UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended September 30, 2020March 31, 2021

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

For the transition period from ____ to _____

Commission file number 001-37973

 

NI HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

NORTH DAKOTA

(State or other jurisdiction of

incorporation or organization)

81-2683619

(IRS Employer

Identification No.)

 

1101 First Avenue North

Fargo, North Dakota

58102

(Address of principal executive offices)

(Zip Code)

(701) 298-4200

Registrant’s telephone number, including area code

(701) 298-4200

Registrant’s telephone number, including area code

Not applicable

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 par value per share

NODK

Nasdaq Capital Market

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

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

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

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

 

 

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

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

The number of shares of Registrant’s common stock outstanding on October 31, 2020April 30, 2021 was 21,306,582.21,337,959. No preferred shares are issued or outstanding.




TABLE OF CONTENTS

 

 

Part I.-I. - FINANCIAL INFORMATION

3

Item 1. - Financial Statements

3

Unaudited Consolidated Balance Sheets

3

Unaudited Consolidated Statements of Operations

4

Unaudited Consolidated Statements of Comprehensive Income (Loss)

5

Unaudited Consolidated Statements of Changes in Shareholders’ Equity

6

Unaudited Consolidated Statements of Cash Flows

87

Notes to Unaudited Consolidated Financial Statements

98

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

4238

Item 3. - Quantitative and Qualitative Disclosures about Market Risk

6961

Item 4. - Controls and Procedures

6961

Part II.-II. - OTHER INFORMATION

7062

Item 1. - Legal Proceedings

7062

Item 1A. - Risk Factors

7062

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

7163

Item 3. - Defaults upon Senior Securities

7264

Item 4. - Mine Safety Disclosures

7264

Item 5. - Other Information

7264

Item 6. - Exhibits

7264

Signatures

7365

ii


Table of Contents

CERTAIN IMPORTANT INFORMATION

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

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

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

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

“Nodak Stock” refers to Nodak Insurance Company, the successor company to Nodak Mutual Insurance Company after the conversion;  

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

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

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

“Battle Creek” refers to Battle Creek Mutual Insurance Company. Battle Creek is not a subsidiary ofbecame affiliated with Nodak Insurance but all of its insurance policies are reinsured byin 2011, and Nodak Insurance through a 100% quota-share reinsurance agreement.provides underwriting, claims management, policy administration, and other administrative services to Battle Creek. Battle Creek is controlled by Nodak Insurance as a result of an affiliation agreement between Battle Creek and Nodak Insurance. Battle CreekInsurance, and is consolidated with Nodak Insurance for financial reporting purposes;  

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

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

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

“Westminster” refers to Westminster American Insurance Company. On January 1, 2020, NI Holdings completed the acquisition of 100% of the common stock of Westminster from the private shareholder of Westminster. The financial results of Westminster have been included in the Consolidated Financial Statements herein since January 1, 2020. Westminster is a property and casualty insurance company specializing in commercial multi-peril insurance in the Mid-Atlantic region of the United States;states; and  

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

FORWARD-LOOKING STATEMENTS

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

statements of goals, intentions, and expectations;  

statements regarding prospects and business strategy; and

1


Table of Contents

  

estimates of future costs, benefits, and results.  

1


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

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

material changes to the federal crop insurance program;  

future economic conditions in the markets in which we compete that are less favorable than expected;  

the effect of legislative, judicial, economic, demographic, and regulatory events in the jurisdictions where we do business;  

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

our ability to successfully integrate acquired businesses;  

financial market conditions, including, but not limited to, changes in interest rates and the stock markets causing a reduction of investment income or investment gains and a reduction in the value of our investment portfolio;  

heightened competition, including specifically the intensification of price competition, the entry of new competitors, and the development of new products by new or existing competitors, resulting in a reduction in the demand for our products;  

changes in general economic conditions, including inflation, unemployment, interest rates, and other factors;  

the impact of national or global events, including pandemics, military conflicts, and other wide-spread events;  

estimates and adequacy of loss reserves and trends in loss and loss adjustment expenses;  

changes in the coverage terms required by state laws with respect to minimum auto liability insurance, including higher minimum limits;  

our inability to obtain regulatory approval of, or to implement, premium rate increases;  

our ability to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us and to collect amounts that we believe we are entitled to under such reinsurance;  

the potential impact on our reported net income that could result from the adoption of future accounting standards issued by the Securities and Exchange Commission, the Financial Accounting Standards Board, or other standard-setting bodies;  

unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;  

the potential impact of fraud, operational errors, systems malfunctions, or cybersecurity incidents;  

adverse litigation or arbitration results; and  

adverse changes in applicable laws, regulations or rules governing insurance holding companies and insurance companies, and tax or accounting matters including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements, and changes that affect the cost of, or demand for our products.  

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

2


Table of Contents

PART I. - FINANCIAL INFORMATION

Item 1. - Financial Statements

NI Holdings, Inc.

Unaudited Consolidated Balance Sheets

(dollar amounts in thousands, except par value)

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

Assets:

Cash and cash equivalents

$

71,305

$

62,132

$

52,683

$

101,077

Fixed income securities, at fair value

322,429

295,945

361,330

320,410

Equity securities, at fair value

65,786

59,932

79,363

69,952

Other investments

2,907

1,914

2,089

2,924

Total cash and investments

462,427

419,923

495,465

494,363

Premiums and agents' balances receivable

84,868

36,691

49,325

48,523

Deferred policy acquisition costs

23,885

15,399

26,575

23,968

Reinsurance premiums receivable

0-

93

Reinsurance recoverables on losses

13,556

4,045

9,270

8,710

Income tax recoverables

543

-

Accrued investment income

2,094

2,089

2,281

2,141

Property and equipment

10,008

7,694

9,843

9,899

Receivable from Federal Crop Insurance Corporation

9,519

14,230

5,182

6,646

Goodwill and other intangibles

18,637

2,912

18,076

18,194

Other assets

4,499

5,176

5,368

5,066

Total assets

$

630,036

$

508,159

$

621,385

$

617,603

Liabilities:

Unpaid losses and loss adjustment expenses

$

134,803

$

93,250

$

111,522

$

105,750

Unearned premiums

125,966

89,276

123,458

119,363

Reinsurance premiums payable

1,173

170

700

0-

Income tax payable

-

1,645

1,917

754

Deferred income taxes, net

7,401

4,590

Deferred income taxes

7,851

8,757

Westminster consideration payable

12,720

19,287

Accrued expenses and other liabilities

35,180

9,425

10,627

14,820

Commitments and contingencies

-

-

Total liabilities

304,523

198,356

268,795

268,731

Commitments and contingencies

0-

0-

Shareholders’ equity:

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

issued: 23,000,000 shares; and

outstanding: 2020 – 21,346,079 shares, 2019 – 22,119,380 shares

230

230

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

0 shares issued or outstanding

-

-

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

issued: 23,000,000 shares; and outstanding: 2021 – 21,372,772 shares,

2020 – 21,318,638 shares​​

230

230

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

0 shares issued or outstanding​​

0-

0-

Additional paid-in capital

97,146

95,961

96,511

97,911

Unearned employee stock ownership plan shares

(1,671

)

(1,671

)

(1,427

)

(1,427

)

Retained earnings

237,162

218,480

268,444

258,741

Accumulated other comprehensive income, net of income taxes

12,064

5,612

7,417

12,840

Treasury stock, at cost, 2020 – 1,486,866 shares, 2019 – 713,565 shares

(23,097

)

(12,308

)

Treasury stock, at cost, 2021 – 1,484,488 shares, 2020 – 1,538,622 shares

(23,012

)

(23,968

)

Non-controlling interest

3,679

3,499

4,427

4,545

Total shareholders’ equity

325,513

309,803

352,590

348,872

Total liabilities and shareholders’ equity

$

630,036

$

508,159

$

621,385

$

617,603

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

3


Table of Contents

NI Holdings, Inc.

Unaudited Consolidated Statements of Operations

(dollar amounts in thousands, except per share amounts)

Three Months Ended

Nine Months Ended

Three Months Ended

September 30,

September 30,

March 31,

2020

2019

2020

2019

2021

2020

Revenues:

Net premiums earned

$

73,342

$

67,116

$

214,120

$

182,736

$

63,135

$

58,772

Fee and other income

524

527

1,332

1,637

317

362

Net investment income

1,886

1,983

5,875

5,504

1,536

1,971

Net capital gain on investments

5,102

622

1,380

9,591

Net capital gain (loss) on investments

5,811

 

(14,919

)

Total revenues

80,854

70,248

222,707

199,468

70,799

46,186

Expenses:

Losses and loss adjustment expenses

53,836

61,558

136,622

135,985

36,889

30,422

Amortization of deferred policy acquisition costs

15,061

11,309

39,277

36,682

13,587

9,387

Other underwriting and general expenses

7,083

5,982

22,651

14,243

7,651

10,772

Total expenses

75,980

78,849

198,550

186,910

58,127

50,581

Income (loss) before income taxes

4,874

(8,601

)

24,157

12,558

12,672

 

(4,395

)

Income tax expense (benefit)

1,188

(1,642

)

5,259

3,206

2,890

 

(840

)

Net income (loss)

3,686

(6,959

)

18,898

9,352

9,782

 

(3,555

)

Net income attributable to non-controlling interest

22

20

88

80

113

32

Net income (loss) attributable to NI Holdings, Inc.

$

3,664

$

(6,979

)

$

18,810

$

9,272

$

9,669

 

$

(3,587

)

Earnings (loss) per common share:

Basic

$

0.45

 

$

(0.16

)

Diluted

$

0.45

 

$

(0.16

)

Basic earnings (loss) per common share

$

0.17

$

(0.32

)

$

0.86

$

0.42

Diluted earnings (loss) per common share

$

0.17

$

(0.31

)

$

0.85

$

0.42

Share data:

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

21,462,641

 

22,218,073

Plus: Dilutive securities

236,358

0-

Weighted average common shares used in diluted per common share calculations

21,698,999

 

22,218,073

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

4


Table of Contents

NI Holdings, Inc.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(dollar amounts in thousands)

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

Attributable

to NI

Holdings, Inc.

Attributable

to Non-

Controlling Interest

Total

Attributable

to NI

Holdings, Inc.

Attributable

to Non-

Controlling Interest

Total

Net income

$

3,664

$

22

$

3,686

$

18,810

$

88

$

18,898

 

Other comprehensive income, before income taxes:

Holding gains on investments

2,038

11

2,049

8,851

119

8,970

Reclassification adjustment for net realized capital (gain) loss included in net income

(539

)

8

(531

)

(684

)

(2

)

(686

)

Other comprehensive income, before income taxes

1,499

19

1,518

8,167

117

8,284

Income tax expense related to items of other comprehensive income

(315

)

(4

)

(319

)

(1,715

)

(25

)

(1,740

)

Other comprehensive income, net of income taxes

1,184

15

1,199

6,452

92

6,544

 

Comprehensive income

$

4,848

$

37

$

4,885

$

25,262

$

180

$

25,442

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

Attributable

to NI

Holdings, Inc.

Attributable

to Non-

Controlling Interest

Total

Attributable

to NI

Holdings, Inc.

Attributable

to Non-

Controlling Interest

Total

Net income (loss)

 

$

(6,979

)

 

$

20

 

 

$

(6,959

)

 

$

9,272

 

 

$

80

 

 

$

9,352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Holding gains on investments

 

 

2,018

 

 

 

36

 

 

 

2,054

 

 

 

9,876

 

 

 

172

 

 

 

10,048

 

Reclassification adjustment for net realized capital (gain) loss included in net income

 

 

(12

)

 

 

-

 

 

(12

)

 

 

22

 

 

 

(3

)

 

 

19

 

Other comprehensive income, before income taxes

 

 

2,006

 

 

 

36

 

 

 

2,042

 

 

 

9,898

 

 

 

169

 

 

 

10,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense related to items of other comprehensive income

 

 

(422

)

 

 

(7

)

 

 

(429

)

 

 

(2,079

)

 

 

(35

)

 

 

(2,114

)

Other comprehensive income, net of income taxes

 

 

1,584

 

 

 

29

 

 

 

1,613

 

 

 

7,819

 

 

 

134

 

 

 

7,953

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(5,395

)

 

$

49

 

 

$

(5,346

)

 

$

17,091

 

 

$

214

 

 

$

17,305

 

Three Months Ended March 31, 2021

Three Months Ended March 31, 2020

Attributable

to NI

Holdings, Inc.

Attributable

to Non-

Controlling Interest

Total

Attributable

to NI

Holdings, Inc.

Attributable

to Non-

Controlling Interest

Total

Net income (loss)

$

9,669

 

$

113

$

9,782

 

$

(3,587

)

$

32

$

(3,555

)

 

Other comprehensive loss, before income taxes:

Holding losses on investments

(6,763

)

(293

)

(7,056

)

(4,456

)

(86

)

(4,542

)

Reclassification adjustment for net realized capital gain included in net income (loss)

(101

)

0-

 

(101

)

(57

)

(5

)

(62

)

Other comprehensive loss, before income taxes

(6,864

)

(293

)

(7,157

)

(4,513

)

(91

)

(4,604

)

Income tax benefit related to items of other comprehensive loss

1,441

62

1,503

948

19

967

Other comprehensive loss, net of income taxes

(5,423

)

(231

)

(5,654

)

(3,565

)

(72

)

(3,637

)

 

Comprehensive income (loss)

$

4,246

 

$

(118

)

$

4,128

 

$

(7,152

)

$

(40

)

$

(7,192

)

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

5


Table of Contents

NI Holdings, Inc.

Unaudited Consolidated Statements of Changes in Shareholders’ Equity

(dollar amounts in thousands)

Three Months Ended September 30, 2020

Common

Stock

Additional

Paid-in

Capital

Unearned

Employee

Stock

Ownership

Plan Shares

Retained

Earnings

Accumulated

Other

Comprehensive

Income, Net of

Income Taxes

Treasury

Stock

Non-Controlling

Interest

Total Shareholders’ Equity

Balance, July 1, 2020

$

230

$

96,661

$

(1,671

)

$

233,498

$

10,880

$

(18,517

)

$

3,642

$

324,723

 

Net income

-

-

-

3,664

-

-

22

3,686

Other comprehensive income, net of income taxes

-

-

-

-

1,184

-

15

1,199

Purchase of treasury stock

-

-

-

-

-

(4,580

)

-

(4,580)

Share-based compensation

-

485

-

-

-

-

-

485

Balance, September 30, 2020

$

230

$

97,146

$

(1,671

)

$

237,162

$

12,064

$

(23,097

)

$

3,679

$

325,513

Three Months Ended March 31, 2021

Common

Stock

Additional

Paid-in

Capital

Unearned

Employee

Stock

Ownership

Plan Shares

Retained

Earnings

Accumulated

Other

Comprehensive

Income, Net of

Income Taxes

Treasury

Stock

Non-Controlling

Interest

Total Shareholders’ Equity

Balance, January 1, 2021

$

230

$

97,911

$

(1,427

)

$

258,741

$

12,840

$

(23,968

)

$

4,545

$

348,872

 

Net income

-

-

-

9,669

-

-

113

9,782

Other comprehensive loss, net of income taxes

-

-

-

-

(5,423

)

-

(231

)

(5,654

)

Purchase of treasury stock

-

-

-

-

-

(596

)

-

(596

)

Share-based compensation

-

672

-

-

-

-

-

672

Issuance of vested award shares

-

(2,072

)

-

34

 

-

1,552

-

(486

)

Balance, March 31, 2021

$

230

$

96,511

$

(1,427

)

$

268,444

$

7,417

$

(23,012

)

$

4,427

$

352,590

 

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2020

Three Months Ended March 31, 2020

Common

Stock

Additional

Paid-in

Capital

Unearned

Employee

Stock

Ownership

Plan Shares

Retained

Earnings

Accumulated

Other

Comprehensive

Income, Net of

Income Taxes

Treasury

Stock

Non-Controlling

Interest

Total Shareholders’ Equity

Common

Stock

Additional

Paid-in

Capital

Unearned

Employee

Stock

Ownership

Plan Shares

Retained

Earnings

Accumulated

Other

Comprehensive

Income, Net of

Income Taxes

Treasury

Stock

Non-Controlling

Interest

Total Shareholders’ Equity

Balance, January 1, 2020

$

230

$

95,961

$

(1,671

)

$

218,480

$

5,612

$

(12,308

)

$

3,499

$

309,803

$

230

$

95,961

$

(1,671

)

$

218,480

$

5,612

$

(12,308

)

$

3,499

$

309,803

Net income

-

-

-

18,810

-

-

88

18,898

Other comprehensive income, net of income taxes

-

-

-

-

6,452

-

92

6,544

Net income (loss)

-

-

-

(3,587

)

-

-

32

(3,555

)

Other comprehensive loss, net of income taxes

-

-

-

-

(3,565

)

-

(72

)

(3,637

)

Purchase of treasury stock

-

-

-

-

-

(11,363

)

-

(11,363

)

-

-

-

-

-

(1,502

)

-

(1,502

)

Share-based compensation

-

1,662

-

-

-

-

-

1,662

-

713

-

-

-

-

-

713

Issuance of vested award shares

-

(477

)

-

(128

)

-

574

-

(31

)

-

(300

)

-

(82

)

-

351

-

(31

)

Balance, September 30, 2020

$

230

$

97,146

$

(1,671

)

$

237,162

$

12,064

$

(23,097

)

$

3,679

$

325,513

Balance, March 31, 2020

$

230

$

96,374

$

(1,671

)

$

214,811

$

2,047

$

(13,459

)

$

3,459

$

301,791

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

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Table of Contents

NI Holdings, Inc.

Unaudited Consolidated Statements of Changes in Shareholders’ EquityCash Flows

(dollar amounts in thousands)

Three Months Ended September 30, 2019

 

 

Common Stock

 

 

Additional Paid-in Capital

 

 

Unearned Employee Stock Ownership Plan Shares

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Income, Net of Income Taxes

 

 

Treasury Stock

 

 

Non-Controlling Interest

 

 

Total Equity

 

Balance, July 1, 2019

 

$

230

 

 

$

95,121

 

 

$

(1,914

)

 

$

208,330

 

 

$

4,427

 

 

$

(12,308

)

 

$

3,428

 

 

$

297,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,979)

 

 

-

 

 

 

-

 

 

 

20

 

 

 

(6,959

)

Other comprehensive income, net of income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,584

 

 

 

-

 

 

 

29

 

 

 

1,613

 

Share-based compensation

 

 

-

 

 

 

339

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

339

 

Balance, September 30, 2019

 

$

230

 

 

$

95,460

 

 

$

(1,914

)

 

$

201,351

 

 

$

6,011

 

 

$

(12,308

)

 

$

3,477

 

 

$

292,307

 

Nine Months Ended September 30, 2019

 

 

Common Stock

 

 

Additional Paid-in Capital

 

 

Unearned Employee Stock Ownership Plan Shares

 

 

Retained Earnings

 

 

Accumulated Other Comprehensive Income, Net of Income Taxes

 

 

Treasury Stock

 

 

Non-Controlling Interest

 

 

Total Equity

 

Balance, January 1, 2019

$

230

$

94,486

$

(1,914

)

$

183,946

$

6,376

$

(10,634

)

$

3,263

$

275,753

 

Cumulative effect of change in accounting for equity securities

-

-

-

8,184

(8,184

)

-

-

-

Net income

-

-

-

9,272

-

-

80

9,352

Other comprehensive income, net of income taxes

-

-

-

-

7,819

 

-

-

 

7,953

 

Purchase of treasury stock

-

-

-

-

-

(2,006

)

-

(2,006

)

Share-based compensation

-

1,274

-

-

-

-

-

1,274

Issuance of vested award shares

-

(300

)

-

(51

)

-

332

-

(19

)

Balance, September 30, 2019

$

230

$

95.460

$

(1,914

)

$

201,351

$

6,011

$

(12,308

)

$

3,477

$

292,307

Three Months Ended March 31,

2021

2020

Cash flows from operating activities:

Net income (loss)

$

9,782

 

$

(3,555

)

Adjustments to reconcile net income (loss) to net cash flows from operating activities:

Net capital (gain) loss on investments

(5,811

)

14,919

Deferred income tax expense (benefit)

597

 

(2,708

)

Depreciation of property and equipment

170

187

Amortization of intangibles

118

1,882

Share-based compensation

672

713

Amortization of deferred policy acquisition costs

13,587

9,387

Deferral of policy acquisition costs

(16,194

)

(13,152

)

Net amortization of premiums and discounts on investments

482

282

Loss on sale of property and equipment

4

0-

Changes in operating assets and liabilities:

Premiums and agents’ balances receivable

(802

)

(3,085

)

Reinsurance premiums receivable / payable

793

181

Reinsurance recoverables on losses

(560

)

(3,259

)

Accrued investment income

(140

)

60

Receivable from Federal Crop Insurance Corporation

1,464

8,990

Income tax recoverable / payable

1,163

 

(1,034

)

Other assets

(302

)

72

Unpaid losses and loss adjustment expenses

5,772

 

(4,418

)

Unearned premiums

4,095

523

Accrued expenses and other liabilities

(4,096

)

(2,369

)

Net cash flows from operating activities

10,794

3,616

 

Cash flows from investing activities:

Proceeds from maturities and sales of fixed income securities

13,079

19,872

Proceeds from sales of equity securities

8,246

6,016

Purchases of fixed income securities

(61,536

)

(27,016

)

Purchases of equity securities

(11,946

)

(5,503

)

Purchases of property and equipment

(117

)

(310

)

Acquisition of Westminster American Insurance Company (cash consideration paid net of cash and cash equivalents acquired)

0-

 

(703

)

Proceeds from sale of other investments and other

835

66

Net cash flows from investing activities

(51,439

)

(7,578

)

 

Cash flows from financing activities:

Purchases of treasury stock

(596

)

(1,502

)

Installment payment on Westminster consideration payable

(6,667

)

0-

 

Issuance of restricted stock awards

(486

)

(31

)

Net cash flows from financing activities

(7,749

)

(1,533

)

 

Net decrease in cash and cash equivalents

(48,394

)

(5,495

)

 

Cash and cash equivalents at beginning of period

101,077

62,132

 

Cash and cash equivalents at end of period

$

52,683

$

56,637

 

 

Non-cash item: Present value of installment payable issued in connection with acquisition of Westminster American Insurance Company

$

0-

$

18,787

 

Federal and state income taxes paid

$

1,130

$

2,900

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

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Table of Contents

NI Holdings, Inc.

