigns at or after Retirement Age, the Restricted Stock units shall continue to vest and become payable as of December 31, 2024. In addition, if the
Participant is involuntarily terminated without Cause or resigns for Good Reason within twenty four (24) months following the Change in Control but prior
to December 31, 2024, any Restricted Stock Units (or replacement award) that remains unvested will vest in full and become non-forfeitable as of the date
of such termination. Notwithstanding the foregoing, if the Participant’s Restricted Stock Units are neither assumed nor substituted or replaced with similar
rights (or cash equivalent value thereof), then any unvested Restricted Stock Units will vest in full and become non-forfeitable upon the Change in Control.
(f) Any Performance Share Units that do not vest pursuant to this Agreement shall be forfeited without consideration therefor.
3. Issuance and Settlement.
(a) After any Performance Share Units vest in accordance with Section 2, the Company shall cause to be issued to the Participant, or to the Participant’s
designated beneficiary or estate in the event of the Participant’s death, one Share in payment and settlement of each vested Performance Share Unit, subject
to applicable required tax withholding. The Committee shall cause the Shares issuable in connection with the vesting of any such Performance Share Units
to be issued as of the Determination Date (except, in cases where there is no determination, Shares shall be issued within sixty (60) days of vesting), and
the Participant shall have no power to affect the timing of such issuance. Such issuance shall be evidenced by a stock certificate or appropriate entry on the
books of the Company or a duly authorized transfer agent of the Company and shall be in complete settlement and satisfaction of such vested Performance
Share Units.
(b) Notwithstanding the foregoing, if the Participant has attained or will attain Retirement Age prior to the last day of the Measurement Period under
this Agreement, such Units shall be treated as “deferred compensation” subject to section 409A of the Internal Revenue Code (the “Code”). In such case,
the following special provisions shall apply to the payment of the underlying Shares:
(i) if any Performance Share Units vest and become payable on account of a Change in Control, the Performance Share Units shall not become payable
(even though non forfeitable) unless the Change in Control constitutes a “change in control event” as defined in Treasury Regulations promulgated under
section 409A of the Code; and
(ii) if any Performance Share Units vest and become payable on account of the Participant’s (A) Involuntary Termination Due to Position Elimination
or Reorganization or (B) involuntary termination without Cause or resignation for Good Reason on or after a Change in Control, the Performance Share
Units shall not become payable (even though non forfeitable) unless the termination constitutes a “separation from service” as defined in Treasury
Regulations promulgated under section 409A of the Code. In addition, if the Participant is a Specified Employee, payment on account of separation from
service hereunder shall be made as of the date that is six months following the Participant’s separation from service (or, if earlier, upon the Participant’s
death).
(c) The Participant may elect to satisfy any applicable required tax arising in relation to the Performance Share Units by (i) delivering cash (including
check, draft, money order or wire transfer made payable to the order of the Company) or (ii) having the Company withhold a portion of the Shares
otherwise to be delivered having a Fair Market Value equal to the amount of such tax liability (subject to any limitations required under applicable financial
accounting standards to avoid liability accounting for the Award). In the case of clause (ii), the Company will not deliver to the Participant any fractional
Shares (or equivalent cash value) remaining after reduction for taxes; rather, any remaining fractional Shares will be cancelled without payment.
4. Shareholder Rights. The Performance Share Units do not entitle the Participant to any rights of a shareholder of the Company. Notwithstanding the
foregoing, the Participant shall accumulate an unvested right to payment of cash dividend equivalents on the Shares underlying Performance Share Units if
cash dividends are declared by the Company on the Shares on or after the Date of Grant. Such dividend equivalents will be in an amount of cash per
Performance Share Unit equal to the cash dividend paid with respect to one Share, subject to applicable required tax withholding. The Participant shall be
entitled solely to payment of accumulated dividend equivalents with respect to the number of Performance Share Units equal to the number of Shares that
become issuable to the Participant pursuant to this Agreement. Dividend equivalents will be paid to the Participant as soon as administratively possible
following the date that the Shares are issued to the Participant. The Participant shall not be entitled to dividend equivalents with respect to dividends
declared prior to the Date of Grant. All dividend equivalents accumulated with respect to forfeited Performance Share Units shall also be irrevocably
forfeited. As of the date of issuance of Shares underlying Performance Share Units, the Participant shall have all of the rights of a shareholder of the
Company with respect to any Shares issued pursuant hereto.
