Primero owns the building at 2640 South Jones Blvd, Suite 2, Las Vegas, Nevada, and Tri-State Ltd. leases the building at 506 5th Street, Spearfish, South Dakota. Primero employees at these two locations administer their non-standard auto business.
Direct Auto leases office space at 8700 West Bryn Mawr Avenue, Chicago, Illinois until August 31, 2029. Direct Auto employees at this location administer their non-standard auto business.
Westminster owns the building in which its offices are located at 8890 McDonogh Road, Suite 310, Owings Mills, Maryland. Westminster employees at this location administer their commercial business.
Battle Creek is managed by Nodak Insurance under the terms of a surplus note issued by Battle Creek to Nodak Insurance. Nodak Agency is an inactive shell corporation.
Unlike property and casualty insurance, the total crop insurance premiums written each year vary mainly based on prevailing commodity prices for the type of crops planted, because the aggregate number of acres planted usually does not vary much from year to year. Because the premiums that are charged for crop insurance are established by the RMA, 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 commercial farmers obtain crop insurance on their plantings each year.
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.
NI Holdings’ expenses consist primarily of losses and LAE, amortization of deferred policy acquisition costs, other underwriting and general expenses, and income taxes.
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.
NI Holdings uses net income (loss) to measure its profit and uses return on average equity to measure its effectiveness in utilizing equity to generate net income. In determining return on average equity for a given year, net income (loss) is divided by the average of the beginning and ending equity attributable to NI Holdings for that year.
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.
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 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.
NI Holdings determines its ultimate liability for unpaid losses and LAE by using the following actuarial methodologies:
Ratio of Paid ALAE to Paid Loss Method - The Ratio of Paid ALAE to Paid Loss Method utilizes the ratio of paid ALAE to paid losses and is similar to the Paid and Case Incurred Method described above, except that the data projected are the ratios of paid ALAE to paid losses. The projected ultimate ratio is then multiplied by the selected ultimate losses, by accident year, to yield the ultimate ALAE. ALAE reserves are calculated by subtracting paid losses from ultimate ALAE.
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.
As of December 31, 2020, 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 $767.
The fixed income portion of the portfolio experienced an increase in net unrealized gains of $9,264 during the year ended December 31, 2020. The net increase is reflected directly in shareholders’ equity as a component of accumulated other comprehensive income.
During the fourth quarter of 2020, vaccine rollout and an agreement on the next round of fiscal stimulus helped renew the risk-on sentiment, which led to new highs in equities, tighter spreads, and a steeper Treasury curve. While the next wave of the COVID-19 virus is prompting further restrictions in some areas of the United States and globally, market participants are looking forward, expecting that continued accommodative monetary policy combined with fiscal support will bolster the economic recovery that is well underway.
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, who specializes in the management of insurance company investment portfolios and participates in this evaluation.
Level I:Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
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 for any of the Company’s investments at December 31, 2020, 2019, or 2018.
For more information on the Company’s fair value measurements, see Note 7 to the Consolidated Financial Statements, included elsewhere in this Form 10-K.
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.
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.
NI Holdings had gross deferred income tax assets of $8,603 at December 31, 2020 and $6,294 at December 31, 2019, arising primarily from unearned premiums, loss reserve discounting, and net operating loss carryforwards. A valuation allowance is required to be established for any portion of the deferred income tax asset for which the Company believes it is more likely than not that it will not be realized. A valuation allowance of $931 and $594 was maintained at December 31, 2020 and December 31, 2019, respectively.
As of December 31, 2020, NI Holdings had no material unrecognized tax benefits or accrued interest and penalties. Federal income tax returns for the years 2014 through 2019 are open for examination.
Premiums in the personal lines of business (private passenger auto and home and farm) are generally written and earned throughout the year. 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.
For more information on the Company’s results of operations by segment, see Note 22 to the Consolidated Financial Statements, included elsewhere in this Form 10-K.
Assumed premiums earned increased slightly, primarily related to the assumed reinsurance business from American Agricultural Insurance Company. Ceded premiums earned increased due to incorporating Westminster into our reinsurance program and increasing our overall reinsurance coverage limits.