Unaudited Consolidated Statements of Cash Flows

(dollar amounts in thousands)

Nine Months Ended

September 30,

2020

2019

Cash flows from operating activities:

Net income

$

18,898

$

9,352

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

 

Net capital gain on investments

(1,380

)

(9,591

)

Deferred income tax (benefit) expense

(511

569

Depreciation of property and equipment

545

374

Amortization of intangibles

4,781

1,695

Share-based compensation

1,662

1,274

Amortization of deferred policy acquisition costs

39,277

36,682

Deferral of policy acquisition costs

(47,763

(39,620

)

Net amortization of premiums and discounts on investments

1,031

827

Loss on sale of property and equipment

7

11

Changes in operating assets and liabilities:

Premiums and agents’ balances receivable

(39,670

)

(42,739

)

Reinsurance premiums receivable / payable

438

 

4,277

Reinsurance recoverables on losses

(8,748

(3,521

Accrued investment income

64

 

(133

Receivable from Federal Crop Insurance Corporation

4,711

(8,022

)

Income tax recoverable / payable

(2,050

)

(1,454

)

Other assets

753

1,208

Unpaid losses and loss adjustment expenses

32,985

30,252

Unearned premiums

20,079

16,650

Accrued expenses and other liabilities

5,835

412

Net cash flows from operating activities

30,944

(1,497

)

 

Cash flows from investing activities:

Proceeds from maturities and sales of fixed income securities

67,029

36,924

Proceeds from sales of equity securities

13,176

12,373

Purchases of fixed income securities

(73,502

(71,828

)

Purchases of equity securities

(15,630

(16,708

)

Purchases of property and equipment, net

(489

(1,009

)

Acquisition of Westminster American Insurance Company (cash consideration paid net of cash and cash equivalents acquired)

(703

-

Other

(258

)

62

Net cash flows from investing activities

(10,377

(40,186

)

 

Cash flows from financing activities:

Purchases of treasury stock

(11,363

(2,006

Issuance of restricted stock awards

(31

(19

Net cash flows from financing activities

(11,394

(2,025

 

Net increase (decrease) in cash and cash equivalents

9,173

(43,708

 

Cash and cash equivalents at beginning of period

62,132

68,950

 

Cash and cash equivalents at end of period

$

71,305

$

25,242

 

 

Non-cash item: Present value of installment payable issued in connection with acquisition of Westminster American Insurance Company

$

18,787

$

-

 

Income taxes paid

$

7,819

$

3,955

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

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Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

1.Organization

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

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

Nodak Insurance Company (“Nodak Insurance”, formerly Nodak Mutual Insurance Company prior to the conversion);  

Nodak Agency, Inc. (“Nodak Agency”);  

American West Insurance Company (“American West”);  

Primero Insurance Company (“Primero”);  

Battle Creek Mutual Insurance Company (“Battle Creek”, an affiliated company with Nodak Insurance);  

Direct Auto Insurance Company (“Direct Auto”); and  

Westminster American Insurance Company (“Westminster”).  

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

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

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

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

Battle Creek became affiliated with Nodak Insurance in 2011, and Nodak Insurance provides underwriting, claims management, policy administration, and other administrative services to Battle Creek. Battle Creek is controlled by Nodak Insurance via a surplus note and 100% quota-share agreement.note. The terms of the surplus note and quota-share agreement allow Nodak Insurance to appoint two-thirds of the Battle Creek Board of Directors. Battle Creek is a property and casualty insurance company writing personal auto, homeowners, and farm coverages solely in the state of Nebraska.

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

Westminster, a wholly-owned subsidiary of NI Holdings, 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 multi-peril commercial 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. The financial results of Westminster have been included in the Consolidated Financial Statements herein since January 1, 2020. See Note 4.

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Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

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 insurance companies share a combined business plan to achieve market penetration and underwriting profitability objectives. Distinctions within the products of the insurance companies generally relate to the states in which the risk is located and specific risk profiles targeted within similar classes of business.

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Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

2.Basis of Presentation

The accompanying unaudited consolidated financial statementsUnaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periodsperiod ended September 30, 2020March 31, 2021 are not necessarily indicative of the results that may be expected for the year ended December 31, 2021. These financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.

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

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Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

3.Summary of Significant Accounting Policies

Use of Estimates:

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

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

Variable-Interest Entities:

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

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

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

We control Battle Creek via a 100% quota-share reinsurance agreement between Nodak Insurance and Battle Creek, as well assurplus note which provides us with the ability to control a majorityappoint two-thirds of the Board of Directors of Battle Creek. ThroughUnder the effects of the 100% quota-sharequota share reinsurance agreement with Battle Creek, we are considered the primary beneficiary ofthat existed through December 31, 2019, Battle Creek’s operating results excludingincluded only net investment income, bad

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Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

debt expense, and income taxes. Therefore,Effective January 1, 2020, the Company implemented an intercompany pooling reinsurance agreement, and Battle Creek’s operating results now include their participation in the underwriting results of the pool (2% during 2020 and 2021). See Note 13. 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.

Cash and Cash Equivalents:

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

Investments:

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

Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair

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Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

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 (loss) on investments, along with the change in unrealized gains and losses on equity securities after January 1, 2019.securities.

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

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

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

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

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

Fair Value of Other Financial Instruments:

Our other financial instruments, aside from investments, are cash and cash equivalents, premiums and agents’ balances receivable, and accrued expenses and accounts payable. The carrying amounts for cash and cash equivalents, premiums and agents’ balances receivable, and accrued expenses and accounts payable approximate their fair value based on their short-term nature. Other invested assets that do not have observable inputs and little or no market activity are carried on a cost basis.basis, which is not materially different from fair value. All other invested assets have been assessed for impairment. The carrying value of these other invested assets was $2,907 at September 30, 2020 and $1,914 at December 31, 2019.

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Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

Reclassification of Segment Information:

Effective in the first quarter of 2020, the Company’s results are being reported in our Consolidated Financial Statements in the following five primary operating segments – private passenger auto insurance, non-standard auto insurance, home and farm insurance, crop insurance, and commercial insurance. A sixth “all other” segment captures all other insurance business, including our assumed reinsurance lines of business.

Commercial insurance was previously reported within the all other segment. All prior periods presented have been reclassified to conform to this presentation.

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 compriseis comprised primarily of spring-planted crops, typically runs from April1April 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 flood, drought, or other natural disaster (known as “prevented planting”). In cases where a valid prevented planting claim is made by an insured, the Company assumes that the risk period has ended as there will be no additional coverage under the policy, and the Company will immediately recognize the remaining unearned premium.

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NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

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

Property and Equipment:

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

Losses and Loss Adjustment Expenses:

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

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

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Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

inflation is embedded in the estimated loss development factors. We closely monitor our liabilities and update them periodically using new information on reported claims and a variety of statistical techniques. We do not discount our liabilities for unpaid losses and loss adjustment expense.expenses.

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

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

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. Direct Auto and Westminster became part of the consolidated federal income tax return as of their acquisition dates.

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. While state premium taxes are included as a part of amortization of deferred policy acquisition costs, state income taxes are combined with federal income taxes within the financial reporting category labeled income taxes.tax expense (benefit).

The Company reportsdoes not have any material uncertain tax positions. The Company’s policy is to recognize tax-related interest and penalties if any,accrued related to unrecognized benefits as parta component of income tax expense in the year such amounts are determinable.(benefit). The Company did not recognize any tax-related interest and penalties, nor did it have any tax-related interest or penalties accrued as of March 31, 2021 and December 31, 2020.

We account for deferred income taxes using the asset and liability method. The objective of the asset and liability method is to establish deferred income tax assets and liabilities for the temporary differences between the financial reporting basis and the income tax basis of our assets and liabilities at enacted tax rates expected to be in effect when we realize or settle such amounts.

Accounting guidance requires that companiesWe re-measure existing deferred income tax assets (including loss carryforwards) and liabilities when a change in tax rate occurs, and record an offset for the net amount of the change as a component of income tax expense from continuing operations in the period of enactment. The guidanceWe also requiresrecord any change to a previously recorded valuation allowance as a result of re-measuring existing temporary differences and loss carryforwards to be reflected as a component of income tax expense (benefit) 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 Employee Stock Ownership Plan are not considered outstanding until they are released and allocated to plan participants. Unearned shares related to the Company’s Restricted Stock Units and Performance Share Units are not considered outstanding until they are earned by award participants. See Notes 14 and 20.

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 $250.$ 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.

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NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

Corporation (“SIPC”) up to $500. On occasion, balances for these accounts are maintained in excess of the SIPC insurance limit.

Reinsurance:

The Company limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risks to other insurers or reinsurers, either on an automatic basis under general reinsurance contracts knows as “treaties” or by negotiation on substantial individual risks. Ceded reinsurance is treated as the risk and liability of the assuming companies.

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

Goodwill and Other Intangibles:

Goodwill represents the excess of the purchase price over the underlying fair value of acquired entities. When completing acquisitions, we seek also to identify separately identifiable intangible assets that we have acquired. We assess goodwill and 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 three or nine month periods ended September 30, 2020March 31, 2021 and 2019.2020.

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 which arose from this transaction is included in the basis of the net assets acquired and is not deductible for income tax purposes.

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

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, Westminster trade name, and VOBA assets will be amortized over twenty years, ten years, and twelve months, respectively, from the January 1, 2020 acquisition/valuation date.

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Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

4.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 remains headquartered in Owings Mills, Maryland, and the current president of Westminster continues to manage the Westminster insurance operations along with the staffbe led by its president and other key management team in place at the time of the acquisition. The results of Westminster are included as part of the Company’s commercial business segment following the closing date.

We account for business acquisitions in accordance with the acquisition method of accounting, which requires, among other things, that most assets acquired, liabilities assumed, and contingent consideration be recognized at their fair values as of the acquisition date, which is the closing date for the 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. During the three months ended June 30, 2020, the Company made minor adjustments to property and equipment, the value of business acquired intangible asset, and deferred income taxes. During the three months ended September 30, 2020, the Company made minor adjustments to fixed income securities, deferred income taxes, and goodwill.

The acquired Westminster business contributed revenues of $10,294 and net income of $1,763 to the Companymeasurement period for the three monthsWestminster acquisition ended September 30, 2020, and revenues of $24,085 and net income of $1,080 for the nine months ended September 30,December 31, 2020. The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2019:

Pro forma

Three Months Ended

September 30,

Pro forma

Nine Months Ended

September 30,

2020

2019

2020

2019

Revenues

$

80,854

$

75,915

$

222,707

$

215,814

 

Net income (loss) attributable to NI Holdings, Inc.

3,913

(7,031

)

20,624

7,636

 

Basic earnings (loss) per share attributable to NI Holdings, Inc.

0.18

(0.32

)

0.94

0.34

The Company did not reflect any material, nonrecurring pro forma adjustments directly attributable to the business combination in the above pro forma revenue and earnings.

These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Westminster 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 during the nine months ended September 30, 2020, and $83 during the yearyears ended December 31, 2019. These expenses were reclassified to occur in first quarter2020, and 2019, in the pro forma amounts presented above.

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NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

respectively.

The Company paid $20,000 in cash consideration to the private shareholder of Westminster as of the closing date, and will paywith an additional $20,000 to be paid in 3 equal annual installments. The acquisition of Westminster did not include any contingent consideration other than a provision regarding future changes to federal income tax rates. The 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:

Fair Value of Consideration:

Fair Value of Consideration:

Cash consideration transferred

$

20,000

$

20,000

Present value of future cash consideration

18,787

18,787

Total cash consideration

$

38,787

$

38,787

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:

Fair Value of Identifiable Assets Acquired and Liabilities Assumed:

Identifiable net assets:

Cash and cash equivalents

$

19,297

$

19,297

Fixed income securities, at fair value

12,073

Equity securities, at fair value

2,705

Fixed income securities

12,073

Equity securities

2,705

Other investments

735

735

Premiums and agents' balances receivable

8,507

8,507

Reinsurance recoverables on losses

763

763

Accrued investment income

70

70

Property and equipment

2,376

2,376

Federal income tax recoverable

138

138

State insurance licenses (included in goodwill and other intangibles)

1,800

1,800

Distribution network (included in goodwill and other intangibles)

6,700

6,700

Trade name (included in goodwill and other intangibles)

500

500

Value of business acquired (included in goodwill and other intangibles)

4,750

4,750

Other assets

76

76

Unpaid losses and loss adjustment expenses

(8,568

)

(8,568

)

Unearned premiums

(16,611

)

(16,611

)

Deferred income taxes, net

(1,583

)

(1,583

)

Reinsurance premiums payable

(565

)

(565

)

Accrued expenses and other liabilities

(1,132

)

(1,132

)

Total identifiable net assets

$

32,031

$

32,031

Goodwill

$

6,756

$

6,756

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NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

The fair value of the assets acquired includes 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 areis anticipated to be uncollectible. The Company did not acquire any other material class of receivable 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 ofwere $6,700, $1,800, $500, and $4,750, respectively, are provisional pending final valuation for those assets.respectively. The state insurance license intangible has an indefinite life, while the other intangible assets will be amortized over useful lives of up to twenty years. The goodwill is not deductible for income tax purposes.

The first installment of the additional consideration was paid during the first quarter of 2021.

5.Recent Accounting Pronouncements

As an emerging growth company, we have elected to use the extended transition period for complying with any new or revised financial accounting standards 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 Financial Accounting Standards Board (“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

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NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

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 (loss), 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 2019,2020, the Company adopted amended guidance from the FASB that addressed diversity in howshortened the amortization period of premiums on certain cash receipts and cash payments are presented and classified infixed income securities held at a premium to the Consolidated Statementearliest call date rather than through the maturity date of Cash Flows, and the presentationcallable security. The adoption 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 nothis guidance did not materially impact to 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, which replaces the current lease guidance, is effective for annual and interim reporting periods beginning after December 15, 20192018 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. Early adoption is permitted for all entities. We do not expect the adoption of this new guidance to have a significant impact on our financial position, results of operations, or cash flows.Inflows. Upon adoption, the Company will recognize a right of use asset and operating lease liabilities on its Consolidated Balance Sheet. The cumulative adjustment to retained earnings is not expected to be significant.

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

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Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

2019 for filers with the Securities and Exchange Commission (“SEC”) excluding smaller reporting companies, and emerging growth companies that did not relinquish private company relief. For all other entities, this guidance is 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 are evaluating the impactBased on our evaluation, adoption of this new guidancestandard will not have on our financial position, results of operations, and cash flows.

In March 2017, the FASB issued amended guidance to shorten the amortization period of premiums on certain purchased callable fixed income securities to the earliest call date. The amended guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for public business entities. For private companies and emerging growth companies, this amended guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments on a modified retrospective basis through a cumulative-effect adjustment

17


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

directly to retained earnings as of the beginning of the period of adoption. We are evaluating the requirements of this guidance and the potentialsignificant impact toon 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 is 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, this amended guidance is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted, including adoption in an interim period. We are evaluating the impact this new guidance will have on our financial position, results of operations, and cash flows.

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NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

6.Investments

The amortized cost and estimated fair value of investmentfixed income securities as of September 30, 2020March 31, 2021 and December 31, 2019,2020, were as follows:

September 30, 2020

Cost or Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

Fixed income securities:

U.S. Government and agencies

$

16,110

$

1,324

$

(1

)

$

17,433

Obligations of states and political subdivisions

62,975

3,044

(150

)

65,869

Corporate securities

120,955

8,137

(434

)

128,658

Residential mortgage-backed securities

36,384

1,612

(4

)

37,992

Commercial mortgage-backed securities

24,574

1,705

(29

)

26,250

Asset-backed securities

45,906

509

(188

)

46,227

Total fixed income securities

306,904

16,331

(806

)

322,429

 

Equity securities:

Basic materials

1,259

289

(69

)

1,479

Communications

4,304

2,563

(507

)

6,360

Consumer, cyclical

5,903

3,139

(596

)

8,446

Consumer, non-cyclical

10,456

6,092

(758

)

15,790

Energy

1,931

18

(532

)

1,417

Financial

5,879

520

(491

)

5,908

Industrial

6,857

4,240

(132

)

10,965

Technology

7,905

7,570

(90

)

15,385

Utility

37

-

(1

)

36

Total equity securities

44,531

24,431

(3,176

)

65,786

Total investments

$

351,435

$

40,762

$

(3,982

)

$

388,215

March 31, 2021

Cost or Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value

Fixed income securities:

U.S. Government and agencies

$

15,195

$

680

$

(145

)

$

15,730

Obligations of states and political subdivisions

65,635

2,594

(269

)

67,960

Corporate securities

152,649

5,730

(1,437

)

156,942

Residential mortgage-backed securities

41,001

1,299

(206

)

42,094

Commercial mortgage-backed securities

27,031

1,064

(106

)

27,989

Asset-backed securities

50,471

332

(188

)

50,615

Total fixed income securities

$

351,982

$

11,699

$

(2,351

)

$

361,330

 

December 31, 2019

Cost or Amortized

Cost

Gross Unrealized

Gains

Gross Unrealized

Losses

Fair Value

Fixed income securities:

U.S. Government and agencies

$

17,078

$

472

$

(4

)

$

17,546

Obligations of states and political subdivisions

55,232

1,511

(91

)

56,652

Corporate securities

109,457

3,772

(16

)

113,213

Residential mortgage-backed securities

50,458

1,050

(22

)

51,486

Commercial mortgage-backed securities

26,450

658

(51

)

27,057

Asset-backed securities

30,029

132

(170

)

29,991

Total fixed income securities

288,704

7,595

(354

)

295,945

 

Equity securities:

Basic materials

1,062

155

(7

)

1,210

Communications

4,823

2,342

(169

)

6,996

Consumer, cyclical

5,477

4,207

(72

)

9,612

Consumer, non-cyclical

7,483

5,255

(171

)

12,567

Energy

2,817

124

(485

)

2,456

Financial

5,059

905

(35

)

5,929

Industrial

5,293

4,023

(17

)

9,299

Technology

6,022

5,867

(26

)

11,863

Total equity securities

38,036

22,878

(982

)

59,932

Total investments

$

326,740

$

30,473

$

(1,336

)

$

355,877

December 31, 2020

Cost or Amortized

Cost

Gross Unrealized

Gains

Gross Unrealized

Losses

Fair Value

Fixed income securities:

U.S. Government and agencies

$

13,334

$

1,055

$

(6

)

$

14,383

Obligations of states and political subdivisions

61,001

3,278

(35

)

64,244

Corporate securities

119,826

8,755

(147

)

128,434

Residential mortgage-backed securities

35,017

1,478

(1

)

36,494

Commercial mortgage-backed securities

23,976

1,700

(21

)

25,655

Asset-backed securities

50,751

535

(86

)

51,200

Total fixed income securities

$

303,905

$

16,801

$

(296

)

$

320,410

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Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

The amortized cost and estimated fair value of fixed income securities by contractual maturity are shown below. Actual maturities could differ from contractual maturities because issuers of the securities may have the right to call or prepay certain obligations, which may or may not include call or prepayment penalties.

September 30, 2020

March 31, 2021

Amortized Cost

Fair Value

Amortized Cost

Fair Value

Due to mature:

One year or less

$

16,413

$

16,659

$

22,846

$

23,071

After one year through five years

90,477

95,182

87,767

91,773

After five years through ten years

59,812

64,928

85,183

86,921

After ten years

33,338

35,191

37,683

38,867

Mortgage / asset-backed securities

106,864

110,469

118,503

120,698

Total fixed income securities

$

306,904

$

322,429

$

351,982

$

361,330

 

December 31, 2019

December 31, 2020

Amortized Cost

Fair Value

Amortized Cost

Fair Value

Due to mature:

One year or less

$

19,567

$

19,663

$

17,722

$

17,933

After one year through five years

84,937

87,134

86,709

91,457

After five years through ten years

55,927

58,466

59,408

64,987

After ten years

21,336

22,148

30,322

32,684

Mortgage / asset-backed securities

106,937

108,534

109,744

113,349

Total fixed income securities

$

288,704

$

295,945

$

303,905

$

320,410

Fixed income securities with a fair value of $6,164 at September 30, 2020 and $5,585 at December 31, 2019, were deposited with various state regulatory agencies as required by law. The Company has not pledged any assets to secure any obligations.

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Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

Fixed income securities with a fair value of $7,852 at March 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 and equity securities were as follows:

September 30, 2020

Less than 12 Months

Greater than 12 months

Total

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Fair

Value

 

 

Unrealized

Losses

Fixed income securities:

 

 

 

 

 

 

U.S. Government and agencies

$

203

$

(1

)

$

-

$

-

$

203

$

(1

)

Obligations of states and political subdivisions

4,578

(150

)

 

-

-

4,578

(150

)

Corporate securities

8,763

(420

)

693

(14

)

9,456

(434

)

Residential mortgage-backed securities

397

(4

)

-

-

397

(4

)

Commercial mortgage-backed securities

1,511

(29

)

-

-

1,511

(29

)

Asset-backed securities

10,324

(80

)

4,393

(108

)

14,717

(188

)

Total fixed income securities

25,776

(684

)

5,086

(122

)

30,862

(806

)

 

Equity securities:

Basic materials

345

(69

)

-

-

345

(69

)

Communications

1,272

(507

)

-

-

1,272

(507

)

Consumer, cyclical

1,184

(528

)

211

(68

)

1,395

(596

)

Consumer, non-cyclical

2,456

(758

)

-

-

2,456

(758

)

Energy

47

(33

)

442

(499

)

489

(532

)

Financial

2,750

(491

)

-

-

2,750

(491

)

Industrial

1,139

(132

)

-

-

1,139

(132

)

Technology

1,379

(90

)

-

-

1,379

(90

)

Utility

37

(1

)

-

-

37

(1

)

Total equity securities

10,609

(2,609

)

653

(567

)

11,262

(3,176

)

Total investments

 

$

36,385

$

(3,293

)

 

$

5,739

$

(689

)

 

$

42,124

$

(3,982

)

March 31, 2021

Less than 12 Months

Greater than 12 months

Total

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fixed income securities:

U.S. Government and agencies

$

3,177

$

(145

)

$

0-

$

0-

$

3,177

$

(145

)

Obligations of states and political subdivisions

8,498

(269

)

0-

0-

8,498

(269

)

Corporate securities

38,660

(1,341

)

1,481

(96

)

40,141

(1,437

)

Residential mortgage-backed securities

14,466

(206

)

0-

0-

14,466

(206

)

Commercial mortgage-backed securities

4,575

(106

)

0-

0-

4,575

(106

)

Asset-backed securities

14,237

(177

)

1,486

(11

)

15,723

(188

)

Total fixed income securities

$

83,613

$

(2,244

)

$

2,967

$

(107

)

$

86,580

$

(2,351

)

 

 

December 31, 2020

 

 

 

Less than 12 Months

 

 

Greater than 12 months

 

 

Total

 

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Fixed income securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

$

931

$

(6

)

$

0-

$

0-

$

931

$

(6

)

Obligations of states and political subdivisions

 

 

1,806

 

 

 

(35

)

 

 

0-

 

 

 

0-

 

 

 

1,806

 

 

 

(35

)

Corporate securities

 

 

3,215

 

 

 

(97

)

 

 

734

 

 

 

(50

)

 

 

3,949

 

 

(147

)

Residential mortgage-backed securities

 

 

68

 

 

 

(1

)

 

 

0-

 

 

 

0-

 

 

 

68

 

 

 

(1

)

Commercial mortgage-backed securities

 

 

1,103

 

 

 

(21

)

 

 

0-

 

 

 

0-

 

 

 

1,103

 

 

 

(21

)

Asset-backed securities

 

 

5,785

 

 

 

(31

)

 

 

4,188

 

 

 

(55

)

 

 

9,973

 

 

 

(86

)

Total fixed income securities

 

$

12,908

 

 

$

(191

)

 

$

4,922

 

 

$

(105

)

 

$

17,830

 

 

$

(296

)

 

21


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

December 31, 2019

Less than 12 Months

Greater than 12 months

Total

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Fair

Value

Unrealized

Losses

Fixed income securities:

U.S. Government and agencies

$

494

$

(4

)

$

-

$

-

$

494

$

(4

)

Obligations of states and political subdivisions

8,018

(91

)

-

-

8,018

(91

)

Corporate securities

2,066

(15

)

650

(1

)

2,716

(16

)

Residential mortgage-backed securities

2,911

(9

)

2,583

(13

)

5,494

(22

)

Commercial mortgage-backed securities

4,841

(35

)

653

(16

)

5,494

(51

)

Asset-backed securities

8,511

(96

)

7,686

(74

)

16,197

(170

)

Total fixed income securities

26,841

(250

)

11,572

(104

)

38,413

(354

)

 

Equity securities:

Basic materials

258

(7

)

-

-

258

(7

)

Communications

506

(-

)

658

(169

)

1,164

(169

)

Consumer, cyclical

595

(30

)

146

(42

)

741

(72

)

Consumer, non-cyclical

1,033

(171

)

-

-

1,033

(171

)

Energy

823

(432

)

6

(53

)

829

(485

)

Financial

393

(35

)

-

-

393

(35

)

Industrial

620

(17

)

-

-

620

(17

)

Technology

575

(26

)

-

-

575

(26

)

Total equity securities

4,803

(718

)

810

(264

)

5,613

(982

)

Total investments

$

31,644

$

(968

)

$

12,382

$

(368

)

$

44,026

$

(1,336

)

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

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

The Company did not record any other-than-temporary impairments during the three or nine month periods ended September 30, 2020March 31, 2021 and 2019.2020.