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5. Definitions. For purposes of this Agreement, the following shall have the following meanings:
(a) “Cause” means (i) the Participant’s willful conduct that is demonstrably and materially injurious to the Company or an Affiliate, monetarily or
otherwise; (ii) the Participant’s material breach of written agreement between the Participant and the Company; (iii) the Participant’s breach of the
Participant’s fiduciary duties to the Company or an Affiliate; (iv) the Participant’s conviction of any crime (or entering a plea of guilty or nolo contendere
to any crime) constituting a felony; or (v) the Participant’s entering into an agreement or consent decree or being the subject of any regulatory order that in
any of such cases prohibits the Participant from serving as an officer or director of a company that has publicly traded securities. A termination of the
Participant shall not be for “Cause” unless the decision to terminate the Participant is set forth in a resolution of the Board to that effect and which specifies
the particulars thereof and that is approved by a majority of the members of the Board (exclusive of the Participant if the Participant is a member of the
Board) adopted at a meeting called and held for such purpose (after reasonable notice to the Participant and an opportunity for the Participant to be heard
before the Board). No act or failure to act by the Participant will be deemed “willful” if it was done or omitted to be done by the Participant in good faith or
with a reasonable belief on the part of the Participant that the action or omission was in the best interests of the Company or an Affiliate. Any act or failure
to act by the Participant based upon authority given pursuant to a resolution duly adopted by the Board or based on the advice of counsel to the Company
shall be conclusively presumed to be done or omitted to be done by the Participant in good faith and in the best interest of the Company and its Affiliates.
(b) “Change in Control” means:
(i) the approval of the shareholders of the Company, and consummation, of (A) any consolidation, merger or statutory share exchange of the Company
with any person in which the surviving entity would not have as its directors at least a majority of the Incumbent Board and as a result of which those
persons who were shareholders of the Company immediately prior to such transaction would not hold, immediately after such transaction, at least 50% of
the Voting Power of the Company then outstanding or the combined voting power of the surviving entity’s then outstanding voting securities; (B) any sale,
lease, exchange or other transfer in one transaction or series of related transactions substantially all of the assets of the Company; or (C) the adoption of any
plan or proposal for the complete or partial liquidation or dissolution of the Company. For purposes of this Section 5(a), “Voting Power” when used with
reference to the Company shall mean the voting power of all classes and series of capital stock of the Company now or hereafter authorized; or
(ii) the individuals who, as of the date of this Agreement, are members of the Board of Directors of the Company (the “Incumbent Board”) cease for
any reason to constitute at least a majority of the Board (provided, however, that if the election or nomination for election by the Company’s shareholders
of any new director was approved by a vote of at least a majority of the Incumbent Board, such new director shall be considered to be a member of the
Incumbent Board).
(c) “Growth in Book Value” shall have the meaning ascribed that term in Exhibit 1 attached hereto.
(d) “Disability” means the Participant has been determined, by a physician selected by the Company and reasonably acceptable to the Participant, to be
unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in
death or can be expected to last for a continuous period of not less than 12 months.
(e) “Good Reason” means, without the express written consent of the Participant (i) a change in the Participant’s position with the Company or an
Affiliate which results in a material diminution of the Participant’s authority, duties or responsibilities; (ii) a material reduction by the Company or an
Affiliate in the annual rate of the Participant’s base salary; or (iii) a change in the location of the Participant’s principal office to a different place that is
more than fifty miles from the Participant’s principal office immediately prior to such change. A reduction in the Participant’s rate of annual base pay shall
be material if the rate of annual base salary on any date is less than ninety percent (90%) of the Participant’s highest rate of annual base pay as in effect on
any date in the preceding thirty-six (36) months. Notwithstanding the two preceding sentences, a change in the Participant’s duties or responsibilities shall
not constitute Good Reason, and the Participant shall not have Good Reason to resign, solely because the Company does not have common shares or other
securities that are publicly traded. A resignation by the Participant shall not be with “Good Reason” unless the Participant gives the Company written
notice specifying the event or condition that the Participant asserts constitutes Good Reason, the notice is given no more than ninety days after the
occurrence of the event or initial existence of the condition that the Participant asserts constitutes Good Reason and the Company has failed to remedy or
cure the event or condition during the thirty day period after such written notice is given to the Company.
(f) “Involuntary Termination Due to Position Elimination or Reorganization” means an involuntary termination of the Participant’s service with the
Company or its Affiliates due to a job elimination, reduction in force, business restructuring or other circumstances the Committee deems appropriate, in its
sole discretion, as qualifying as an Involuntary Termination Due to Position Elimination or Reorganization.
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(g) “Measurement Period” means the period beginning on January 1, 2022 and ending on the earliest of (i) December 31, 2024; (ii) the date of the
Participant’s death while in service with the Company or an Affiliate; or (iii) the date of a Change in Control.
(h) “Qualifying Termination” means a termination of the Participant’s service on account of (i) Disability, (ii) Retirement or (iii) Involuntary
Termination Due to Position Elimination or Reorganization.