19


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

As of September 30, 2020,March 31, 2021, we held 83167 fixed income securities with unrealized losses. As of December 31, 2019,2020, we held 8867 fixed income securities with unrealized losses. In conjunction with our outside investment advisors, we analyzed the credit ratings of the securities as well as the historical monthly amortized cost to fair value ratio of securities in an unrealized loss position. This analysis yielded no fixed income securities which had fair values less than 80% of amortized cost for the preceding 12-month period.

Net investment income consisted of the following:

Three Months Ended March 31,

2021

2020

Fixed income securities

$

2,011

$

2,309

Equity securities

265

325

Real estate

156

146

Cash and cash equivalents

1

20

Total gross investment income

2,433

2,800

Investment expenses

897

829

Net investment income

$

1,536

$

1,971

Net capital gain (loss) on investments consisted of the following:

Three Months Ended March 31,

2021

2020

Gross realized gains:

Fixed income securities

$

110

$

85

Equity securities

3,915

1,515

Total gross realized gains

4,025

1,600

 

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

Fixed income securities

(9

)

(23

)

Equity securities

(114

)

(562

)

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

(123

)

(585

)

 

Net realized gain on investments

3,902

1,015

 

Change in net unrealized gain on equity securities

1,909

(15,934

)

Net capital gain (loss) on investments

$

5,811

$

(14,919

)

2220


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

Net investment income consisted of the following:

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

Fixed income securities

$

2,065

$

2,196

$

6,655

$

6,167

Equity securities

278

247

903

704

Real estate

170

91

440

273

Cash and cash equivalents

1

15

27

50

Total gross investment income

2,514

2,549

8,025

7,194

Investment expenses

628

566

2,150

1,690

Net investment income

$

1,886

$

1,983

$

5,875

$

5,504

Net capital gain (loss) on investments consisted of the following:

Three Months Ended September 30,

Nine Months Ended September 30,

2020

2019

2020

2019

Gross realized gains:

Fixed income securities

$

279

$

58

$

756

$

114

Equity securities

637

1,386

2,887

2,408

Total gross realized gains

916

1,444

3,643

2,522

 

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

Fixed income securities

252

 

(46

)

(70

)

(132

)

Equity securities

(532

)

(392

)

(1,552

)

(1,052

)

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

(280

)

(438

)

(1,622

)

(1,184

)

 

Net realized gain on investments

636

1,006

2,021

1,338

 

Change in net unrealized gain on equity securities

4,466

(384

)

(641

)

8,253

Net capital gain on investments

$

5,102

$

622

$

1,380

$

9,591

7.Fair Value Measurements

We maximize the use of observable inputs in our valuation techniques and apply unobservable inputs only to the extent that observable inputs are unavailable. The largest class of assets and liabilities carried at fair value by the Company at September 30, 2020March 31, 2021 and December 31, 20192020 were fixed income securities.

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

Our available-for-sale investments are comprised of a variety of different securities, which are classified into levels based on the valuation technique and inputs used in their valuation. The valuation of money market funds classified as cash equivalents and equity securities are generally based on Level I inputs, which use the market approach valuation technique. The valuation of fixed income securities generally incorporates significant Level II inputs using the market and income approach techniques. We may assign a lower level to inputs typically considered to be Level II based on our assessment of liquidity and relative level of uncertainty surrounding inputs. There were no assets or liabilities classified as Level III at September 30, 2020March 31, 2021 or December 31, 2019.

23


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

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:

September 30, 2020

March 31, 2021

Total

Level I

Level II

Level III

Total

Level I

Level II

Level III

Fixed income securities:

U.S. Government and agencies

$

17,433

$

-

$

17,433

$

-

$

15,730

$

0-

$

15,730

$

0-

Obligations of states and political subdivisions

65,869

-

65,869

-

67,960

0-

67,960

0-

Corporate securities

128,658

-

128,658

-

156,942

0-

156,942

0-

Residential mortgage-backed securities

37,992

-

37,992

-

42,094

0-

42,094

0-

Commercial mortgage-backed securities

26,250

-

26,250

-

27,989

0-

27,989

0-

Asset-backed securities

46,227

-

46,227

-

50,615

0-

50,615

0-

Total fixed income securities

322,429

-

322,429

-

361,330

0-

361,330

0-

Equity securities:

Basic materials

1,479

1,479

-

-

1,607

1,607

0-

0-

Communications

6,360

6,360

-

-

8,757

8,757

0-

0-

Consumer, cyclical

8,446

8,446

-

-

11,125

11,125

0-

0-

Consumer, non-cyclical

15,790

15,790

-

-

16,045

16,045

0-

0-

Energy

1,417

1,417

-

-

2,015

2,015

0-

0-

Financial

5,908

5,908

-

-

6,737

6,737

0-

0-

Industrial

10,965

10,965

-

-

15,002

15,002

0-

0-

Technology

15,385

15,385

17,742

17,742

0-

0-

Utility

36

36

-

-

333

333

 

-

Total equity securities

65,786

65,786

-

-

79,363

79,363

0-

0-

Cash and cash equivalents

71,305

71,305

-

-

52,683

37,694

14,989

0-

Total assets at fair value

$

459,520

$

137,091

$

322,429

$

-

$

493,376

$

117,057

$

376,319

$

0-

December 31, 2019

Total

Level I

Level II

Level III

Fixed income securities:

U.S. Government and agencies

$

17,546

$

-

$

17,546

$

-

Obligations of states and political subdivisions

56,652

-

56,652

-

Corporate securities

113,213

-

113,213

-

Residential mortgage-backed securities

51,486

-

51,486

-

Commercial mortgage-backed securities

27,057

-

27,057

-

Asset-backed securities

29,991

-

29,991

-

Total fixed income securities

295,945

-

295,945

-

 

Equity securities:

Basic materials

1,210

1,210

-

-

Communications

6,996

6,996

-

-

Consumer, cyclical

9,612

9,612

-

-

Consumer, non-cyclical

12,567

12,567

-

-

Energy

2,456

2,456

-

-

Financial

5,929

5,929

-

-

Industrial

9,299

9,299

-

-

Technology

11,863

11,863

-

-

Total equity securities

59,932

59,932

-

-

 

Cash and cash equivalents

62,132

62,132

-

-

Total assets at fair value

$

418,009

$

122,064

$

295,945

$

-

There were no liabilities measured at fair value on a recurring basis at September 30, 2020 or December 31, 2019.

2421


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

December 31, 2020

Total

Level I

Level II

Level III

Fixed income securities:

U.S. Government and agencies

$

14,383

$

0-

$

14,383

$

0-

Obligations of states and political subdivisions

64,244

0-

64,244

0-

Corporate securities

128,434

0-

128,434

0-

Residential mortgage-backed securities

36,494

0-

36,494

0-

Commercial mortgage-backed securities

25,655

0-

25,655

0-

Asset-backed securities

51,200

0-

51,200

0-

Total fixed income securities

320,410

0-

320,410

0-

 

Equity securities:

Basic materials

1,285

1,285

0-

0-

Communications

7,455

7,455

0-

0-

Consumer, cyclical

9,929

9,929

0-

0-

Consumer, non-cyclical

14,633

14,633

0-

0-

Energy

1,499

1,499

0-

0-

Financial

6,235

6,235

0-

0-

Industrial

12,733

12,733

0-

0-

Technology

16,145

16,145

0-

0-

Utility

38

38

-

-

Total equity securities

69,952

69,952

0-

0-

 

Cash and cash equivalents

101,077

65,354

35,723

0-

Total assets at fair value

$

491,439

$

135,306

$

356,133

$

0-

There were no liabilities measured at fair value on a recurring basis at March 31, 2021 or December 31, 2020.

22


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

8.Reinsurance

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

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

As a group, during the ninethree month period ended September 30,March 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. 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 actively monitors and evaluates the financial condition of the reinsurers and develops estimates of the uncollectible amounts due from reinsurers. Such estimates are made based on periodic evaluation of balances due from reinsurers, judgments regarding reinsurers’ solvency, known disputes, reporting characteristics of the underlying reinsured business, historical experience, current economic conditions, and the state of reinsurer relations in general. Collection risk is mitigated from reinsurers by entering into reinsurance arrangements only with reinsurers that have strong credit ratings and statutory surplus above certain levels. The Company’s largest reinsurance recoverables on paid and unpaid losses were due from reinsurance companies with A.M. Best ratings of “A-”“A” or higher.

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

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

Premiums Written

Premiums Earned

Premiums Written

Premiums Earned

Premiums Written

Premiums Earned

Direct premium

$

68,322

$

79,455

$

244,053

$

224,300

$

72,420

$

68,743

Assumed premium

1,426

1,372

5,728

5,655

1,450

1,448

Ceded premium

(7,596

)

(7,485

)

(15,497

)

(15,835

)

(7,114

)

(7,056

)

Net premiums

$

62,152

$

73,342

$

234,284

$

214,120

$

66,756

$

63,135

Percentage of assumed earned premium to direct earned premium

1.7%

2.5%

2.1

%

 

Three Months Ended September 30, 2019

 

Nine Months Ended September 30, 2019

 

Three Months Ended March 31, 2020

 

Premiums Written

 

Premiums Earned

 

Premiums Written

 

Premiums Earned

 

Premiums Written

Premiums Earned

Direct premium

 

$

49,984

 

$

70,481

 

$

208,880

 

$

192,233

 

$

62,972

$

62,393

Assumed premium

 

1,203

 

1,234

 

5,235

 

5,233

 

1,600

1,600

Ceded premium

 

 

(4,599

)

 

 

(4,599

)

 

 

(14,730

)

 

 

(14,730

)

(5,170

)

(5,221

)

Net premiums

 

$

46,588

 

$

67,116

 

$

199,385

 

$

182,736

 

$

59,402

$

58,772

 

 

 

 

 

 

 

 

 

Percentage of assumed earned premium to direct earned premium

 

 

 

 

1.8%

 

 

 

 

2.7%

 

2.6%

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

Three Months Ended March 31,

2021

2020

Direct losses and loss adjustment expenses

$

37,578

$

33,892

Assumed losses and loss adjustment expenses

948

308

Ceded losses and loss adjustment expenses

(1,637

)

(3,778

)

Net losses and loss adjustment expenses

$

36,889

$

30,422

2523


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

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

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Direct losses and loss adjustment expenses

 

$

59,936

 

 

$

62,248

 

 

$

153,203

 

 

$

138,481

 

Assumed losses and loss adjustment expenses

 

 

2,436

 

 

 

2,017

 

 

 

3,538

 

 

 

3,000

 

Ceded losses and loss adjustment expenses

 

 

(8,536

)

 

 

(2,707

)

 

 

(20,119

)

 

 

(5,496

)

Net losses and loss adjustment expenses

 

$

53,836

 

 

$

61,558

 

 

$

136,622

 

 

$

135,985

 

If 100% of our ceded reinsurance was cancelled as of September 30, 2020March 31, 2021 or December 31, 2019,2020, no ceded commissions would need to be returned to the reinsurers. Reinsurance contracts are typically effective from January 1 through December 31 each year.

9.Deferred Policy Acquisition Costs

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

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Three Months Ended March 31,

 

2020

 

2019

 

2020

 

2019

 

2021

2020

Balance, beginning of period

 

$

24,204

 

$

16,721

 

$

15,399

 

 

$

12,866

 

$

23,968

$

15,399

Deferral of policy acquisition costs

 

14,742

 

10,392

 

 

47,763

 

 

 

39,620

 

16,194

13,152

Amortization of deferred policy acquisition costs

 

 

(15,061

)

 

 

(11,309

)

 

 

(39,277

)

 

 

(36,682

)

(13,587

)

(9,387

)

Balance, end of period

 

$

23,885

 

$

15,804

 

$

23,885

 

 

$

15,804

 

$

26,575

$

19,164

10.Unpaid Losses and Loss Adjustment Expenses

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

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

2021

2020

Balance at beginning of period:

Liability for unpaid losses and loss adjustment expenses

$

93,250

$

87,121

$

105,750

$

93,250

Reinsurance recoverables on losses

4,045

2,232

8,710

4,045

Net balance at beginning of period

89,205

84,889

97,040

89,205

Acquired unpaid losses and loss adjustment expenses related to:

Current year

-

-

0-

0-

Prior years

8,568

-

0-

8,568

Total incurred

8,568

-

0-

8,568

Incurred related to:

Current year

140,890

142,428

34,366

29,912

Prior years

(4,268

)

(6,443

)

2,523

510

Total incurred

136,622

135,985

36,889

30,422

Paid related to:

Current year

65,234

73,974

13,415

12,532

Prior years

47,914

35,280

18,262

26,330

Total paid

113,148

109,254

31,677

38,862

Balance at end of period:

Liability for unpaid losses and loss adjustment expenses

134,803

117,373

111,522

97,400

Reinsurance recoverables on losses

13,556

5,753

9,270

8,067

Net balance at end of period

$

121,247

$

111,620

$

102,252

$

89,333

During the ninethree months ended September 30, 2020,March 31, 2021, the Company’s reported incurred losses and LAE included $4,268$2,523 of net favorableunfavorable development on prior accident years, compared to $6,443$510 of net favorableunfavorable development on prior accident years during the ninethree months ended September 30, 2019.March 31, 2020. Increases and decreases are generally the result of ongoing analysis of loss development trends. As additional information becomes known regarding individual claims, original estimates are increased or decreased accordingly.

24


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

11.Property and Equipment

Property and equipment consisted of the following:

March 31, 2021

December 31, 2020

Estimated Useful Life

Cost:

Real estate

$

15,327

$

15,313

10-31 years

Electronic data processing equipment

1,289

1,271

5-7 years

Furniture and fixtures

2,867

2,867

5-7 years

Automobiles

1,271

1,275

2-3 years

Gross cost

20,754

20,726

 

Accumulated depreciation

(10,911

)

(10,827

)

Total property and equipment, net

$

9,843

$

9,899

Depreciation expense was $170 and $187 for the three months ended March 31, 2021 and 2020, respectively.

12.Goodwill and Other Intangibles

Goodwill

The following table presents the carrying amount of the Company’s goodwill by segment:

March 31, 2021

December 31, 2020

Non-standard auto from acquisition of Primero

$

2,628

$

2,628

Commercial from acquisition of Westminster

6,756

6,756

Total

$

9,384

$

9,384

Other Intangible Assets

The following table presents the carrying amount of the Company’s other intangible assets:

March 31, 2021

Gross Carrying

Amount

Accumulated Amortization

Net

Subject to amortization:

Trade names

$

748

$

191

$

557

Distribution network

6,700

465

6,235

Total subject to amortization

7,448

656

6,792

 

Not subject to amortization – state insurance licenses

1,900

0-

1,900

Total

$

9,348

$

656

$

8,692

25


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

December 31, 2020

Gross Carrying

Amount

Accumulated Amortization

Net

Subject to amortization:

Trade names

$

748

$

166

$

582

Distribution network

6,700

372

6,328

Total subject to amortization

7,448

538

6,910

 

Not subject to amortization – state insurance license

1,900

0-

1,900

Total

$

9,348

$

538

$

8,810

Amortization expense was $118 and $1,882 for the three months ended March 31, 2021 and 2020, respectively.

Other intangible assets that have finite lives, including trade names and distribution networks, are amortized over their useful lives. As of March 31, 2021, the estimated amortization of other intangible assets with finite lives for the next five years in the period ended December 31, 2025, and thereafter is as follows:

Year ending December 31,

Amount

2021

$

354

2022

472

2023

455

2024

422

2025

422

Thereafter

4,667

Total other intangible assets with finite lives

$

6,792

13.Related Party Transactions

Intercompany Reinsurance Pooling Arrangement

Effective January 1, 2020, all of our insurance subsidiary and affiliate companies entered into an intercompany reinsurance pooling agreement. This agreement was finalized, approved, and implemented during the fourth quarter of 2020, retroactive to the January 1 effective date. Nodak Insurance is the lead company of the pool, and assumes the net premiums, net losses, and underwriting expenses from each of the other five companies. Nodak Insurance then retrocedes balances back to each company, while retaining its own share of the pool’s net underwriting results, based on individual pool percentages established in the respective pooling agreement. This arrangement allows each insurance company to rely upon the capacity of the pool’s total statutory capital and surplus. As a result, they are evaluated by A.M. 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 three months ended March 31, 2021 and the year ended December 31, 2020, the pooling share percentages by insurance company subsidiary were:

Pool Percentage

Nodak Insurance Company

66.0

%

American West Insurance Company

7.0

%

Primero Insurance Company

3.0

%

Battle Creek Mutual Insurance Company

2.0

%

Direct Auto Insurance Company

13.0

%

Westminster American Insurance Company

9.0

%

Total

100.0

%

26


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

additional information becomes known regarding individual claims, original estimates are increased or decreased accordingly. The net favorable development reported for the nine months ended September 30, 2020 was primarily attributable to our Direct Auto non-standard auto business and North Dakota personal lines of business, partially offset by unfavorable development from our 2019 multi-peril crop business.

11.Property and Equipment

Property and equipment consisted of the following:

September 30, 2020

December 31, 2019

Estimated Useful Life

Cost:

Real estate

$

15,260

$

12,733

10 - 31 years

Electronic data processing equipment

1,342

1,271

5-7 years

Furniture and fixtures

2,867

2,796

5-7 years

Automobiles

1,237

1,130

2-3 years

Gross cost

20,706

17,930

 

Accumulated depreciation

(10,698

)

(10,236

)

Total property and equipment, net

$

10,008

$

7,694

Depreciation expense was $180 and $129 for the three months ended September 30, 2020 and 2019, respectively, and $545 and $374 for the nine months ended September 30, 2020 and 2019, respectively.

12.Goodwill and Other Intangibles

Goodwill

The following table presents the carrying amount of the Company’s goodwill by segment:

September 30, 2020

December 31, 2019

Non-standard auto from acquisition of Primero

$

2,628

$

2,628

Commercial from acquisition of Westminster

6,756

-

Total

$

9,384

$

2,628

Other Intangible Assets

The following table presents the carrying amount of the Company’s other intangible assets:

September 30, 2020

Gross Carrying Amount

Accumulated Amortization

Net

Subject to amortization:

Trade names

$

748

$

141

$

607

Distribution network

6,700

279

6,421

Value of business acquired

4,750

4,425

325

Total subject to amortization

12,198

4,845

7,353

 

Not subject to amortization – state insurance licenses

1,900

-

1,900

Total

$

14,098

$

4,845

$

9,253

27


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

December 31, 2019

Gross Carrying Amount

Accumulated Amortization

Net

Subject to amortization:

Trade names

$

248

$

66

$

182

Other

20

18

2

Total subject to amortization

268

84

184

 

Not subject to amortization – state insurance license

100

-

100

Total

$

368

$

84

$

284

Amortization expense was $1,070 and $108 for the three months ended September 30, 2020 and 2019, respectively, and $4,781 and $1,695 for the nine months ended September 30, 2020 and 2019, respectively.

13.Related Party TransactionsFarm Bureau

We were organized by the NDFB to provide insurance protection for its members. We have a royalty agreement with the NDFB that recognizes the use of their trademark and provides royalties to the NDFB based on the premiums written on Nodak Insurance’s insurance policies. Royalties paid to the NDFB were $386$337 and $384$336 during the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and $1,115 and $1,104 during the nine months ended September 30, 2020 and 2019, respectively. Royalty amounts payable of $23$125 and $115$113 were accrued as a liability to the NDFB at September 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

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, 20192020 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 20202021 without the prior approval of the North Dakota Insurance Department is $18,984$21,628 based upon the policyholders’ surplus of Nodak Insurance at December 31, 2019.2020. Prior to its payment of any extraordinary dividend, Nodak Insurance will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North Dakota Insurance Department has the power to limit or prohibit dividend payments if Nodak Insurance is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. The Board of Directors of Nodak Insurance declared a $6,000 dividend during the nine months ended September 30, 2020, to be paid to NI Holdings in the fourth quarter of 2020. No dividends were declared or paid by Nodak Insurance during the three months ended March 31, 2021. The Board of Directors of Nodak Insurance declared and paid a $6,000 dividend to NI Holdings during the year ended December 31, 2019.2020.

The amount available for payment of dividends from Direct Auto to NI Holdings during 20202021 without the prior approval of the Illinois Department of Insurance is $6,881$3,582 based upon the statutory net incomepolicyholders’ surplus of Direct Auto for the year endedat December 31, 2019.2020. Prior to its payment of any dividend, Direct Auto will be required to provide notice of the dividend to the Illinois Department of Insurance. This notice must be provided to the Illinois Department of Insurance within five business days following declaration of any dividend and no less than 30 days prior to the payment of an extraordinary dividend or 10 days prior to the payment of an ordinary dividend. The Illinois Department of Insurance has the power to limit or prohibit dividend payments if Direct Auto is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Direct Auto during the ninethree months ended September 30, 2020March 31, 2021 or the year ended December 31, 2019.2020.

The amount available for payment of dividends from Westminster to NI Holdings during 20202021 without the prior approval of the Maryland Insurance Administration is $636$505 based upon the statutory net investment income of Westminster for the year ended December 31, 20192020 and the three preceding years. Prior to its payment of any dividend, Westminster will be required to provide notice of the dividend to the Maryland Insurance Administration. This notice must be provided to the Maryland Insurance Administration within five business days following declaration of any dividend and no less than 30 days prior to the payment of an extraordinary dividend or 10 days prior to the payment of an ordinary dividend. The Maryland Insurance Administration has the power to limit or prohibit dividend payments if Westminster is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Westminster during the ninethree months ended September 30,March 31, 2021 or the year ended December 31, 2020.

27


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

Battle Creek Mutual Insurance Company

The following tables illustrates the impact of including Battle Creek in our Consolidated Balance Sheets and Statements of Operations prior to intercompany eliminations:

March 31, 2021

December 31, 2020

Assets:

Cash and cash equivalents

$

3,649

$

6,055

Investments

10,134

5,543

Premiums and agents’ balances receivable

4,577

4,738

Deferred policy acquisition costs

531

479

Pooling receivable (1)

0-

920

Reinsurance recoverables on losses (2)

6,096

5,646

Accrued investment income

52

27

Deferred income tax asset

133

101

Property and equipment

334

337

Other assets

47

49

Total assets

$

25,553

$

23,895

 

Liabilities:

Unpaid losses and loss adjustment expenses

$

2,549

$

2,445

Unearned premiums

2,453

2,381

Notes payable (1)

3,000

3,000

Reinsurance losses payable (2)

10,349

11,221

Pooling payable (1)

2,536

0-

Accrued expenses and other liabilities

239

303

Total liabilities

21,126

19,350

 

Equity:

Non-controlling interest

4,427

4,545

Total equity

4,427

4,545

 

Total liabilities and equity

$

25,553

$

23,895

(1)

Amount fully eliminated in consolidation.

(2)

Amount partly eliminated in consolidation.

Three Months Ended March 31,

2021

2020

Revenues:

Net premiums earned

$

1,263

$

0-

Fee and other income

(3

)

(2

)

Net investment income

8

39

Net capital gain on investments

0-

5

Total revenues

1,268

42

 

Expenses:

Losses and loss adjustment expenses

738

0-

Amortization of deferred policy acquisition costs

272

0-

Other underwriting and general expenses

116

0-

Total expenses

1,126

0-

 

Income before income taxes

142

42

Income tax expense

29

10

Net income

$

113

$

32

 

28


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

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

September 30, 2020

December 31, 2019

Assets:

Cash and cash equivalents (overdraft)

$

5,988

$

(716

)

Investments

4,611

4,661

Premiums and agents’ balances receivable

4,992

4,801

Reinsurance recoverables on losses (1)

27,894

26,330

Accrued investment income

29

33

Deferred income tax asset, net

294

343

Property and equipment

341

348

Other assets

46

45

Total assets

$

44,195

$

35,845

 

Liabilities:

Unpaid losses and loss adjustment expenses

$

11,026

$

10,622

Unearned premiums

16,868

15,708

Notes payable (1)

3,000

3,000

Reinsurance premiums payable (1)

2,727

1,706

Accrued expenses and other liabilities

6,895

1,310

Total liabilities

40,516

32,346

 

Equity:

Non-controlling interest

3,679

3,499

Total equity

3,679

3,499

 

Total liabilities and equity

$

44,195

$

35,845

(1)

Amount eliminated in consolidation.

Total statutory revenues of Battle Creek, after intercompany eliminations, which is limited to net investment income and other income, were $27 and $26, respectively, during the three months ended September 30, 2020 and 2019, respectively.

Total statutory revenues of Battle Creek, after intercompany eliminations, which is limited to net investment income and other income, were $112 and $103, respectively, during the nine months ended September 30, 2020 and 2019, respectively.

There were no statutory-basis expenses reported, after intercompany eliminations, during the three or nine months ended September 30, 2020 and 2019.

14.Benefit Plans

The Company sponsors a money purchase plan that covers all Nodak Insurance eligible employees. Plan costs are funded annually as they are earned. The Company reported expenses related to the money purchase plan totaling $97$269 and $95$201 during the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and $500 and $493 during the nine months ended September 30, 2020 and 2019, respectively.

The Company also sponsors a 401(k) plan with an automatic contribution to all eligible employees and a matching contribution for eligible employees of 50% up to 3% of eligible compensation. Primero, Direct Auto, and Westminster also sponsor 401(k) plans. The Company reported expenses related to the 401(k) plans totaling $164$172 and $139$163 during the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and $489 and $417 during the nine months ended September 30, 2020 and 2019, respectively. All fees associated with allboth plans are deducted from the eligible employee accounts.

Deferred Compensation Plan

The Board of Directors has authorized a non-qualified deferred compensation plan covering key executives of the Company (as designated by the Board of Directors). The Company’s policy is to fund the plan 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 $15$418 and $14 during the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and $43 and $41 during the nine months ended September 30, 2020 and 2019, respectively.

Employee Stock Ownership Plan

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

29


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

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

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

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

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

The Company recognized compensation expense of $98 and $104 during the three months ended September 30, 2020 and 2019, respectively, related to the ESOP, and $270 and $301 during the nine months ended September 30, 2020 and 2019, respectively.

Through September 30, 2020 and December 31, 2019, the Company had released and allocated 72,945 ESOP shares to participants, with a remainder of 167,055 ESOP shares in suspense at September 30, 2020 and December 31, 2019. Using the Company’s quarter-end market price of $16.89 per share, the fair value of the unearned ESOP shares was $2,822 at September 30, 2020.

3029


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

The Company recognized compensation expense of $109 and $89 during the three months ended March 31, 2021 and 2020, respectively, related to the ESOP.

Through March 31, 2021 and December 31, 2020, the Company had released and allocated 97,260 ESOP shares to participants, with a remainder of 142,740 ESOP shares in suspense at March 31, 2021 and December 31, 2020. Using the Company’s quarter-end market price of $18.48 per share, the fair value of the unearned ESOP shares was $2,638 at March 31, 2021.

15.Line of Credit

Nodak Insurance has a $5,000 line of credit with Wells Fargo Bank, N.A., The terms of which therethe line of credit include a floating interest rate with a floor rate of 3.25%. There were no outstanding amounts during the ninethree months ended September 30, 2020,March 31, 2021, or the year ended December 31, 2019.2020. This line of credit is scheduled to expire on January 30, 2022.

16.Income Taxes

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “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.

At September 30, 2020March 31, 2021 and December 31, 2019,2020, we had no00no unrecognized tax benefits, no00no accrued interest and penalties, and no significant uncertain tax positions. No interest and penalties were recognized during the three or nine month periods ended September 30, 2020March 31, 2021 or 2019.2020.

At September 30, 2020March 31, 2021 and December 31, 2019,2020, 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 income tax returns on a stand-alone basis, had $4,652 of net operating loss carryovercarryovers of $3,390 at December 31, 2019.2020. The net operating loss carryforward expirescarryforwards expire beginning in 2021 through 2030. due to limitations on the use of these net operating loss carryforwards.

Westminster, which became part of the Company’s consolidated federal income tax return beginning in 2020, had $2,559 of net operating loss carryovercarryovers of $2,559 at December 31, 2019. This2020. The net operating loss carryforward expirescarryforwards expire beginning in 2021 through 2023. due to limitations on the use of these net operating loss carryforwards.

17.Operating Leases

Our Primero subsidiary leases a facility in Spearfish, South Dakota under a non-cancellable operating lease expiring in 2023.2023. Our Direct Auto subsidiary leases a facility in Chicago, Illinois under a non-cancellable operating lease expiring in 2029.2029. Our Nodak Insurance subsidiary leases a facility in Fargo, North Dakota under a non-cancellable operating lease expiring in 2024. There were expenses of $94$61 and $76$89 related to these leases during the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and expenses of $277 and $227 related to these leases during the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020,March 31, 2021, we have minimum future commitments under non-cancellable leases as follows:

Year ending December 31,

Estimated Future

Minimum Commitments

Estimated Future

Minimum Commitments

2020

$

94

2021

249

$

188

2022

319

319

2023

358

358

2024

320

320

2025

286

Thereafter

1,353

1,066

We also sub-lease portions

30


Table of our home office building under non-cancellable operating leases.Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

18.Contingencies

We have been named as a defendant in various lawsuits relating to our insurance operations. Contingent liabilities arising from litigation, income taxes, and other matters are not considered to be material to our financial position.

The Company does not have any unrecorded or potential contingent liabilities or material commitments requiring the use of assets as of September 30, 2020 or December 31, 2019.

31


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

19.Common Stock

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

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

2021

2020

Shares outstanding, beginning of period

22,119,380

22,192,894

21,318,638

22,119,380

Treasury shares repurchased through stock repurchase authorization

(804,743

)

(116,034

)

(32,326

)

(123,264

)

Issuance of treasury shares for vesting of restricted stock units

31,442

18,205

86,460

19,042

Shares outstanding, end of period

21,346,079

22,095,065

21,372,772

22,015,158

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 ninesix months ended SeptemberJune 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 nine monthsyear ended September 30,December 31, 2020, we completed the repurchase of 402,687454,443 shares of our common stock for $6,367$7,238 under this new authorization. During the three months ended March 31, 2021, we completed the repurchase of 32,326 shares of our common stock for $596.

The cost of this treasury stock is a reduction of shareholders’ equity within our Consolidated Balance Sheet.Sheets.

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

The total aggregate number of shares of common stock that awards may be issued under all awards made under the Plan shall not exceed 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.

31


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

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.

32


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

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

RSUs

Weighted-Average

Grant-Date

Fair Value

Per Share

Units outstanding and unearned at January 1, 2019

73,880

$

16.87

RSUs granted during 2019

57,100

15.81

RSUs earned during 2019

(34,440

)

16.24

Units outstanding and unearned at December 31, 2019

96,540

$

16.47

 

RSUs granted during 2020

66,000

14.27

RSUs earned during 2020

(46,760

)

16.33

Units outstanding and unearned at September 30, 2020

115,780

$

15.27

RSUs

Weighted-Average

Grant-Date

Fair Value

Per Share

Units outstanding and unearned at January 1, 2020

96,540

$

16.47

RSUs granted during 2020

66,000

14.27

RSUs earned during 2020

(46,760

)

16.33

Units outstanding and unearned at December 31, 2020

115,780

$

15.27

 

RSUs granted during 2021

43,100

18.64

RSUs earned during 2021

(37,320

)

16.64

Units outstanding and unearned at March 31, 2021

121,560

$

16.05

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

2020

2019

2021

2020

RSU compensation expense

$

211

$

165

$

824

$

627

$

388

$

420

Income tax benefit

(44

)

(35

)

(173

)

(132

)

(81

)

(88

)

RSU compensation expense, net of income taxes

$

167

$

130

$

651

$

495

$

307

$

332

At September 30, 2020,March 31, 2021, there was $892$1,097 of unrecognized compensation cost related to outstanding RSUs. That cost is expected to be recognized over a weighted-average period of 1.932.44 years.

Performance Stock Units

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

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

3332


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

 

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

PSUs

Weighted-Average

Grant-Date

Fair Value

Per Share

Units outstanding at January 1, 2019

48,600

$

16.25

PSUs granted during 2019 (at target)

62,400

15.21

Units outstanding at December 31, 2019

111,000

$

15.27

 

PSUs granted during 2020 (at target)

63,600

14.26

Units outstanding at September 30, 2020

174,600

$

15.15

PSUs

Weighted-Average

Grant-Date

Fair Value

Per Share

Units outstanding at January 1, 2020

111,000

$

15.27

PSUs granted during 2020 (at target)

63,600

14.26

Units outstanding at December 31, 2020

174,600

$

15.15

 

PSUs granted during 2021 (at target)

64,600

18.64

PSUs earned during 2021

(70,363

)

16.25

Performance adjustment (1)

24,300

16.25

Forfeitures

(2,537

)

16.25

Units outstanding at March 31, 2021

190,600

$

16.06

(1) Represents the change in PSUs issued based upon the attainment of performance goals established by the Company.

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

2020

2019

2021

2020

PSU compensation expense

$

274

$

175

$

838

$

647

$

284

$

293

Income tax benefit

(58

)

(37

)

(176

)

(136

)

(60

)

(62

)

PSU compensation expense, net of income taxes

$

216

$

138

$

662

$

511

$

224

$

231

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 September 30, 2020,March 31, 2021, there was $1,288$2,011 of unrecognized compensation cost related to outstanding PSUs. That cost is expected to be recognized over a weighted-average period of 1.732.23 years.

3433


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

 

21.Earnings Per Share

As described in Note 1, the conversion of the mutual company to a stock company resulted in the issuance of NI Holdings common shares on March 13, 2017. Earnings per share are computed by dividing net income available to common shareholders for the period by the weighted average number of common shares outstanding for the same period. The weighted average number of common shares outstanding was 21,565,962 and 22,136,885 during the three months ended September 30, 2020 and 2019, respectively, and 21,889,138 and 22,194,102 during the nine months ended September 30, 2020 and 2019, respectively.

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

The following table presents a reconciliation of the numerators and denominators we used in the basic and diluted per share computations for our common stock:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to NI Holdings, Inc.

 

$

3,664

 

 

$

(6,979

)

 

$

18,810

 

 

$

9,272

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

21,565,962

 

 

 

22,136,885

 

 

 

21,889,138

 

 

 

22,194,102

 

Basic earnings (loss) per common share

 

$

0.17

 

 

$

(0.32

)

 

$

0.86

 

 

$

0.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to NI Holdings, Inc.

 

$

3,664

 

 

$

(6,979

)

 

$

18,810

 

 

$

9,272

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares used in basic computation

 

 

21,565,962

 

 

 

22,136,885

 

 

 

21,889,138

 

 

 

22,194,102

 

Weighted average effect of dilutive securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Add: RSUs and PSUs

 

 

189,266

 

 

 

95,189

 

 

 

149,748

 

 

 

75,398

 

Number of shares used in diluted computation

 

 

21,755,228

 

 

 

22,232,074

 

 

 

22,038,886

 

 

 

22,269,500

 

Diluted earnings (loss) per common share

 

$

0.17

 

 

$

(0.31

)

 

$

0.85

 

 

$

0.42

 

35


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

22.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 three and nine month periods ended September 30, 2020March 31, 2021 and 2019.2020. For presentation in these tables, “LAE” refers to loss adjustment expenses.

The ratios presented in these tables are non-GAAP financial measures under Securities and Exchange Commission rules and regulations. TheWhile these ratios are used widely in the property and casualty insurance industry, such non-GAAP ratios may not be comparable to similarly-named measures reported by other companies.

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

36


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

Three Months Ended September 30, 2020

Private

Passenger

Auto

Non-

Standard

Auto

Home and

Farm

Crop

Commercial

All Other

Total

Direct premiums earned

$

19,002

$

13,882

$

20,688

$

12,189

$

12,516

$

1,178

$

79,455

Assumed premiums earned

-

-

-

(33

)

-

1,405

1,372

Ceded premiums earned

(1,055

)

(43

)

(2,140

)

(2,437

)

(1,743

)

(67

)

(7,485

)

Net premiums earned

17,947

13,839

18,548

9,719

10,773

2,516

73,342

 

Direct losses and LAE

13,570

9,425

13,912

12,154

9,257

1,618

59,936

Assumed losses and LAE

(165

)

-

-

617

-

1,984

2,436

Ceded losses and LAE

165

-

(475

)

(3,546

)

(3,680

)

(1,000

)

(8,536

)

Net losses and LAE

13,570

9,425

13,437

9,225

5,577

2,602

53,836

 

Gross margin

4,377

4,414

5,111

494

5,196

(86

)

19,506

 

Underwriting and general expenses

5,103

5,140

5,507

1,542

4,289

563

22,144

Underwriting gain (loss)

(726

)

(726

)

(396

)

(1,048

)

907

(649

)

(2,638

)

 

Fee and other income

336

524

 

(390

)

Net investment income

1,886

Net capital gain on investments

5,102

Income before income taxes

4,874

Income taxes

1,118

Net income

3,686

Net income attributable to non-controlling interest

22

Net income attributable to NI Holdings, Inc.

$

3,664

 

Non-GAAP Ratios:

Loss and LAE ratio

75.6%

68.1%

72.4%

94.9%

51.8%

103.4%

73.4%

Expense ratio

28.4%

37.1%

29.7%

15.9%

39.8%

22.4%

30.2%

Combined ratio

104.0%

105.2%

102.1%

110.8%

91.6%

125.8%

103.6%

 

 

Balances at September 30, 2020:

Premiums and agents’ balances receivable

$

19,269

$

7,358

$

9,323

$

39,182

$

9,071

$

665

$

84,868

Deferred policy acquisition costs

5,629

4,931

7,900

409

4,564

452

23,885

Reinsurance recoverables

341

-

1,984

3,675

5,082

2,474

13,556

Receivable from Federal Crop Insurance Corporation

-

-

-

9,519

-

-

9,519

Goodwill and other intangibles

-

2,872

-

-

15,765

-

18,637

 

Unpaid losses and LAE

20,399

44,526

12,361

29,723

16,602

11,192

134,803

Unearned premiums

29,203

17,147

41,724

8,730

26,247

2,915

125,966

37


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

 

Three Months Ended September 30, 2019

 

 

 

Private

Passenger

Auto

 

 

Non-

Standard

Auto

 

 

Home and

Farm

 

 

Crop

 

 

Commercial

All Other

 

 

Total

 

Direct premiums earned

 

$

18,256

 

 

$

14,167

 

 

$

19,844

 

 

$

15,943

 

$

1,144

$

2,271

 

 

$

70,481

 

Assumed premiums earned

 

 

(7

)

 

 

-

 

 

 

8

 

 

(10

)

 

-

 

1,243

 

 

 

1,234

 

Ceded premiums earned

 

 

(933

)

 

 

(123

)

 

 

(1,944

)

 

 

(1,416

)

 

(126

)

 

(57)

 

 

 

(4,599

)

Net premiums earned

 

 

17,316

 

 

 

14,044

 

 

 

17,908

 

 

 

14,517

 

 

1,018

 

3,331

 

 

 

67,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct losses and LAE

 

 

19,120

 

 

 

8,440

 

 

 

18,639

 

 

 

13,977

 

 

1,356

 

2,072

 

 

 

62,248

 

Assumed losses and LAE

 

 

94

 

 

 

-

 

 

 

-

 

 

 

1,316

 

 

-

 

607

 

 

 

2,017

 

Ceded losses and LAE

 

 

(498

)

 

 

-

 

 

 

41

 

 

(2,151

)

 

(16

)

 

(17

)

 

 

(2,707

)

Net losses and LAE

 

 

18,716

 

 

 

8,440

 

 

 

18,598

 

 

 

13,142

 

 

1,340

 

2,662

 

 

 

61,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

(1,400

)

 

 

5,604

 

 

 

(690

)

 

 

1,375

 

 

(322

)

 

669

 

 

 

5,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting and general expenses

 

 

4,438

 

 

 

5,207

 

 

 

4,892

 

 

 

1,983

 

 

286

 

771

 

 

 

17,291

 

Underwriting gain (loss)

 

 

(5,838

)

 

 

397

 

 

(5,582

)

 

 

(608

)

 

(608

)

 

(102

)

 

 

(11,733

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee and other income

 

 

 

 

 

 

363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

527

 

 

 

 

 

 

 

 

760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net investment income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,983

 

Net capital gain on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

622

 

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,601

)

Income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,642

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,959

)

Net income attributable to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

Net income attributable to NI Holdings, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(6,979

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and LAE ratio

 

 

108.1%

 

 

 

60.1%

 

 

 

103.9%

 

 

 

90.5%

 

 

131.6%

 

79.9%

 

 

 

91.7%

 

Expense ratio

 

 

25.6%

 

 

 

37.1%

 

 

 

27.3%

 

 

 

13.7%

 

 

28.1%

 

23.1%

 

 

 

25.8%

 

Combined ratio

 

 

133.7%

 

 

 

97.2%

 

 

 

131.2%

 

 

 

104.2%

 

 

159.7%

 

103.1%

 

 

 

117.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums and agents’ balances receivable

 

$

18,776

 

 

$

8,186

 

 

$

9,238

 

 

$

39,275

 

 

$

945

$

1,551

 

 

$

77,026

 

Deferred policy acquisition costs

 

 

4,143

 

 

 

4,794

 

 

 

5,945

 

 

 

281

 

 

316

 

641

 

 

 

15,804

 

Reinsurance recoverables

 

 

377

 

 

 

-

 

 

 

1,330

 

 

 

2,855

 

 

(29

)

 

1,191

 

 

 

5,753

 

Receivable from Federal Crop Insurance Corporation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

24,191

 

 

-

 

-

 

 

 

24,191

 

Goodwill and other intangibles

 

 

-

 

 

 

2,928

 

 

 

-

 

 

 

-

 

 

-

 

-

 

 

 

2,928

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unpaid losses and LAE

 

 

21,447

 

 

 

47,672

 

 

 

14,574

 

 

 

23,738

 

 

1,233

 

9,942

 

 

 

117,373

 

Unearned premiums

 

 

28,312

 

 

 

16,723

 

 

 

40,114

 

 

 

11,233

 

 

2,706

 

5,035

 

 

 

101,417

 

3834


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

Private

Passenger

Auto

Non-

Standard

Auto

Home and

Farm

Crop

Commercial

All Other

Total

Private

Passenger

Auto

Non-Standard

Auto

Home and

Farm

Crop

Commercial

All Other

Total

Direct premiums earned

$

55,899

$

40,253

$

61,062

$

31,438

$

32,173

$

3,475

$

224,300

$

18,688

$

13,581

$

20,583

$

(16

)

$

14,722

$

1,185

$

68,743

Assumed premiums earned

-

-

-

1,903

-

3,752

5,655

0-

0-

0-

0-

0-

1,448

1,448

Ceded premiums earned

(3,267

)

(129

)

(61,062

)

109

(5,206

)

(217

)

(15,835

)

(1,190

)

(323

)

(3,129

)

63

(2,384

)

(93

)

(7,056

)

Net premiums earned

52,632

40,124

53,937

33,450

26,967

7,010

214,120

17,498

13,258

17,454

47

12,338

2,540

63,135

Direct losses and LAE

33,324

23,560

32,661

35,212

26,169

2,277

153,203

12,559

4,800

7,888

572

11,464

295

37,578

Assumed losses and LAE

-

-

-

839

-

2,699

3,538

0-

0-

0-

0-

0-

948

948

Ceded losses and LAE

(1

)

-

(1,826

)

(5,352

)

(11,640

)

(1,300

)

(20,119

)

(305

)

0-

(256

)

(11

)

(1,065

)

0-

(1,637

)

Net losses and LAE

33,323

23,560

30,835

30,699

14,529

3,676

136,622

12,254

4,800

7,632

561

10,399

1,243

36,889

Gross margin

19,309

16,564

23,102

2,751

12,438

3,334

77,498

5,244

8,458

9,822

(514

)

1,939

1,297

26,246

Underwriting and general expenses

14,248

15,482

15,102

3,542

11,842

1,712

61,928

5,359

4,414

5,611

536

4,615

703

21,238

Underwriting gain (loss)

5,061

1,082

8,000

(791

)

596

1,622

15,570

(115

)

4,044

4,211

(1,050

)

(2,676

)

594

5,008

Fee and other income

993

1,332

332

317

2,075

4,376

Net investment income

5,875

1,536

Net capital loss on investments

1,380

Net capital gain on investments​​

5,811

Income before income taxes

24,157

12,672

Income taxes

5,259

Income tax expense

2,890

Net income

18,898

9,782

Net income attributable to non-controlling interest

88

113

Net income attributable to NI Holdings, Inc.