(i) “Retirement” means the Participant voluntarily resigns from service with the Company and all Affiliates after having both attained age sixty (60) and
accumulated at least seventy (70) points (“Retirement Age”). The Participant’s points shall equal the sum of the participant’s age (in years) plus completed
full years of employment with the Company and its Affiliates.
6. No Right to Continued Employment or Service. This Agreement and the grant of the Stock Unit Award do not give the Participant any rights with
respect to continued employment by or other service with the Company or an Affiliate. This Agreement and the grant of the Stock Unit Award shall not
interfere with the right of the Company or an Affiliate to terminate the Participant’s employment.
7. Change in Capital Structure. In accordance with the terms of the Plan, the terms of this Agreement and the number and kind of Shares shall be
adjusted as the Board determines to be equitably required in the event the Company effects one or more stock dividends, stock split ups, subdivisions or
consolidations of shares or other similar changes in capitalization.
8. Governing Law; Venue. The laws of the State of North Dakota shall govern all matters arising out of or relating to this Agreement including, without
limitation, its validity, interpretation, construction and performance but without giving effect to the conflict of laws principles that may require the
application of the laws of another jurisdiction. Any party bringing a legal action or proceeding against any other party arising out of or relating to this
Agreement may bring the legal action or proceeding in the United States District Court for the District of North Dakota or in any court of the State of North
Dakota sitting in Fargo, North Dakota. Each party waives, to the fullest extent permitted by law (i) any objection it may now or later have to the laying of
venue of any legal action or proceeding arising out of or relating to this Agreement brought in a court described in the preceding sentence and (ii) any claim
that any legal action or proceeding brought in any such court has been brought in an inconvenient forum.
9. Conflicts. In the event of any conflict between the provisions of the Plan as in effect on the Date of Grant and this Agreement, the provisions of the
Plan shall govern. All references herein to the Plan shall mean the Plan as in effect on the Date of Grant.
10. Participant Bound by Plan. The Participant hereby acknowledges that a copy of the Plan has been made available to the Participant and the
Participant agrees to be bound by all of the terms and provisions of the Plan.
11. Binding Effect. Subject to the limitations stated above and in the Plan, this Agreement shall be binding upon the Participant and the Participant’s
successors in interest and the Company and any successors of the Company.
12. Recoupment. The Participant acknowledges and agrees that the Participant’s rights in the Performance Share Units, Shares and any dividends,
dividend equivalents or other distributions paid or payable with respect to the Performance Share Units or Shares are subject to recoupment or repayment
if, and to the extent that, such action is required under applicable law or any Company recoupment or “clawback” policy.
IN WITNESS WHEREOF, the Company and the Participant have executed this Performance Share Unit Agreement as of the date first set forth
above.
NI HOLDINGS, INC.
[NAME OF PARTICIPANT]
By:
Name:
Title:
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SUBSIDIARIES OF NI HOLDINGS, INC.
Company
Nodak Insurance Company
American West Insurance Company
Tri-State Ltd
Primero Insurance Company
Nodak Agency, Inc.
Battle Creek Mutual Insurance Company
Direct Auto Insurance Company
Westminster American Insurance Company
State of Organization
North Dakota
North Dakota
South Dakota
North Dakota
North Dakota
Nebraska
North Dakota
North Dakota
117
Exhibit 21.1
Percentage of Equity Owned
Directly or Indirectly
100%
100%
100%
100%
100%
0%
100%
100%
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-221630 and 333-239645) of our report dated March 9,
2022 on the consolidated balance sheets of NI Holdings, Inc. and Subsidiaries as of December 31, 2021 and 2020, and the related consolidated statements
of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021,
and the related notes and the schedule listed in Item 15(a)(2). This report appears in the December 31, 2021 Annual Report on Form 10-K of NI Holdings,
Inc. and Subsidiaries.
Exhibit 23.1
/s/ Mazars USA LLP
Fort Washington, PA
March 9, 2022
118
CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Michael J. Alexander, certify that:
Exhibit 31.1
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of NI Holdings, Inc.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
March 9, 2022
119
/s/ Michael J. Alexander
Michael J. Alexander
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF PERIODIC REPORT UNDER SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Seth C. Daggett, certify that:
Exhibit 31.2
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of NI Holdings, Inc.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
March 9, 2022
120
/s/ Seth C. Daggett
Seth C. Daggett
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32
In connection with the annual report of NI Holdings, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2021, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), we, Michael J. Alexander, President and Chief Executive Officer, and Seth C.
Daggett, Chief Financial Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to our knowledge:
(1)
(2)
March 9, 2022
March 9, 2022
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Michael J. Alexander
Michael J. Alexander
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Seth C. Daggett
Seth C. Daggett
Chief Financial Officer
(Principal Financial Officer)
121