$

18,810

9,669

Non-GAAP Ratios:

Loss and LAE ratio

63.3%

58.7%

57.2%

91.8%

53.9%

52.4%

63.8%

70.0%

36.2%

43.7%

n/a

84.3%

48.9%

58.4%

Expense ratio

27.1%

38.6%

28.0%

10.6%

43.9%

24.4%

28.9%

30.6%

33.3%

32.1%

n/a

37.4%

27.7%

33.6%

Combined ratio

90.4%

97.3%

85.2%

102.4%

97.8%

76.9%

92.7%

100.7%

69.5%

75.9%

n/a

121.7%

76.6%

92.1%

Balances at March 31, 2021:

Premiums and agents’ balances receivable

$

19,028

$

8,568

$

9,102

$

0-

$

11,964

$

663

$

49,325

Deferred policy acquisition costs

5,934

6,099

8,170

0-

5,883

489

26,575

Reinsurance recoverables

717

0-

588

9

5,741

2,215

9,270

Receivable from Federal Crop Insurance Corporation

0-

0-

0-

5,182

0-

0-

5,182

Goodwill and other intangibles

0-

2,848

0-

0-

15,228

0-

18,076

Unpaid losses and LAE

22,503

40,289

12,657

96

25,447

10,530

111,522

Unearned premiums

28,912

19,218

40,706

0-

31,639

2,983

123,458

3935


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

Nine Months Ended September 30, 2019

 

Three Months Ended March 31, 2020

 

Private

Passenger

Auto

 

Non-

Standard

Auto

 

Home and

Farm

 

Crop

 

Commercial

All Other

 

Total

 

Private

Passenger

Auto

Non-Standard

Auto

Home and

Farm

Crop

Commercial

All Other

Total

Direct premiums earned

 

$

52,792

 

$

44,029

 

$

57,592

 

$

31,159

 

$

3,379

$

3,282

 

$

192,233

 

$

18,397

$

13,194

$

20,158

$

(5

)

$

9,505

$

1,144

$

62,393

Assumed premiums earned

 

-

 

-

 

-

 

2,087

 

1

 

3,145

 

5,233

 

0-

0-

0-

0-

0-

1,600

1,600

Ceded premiums earned

 

 

(2,698

)

 

 

(123

)

 

 

(5,642

)

 

 

(5,718

)

 

(380

)

 

(169

)

 

 

(14,730

)

(1,098

)

(43

)

(2,537

)

184

(1,652

)

(75

)

(5,221

)

Net premiums earned

 

50,094

 

43,906

 

51,950

 

27,528

 

3,000

 

6,258

 

182,736

 

17,299

13,151

17,621

179

7,853

2,669

58,772

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct losses and LAE

 

41,300

 

27,416

 

41,396

 

23,046

 

2,169

 

3,154

 

138,481

 

11,129

5,940

7,668

2,811

5,919

425

33,892

Assumed losses and LAE

 

173

 

-

 

-

 

1,394

 

-

 

1,433

 

3,000

 

0-

0-

0-

0-

0-

308

308

Ceded losses and LAE

 

 

(730

)

 

 

-

 

 

(1,329

)

 

 

(2,558

)

 

(29

)

 

(850

)

 

 

(5,496

)

0-

0-

(1,130

)

(444

)

(2,204

)

0-

(3,778

)

Net losses and LAE

 

40,743

 

27,416

 

40,067

 

21,882

 

2,140

 

3,737

 

135,985

 

11,129

5,940

6,538

2,367

3,715

733

30,422

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

9,351

 

 

16,490

 

 

11,883

 

 

5,646

 

860

 

2,521

 

 

46,751

 

6,170

7,211

11,083

(2,188

)

4,138

1,936

28,350

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting and general expenses

 

 

14,097

 

 

15,845

 

 

15,327

 

 

3,091

 

995

 

1,570

 

 

50,925

 

4,810

5,197

4,889

702

3,929

632

20,159

Underwriting gain

 

 

(4,746

)

 

 

645

 

 

 

3,444

 

 

 

2,555

 

(135

)

 

951

 

 

(4,174

)

Underwriting gain (loss)

1,360

2,014

6,194

(2,890

)

209

1,304

8,191

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee and other income

 

 

 

 

1,339

 

 

 

 

 

 

 

1,637

 

329

362

 

 

 

 

1,984

 

 

 

 

 

 

 

 

 

 

2,343

Net investment income

 

 

 

 

 

 

 

 

 

 

 

5,504

 

1,971

Net capital gain on investments

 

 

 

 

 

 

 

 

 

 

 

 

9,591

 

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

12,558

 

Income taxes

 

 

 

 

 

 

 

 

 

 

 

 

3,206

 

Net income

 

 

 

 

 

 

 

 

 

 

 

9,352

 

Net capital loss on investments​​

(14,919

)

Loss before income taxes

(4,395

)

Income tax benefit

(840

)

Net loss

(3,555

)

Net income attributable to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

80

 

32

Net income attributable to NI Holdings, Inc.

 

 

 

 

 

 

 

 

 

 

 

$

9,272

 

Net loss attributable to NI Holdings, Inc.

$

(3,587

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and LAE ratio

 

81.3%

 

62.4%

 

77.1%

 

79.5%

 

71.3%

 

59.7%

 

74.4%

 

64.3%

45.2%

37.1%

0n/a

47.3%

27.5%

51.8%

Expense ratio

 

28.1%

 

36.1%

 

29.5%

 

11.2%

 

33.2%

 

25.1%

 

27.9%

 

27.8%

39.5%

27.7%

0n/a

50.0%

23.7%

34.3%

Combined ratio

 

109.5%

 

98.5%

 

106.6%

 

90.7%

 

104.5%

 

84.8%

 

102.3%

 

92.1%

84.7%

64.8%

0n/a

97.3%

51.1%

86.1%

Balances at March 31, 2020:

Premiums and agents’ balances receivable

$

18,657

$

10,557

$

9,204

$

0-

$

9,254

$

611

$

48,283

Deferred policy acquisition costs

5,175

4,952

7,124

0-

1,504

409

19,164

Reinsurance recoverables

500

0-

2,060

600

3,434

1,473

8,067

Receivable from Federal Crop Insurance Corporation

0-

0-

0-

5,240

0-

0-

5,240

Goodwill and other intangibles

0-

2,897

0-

0-

18,354

0-

21,251

Unpaid losses and LAE

19,952

42,000

10,401

3,945

12,248

8,854

97,400

Unearned premiums

28,426

17,260

39,542

0-

18,444

2,738

106,410

4036


Table of Contents

NI Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollar amounts in thousands, except per share amounts)

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

We do not assign or allocate all Consolidated Statement of Operations or Consolidated Balance Sheet line items to our operating segments. Those line items include investment income, net capital gain (loss) 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.

23.Subsequent Events

We have evaluated subsequent events through November 4, 2020, the date these consolidated financial statements were available for issuance.

COVID-19 Pandemic

Beginning in March 2020, the global pandemic associated with novel coronavirus COVID-19 (“COVID-19”) and related economic conditions began to impact the Company’s results. For the nine month period ended September 30, 2020, the Company’s underwriting results were impacted by reduced net premiums earned in our non-standard auto segment. The Company also incurred net unrealized investment losses driven by the impact of changes in fair value on the Company’s equity investments, attributable to the disruption in global financial markets. The actual long-term impact of the pandemic on the property and casualty industry is highly uncertain and will not be known for some time. In the short-term, we expect decreased economic activity to pressure overall top-line growth while negatively impacting investment results, dependent on the extent and duration of the economic contraction.

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Table of Contents

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

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

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

Overview

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

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

Nodak Insurance – a wholly-owned subsidiary of NI Holdings;  

Nodak Agency – a wholly-owned subsidiary of Nodak Insurance;  

American West – a wholly-owned subsidiary of Nodak Insurance;  

Primero – an indirect wholly-owned subsidiary of Nodak Insurance;  

Battle Creek – an affiliated company of Nodak Insurance;   

Direct Auto – a wholly-owned subsidiary of NI Holdings; and  

Westminster – a wholly-owned subsidiary of NI Holdings.  

Battle Creek is managed by Nodak Insurance and Nodak Insurance reinsures 100%under the terms of the risk on all insurance policiesa surplus note issued by Battle Creek.Creek to Nodak Insurance.

Nodak Agency is an inactive shell corporation.

On August 31, 2018, NI Holdings completed the acquisition of 100% of the common stock of Direct Auto Insurance Company (“Direct Auto”) from private shareholders and Direct Auto became a consolidated subsidiary of the Company. The results of Direct Auto are included as part of the Company’s non-standard auto business segment following the closing date.

On January 1, 2020, NI Holdings completed the acquisition of 100% of the common stock of Westminster from the private shareholder of Westminster and Westminster became a consolidated subsidiary of the Company. The results of Westminster are included as part of the Company’s commercial business segment following the closing date.

Nodak Insurance offers property and casualty insurance, crop hail, and multi-peril crop insurance to members of the North Dakota Farm Bureau Federation through captive agents in North Dakota. American West and Battle Creek offer similar insurance coverage through independent agents in South Dakota and Minnesota, and Nebraska, respectively. Primero offers limited nonstandard auto insurance coverage in Arizona, Nevada, North Dakota, and South Dakota. Direct Auto offers limited nonstandard auto insurance coverage in Illinois. Westminster offers commercial multi-peril insurance in the Mid-Atlantic region of the United States.

All of the Company’s insurance subsidiaries of NI Holdingssubsidiary and affiliate companies are rated “A” Excellent by A.M. Best, which is the third highest out of a possible 15 ratings.

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Table of Contents

A chart of the corporate structure follows:

NI HOLDINGS, INC.

ORGANIZATIONAL CHART

 

Nodak Mutual Group, Inc.

 

≥ 55%

ownership

NI Holdings, Inc.

 

100%

100%

100%

ownership

ownership

ownership

Direct Auto Insurance

Company

Nodak Insurance Company

Westminster American Insurance  Company

 

 

 

100%

100%

100%

ownership

ownership

Affiliation

ownership

Nodak Agency, Inc.

American West Insurance Company

Battle Creek Mutual

Insurance Company

Tri-State, Ltd

 

100%

ownership

Primero Insurance Company

 

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

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

2020

2019

2021

2020

Direct premiums written

$

68,322

$

49,984

$

244,053

$

208,880

$

72,420

$

62,972

Net premiums earned

73,342

67,116

214,120

182,736

63,135

58,772

Net income (loss) before non-controlling interest

3,686

(6,959

)

18,898

9,352

9,782

(3,555

)

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

Total assets

$

630,036

$

508,159

$

621,385

$

617,603

Shareholders’ equity

325,513

309,803

352,590

348,872

Marketplace Conditions and Trends

TheBeginning in March 2020 and continuing throughout the year, the global pandemic associated with the novel coronavirus COVID-19 continued to impactand related economic conditions impacted the Company’s results of operations during the quarter, although to a much lesser degree than in previous quarters. Continued decreasedoperations. Decreased economic activity has limited revenue growth in our personal lines of business.business during 2020. This has beenwas partially offset by reduced loss frequency in our private passenger and non-standard auto segments, though to a lesser degreeprimarily during the second and third quarter comparedquarters of 2020.

Vaccinations for COVID-19 are being rolled out at an increasing pace in the United States. The levels of case counts, hospitalizations, and deaths have decreased from 2020, resulting in fewer state health mandates and accelerating economic recovery in many sectors. Congress passed a $1.9 trillion stimulus bill in March 2021, which will result in the receipt of stimulus checks for millions of recipients. This represents the third check for many citizens in the last year. The Federal Reserve remains committed to earlier quarters. Revenue growth fromits current monetary policy, which balances holding the commercial insurancefederal funds rate near zero while monitoring increasing expectations around inflation rates. However, the travel and entertainment industries continue to be impacted, and the related economic challenges in the Las Vegas area have adversely impacted our non-standard auto segment has been exceptional dueby limiting our ability to Westminster’s higher A.M. Best rating and its niche market position.

The actual long-term impacteffectively grow this business. Despite improved overall economic conditions in the United States, we expect to face continued risks associated with the pandemic over the remainder of the pandemic on the propertyyear, including unemployment and casualty industry continues to be highly uncertain and will not be fully known for some time.financial market volatility.

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Table of Contents

The property and casualty insurance industry is affected by recurring industry cycles known as “hard” and “soft” markets. A soft cycle is characterized by intense competition resulting in lower pricing in order to compete for business. A hard market, generally considered a beneficial industry trend, is characterized by reduced competition that results in higher pricing.

We monitor the marketplace both on a regionalgeographic and line of business basis. The private passenger marketplace continues to soften which is creatingbe a very competitive and challenging pricing environment. Rates for private passenger auto areenvironment, as a result of recent favorable results and increased competitive acrosspressure in the Upper Midwest.market. The non-standard auto market also remains competitive with companies seeking to grow this line of business. Two large acquisitions took place in the non-standard auto segment during the third quarter,2020, indicating that others in the marketplace are recognizing profitable opportunities associated with this segment. As opposed to most personal lines, the commercial multi-peril market in which we participate continues to harden, with accelerating positive rate changes in both liability and especially property during 2020 and into 2021.

Unlike our otherproperty and casualty insurance, segments,the total crop insurance premiums written each year fluctuate primarilyvary mainly based on prevailing commodity prices for the type of crops insured, asbecause the aggregate number of acres insured generally remains consistentplanted usually does not vary much from year to year. Because the premiums that are charged for crop insurance are established by the Risk Management Agency (“RMA”), which is a division of the United States Department of Agriculture, and the policy forms and terms are also established by the RMA, insurers do not compete on price or policy terms and conditions. Moreover, because participation in other federal farm programs by a farmer is conditioned upon participation in the federal crop insurance program, most farmers obtain crop insurance on their plantings each year.

Principal Revenue Items

The Company derives its revenue primarily from net premiums earned, net investment income, and net capital gain (loss) on investments.

Gross and net premiums written

Gross premiums written is equal to direct premiums written and assumed premiums before the effect of ceded reinsurance. Gross premiums written are recognized upon sale of new insurance contracts or renewal of existing contracts. Net premiums written is equal to gross premiums written less premiums ceded or paid to reinsurers (ceded premiums written).

Premiums earned

Premiums earned is the earned portion of net premiums written. Gross premiums written include all premiums recorded by an insurance company during a specified policy period. Insurance premiums on property and casualty policies are recognized in proportion to the underlying risk insured and are earned ratably over the duration of the policies or, in the case of crop insurance, over the period of risk to the Company. At the end of each accounting period, the portion of the premiums that is not yet earned is included in unearned premiums and is realized as revenue in subsequent periods over the remaining term of the policy or period of risk. NI Holdings’ property and casualty policies, other than some of our auto lines and the non-standard auto policies, typically have a term of twelve months. For example, for an annual policy that is written on July 1, 2020, one-half of the premiums would be earned in 2020 and the other half would be earned in 2021.

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 Federal Crop Insurance Corporation (“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 NI Holdings covers crops planted in the spring.

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Table of Contents

Net investment income and net capital gain (loss) on investments

NI Holdings invests its surplus and the funds supporting its insurance liabilities (including unearned premiums and unpaid losses and loss adjustment expenses) in cash, cash equivalents, equity securities, and fixed income 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. NI Holdings recognizes realized capital gains when investments are sold for an amount greater than their cost or amortized cost (in the case of fixed income securities) and recognizes realized capital losses when investments are written down as a result of an other-than-temporary impairment or sold for an amount less than their cost or amortized cost, as applicable.

Beginning in 2019, in accordance with a change in accounting principle, The Company recognizes changes in unrealized gains and losses on the Company’s investments in equity securities are included in net income as part of net capital gains and losses on investments. These

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Table of Contents

gains and losses may be significant given the size of the equity securities holdings and the inherent volatility in equity securities prices. Prior to 2019, the changes in unrealized gains and losses pertaining to such investments were recorded in other comprehensive income.

The changes in unrealized gains and losses on fixed income securities continue to beare recorded in other comprehensive income, net of income taxes. The new accounting treatment has no effect on total shareholders’ equity.

NI Holdings’ portfolio of investments is managed by Conning, Inc., Disciplined Growth Investors, and CIBC Personal Wealth Management, and Morgan Stanley Wealth Management. These investment managers have discretion to buy and sell securities in accordance with the investment policy approved by our Board of Directors.

Principal Expense Items

NI Holdings’ expenses consist primarily of losses and loss adjustment expenses (“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.

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.

NI Holdings 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 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.

Non-GAAP Financial Measures

NI Holdings evaluates its insurance operations in the way it believes will be most meaningful and representative of its business results. Some of these measurements are “non-GAAP financial measures” under Securities and Exchange Commission rules and regulations. GAAP is the acronym for “accounting principles generally accepted in the United States of America”. TheWhile used widely in the property and casualty insurance industry, the non-GAAP financial measures that NI Holdings presents may not be compatiblecomparable to similarly-named measures reported by other companies. The non-GAAP financial measures described in this section are used widely in the property and casualty insurance industry, and are the expense ratio, loss and LAE ratio, combined ratio, written premiums, ratio of net written premiums to statutory surplus, underwriting gain, and return on average equity.

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NI Holdings measures growth by monitoring changes in gross premiums written and net premiums written. The Company measures underwriting profitability by examining its loss and LAE ratio, expense ratio, and combined ratio. It also measures profitability by examining underwriting gain (loss), net income (loss), and return on average equity.

Loss and LAE ratio

The loss and LAE ratio is the ratio (expressed as a percentage) of losses and LAE incurred to premiums earned. NI Holdings measures the loss and LAE ratio on an accident year and calendar year loss basis to measure underwriting profitability. An accident year loss ratio measures losses and LAE for insured events occurring in a particular year, regardless of when they are reported, as a

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percentage of premiums earned during that year. A calendar year loss ratio measures losses and LAE for insured events occurring during a particular year and the change in loss reserves from prior policy years as a percentage of premiums earned during that year.

Expense ratio

The expense ratio is the ratio (expressed as a percentage) of amortization of deferred policy acquisition costs and other underwriting and general expenses (attributable to insurance operations) to premiums earned, and measures our operational efficiency in producing, underwriting, and administering the Company’s insurance business.

Combined ratio

The Company’s combined ratio is the ratio (expressed as a percentage) of the sum of losses and LAE incurred and expenses to premiums earned, and measures its overall underwriting profit. Generally, if the combined ratio is below 100%, NI Holdings is making an underwriting profit. If the combined ratio is above 100%, it is not profitable without investment income and may not be profitable if investment income is insufficient.

Premiums written

Premiums written represent a measure of business volume most relevant on an annual basis for the Company’s business model. This measure includes the amount of premium purchased by policyholders as of the policy’s effective date, whereas premiums earned as presented in the Consolidated Statement of Operations matches the amount of premium to the period of risk for those insurance policies. The Company’s insurance policies are sold with a variety of effective periods, including annual, semi-annual, and monthly.

Net premiums written to statutory surplus ratio

The net premiums written to statutory surplus ratio represents the ratio of net premiums written to statutory surplus. This ratio is designed to measure the ability of the Company to absorb above-average losses and the Company’s financial strength. In general, a low premium to surplus ratio is considered a sign of financial strength because the Company has an adequate provision for adverse development of loss reserves within the Company’s current book of business and provides a capacity to write more business. Statutory surplus is determined using accounting principles prescribed or permitted by the insurance subsidiaries’ state of domicile and differs from GAAP equity.

Underwriting gain (loss)

Underwriting gain (loss) measures the pre-tax profitability of insurance operations. It is derived by subtracting losses and LAE, amortization of deferred policy acquisition costs, and other underwriting and general expenses from net premiums earned. Each of these items is presented as a caption in NI Holdings’ Consolidated Statements of Operations.

Net income (loss) and return on average equity

NI Holdings uses net income (loss) to measure its profit and uses return on average equity to measure its effectiveness in utilizing shareholders’ equity to generate net income. In determining return on average equity for a given period, net income (loss) is divided by the average of the beginning and ending shareholders’ equity attributable to NI Holdings for that period.

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Critical Accounting Policies

General

The preparation of financial statements in accordance with GAAP requires both the use of estimates and judgment relative to the application of appropriate accounting policies. NI Holdings is required to make estimates and assumptions in certain circumstances that affect amounts reported in its Consolidated Financial Statements and related footnotes. NI Holdings evaluates these estimates and assumptions on an ongoing basis based on historical developments, market conditions, industry trends, and other information that it believes to be reasonable under the circumstances. There can be no assurance that actual results will conform to its estimates and assumptions and that reported results of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. The Company believes the following policies are the most sensitive to estimates and judgments.

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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 (loss adjustment expenses, or “LAE”)(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) reserves for claims that have been incurred but have not yet been reported and for the future development of case reserves (“IBNR”).

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 NI Holdings, 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, NI Holdings utilizes mapping technology through geographic coding of its property risks to overlay the path of the storm. This enables the Company to establish estimated damage amounts based on the wind speed and size of the hail for case or per claim loss amounts. This process allows the Company to determine within a reasonable time (5 – 7 days) an estimated number of claims and estimated losses from the storm. If the Company estimates the damages to be in excess of its retained catastrophe amount, reinsurers are notified immediately of a potential loss so that the Company can quickly recover reinsurance payments once the retention is exceeded.

In addition to case reserves, NI Holdings maintains estimates of reserves for losses and LAE incurred but not reported. These reserves include estimates for the future development of case reserves. Some claims may not be reported for several years. As a result, the liability for unpaid losses and LAE includes significant estimates for IBNR.

The Company estimates multi-peril crop insurance losses on a quarterly basis based upon historical loss patterns, current crop conditions, current weather patterns, and input from crop loss adjusters. These estimates have proven to be reasonably accurate indicators of the Company’s anticipated losses for this line of business.

NI Holdings utilizes an independent actuary to assist with the estimation of its 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 described below. The Company then reduces 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. The Company’s 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. NI Holdings may adjust the actuarial estimates based on this supplemental information in order to arrive at the amount recorded in the Consolidated Financial Statements.

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NI Holdings accrues its ultimate liability for unpaid losses and LAE by using the following actuarial methodologies:

Bornhuetter-Ferguson Method — The Bornhuetter-Ferguson Method is a blended method that explicitly takes into account 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 MethodThis methodThe Ratio of Paid ALAE to Paid Loss Method utilizes the ratio of paid allocated loss adjustment expense (“ALAE”)ALAE to paid losses and is similar to the Paid and Case Incurred 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 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 case of nonstandard auto insurance, and legislative changes, among others. The impact of many of these items on ultimate costs for claims and claim adjustment expenses is difficult to estimate. Loss reserve estimation is also affected by the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim, and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer). Informed judgment is applied throughout the process, including the application of various individual experiences and expertise to multiple sets of data and analyses. NI Holdings continually refines its estimates of unpaid losses and LAE in a regular ongoing process as historical loss experience develops and additional claims are reported and settled. NI Holdings considers 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

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carried in these more recent accident years are generally more conservative than those carried for older accident years. As the Company has the opportunity to investigate and adjust the reported claims, both the case and IBNR reserves are adjusted to more closely reflect the ultimate expected loss.

Other factors that have or can have an impact on the Company’s case and IBNR reserves include but are not limited to those described below.

Changes in liability law and public attitudes regarding damage awards

Laws governing liability claims and judicial interpretations thereof can change over time, which can expand the scope of coverage anticipated by insurers when initially establishing reserves for claims. In addition, public attitudes regarding damage awards can result in judges and juries granting higher recoveries for damages than expected by claims personnel when claims are presented. In addition, these changes can result in both increased claim frequency and severity as both plaintiffs and their legal counsel perceive the opportunity for higher damage awards. Reserves established for claims that occurred in prior years would not have anticipated these legal changes and, therefore, could prove to be inadequate for the ultimate losses paid by the Company, causing the Company to experience adverse development and higher loss payments in future years.

Change in claims handling and/or setting case reserves

Changes in Company personnel and/or the approach to how claims are reported, adjusted, and reserved may affect the reserves established by the Company. As discussed above, the setting of IBNR reserves is not an exact science and involves the expert judgment of an actuary. One actuary’s reserve opinion may differ slightly from another actuary’s opinion. This is the primary reason why the IBNR reserve estimate is customarily reported as a range by a company’s actuary, which provides a company with an acceptable “range” to use in establishing its best estimate for IBNR reserves.

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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, 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(as in the case of a hurricane,Hurricane Katrina) 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. During 2018, the state of Nevada mandated the incorporation of higher minimum liabilities for nonstandard auto insurance policies written in the state. Similar mandates became effective in July 2020 in the state of Arizona. While it is certain that these actions increase the average claim cost experienced in the state, the actual amount is subject to judgement until further claim experience is obtained.

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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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Actuarial Loss Reserves

NI Holdings’ liabilities for unpaid losses and LAE are summarized below:

September 30,

2020

December 31,

2019

March 31, 2021

December 31, 2020

Case reserves

$

122,562

$

90,210

$

96,085

$

89,903

IBNR reserves

12,241

3,040

15,437

15,847

Liability for unpaid losses and LAE

$

134,803

$

93,250

$

111,522

$

105,750

Reinsurance recoverables on losses

13,556

4,045

9,270

8,710

Net unpaid losses and LAE

$

121,247

$

89,205

$

102,252

$

97,040

The following table provides case and IBNR reserves for unpaid losses and LAE by segment.

September 30, 2020

March 31, 2021

Case Reserves

IBNR Reserves

Total Reserves

Case Reserves

IBNR Reserves

Total Reserves

Private passenger auto

$

14,373

$

6,026

$

20,399

$

16,347

$

6,156

$

22,503

Non-standard auto

53,592

(9,066

)

44,526

49,854

(9,565

)

40,289

Home and farm

8,830

3,531

12,361

8,439

4,218

12,657

Crop

29,317

406

29,723

81

15

96

Commercial

11,576

5,026

16,602

16,457

8,990

25,447

All other

4,874

6,318

11,192

4,907

5,623

10,530

Liability for unpaid losses and LAE

$

122,562

$

12,241

$

134,803

$

96,085

$

15,437

$

111,522

Reinsurance recoverables on losses

10,978

2,578

13,556

5,762

3,508

9,270

Net unpaid losses and LAE

$

111,584

$

9,663

$

121,247

$

90,323

$

11,929

$

102,252

 

December 31, 2019

December 31, 2020

Case Reserves

IBNR Reserves

Total Reserves

Case Reserves

IBNR Reserves

Total Reserves

Private passenger auto

$

14,115

$

5,777

$

19,892

$

14,984

$

5,327

$

20,311

Non-standard auto

55,623

(11,645

)

43,978

50,702

(7,366

)

43,336

Home and farm

7,098

3,405

10,503

7,705

4,032

11,737

Crop

8,411

168

8,579

756

15

771

Commercial

731

345

1,076

10,749

8,340

19,089

All other

4,232

4,990

9,222

5,007

5,499

10,506

Liability for unpaid losses and LAE

$

90,210

$

3,040

$

93,250

$

89,903

$

15,847

$

105,750

Reinsurance recoverables on losses

2,867

1,178

4,045

5,102

3,608

8,710

Net unpaid losses and LAE

$

87,343

$

1,862

$

89,205

$

84,801

$

12,239

$

97,040

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Sensitivity of Major Assumptions Underlying the Liabilities for Unpaid Losses and Loss Adjustment Expenses

Management has identified the impact on earnings of various factors used in establishing loss reserves so that users of the Company’s financial statements can better understand how development on prior years’ reserves might impact the Company’s results of operations.

Total Reserves

As of September 30, 2020,March 31, 2021, the impact of a 1% change in our estimate for unpaid losses and LAE, net of reinsurance recoverables, on our net income, after federal income taxes of 21%, would be approximately $958.$808.

Inflation

Inflation is not explicitly selected in the loss reserve analysis. However, historical inflation is embedded in the estimated loss development factors. The following table displays the impact on net income, after federal income taxes of 21%, resulting from various changes from the inflation factor implicitly embedded in the estimated payment pattern as of December 31, 2019,2020, which is deemed consistent with September 30, 2020, excluding the addition of the Westminster liability for unpaid losses and LAE.March 31, 2021. A change in inflation may or may not fully impact loss payments in the future because some of the underlying expenses have already been paid. The table below assumes that any change in inflation will be fully reflected in future loss payments. This variance in future IBNR emergence could occur in one year or over multiple years, depending when the change is recognized.

Change in Inflation

Impact on After-Tax Earnings

Impact on After-Tax Earnings

-1%

$

(1,103

)

$

(1,392

)

1%

1,128

1,429

3%

3,463

4,402

5%

5,910

7,540

Inflation includes actual inflation as well as social inflation which includes future emergence of new classes of losses or types of losses, change in judicial awards, and any other changes beyond assumed levels that impact the cost of claims.

Case Reserves

When a claim is reported, claims personnel establish a case reserve for the estimated amount of the ultimate payment to the extent it can be determined or estimated. It is possible that the level of adequacy in the case reserve may differ from historical levels and/or the claims reporting pattern may change. The following table displays the impact on net income, after federal income taxes of 21% that results, resulting from various changes to the level of case reserves as of December 31, 2019,2020, which is deemed consistent with September 30, 2020, excluding the addition of the Westminster liability for unpaid losses and LAE.March 31, 2021. This variance in future IBNR emergence could occur in one year or over multiple years, depending when the change is recognized.

Change in Case Reserves

Impact on After-Tax Earnings

Impact on After-Tax Earnings

-10%

$

7,127

$

7,102

-5%

3,563

3,551

-2%

1,425

1,420

+2%

(1,425

)

(1,420

)

+5%

(3,563

)

(3,551

)

+10%

(7,127

)

(7,102

)

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, and on equity securities through December 31, 2018, 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). Effective January 1, 2019, changesChanges in unrealized investment gains or losses on equity securities will beare recorded in net income (loss), rather than as a component of other comprehensive 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 (“OTTI”) is recognized.

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NI Holdings evaluates fixed income securities for other-than-temporary impairment (“OTTI”)OTTI at least on a quarterly basis. For periods subsequent to December 31, 2018, this evaluation includes only fixed income securities. Prior to January 1, 2019, this evaluation included both fixed income and equity securities. NI Holdings assesses whether OTTI is present when the fair value of a security is less than its amortized cost. OTTI is considered to have occurred with respect to fixed income securities if (1) an entity intends to sell

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the security, (2) it is more likely than not an entity will be required to sell the security before recovery of its amortized cost basis, or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. When assessing whether the cost or amortized cost basis of the security will be recovered, the Company compares the present value of the expected cash flows likely to be collected, based on an evaluation of all available information relevant to the collectability of the security, to the cost or amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the cost of amortized cost basis is referred to as the “credit loss”. If there is a credit loss, the impairment is considered to be other-than-temporary. If NI Holdings identifies that an other-than-temporary impairmentOTTI loss has occurred, it then determines whether it intends to sell the security, or if it is more likely than not that the Company will be required to sell the security prior to recovering the cost or amortized cost basis less any current-period credit losses. If NI Holdings determines that it does not intend to sell, and it is not more likely than not that it will be required to sell the security, the amount of the impairment loss related to the credit loss will be recorded in earnings, and the remaining portion of the other-than-temporary impairmentOTTI loss will be recognized in other comprehensive income (loss), net of income taxes. If NI Holdings determines that it intends to sell the security, or that it is more likely than not that it will be required to sell the security prior to recovering its cost or amortized cost basis less any current-period credit losses, the full amount of the other-than-temporary impairmentOTTI will be recognized in earnings.

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 the ninethree months ended September 30, 2020,March 31, 2021, NI Holdings’ investment portfolio experienced an increasea decrease in net unrealized gains of $7,643.$5,248.

September 30, 2020

December 31, 2019

Change

March 31, 2021

December 31, 2020

Change

Fixed income securities:

Gross unrealized gains

$

16,331

$

7,595

$

8,736

$

11,699

$

16,801

$

(5,102

)

Gross unrealized losses

(806

)

(354

)

(452

)

(2,351

)

(296

)

(2,055

)

Net fixed income unrealized gains

15,525

7,241

8,284

9,348

16,505

(7,157

)

Equity securities:

Gross unrealized gains

24,431

22,878

1,553

30,566

29,139

1,427

Gross unrealized losses

(3,176

)

(982

)

(2,194

)

(908

)

(1,390

)

482

Net equity unrealized gains

21,255

21,896

(641

)

29,658

27,749

1,909

Net unrealized gains

$

36,780

$

29,137

$

7,643

$

39,006

$

44,254

$

(5,248

)

The fixed income portion of the portfolio experienced an increasea decrease in net unrealized gains of $8,284$7,157 during the ninethree months ended September 30, 2020.March 31, 2021. This decrease was primarily the result of a steepening yield curve, with 10-year and 30-year U.S. Treasury yields increasing during the quarter. Rates on the short end of the yield curve remain anchored by expectations for a continued accommodative monetary policy stance by the Fed, with 2-year U.S. Treasury yields increasing only slightly during the quarter. The net increasedecrease is reflected directly in shareholders’ equity as a component of accumulated other comprehensive income.

Capital markets staged a strong rally during the third quarter of 2020, aided by significant fiscal and monetary support from world central banks to help the global economy. In the United States, the S&P 500 index performed well, helping offset negative returns from earlier in the year. Despite rising slightly from the second quarter, U.S. 10-year Treasury rates remain extremely depressed given the negative impact on economic growth from the current public health crisis and announcements from the U.S. Federal Reserve on its intention to maintain a near-zero interest rate policy for the foreseeable future.

The equity portion of the portfolio experienced significant decreasesan increase in net unrealized gains and increases in unrealized lossesof $1,909 during the three months ended March 31, 2020,2021, which wereis attributed to the unfavorable conditionscontinuing recovery in the stockequity markets. Equity market brought about by the COVID-19 pandemicresults show expectations of a return to normalcy as travel and a significant drop in oil prices. The stock market has mostly recovered over the second and third quarters, resulting in a much smaller decrease in net unrealized gains for the nine months ended September 30, 2020.leisure sectors have recently risen while stocks benefitting from work-from-home have declined. The net decrease of $641increase is included in net capital gains (losses) on investments on the Company’s Consolidated Statements of Operations for the nine months ended September 30, 2020.Operations.

NI Holdings has evaluated each security and taken into account the severity and duration of any impairment, the current rating on the security (if any), and the outlook for the issuer according to independent analysts. The Company’s fixed income portfolio is managed by Conning Asset Management, whichwho specializes in managingthe handling of insurance company investment portfolios and participates in this evaluation.

For the ninethree months ended September 30, 2020,March 31, 2021, NI Holdings did not recognize any other-than-temporary impairmentsOTTIs of its investment securities. For the year ended December 31, 2019,2020, NI Holdings did not recognize any other-than-temporary impairmentsOTTIs of its investment securities. Adverse investment market conditions, in addition to poor operating results of underlying investments, could result in impairment charges in the future.

For more information on the Company’s investments, see Note 6 to the Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q.

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Fair Value Measurements

NI Holdings 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, NI Holdings may be required to record at fair value other assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets. Accounting guidance on fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The three levels of the fair value hierarchy are as follows:

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).

NI Holdings bases its fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is our policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements, in accordance with the fair value hierarchy. Fair value measurements for assets where there exists limited or no observable market data and, therefore, are based primarily upon the estimates of NI Holdings or other third-parties, 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 NI Holdings could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective period-end and have not been re-evaluated or updated for purposes of our financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different 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.

NI Holdings 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 NI Holdings with one quote per instrument. For fixed income securities that have quoted prices in active markets, market quotations are provided. For fixed income securities that do not trade on a daily basis, the independent pricing service prepares estimates of fair value using a wide array of observable inputs including relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The observable market inputs that the Company’s independent pricing service utilizes may include (listed in order of priority for use) benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, and other reference data on markets, industry, and the economy. Additionally, the independent pricing service uses an option-adjusted spread model to develop prepayment and interest rate scenarios. The pricing service did not use broker quotes in determining fair values of the Company’s investments at September 30, 2020March 31, 2021 or December 31, 2019.2020.

Should the independent pricing service be unable to provide a fair value estimate, NI Holdings would attempt to obtain a non-binding fair value estimate from a number of broker-dealers and 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, NI Holdings would use that estimate. In instances where NI Holdings would be able to obtain fair value estimates from more than one broker-dealer, the Company would review the range of estimates and select the most appropriate value based on the facts and circumstances. Should neither the independent pricing service nor a broker-dealer provide a fair value estimate, NI Holdings would develop a fair value estimate based on cash flow analyses and other valuation techniques that utilize certain unobservable inputs. Accordingly, NI Holdings classifies such a security as a Level III investment.

The fair value estimates of NI Holdings’ investments provided by the independent pricing service at each period-end were utilized, among other resources, in reaching a conclusion as to the fair value of its investments.

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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

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securities in common sectors, durations, and credit ratings. This review will also include all fixed income securities rated lower than “A” by Moody’s or Standard & Poor’s. If, after this review, management does not believe the pricing for any security is a reasonable estimate of fair value, then it will seek to resolve the discrepancy through discussions with the pricing service. In its review, management did not identify any such discrepancies, and no adjustments were made to the estimates provided by the pricing service, for the ninethree month period ended September 30, 2020March 31, 2021 or the year ended December 31, 2019.2020. The classification within the fair value hierarchy is then confirmed based on the final conclusions from the pricing review.

For more information on the Company’s fair value measurements, see Note 7 to the Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q.

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 will bewas amortized into expense as the acquired unearned premiums are reported into income, in the same way as DAC.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 September 30, 2020March 31, 2021 and December 31, 2019, DAC, the VOBA intangible asset,2020, deferred policy acquisition costs and the related liability for unearned premiums were as follows:

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

Deferred policy acquisition costs

$

23,885

$

15,399

$

26,575

$

23,968

Value of business acquired intangible asset

325

Liability for unearned premiums

125,966

89,276

123,458

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. NI Holdings uses the asset and liability method of accounting for deferred income taxes. Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the income tax bases of our assets and liabilities. A valuation allowance is provided when it is more likely than not that some portion of the deferred income tax asset will not be realized. Total income taxes reflect both current income taxes and the change in the net deferred income tax asset or liability, excluding amounts attributed to accumulated other comprehensive income.

NI Holdings had gross deferred income tax assets of $8,852$8,842 at September 30, 2020March 31, 2021 and $6,294$8,603 at December 31, 2019,2020, arising primarily from unearned premiums, loss reserve discounting, and net operating loss carryforwards. A valuation allowance is required to be established for any portion of the deferred income tax asset for which the Company believes it is more likely than not that it will not be realized. Valuation allowancesA valuation allowance of $948 and $594 were$931 was maintained at September 30, 2020March 31, 2021 and December 31, 2019, respectively. The increase is attributable to the addition of net operating loss carryforwards from Westminster, a portion of which are not expected to be used.2020.

NI Holdings had gross deferred income tax liabilities of $15,305$15,762 at September 30, 2020March 31, 2021 and $10,290$16,429 at December 31, 2019,2020, arising primarily from DAC,deferred policy acquisition costs, net unrealized capital gains on investments, and other intangible assets.

NI Holdings exercises significant judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments require NI Holdings to make projections of future taxable income. The judgments and estimates the Company makes 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 September 30, 2020,March 31, 2021, NI Holdings had no material unrecognized income tax benefits or accrued interest and penalties. Federal income tax years 2014 through 20182019 are open for examination.

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Results of Operations

NI Holdings’ 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 regulation, general economic conditions, rising medical expenses, judicial trends, fluctuations in interest rates, and other changes in the investment environment.

NI Holdings premium levels and underwriting results have been, and 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 NI Holdings serve are diversified, which requires management to regularly monitor the Company’s 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 pricing is setrates are established by the RMA rather than individual insurance carriers. The expected loss experience of thisthe MPCI business for the calendar year may also significantly impactaffect 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 extends into the fourth quarter. However, as was the case in 2020, if the Company experiences a higher than average number of prevented planting claims early in the season, additionalrisk period, recognition of earned premiums may be recognized in the second quarteraccelerated due to the 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 the personal lines of business (private passenger auto and home and farm) are generally written and earned throughout the year.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 weather-related activity in the second and third quarters.

Premiums in the commercial lines of business are generally written and earned throughout the year. Losses on this business are also incurred throughout the year, but generally are more frequent during the first and second quarters.

For more information on the Company’s results of operations by segment, see Note 2221 to the Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q.

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Three Months ended September 30,March 31, 2021 and 2020 and 2019

The consolidated net income for NI Holdings was $3,686$9,782 for the three months ended September 30, 2020March 31, 2021, compared to net loss of $6,959$3,555 for the three months ended September 30, 2019.March 31, 2020. The major components of NI Holdings’ operating revenues and net income for the two periods were as follows:

Three Months Ended

September 30,

Three Months Ended March 31,

2020

2019

2021

2020

Revenues:

Net premiums earned

$

73,342

$

67,116

$

63,135

$

58,772

Fee and other income

524

527

317

362

Net investment income

1,886

1,983

1,536

1,971

Net capital gain on investments

5,102

622

Net capital gain (loss) on investments

5,811

(14,919

)

Total revenues

$

80,854

$

70,248

$

70,799

$

46,186

Components of net income (loss):

Net premiums earned

$

73,342

$

67,116

$

63,135

$

58,772

Losses and loss adjustment expenses

53,836

61,558

36,889

30,422

Amortization of deferred policy acquisition costs and other underwriting and general expenses

22,144

17,291

21,238

20,159

Underwriting loss

(2,638

)

(11,733

)

Underwriting gain

5,008

8,191

Fee and other income

524

527

317

362

Net investment income

1,886

1,983

1,536

1,971

Net capital gain on investments

5,102

622

Net capital gain (loss) on investments

5,811

(14,919

)

Income (loss) before income taxes

4,874

(8,601

)

12,672

(4,395

)

Income taxes

1,188

(1,642

)

2,890

(840

)

Net income (loss)

$

3,686

$

(6,959

)

$

9,782

$

(3,555

)

Beginning in March 2020, the global pandemic associated with COVID-19 and related economic conditions began to impact the Company’s results. ForThe immediate financial impact to the three months ended September 30, 2020, the Company’s underwriting results were impacted by reduced net premiums earnedCompany was volatility in our non-standard auto segment. The Company also experienced continued volatility in net unrealized investment gainsportfolio and losses driven by the impact of changessignificant declines in fair value on the Company’s equity investments, attributable to the recent disruption in global financial markets. For further discussion regardingThe Company’s underwriting results, especially in the potential impactsnon-standard auto segment, were impacted during the second and third quarters of 2020 as a result of reduced economic activity.

Vaccinations for COVID-19 are being rolled out at an increasing pace in the United States. The levels of case counts, hospitalizations, and deaths decreased from 2020, resulting in fewer state health mandates and accelerating economic recovery in many sectors. Congress passed a $1.9 trillion stimulus bill in March 2021, which will result in the receipt of stimulus checks for millions of recipients. This represents the third check for many citizens in the last year. The Federal Reserve remains committed to its current monetary policy, which balances holding the federal funds rate near zero while monitoring increasing expectations around inflation rates. However, the travel and entertainment industries continue to be impacted, and the related economic challenges in the Las Vegas area have adversely impacted our non-standard auto business by limiting our ability to effectively grow this business. Despite improved overall economic conditions in the United States, we expect to face continued risks associated with the pandemic over the remainder of the Company, see “Part II – Item 1A – Risk Factors”.year, including unemployment and financial market volatility.

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Net Premiums Earned

NI Holdings’ net premiums earned for the three months ended September 30, 2020March 31, 2021 increased $6,226,$4,363, or 9.3%7.4%, compared to a year ago.the three months ended March 31, 2020.

Three Months Ended

September 30,

Three Months Ended March 31,

2020

2019

2021

2020

Net premiums earned:

Private passenger auto

$

17,947

$

17,316

$

17,498

$

17,299

Non-standard auto

13,839

14,044

13,258

13,151

Home and farm

18,548

17,908

17,454

17,621

Crop

9,719

14,517

47

179

Commercial

10,773

0

12,338

7,853

All other

2,516

3,331

2,540

2,669

Total net premiums earned

$

73,342

$

67,116

$

63,135

$

58,772

Three Months Ended

September 30,

2020

2019

Net premiums earned:

Direct premium

$

79,455

$

70,481

Assumed premium

1,372

1,234

Ceded premium

(7,485

)

(4,599

)

Total net premiums earned

$

73,342

$

67,116

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Three Months Ended March 31,

2021

2020

Net premiums earned:

Direct premium

$

68,743

$

62,393

Assumed premium

1,448

1,600

Ceded premium

(7,056

)

(5,221

)

Total net premiums earned

$

63,135

$

58,772

Direct premiums earned for the thirdfirst quarter of 20202021 increased $8,974,$6,350, or 12.7%10.2%, from the thirdfirst quarter of 2019. The addition of the2020. This increase was primarily driven by growth in our Westminster commercial business contributed $11,291 in directbusiness.

Assumed premiums earned, duringwhich represents our participation in the assumed domestic and international business in our all other segment, decreased slightly. Ceded premiums earned increased $1,835, reflecting an increase in our overall reinsurance coverage limits and the growth in our business.

Direct premiums written for the three months ended September 30, 2020. Crop segment direct premiums earned decreased $3,754March 31, 2021 were $72,420, compared to last$62,972 a year related to the acceleration of premiums earnedago. This increase was driven by growth in second quarter due to the high claim volume of prevented planting claims submitted for the current multi-peril crop season.

Assumed premiums earned increased $138, related to the assumed reinsurance business. Ceded premiums earned increased $2,886, due to ceding of theboth our Westminster commercial business and increasing our overall reinsurance coverage limits. Premiums ceded to the federal government under the multi-peril crop program also increased year-over-year.

Our personalnon-standard auto business. Personal lines of business (private passenger auto, home and farm) also grew due to continued to growgrowth in South Dakota and modest growth in North Dakota, while premiums in Nebraska albeit at a slower pace due to COVID-19 concerns and increased competition.

Ourwere flat. We anticipate that commercial written premium growth will remain strong over the remainder of 2021, while continued growth in the non-standard auto net premiums earned decreased year-over-yearbusiness is more unpredictable due to the COVID-19 pandemic, which negatively impacted policy counts in this segment across all states. Direct premiums written in this segment increased slightly during the third quarter, both year-over-year and compared to second quarter. This increase reflects the positive impacts from rate actions in Nevada during 2019 and rate actions in Arizona during 2020, offset by the lower policy counts caused byfactors associated with the pandemic throughout 2020. At this time, we are unsure what impact the pandemic will have on policy counts for the remainderand related economic implications.

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Table of 2020.Contents

Losses and LAE

NI Holdings’ net losses and LAE for the three months ended September 30, 2020 decreased $7,722,March 31, 2021 increased $6,467, or 12.6%21.3%, compared to the three months ended March 31, 2020. As a year ago, due primarily to improvedresult, the Company’s loss experience in the private passenger auto and home and farm segments. LAE ratio also increased.

Three Months Ended March 31,

2021

2020

Net losses and LAE:

Private passenger auto

$

12,254

$

11,129

Non-standard auto

4,800

5,940

Home and farm

7,632

6,538

Crop

561

2,367

)

Commercial

10,399

3,715

All other

1,243

733

Total net losses and LAE

$

36,889

$

30,422

Three Months Ended March 31,

2021

2020

Net losses and LAE:

Direct losses and LAE

$

37,578

$

33,892

Assumed losses and LAE

948

308

Ceded losses and LAE

(1,637

)

(3,778

)

Total net losses and LAE

$

36,889

$

30,422

Three Months Ended March 31,

2021

2020

Loss and LAE ratio:

Private passenger auto

70.0%

64.3%

Non-standard auto

36.2%

45.2%

Home and farm

43.7%

37.1%

Crop

n/a

n/a

Commercial

84.3%

47.3%

All other

48.9%

27.5%

Total loss and LAE ratio

58.4%

51.8%

The Company’s loss and LAE ratio decreased significantly.

Three Months Ended

September 30,

2020

2019

Net losses and LAE:

Private passenger auto

$

13,570

$

18,716

Non-standard auto

9,425

8,440

Home and farm

13,437

18,598

Crop

9,225

13,142

Commercial

5,577

1,340

All other

2,602

1,322

Total net losses and LAE

$

53,836

$

61,558

Three Months Ended

September 30,

2020

2019

Loss and LAE ratio:

Private passenger auto

75.6%

108.1%

Non-standard auto

68.1%

60.1%

Home and farm

72.4%

103.9%

Crop

94.9%

90.5%

Commercial

51.8%

131.6%

All other

103.4%

57.2%

Total loss and LAE ratio

73.4%

91.7%

The Company’s overall loss and LAE experience improved 18.3 percentage points year-over-year. The private passenger auto, home and farm, and commercialincreased year-over-year across most segments improved significantly, whileof the non-standard auto, crop, and all other segments reported increases in their loss and LAE ratios.Company.

Losses were favorableincreased modestly year-over-year in private passenger andauto, while non-standard auto reported better than normal loss experience. In home and farm, losses and LAE increased modestly due to fewer weather-related losses during the current quarter. Inmore weather activity in 2021.

The commercial while overall losses increasedsegment experienced a higher than expected first quarter 2021 loss ratio due to Westminster’s results being addedan elevated number of fires and slip-and-fall claims due to the segment,winter weather on the year-over-year losseast coast. Most of these losses fell beneath the reinsurance retention limit, resulting in a decrease in ceded losses and LAE ratio was significantly improved.LAE.

The 2019 multi-perilfirst quarter 2020 results for our crop insurance business ended the year with less than 50% of the corn in North Dakota harvested and we carried a significant number of open claims as of December 31, 2019. All of those claims have now been settled as of the end of September. This business experiencedincluded unfavorable loss development of $217,$2,367 on a net basis during the current quarter.

The issues arising from the 2019 multi-peril crop season have impactedseason. For the 2020 season. A higher than normal numberfirst quarter of prevented planting claims were submitted2021, the crop segment includes $561 of net unfavorable loss development due primarily to fields not harvested fromlate development within a moisture index component of the prior year, resulting in a shortened risk period for these policies and an acceleration of multi-perilfederal crop premiums earned during the second quarter. The net premiums earned and net losses reported for third quarter 2020, while less than third quarter 2019 due to this acceleration, reflect a higher expected loss and LAE ratio compared to a year ago.program.

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During the three months ended September 30, 2020,March 31, 2021, reported losses and LAE included $1,736$2,523 of net favorableunfavorable development on prior accident years, compared to $1,227$510 of net unfavorable development on prior accident years during the three months ended September 30, 2019. Net favorable development is the result of prior years’ claims settling for less than originally estimated, while net unfavorable development is the result of prior years’ claims settling for more than originally estimated. Adjustments to our original estimates resulting from claims are not made until the period in which there is reasonable evidence that an adjustment to the reserve is appropriate. The net favorable development reported in the third quarter of 2020 is primarily related to the Direct Auto non-standard auto business.

Amortization of Deferred Policy Acquisition Costs and Other Underwriting and General Expenses

Total underwriting and general expenses, including amortization of deferred policy acquisition costs, increased $3,998, or 22.3%, during the three months ended September 30, 2020 compared to a year ago.

Three Months Ended

September 30,

2020

2019

Underlying expenses

$

21,825

$

16,374

Deferral of policy acquisition costs

(14,742

)

(10,392

)

Other underwriting and general expenses

7,083

5,982

Amortization of deferred policy acquisition costs

15,061

11,309

Total reported expenses

$

22,144

$

17,291

Underlying expenses were $5,451 higher in the three months ended September 30, 2020 compared to a year ago, driven primarily by the addition of Westminster’s $4,703 of underlying expenses, including $1,057 amortization of other intangibles. Consulting fees and stock compensation costs contributed to the increase.

Expense deferrals were $4,350 higher in the three months ended September 30, 2020 compared to 2019, while amortization of those costs was $3,752 higher inMarch 31, 2020. The commercial business contributed $2,615 of new expense deferrals and $1,658 of amortization in the third quarter of 2020.

The expense ratio of 30.2% for the three months ended September 30, 2020 was 4.4 percentage points higher than the expense ratio in the third quarter of 2019 due primarily to the addition of Westminster and increased expense levels, while net premiums earned increased at a lesser rate in the current quarter.

Underwriting Gain (Loss)

Underwriting gain (loss) measures the pretax profitability of a company’s insurance business. It is derived by subtracting losses and LAE, amortization of deferred policy acquisition costs, and other underwriting and general expenses from net premiums earned.

Three Months Ended September 30,

2020

2019

Underwriting gain (loss):

Private passenger auto

$

(726

)

$

(5,838

)

Non-standard auto

(726

)

397

Home and farm

(396

)

(5,582

)

Crop

(1,048

)

(608

)

Commercial

907

(608

)

All other

(649

)

506

Total underwriting loss

$

(2,638

)

$

(11,733

)

Three Months Ended September 30,

2020

2019

Combined ratio:

Private passenger auto

104.0%

133.7%

Non-standard auto

105.2%

97.2%

Home and farm

102.1%

131.2%

Crop

110.8%

104.2%

Commercial

91.6%

159.7%

All other

125.8%

78.1%

Total combined ratio

103.6%

117.5%

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Overall underwriting profitability improved significantly year-over-year across all segments with the exception of crop and commercial.

The combined ratio for the private passenger auto segment improved 29.7 percentage points year-over-year. Loss experience during third quarter 2019 was elevated due to weather-related losses, as well as significant bodily injury and underinsured liability losses. During third quarter 2020, claims frequency has mostly returned to normal levels after benefitting from a reduction in miles driven during the earlier months of the COVID-19 pandemic.

For the non-standard auto segment, the combined ratio has deteriorated modestly during third quarter 2020. Similar to private passenger auto, claims frequency for this segment is returning to more normal levels as miles driven are increasing to more normal levels.

The combined ratio for the home and farm segment improved substantially as we experienced a lower amount of weather-related events in the third quarter. The favorable impact from weather-related losses combined with some modest rate adjustments helped continue the excellent results in 2020 for these lines of business.

For the commercial segment, the results of Westminster are now combined with the commercial business of Nodak Insurance. The third quarter 2019 results reflected high loss experience for the Nodak book. During third quarter 2020, the addition of Westminster decreased the loss and LAE ratio to more profitable levels. Underwriting expenses during the third quarter for Westminster continue to be impacted by amortization of their VOBA intangible asset. Regulatory actions related to commercial insurance policies taken by certain states within Westminster’s operating territory earlier during 2020 have had minimal impact on our results thus far, although it is possible that additional steps taken by federal, state, and local governments may have adverse impacts on our future results.

For the crop segment, the combined ratio is elevated due to the high percentage of unharvested corn that remained in the field from the 2019 season. As these fields were harvested, the losses were higher than anticipated, resulting in additional adverse development for this segment that continued into this quarter. The current year multi-peril crop loss ratio is also elevated due to the large number of prevented planting claims submitted this spring. The high combined ratio for multi-peril crop has been partially offset by improved loss experience for our crop hail business.

For the all other segment, the assumed domestic and international pools in which we participate had increased loss experience during the quarter. These losses were driven largely by severe hail storms in Canada, an active Atlantic hurricane season, and California wildfires.

Fee and Other Income

NI Holdings had fee and other income of $524 for the three months ended September 30, 2020, compared to $527 for the three months ended September 30, 2019. Fee income attributable to the non-standard auto segment is a key component in measuring its profitability. Fee income on this business decreased to $336 for the three months ended September 30, 2020 from $363 for the three months ended September 30, 2019, as the amount of new inforce polices in Primero has dropped considerably. Primero also temporarily waived some of its policy maintenance fees as a response to the COVID-19 pandemic.

Net Investment Income

The following table sets forth our average cash and invested assets, net investment income, and return on average cash and invested assets for the reported periods:

Three Months Ended

September 30,

2020

2019

Average cash and invested assets

$

457,238

$

393,876

 

Gross investment income

$

2,514

$

2,549

Investment expenses

628

566

Net investment income

$

1,886

$

1,983

 

Gross return on average cash and invested assets

2.2%

2.6%

Net return on average cash and invested assets

1.7%

2.0%

Investment income, net of investment expense, decreased $97 for the three months ended September 30, 2020 compared to a year ago. This decrease is attributable to adjusted amortization of bond discounts on Westminster’s fixed income securities and additional investment expenses from Westminster. The weighted average gross yield on invested assets decreased to 2.2% in 2020 from 2.6% in 2019.

As of September 30, 2020, our overall book yield for our combined fixed income and equity portfolio was 2.6%, excluding Westminster’s standalone portfolio. The average duration of our fixed income securities was 3.7 years at September 30, 2020.

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Net Capital Gain on Investments

NI Holdings had realized capital gains on investment of $636 for the three months ended September 30, 2020, compared to realized capital gains of $1,006 a year ago.

Effective January 1, 2019, in accordance with a change in accounting principle, market fluctuations on our equity securities are reflected in the Company’s results of operations. NI Holdings reported a net gain of $4,466 attributed to the change in unrealized appreciation of its equity securities for the three months ended September 30, 2020, compared to a net loss of $384 for the three months ended September 30, 2019. Prior to January 1, 2019, such unrealized gains and losses were included in other comprehensive income. The significant gain in the current quarter was the result of a continued rebound from the extensive losses reported in first quarter due to the COVID-19 pandemic and the related economic implications on businesses and the stock market. We anticipate additional volatility throughout the remainder of the pandemic and economic recovery period.

The Company recorded no other-than-temporary impairments in the three months ended September 30, 2020 and 2019.

The Company’s fixed income securities and equity securities are classified as available for sale because it will, from time to time, make sales of securities that are not impaired, consistent with our investment goals and policies. At September 30, 2020, the Company had net unrealized gains on fixed income securities of $15,525 and net unrealized gains on equity securities of $21,255. At December 31, 2019, the Company had net unrealized gains on fixed income securities of $7,241 and net unrealized gains on equity securities of $21,896. The increase in the fair value of our fixed income securities was driven primarily by the U.S. Federal Reserve’s implementation of the unprecedented efforts it announced in March to support the economy, as well as its intention to maintain a near-zero interest rate policy for the foreseeable future.

NI Holdings has evaluated each security in a loss position and taken into account the severity and duration of the impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. NI Holdings will continue to monitor these securities throughout the remainder of the COVID-19 pandemic and economic recovery period.

Income before Income Taxes

For the three months ended September 30, 2020, NI Holdings had pre-tax income of $4,874 compared to pre-tax loss of $8,601 for the three months ended September 30, 2019. The increase in pre-tax results was largely attributable to the significant improvement in loss experience and the pre-tax $4,850 fluctuation in the change in net unrealized gains in our equity portfolio between the third quarter of 2020 and 2019.

Income Taxes

NI Holdings recorded income tax expense of $1,188 for the three months ended September 30, 2020, compared to income tax benefit of $1,642 for the three months ended September 30, 2019. A portion of income tax expense relates to state income taxes primarily for the state of Illinois. Our effective tax rate for the third quarter of 2020 was 24.4% compared to an effective tax rate of 19.1% for the third quarter of 2019.

The valuation allowance against certain deferred income tax assets increased to $948 as of September 30, 2020, compared to $594 as of December 31, 2019. The acquisition of Westminster included $354 of valuation allowance related to net operating loss carryforwards.

Net Income

For the three months ended September 30, 2020, NI Holdings had net income before non-controlling interest of $3,686 compared to net loss before non-controlling interest of $6,959 for the three months ended September 30, 2019. This increase in net income was largely attributable to the significant improvement in loss experience and the fluctuation in the change in net unrealized gains in our equity portfolio between the third quarter of 2020 and 2019.

Return on Average Equity

For the three months ended September 30, 2020, NI Holdings had annualized return on average equity, after non-controlling interest, of 4.6% compared to annualized return on average equity, after non-controlling interest, of -9.6% for the three months ended September 30, 2019. Average equity is calculated as the average between beginning and ending equity excluding non-controlling interest for the period.

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Nine Months ended September 30, 2020 and 2019

The consolidated net income for NI Holdings was $18,898 for the nine months ended September 30, 2020 compared to net income of $9,352 for the nine months ended September 30, 2019. The major components of NI Holdings’ operating revenues and net income for the two periods were as follows:

Nine Months Ended September 30,

2020

2019

Revenues:

Net premiums earned

$

214,120

$

182,736

Fee and other income

1,332

1,637

Net investment income

5,875

5,504

Net capital (loss) gain on investments

1,380

9,591

Total revenues

$

222,707

$

199,468

 

Components of net income:

Net premiums earned

$

214,120

$

182,736

Losses and loss adjustment expenses

136,622

135,985

Amortization of deferred policy acquisition costs and other underwriting and general expenses

61,928

50,925

Underwriting gain

15,570

(4,174

)

Fee and other income

1,332

1,637

Net investment income

5,875

5,504

Net capital (loss) gain on investments

1,380

9,591

Income before income taxes

24,157

12,558

Income taxes

5,259

3,206

Net income

$

18,898

$

9,352

The global pandemic associated with the novel coronavirus COVID-19 continued to impact the Company’s results of operations during the nine months ended September 30, 2020. Decreased economic activity restricted top-line growth and volatile financial markets had a negative impact on the Company’s equity investments and overall investment returns. These top-line growth impacts were partially offset by reduced loss frequency in our private passenger and non-standard auto segments, due to decreased overall miles driven during the second quarter.

The actual long-term impact of the pandemic on the property and casualty industry continues to be highly uncertain and will not be fully known for some time. For further discussion regarding the potential impacts of COVID-19 and related economic conditions of the Company, see “Part II – Item 1A – Risk Factors”.

Net Premiums Earned

NI Holdings’ net premiums earned for the nine months ended September 30, 2020 increased $31,384, or 17.2%, compared to a year ago.

Nine Months Ended September 30,

2020

2019

Net premiums earned:

Private passenger auto

$

52,632

$

50,094

Non-standard auto

40,124

43,906

Home and farm

53,937

51,950

Crop

33,450

27,528

Commercial

26,967

3,000

All other

7,010

6,258

Total net premiums earned

$

214,120

$

182,736

Nine Months Ended September 30,

2020

2019

Net premiums earned:

Direct premium

$

224,300

$

192,233

Assumed premium

5,655

5,233

Ceded premium

(15,835

)

(14,730

)

Total net premiums earned

$

214,120

$

182,736

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Direct premiums earned for the first nine months of 2020 increased $32,067, or 16.7%, from the same period of 2019. The addition of the Westminster commercial business contributed $28,606 in direct premiums earned during the nine months ended September 30, 2020. Private passenger auto and home and farm segments reported modest increases to direct premiums earned, while non-standard auto decreased due mainly to COVID-19 pandemic impacts.

Assumed premiums earned increased $422, primarily due to increasing our participation in the assumed domestic and international reinsurance pools in our all other segment. Ceded premiums earned increased $1,105, due to ceding of the Westminster commercial business and increasing our overall reinsurance coverage limits, and offset by gain-sharing amounts from the federal government for the multi-peril crop business.

Our personal lines of business (private passenger auto, home and farm) continued to grow in South Dakota and Nebraska. Our North Dakota business grew modestly.

Our non-standard auto premiums decreased year-over-year. Rate changes implemented to address unprofitable results and increased policy liability limits mandated by Nevada and Arizona led to a decrease in the number of vehicles insured. In addition, the COVID-19 pandemic has negatively impacted policy counts in this segment. During the third quarter, we have seen a modest increase in new business for the non-standard auto line of business compared to the second quarter.

Losses and LAE

NI Holdings’ net losses and LAE for the nine months ended September 30, 2020 increased $637, or 0.5%, compared to a year ago. The Company’s loss and LAE ratio decreased significantly due to improved loss experience in all segments except crop.

Nine Months Ended September 30,

2020

2019

Net losses and LAE:

Private passenger auto

$

33,323

$

40,743

Non-standard auto

23,560

27,416

Home and farm

30,835

40,067

Crop

30,699

21,882

Commercial

14,529

2,140

All other

3,676

3,737

Total net losses and LAE

$

136,622

$

135,985

Nine Months Ended September 30,

2020

2019

Loss and LAE ratio:

Private passenger auto

63.3%

81.3%

Non-standard auto

58.7%

62.4%

Home and farm

57.2%

77.1%

Crop

91.8%

79.5%

Commercial

53.9%

71.3%

All other

52.4%

59.7%

Total loss and LAE ratio

63.8%

74.4%

The Company’s overall loss and LAE experience improved 10.6 percentage points year-over-year, across most segments of the Company. Only the crop segment reported an increase in its loss and LAE ratio.

Losses were favorable year-over-year in private passenger and non-standard auto, due to less frequency of losses as insureds drove fewer miles, primarily during the second quarter of 2020. In private passenger auto and home and farm, losses and LAE decreased due to lower weather-related losses. Private passenger auto also experienced significant bodily injury and underinsured losses last year.

For the commercial business, while overall losses increased due to Westminster’s results being added to the segment, the year-over-year loss and LAE ratio significantly improved.

The 2019 multi-peril crop insurance business ended the year with less than 50% of the corn in North Dakota harvested and we carried a significant number of open claims as of December 31, 2019. All of those claims have been settled during the first nine months of the year. This business produced unfavorable loss development of $3,831 on a net basis as these claims were adjusted and settled in 2020.

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The issues arising from the 2019 multi-peril crop season have impacted the 2020 season. A higher than normal number of prevented planting claims were submitted due to fields not harvested from the prior year, resulting in a shortened risk period for these policies and an acceleration of multi-peril crop premiums earned for the first nine months of 2020. The net losses reported through third quarter 2020 reflect a higher expected loss and LAE ratio compared to a year ago.

During the nine months ended September 30, 2020, reported losses and LAE included $4,268 of net favorable development on prior accident years, compared to $6,443 of net favorable development on prior accident years during the nine months ended September 30, 2019. Net favorable development is the result of prior years’ claims settling for less than originally estimated, while net unfavorable development is the result of prior years’ claims settling for more than originally estimated. Adjustments to our original estimates resulting from claims are not made until the period in which there is reasonable evidence that an adjustment to the reserve is appropriate.

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Table of Contents

Amortization of Deferred Policy Acquisition Costs and Other Underwriting and General Expenses

Total underwriting and general expenses, including amortization of deferred policy acquisition costs, increased $11,003,$1,079, or 21.6%5.4%, during the ninethree months ended September 30, 2020March 31, 2021 compared to the three months ended March 31, 2020.

Three Months Ended March 31,

2021

2020

Underlying expenses

$

23,845

$

23,924

Deferral of policy acquisition costs

(16,194

)

(13,152

)

Other underwriting and general expenses

7,651

10,772

Amortization of deferred policy acquisition costs

13,587

9,387

Total reported expenses

$

21,238

$

20,159

Underlying expenses were $79 lower in the three months ended March 31, 2021 compared to a year ago.

Nine Months Ended September 30,

2020

2019

Underlying expenses

$

70,414

$

53,863

Deferral of policy acquisition costs

(47,763

)

(39,620

)

Other underwriting and general expenses

22,651

14,243

Amortization of deferred policy acquisition costs

39,277

36,682

Total reported expenses

$

61,928

$

50,925

Underlying expenses were $16,551 higher in the nine months ended September 30, 2020 compared to a year ago. Westminster contributed $14,212 of underlying expenses to the current quarter, including $4,741 amortization of other intangibles. Underlying expenses were also elevated due to consulting fees, stock compensation costs, and Acquisition costs related to the acquisitionincrease in direct written premiums were offset by reduced consulting fees and amortization of Westminster.other intangibles.

Expense deferrals were $8,143$3,042 higher in the ninethree months ended September 30, 2020March 31, 2021 compared to 2019,2020, while amortization of those costs was $2,595$4,200 higher in 2020.2021. The increase in amortization is partly attributable to the increase in commercial segment contributed $7,385 of new expense deferrals in 2020, and $3,137 of amortization expense.business sold throughout 2020.

The expense ratio of 28.9%33.6% for the ninethree months ended September 30,March 31, 2020 was 1.00.7 percentage points higherlower than the expense ratio in 2019 due primarily to the higher levelfirst quarter of expenses in Westminster.2020, as premium growth outpaced expenses.

Underwriting Gain (Loss)

Underwriting gain (loss) measures the pretax profitability of a company’s insurance business. It is derived by subtracting losses and LAE, amortization of deferred policy acquisition costs, and other underwriting and general expenses from net premiums earned.

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

2021

2020

Underwriting gain (loss):

Private passenger auto

$

5,061

$

(4,746

)

$

(115

)

$

1,360

Non-standard auto

1,082

645

4,044

2,014

Home and farm

8,000

(3,444

)

4,211

6,194

Crop

(791

)

2,555

(1,050

)

(2,890

)

Commercial

596

(135

)

(2,676

)

209

All other

1,622

951

594

1,304

Total underwriting gain (loss)

$

15,570

$

(4,174

)

Total underwriting gain

$

5,008

$

8,191

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

2021

2020

Combined ratio:

Private passenger auto

90.4%

109.5%

100.7%

92.1%

Non-standard auto

97.3%

98.5%

69.5%

84.7%

Home and farm

85.2%

106.6%

75.9%

64.8%

Crop

102.4%

90.7%

n/a

n/a

Commercial

97.8%

104.5%

121.7%

97.3%

All other

76.9%

84.8%

76.6%

51.1%

Total combined ratio

92.7%

102.3%

92.1%

86.1%

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Table of Contents

OverallThe gain from underwriting results improved significantly year-over-year, as combined ratios improved in all segments except crop.operations for the three months ended March 31, 2021 decreased $3,183 when compared to 2020.

The combined ratio for the private passenger auto segment improved 19.1increased 8.6 percentage points year-over-year. Elevated lossLosses and LAE experience during third quarter 2019increased due to weather-related losses and significant bodily injury and underinsured liability losses did not recur in 2020. During 2020, a reductionhigher frequency of miles drivenlosses. Non-standard auto’s combined ratio decreased due to the COVID-19 pandemic primarily during the second quarter resulted in decreased claims frequency. During third quarter 2020, claims frequency has mostly returned to normal levels.improved loss experience.

For the non-standard auto segment, the combined ratio improved slightly year-over-year. Similar to private passenger auto, claims frequency for this segment is returning to more normal levels as miles driven are increasing again.

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The combined ratio for the home and farm segment improved substantiallydeteriorated as North Dakota has experiencedDakota’s loss experience returned to more normal levels after a lower number of weather-related eventsvery favorable winter in 2020. The favorable impact from fewer weather-related losses combined with modest rate adjustments has resulted in a profitable nine months of 2020.

For the commercial segment, the results of Westminster are now combined with the commercial business of Nodak Insurance. The 2019 results reflected highWestminster’s loss experience forincluded an elevated number of fire losses as well as slip-and-fall claims due to ice and snow during the Nodak book. During 2020, the additionfirst quarter of Westminster decreased the loss and LAE ratio to more profitable levels. Underwriting expenses for Westminster are adversely impacted by amortization of their VOBA intangible asset for 2020. Regulatory actions related to commercial insurance policies taken by certain states within Westminster’s operating territory earlier during 2020 have had minimal impact on our results thus far, although it is possible that additional steps taken by federal, state, and local governments may have adverse impacts to our future results.2021.

For the crop segment, the underwriting results improved due to less unfavorable loss reserve development compared to a year ago. The combined ratio is elevatedratios are not meaningful for first quarter in the crop segment due to the high percentagelack of unharvested corn that remained in the field from the 2019 season. As these fields were harvested, the losses were higher than anticipated, resulting in adverse development for this segment. The current multi-peril crop loss ratio is also elevated due to the large number of prevented planting claims submitted this spring. The high combined ratio for multi-peril crop has been partially offset by favorable loss experience in our crop hail business.earned premiums.

Fee and Other Income

NI Holdings had fee and other income of $1,332$317 for the ninethree months ended September 30, 2020,March 31, 2021, compared to $1,637$362 for the ninethree months ended September 30, 2019.March 31, 2020. Fee income attributable to the non-standard auto segment is a key component in measuring its profitability. Fee income on this business decreasedincreased slightly to $993$332 for the ninethree months ended September 30, 2020March 31, 2021 from $1,339$329 for the ninethree months ended September 30, 2019, as the number of inforce polices in Primero has dropped considerably. Primero also temporarily waived some of its policy maintenance fees in response to the COVID-19 pandemic.March 31, 2020.

Net Investment Income

The following table sets forth our average cash and invested assets, net investment income, and return on average cash and invested assets for the reported periods:

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

2021

2020

Average cash and invested assets

$

437,845

$

388,023

$

494,914

$

418,452

Gross investment income

$

8,025

$

7,194

$

2,433

$

2,800

Investment expenses

2,150

1,690

897

829

Net investment income

$

5,875

$

5,504

$

1,536

$

1,971

Gross return on average cash and invested assets

2.4%

2.5%

2.0%

2.7%

Net return on average cash and invested assets

1.8%

1.9%

1.2%

1.9%

Investment income, net of investment expense, increased $371decreased $435 for the ninethree months ended September 30, 2020March 31, 2021 compared to a year ago.the three months ended March 31, 2020. This increasedecrease is attributable to the increase intemporary amount of invested assets placed in cash and short term equivalents during the current period, due primarily to the acquisitionmovement of Westminster and increased year-to-date net cash from operating activities, partially offset by an increase in investment expenses primarily from Westminster.funds between insurance subsidiaries while implementing the intercompany reinsurance pooling agreement, as well as lower reinvestment rates. The weighted average gross yield on invested assets decreased to 2.4%2.0% in 20202021 from 2.5%2.7% in 2019.2020.

As of September 30, 2020,March 31, 2021, our overall book yield for our combined fixed income and equity portfolio was 2.6%, excluding Westminster’s standalone portfolio.2.4%. The average duration for our fixed income securities was 3.74.2 years at September 30, 2020.March 31, 2021.

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TableThe decline in the Company’s investment yields is driven by a combination of Contentsfactors, including a persistent low reinvestment rate environment, ongoing maturities of existing holdings with high embedded yields, and significant cash inflows to the investment portfolio from the Company’s business operations. The dividend yield of the Company’s equity portfolio also declined given the ongoing rally in U.S. equity markets.

Net Capital Gain (Loss) on Investments

NI Holdings had realized capital gains on investment of $2,021$3,902 for the ninethree months ended September 30, 2020,March 31, 2021, compared to realized capital gains of $1,338 a year ago.$1,015 for the three months ended March 31, 2020.

Effective January 1, 2019, in accordance with a change in accounting principle, market fluctuations on our equity securities are reflected in the Company’s results of operations. NI Holdings reported a net lossgain of $641$1,909 attributed to the change in unrealized appreciation of its equity securities for the ninethree months ended September 30, 2020,March 31, 2021, compared to a higher than expected net gainloss of $8,253$15,934 for the ninethree months ended September 30, 2019. Prior to January 1, 2019, such unrealized gainsMarch 31, 2020.

NI Holdings has evaluated each fixed income security in a loss position and losses were included in other comprehensive income. The losstaken into account the severity and duration of any potential impairment, the current rating on the bond, and the outlook for the current period was dueissuer according to the COVID-19 pandemic and the related economic implications on businesses and the stock market. We anticipate additional volatility throughout the remainder of the pandemic and economic recovery period.

independent analysts. The Company recorded no other-than-temporary impairmentsOTTIs in the ninethree months ended September 30, 2020March 31, 2021 and 2019.2020.

The Company’s fixed income securities and equity securities are classified as available for sale because itwe will, from time to time, make sales of securities that are not impaired, consistent with our investment goals and policies. At September 30,March 31, 2021, the Company had net unrealized gains on fixed income securities of $9,348 and net unrealized gains on equity securities of $29,658. At December 31, 2020, the Company had net unrealized gains on fixed income securities of $15,525$16,505 and net unrealized gains on equity securities of $21,255. At December 31, 2019, the Company had net unrealized gains on fixed income securities$27,749.

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Table of $7,241Contents

Strong U.S. retail sales and net unrealized gains on equity securities of $21,896. Thedurable goods reports led to a sharp increase in first quarter Gross Domestic Product growth estimates. The steepening yield curve has received much attention during the fair valuefirst quarter. However, rates for two years and shorter remain anchored. Equity market results show expectations of our fixed income securities was driven primarily bya return to normalcy as travel and leisure sectors have recently risen while stocks benefitting from work-from-home have declined. Core inflation numbers are expected to move above 2% due to comparisons with weak prices during the U.S. Federal Reserve’s implementation of the unprecedented efforts it announcedinitial lockdown in Marchfirst quarter 2020. This is likely to supportbe transitory as many believe there is too much slack in the economy as well as its intention to maintainenvision a near-zero interest rate policy for the foreseeable future.

NI Holdings has evaluated each security in a loss position and taken into account the severity and durationscenario of the impairment, the current rating on the bond, and the outlook for the issuer according to independent analysts. NI Holdings will continue to monitor these securities throughout the remainder of the COVID-19 pandemic and economic recovery period.substantially higher inflation this year.

Income (Loss) before Income Taxes

For the ninethree months ended September 30, 2020,March 31, 2021, NI Holdings had pre-tax income of $24,157$12,672 compared to pre-tax incomeloss of $12,558$4,395 for the ninethree months ended September 30, 2019.March 31, 2020. The increase in pre-tax results was largely attributable to improved loss experience in 2020, partially offset by the pre-tax $8,894$17,843 fluctuation in the change in net unrealized gains in our equity portfolio between the first nine monthsquarter of 2021 and 2020, and 2019.partially offset by the decrease in first quarter 2021 underwriting results.

Income TaxesTax Expense (Benefit)

NI Holdings recorded income tax expense of $5,259$2,890 for the ninethree months ended September 30, 2020,March 31, 2021, compared to income tax expensebenefit of $3,206$840 for the ninethree months ended September 30, 2019.March 31, 2020. A portion of income tax expensetaxes relates to state income taxes primarily for the state of Illinois. Our effective tax rate for the first nine monthsquarter of 20202021 was 21.8%22.8% compared to an effective tax rate of 25.5%19.1% for the same periodfirst quarter of 2019.

The valuation allowance against certain deferred income tax assets increased to $948 as of September 30, 2020, compared to $594 as of December 31, 2019. The acquisition of Westminster included $354 of valuation allowance related to net operating loss carryforwards.2020.

Net Income (Loss)

For the ninethree months ended September 30, 2020,March 31, 2021, NI Holdings had net income before non-controlling interest of $18,898$9,782 compared to net income before non-controlling interestloss of $9,352$3,555 for the ninethree months ended September 30, 2019.March 31, 2020. This increase in net income was primarily attributable to improved loss experience in 2020, partially offset by the fluctuation in the change in net unrealized gains in our equity portfolio between the first quarter of 2021 and 2020, and 2019.partially offset by the decrease in first quarter 2021 underwriting results.

Return on Average Equity

For the ninethree months ended September 30, 2020,March 31, 2021, NI Holdings had annualized return on average equity, after non-controlling interest, of 8.0%11.2% compared to annualized return on average equity, after non-controlling interest, of 4.4%-4.7% for the ninethree months ended September 30, 2019.March 31, 2020. Average equity is calculated as the average between beginning and ending equity excluding non-controlling interest for the period.

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Table of Contents

Financial Position

The major components of NI Holdings’ financial position are as follows:

September 30, 2020

December 31, 2019

March 31, 2021

December 31, 2020

Assets:

Cash and investments

$

462,427

$

419,923

$

495,465

$

494,363

Premiums and agents’ balances receivable

84,868

36,691

49,325

48,523

Deferred policy acquisition costs

23,885

15,399

26,575

23,968

Receivable from Federal Crop Insurance Corporation

9,519

14,230

5,182

6,646

Property and equipment

10,008

7,694

9,843

9,899

Goodwill and other intangibles

18,637

2,912

18,076

18,194

Other assets

20,692

11,310

16,919

16,010

Total assets

$

630,036

$

508,159

$

621,385

$

617,603

Liabilities:

Unpaid losses and loss adjustment expenses

$

134,803

$

93,250

$

111,522

$

105,750

Unearned premiums

125,966

89,276

123,458

119,363

Westminster consideration payable

12,720

19,287

Other liabilities

43,754

15,830

21,095

24,331

Total liabilities

304,523

198,356

268,795

268,731

Shareholders’ equity

325,513

309,803

352,590

348,872

Total liabilities and equity

$

630,036

$

508,159

Total liabilities and shareholders’ equity

$

621,385

$

617,603

At September 30, 2020,March 31, 2021, NI Holdings’ total assets increased by $121,877,$3,782, or 24.0%0.6%, from December 31, 2019. Cash and investments increased due to increased fair market values of our fixed income investments and the acquired Westminster assets. Premiums and agents’ balances receivable increased due to recognition of the year’s multi-peril crop premiums, in addition to the acquired Westminster receivables. DAC increased due partly to the Westminster commercial business and growth in other segments. The receivable from the Federal Crop Insurance Corporation decreased due to a partial collection of past year amounts, partially offset by 2020 activity. Goodwill and other intangibles recognized in the Westminster acquisition was $20,506, less amortization during the first nine months of 2020. Other assets increased as a result of reinsurance recoverables from the Westminster commercial business.

At September 30, 2020,March 31, 2021, total liabilities increased by $106,167, or 53.5%,$64 from December 31, 2019.2020. Unpaid losses and loss adjustment expenses increased due to Westminster commercial liabilities, multi-peril crop losses, and seasonably higher losses for our other segments.loss experience during the first quarter of 2021. Unearned premiums increased due to Westminster acquired amountsan increase in direct written premiums. The first installment of $16,611$6,667 was paid to the former shareholder of Westminster. Other liabilities decreased due to payment of employee and the recognition of this year’s multi-peril crop premiums to be earned over the remainder of the year.agent bonuses.

Total shareholders’ equity increased by $15,710,$3,718, or 5.1%1.1%, during the ninethree months ended September 30, 2020.March 31, 2021. The increase in shareholders’ equity reflects a consolidated net income of $18,898$9,782 for the nine-monththree-month period, share repurchases of $11,363,$596, and higherlower fair market values acrossof our fixed income investment portfolio.securities.

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Table of Contents

Liquidity and Capital Resources

NI Holdings 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 initial public offering (“IPO”), which we hopedplanned 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. We will payThe 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 installment was paid during the first quarter of 2021.

We currently anticipate that cash generated from our operations and available from our investment portfolio, along with the remaining initial public offeringIPO net proceeds, will be sufficient to fund our operations. The COVID-19 pandemic has resulted in volatility in the credit and financial markets, which has adversely affected our investment portfolio and could increase the cost of capital and/or our ability to access additional capital if the need arises.

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 change in cash and cash equivalents for the ninethree months ended September 30,March 31, 2021 and 2020 and 2019 were as follows:

Nine Months Ended September 30,

Three Months Ended March 31,

2020

2019

2021

2020

Net cash flows from operating activities

$

30,944

$

(1,497

)

$

10,794

$

3,616

Net cash flows from investing activities

(10,377

)

(40,186

)

(51,439

)

(7,578

)

Net cash flows from financing activities

(11,394

)

(2,025

)

(7,749

)

(1,533

)

Net increase (decrease) in cash and cash equivalents

$

9,173

$

(43,708

)

Net decrease in cash and cash equivalents

$

(48,394

)

$

(5,495

)

For the ninethree months ended September 30, 2020,March 31, 2021, net cash provided by operating activities totaled $30,944$10,794 compared to a use of $1,497$3,616 a year ago. TheThis increase was driven by consolidated net income of $18,898$9,782 for the ninethree months ended September 30, 2020March 31, 2021 compared to consolidated net incomeloss of $9,352$3,555 for the same period a year ago. TheAn increase in amortization of deferred acquisition costs and an increase in unpaid losses and LAE, offset by a net decrease in unrealized gains on equity investments, also contributed to the increase when evaluating net cash flows from operating activities also reflected the impact of the difference in the change in the market value of equity securities (a non-cash component of net income) between 2020 and 2019, differences in the activity between the Company and the Federal Crop Insurance Corporation during 2020 and 2019, the addition of the Westminster commercial business, and lower levels of loss and loss adjustment expenses.activities.

For the ninethree months ended September 30, 2020,March 31, 2021, net cash used by investing activities totaled $10,377$51,439 compared to $40,186$7,578 a year ago. In 2020, the initial cash installment payment for Westminster was $703 more thanfirst quarter of 2021, the cash and cash equivalents received in the acquisition. Both the current and prior year reflect the impact of investingCompany invested excess cash generated from operations and the implementation of the intercompany pooling reinsurance agreement into longer term investments, partially offset by sales and maturities of fixed income securities.investments.

For the ninethree months ended September 30, 2020,March 31, 2021, net cash used by financing activities totaled $11,394$7,749 compared to $2,025$1,533 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 $11,363 and $2,006$596 during 2020 and 2019, respectively.the first quarter of 2021, compared to $1,502 during 2020.

As a standalone entity, and outside of the net proceeds from the initial public offering,IPO, NI Holdings’ 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 dividends or other distributions it may pay to NI Holdings. North Dakota law sets the maximum amount of dividends that may be paid by Nodak Insurance during any twelve-month period after notice to, but without prior approval of, the North Dakota Insurance Department. This amount cannot exceed the lesser of (i) 10% of the Company’s surplus as regards policyholders as of the preceding December 31, or (ii) the Company’s statutory net income for the preceding calendar year (excluding realized 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 20202021 without the prior approval of the North Dakota Insurance Department is approximately $18,984$21,628 based upon the policyholders’ surplus of Nodak Insurance at December 31, 2019.2020. Prior to its payment of any extraordinary dividend, Nodak Insurance will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North Dakota Insurance Department has the power to limit or prohibit dividend payments if 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 a $6,000 dividend during the nine months ended September 30, 2020, to be paid to NI Holdings in the fourth quarter of 2020. No dividends were declared or paid by Nodak Insurance during the three months ended March 31, 2021. The Nodak Insurance Board of Directors declared and paid a $6,000 dividend to NI Holdings during the year ended December 31, 2019.2020.

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Direct Auto is restricted by the insurance laws of Illinois as to the amount of dividends or other distributions it may pay to NI Holdings. Illinois law sets the maximum amount of dividends that may be paid by Direct Auto during any twelve-month period after notice to, but without prior approval of, the Illinois Department of Insurance. This amount cannot exceed the greater 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). Dividends in excess of this amount are considered “extraordinary” and are subject to the approval of the Illinois Department of Insurance.

The amount available for payment of dividends from Direct Auto to NI Holdings during 20202021 without the prior approval of the Illinois Department of Insurance is $6,881$3,582 based upon the policyholders’ surplus of Direct Auto at December 31, 2019.2020. Prior to its payment of any dividend, Direct Auto will be required to provide notice of the dividend to the Illinois Department of Insurance. This notice must be provided to the Illinois Department of Insurance within five business days following declaration of any dividend and no less than 30 days prior to the payment of an extraordinary dividend or 10 days prior to the payment of an ordinary dividend. The Illinois Department of Insurance has the power to limit or prohibit dividend payments if Direct Auto is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Direct Auto during the ninethree months ended September 30, 2020March 31, 2021 or the year ended December 31, 2019.2020.

The amount available for payment of dividends from Westminster to NI Holdings during 20202021 without the prior approval of the Maryland Insurance Administration is $636$505 based upon the statutory net investment income of Westminster for the year ended December 31, 20192020 and the three preceding years. Prior to its payment of any dividend, Westminster will be required to provide notice of the dividend to the Maryland Insurance Administration. This notice must be provided to the Maryland Insurance Administration within five business days following declaration of any dividend and no less than 30 days prior to the payment of an extraordinary dividend or 10 days prior to the payment of an ordinary dividend. The Maryland Insurance Administration has the power to limit or prohibit dividend payments if Westminster is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Westminster during the ninethree months ended September 30,March 31, 2021 or the year ended December 31, 2020.

Off-Balance Sheet Arrangements

NI Holdings has no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital reserves.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 5 to the Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q.

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Item 3. - Quantitative and Qualitative Disclosures about Market Risk

The Company’s assessment of market risk as of September 30, 2020March 31, 2021 indicates there have been no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 20192020 filed with the SEC.

Item 4. - 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-15(a)15d-15(b)) as of September 30, 2020.March 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.

Changes in Internal Controls

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 quarter ended September 30, 2020,March 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.

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PART II. – OTHER INFORMATION

Item 1. - 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 uncertainties attendant to litigation, we cannot assure you that our results of operations and financial condition will not be materially adversely affected by any litigation.

Item 1A. - Risk Factors

For a discussion of the Company’s potential risk or uncertainties, please see “Part 1 – Item 1A – Risk Factors” and “Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2019 Annual Report filed with the SEC, and “Part 1 – Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, in each case as updated by the Company’s periodic filings with the SEC. Other than as described below, thereThere have been no material changes to thein our assessment of our risk factors disclosed in Part I – Item 1A of the Company’s 2019 Annual Report.

The impact of COVID-19 and responses thereto, and related risks, could materially affect our results of operations, financial position, and/or liquidity.

Beginning in March 2020, the global pandemic related to novel coronavirus COVID-19 began to impact the global and U.S. economy. The extent of this pandemic continues to evolve, thus the extent of the direct and indirect impacts of COVID-19 are not yet known and may not emerge for some time. We have experienced a decrease in premiumsfrom those set forth in our non-standard auto segment due to the COVID-19 pandemic, which has negatively impacted policy counts in our auto segments across all states. We expect that premiums may decrease in these segments as individuals and businesses reduce travel and seek to limit expenses, including the cost of insurance.

Federal, state, and local government actions to address and contain the impact of COVID-19 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. At least one state regulator has issued an order requiring insurers to issue premium refunds, and regulators in other states could take similar actions. It is also possible that changes in economic conditions and steps taken by federal, state, and local governments in response to COVID-19 could require an increase in taxes at the federal, state, and local levels, which would adversely impact our results of operations.

The disruption in the financial markets related to COVID-19 has contributed to net unrealized investment losses, due to the impact of changes in fair valueAnnual Report on our equity investment portfolio. Our corporate fixed income portfolio may be adversely impacted by ratings downgrades, increased bankruptcies, and credit spread widening in distressed industries. In addition, many state and local governments may be operating under deficits or projected deficits. These deficits may be exacerbated by the costs of responding to COVID-19 and reduced tax revenues due to adverse economic conditions. The severity and duration of these deficits could have an adverse impact on the collectability and valuation of our municipal bond portfolio. Our investment portfolio also includes residential and commercial mortgage-backed securities, which could be adversely impacted by declines in real estate valuations and/or financial market disruption, including a heightened collection risk on the underlying mortgages. Further disruptions in global financial markets due to the continuing impact of COVID-19 could result in additional net realized and unrealized investment losses. In addition, declines in fixed income yields would result in decreases in net investment income from future investment activity, including re-investments.

We expect that the impact of COVID-19 on general economic activity may continue to negatively impact our premium volumes. We have experienced this impact in the first nine months of 2020 and this impact may further persistForm 10-K for the remainder of 2020, but the degree of the impact will depend on the extent and duration of the economic contraction. As a result of the anticipated impact of the pandemic on our earned premiums, our underwriting expense ratio may increase in the near term.

It is possible that changes in economic conditions and steps taken by the federal government and the Federal Reserve in response to COVID-19 could lead to higher inflation than we had anticipated, which could in turn lead to an increase in our loss costs and the need to strengthen claims and claim adjustment expense reserves. These impacts of inflation on loss costs and claims and claim adjustment expense reserves could be more pronounced for those lines of business that require a relatively longer period of time to finalize and settle claims for a given accident year and, accordingly, are relatively more inflation sensitive. Inflation could also adversely impact our general and administrative expenses. Changes in interest rates caused by inflation affect the carrying value of our fixed maturity investments and returns on our fixed maturity and short-term investments. An increase in interest rates reduces the market value of existing fixed maturity investments, thereby negatively impacting our book value.ended December 31, 2020.

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

The Company has not sold any unregistered securities within the past three years.

On January 17, 2017, the SEC declared effective our registration statement on Form S-1 registering our common stock. On March 13, 2017, the Company completed the initial public offeringIPO of 10,350,000 shares of common stock at a price of $10.00 per share. The Company received net proceeds of $93,145 from the offering, after deducting underwriting discounts and offering expenses. Griffin Financial Group, LLC acted as our placement agent in connection with the initial public offering.IPO.

Direct Auto was acquired on August 31, 2018 with $17,000 of the net proceeds from the initial public offering.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 initial public offeringIPO at time of closing. The Company will payterms 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 installment was paid during the first quarter of 2021. The Company anticipates using the net proceeds from the initial public offeringIPO to satisfy these obligations.

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 the net proceeds from the initial public offeringIPO to fund these buyback programs.

There has been no material change in the planned use of proceeds from our initial public offeringIPO as described in our final prospectus filed with the SEC on January 17, 2017.

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 nine monthsyear ended September 30,December 31, 2020, we completed the repurchase of 402,687454,443 shares of our common stock for $6,367$7,238 under this new authorization.

In total during During the ninethree months ended September 30, 2020,March 31, 2021, we completed the repurchase of 804,743repurchased an additional 32,326 shares of our common stock for $11,363. The repurchases made in the three months ended September 30, 2020 are described below.$596.

Period in 2020

Total Number of

Shares

Purchased

Average Price

Paid

Per Share

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs (1)

Maximum Dollar Value

of Shares That May Yet

Be Purchased Under the

Plans or Programs (1)

(in thousands)

July 1-31, 2020

159,100

$

15.82

159,100

$

5,696

August 1-31, 2020

64,620

16.73

64,620

4,615

September 1-30, 2020

61,425

15.99

61,425

3,633

Total

285,145

$

16.06

285,145

$

3,633

Period in 2021

Total Number of

Shares

Purchased

Average Price

Paid

Per Share

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs (1)

Maximum Dollar Value

of Shares That May Yet

Be Purchased Under the

Plans or Programs (1)

(in thousands)

January 1-31, 2021

10,879

$

16.82

10,879

$

2,579

February 1-28, 2021

1,140

17.02

1,140

2,559

March 1-31, 2021

20,307

19.35

20,307

2,166

Total

32,326

$

18.42

32,326

$

2,166

(1)

Shares purchased pursuant to the May 4, 2020 publicly announced share repurchase authorization, which was for

(1)

Shares purchased pursuant to the May 4, 2020 publicly announced share repurchase authorization of up to approximately $10,000 of the Company’s outstanding common stock.

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Item 3. - Defaults upon Senior Securities

Not Applicable

Item 4. - Mine Safety Disclosures

Not Applicable

Item 5. - Other Information

None

Item 6. - Exhibits

Exhibit

Number

Description

10.1

 #

Form of Time-Based Restricted Stock Unit Agreement for Executives

10.2

 #

Form of NI Holdings, Inc. Growth in Book Value Per Share Performance Share Unit Agreement

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.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)

 #

Management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 4, 2020.May 5, 2021.

NI HOLDINGS, INC.

 

/s/ Michael J. Alexander

Michael J. Alexander

President and Chief Executive Officer

(Principal Executive Officer)

 

 

/s/ Brian R. Doom

Brian R. Doom

Chief Financial Officer

(Principal Financial and Accounting Officer)

7365