Net losses for private passenger auto and non-standard auto decreased in 2020 compared to the prior year, due primarily to improved loss frequency as insureds drove fewer miles, primarily during the second quarter of the year. In home and farm, losses and LAE decreased due primarily to a lower frequency of weather-related losses. During 2019, private passenger auto also experienced significant bodily injury and underinsured losses, as well as higher weather-related losses.
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 improved.
Total underwriting and general expenses, including amortization of deferred policy acquisition costs, increased $17,810, or 26.5%, during the year ended December 31, 2020 compared to a year ago.
Underlying expenses were $23,846 higher in the year ended December 31, 2020 compared to a year ago. Westminster contributed $19,163 of underlying expenses to the current year, including $5,172 of other intangibles amortization expense. Policy acquisition costs have increased due to higher written premiums. Compensation expenses have increased year-over-year. The Company also paid $1,129 of membership dues on behalf of its NDFB members in North Dakota during 2020 in response to the COVID-19 pandemic.
Deferrals of policy acquisition costs were $11,320 higher in the year ended December 31, 2020 compared to 2019 primarily due to the addition of Westminster. Amortization of those costs also increased consistent with the increase in earned premiums.
The improvement in the private passenger auto combined ratio reflects elevated loss experience during 2019 and favorable loss experience during 2020. Losses during 2019 were impacted by weather-related losses and significant bodily injury and underinsured liability losses. During 2020, a reduction in miles driven due to the COVID-19 pandemic primarily during the second quarter resulted in decreased claims frequency. Claims frequency has mostly returned to normal levels, although the level of large claims has moderated from a year ago.
For the non-standard auto segment, the combined ratio increased slightly year-over-year. The loss and LAE ratio improved as claims frequency for this segment was reduced due to fewer miles driven. However, the expense ratio increased due to Direct Auto, which has a higher expense load than Primero, writing a higher proportion of business in the segment compared to the prior year.
NI Holdings had realized capital gains on investment of $7,771 for the year ended December 31, 2020, compared to $3,246 a year ago. This increase was driven by the strong recovery in financial markets, along with the liquidation of certain investment holdings to fund intercompany cash transfers needed to establish the new reinsurance pooling arrangement.
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 December 31, 2020, the Company had net unrealized gains on fixed income securities of $16,505 and net unrealized gains on equity securities of $27,749. At December 31, 2019, the Company had net unrealized losses 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. Additionally, the stock market recovery previously noted was the primary driver of the increased unrealized gains in the equity securities portfolio.
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.
For the year ended December 31, 2020, NI Holdings had net income before non-controlling interest of $41,344 compared to $26,500 for 2019. This increase in net income was largely attributable to the significant improvement in loss experience during 2020.
For the year ended December 31, 2020, NI Holdings had annualized return on average equity, after non-controlling interest, of 12.4% compared to annualized return on average equity, after non-controlling interest, of 9.1% for the year ended December 31, 2019. Average equity is calculated as the average between beginning and ending equity excluding non-controlling interest for the period.
The consolidated net income for NI Holdings was $26,500 for the year ended December 31, 2019 compared to $31,244 for the prior year. The major components of NI Holdings’ operating revenues and net income for the two periods were as follows:
Direct premiums earned for 2019 increased $38,061, or 17.3%, to $257,661 from $219,600 for 2018. The addition of the Direct Auto non-standard auto business contributed $43,873 in direct premiums earned during 2019 compared to $14,516 for the prior year.
The Company’s overall loss and LAE experience deteriorated year-over-year, primarily with increases in the loss and LAE ratios in the private passenger auto, non-standard auto, crop, and commercial segments.
Net losses for private passenger auto increased in 2019 compared to the prior year, as third quarter weather activity and liability losses each increased compared to a year ago. The loss and LAE ratio for the home and farm segment was at the expected level, with favorable farmowners results offsetting unfavorable homeowners results.
Increased weather activity, and a higher frequency and severity of liability losses for the auto lines, resulted in lower 2019 underwriting results in our private passenger auto and commercial businesses. The homeowners’ portion of the home and farm segment also experienced increased weather activity, although the underwriting results for the segment as a whole for 2019 were favorable compared to a year ago based on strong results for our farmowners’ business.
Investment income, net of investment expense, increased $1,253 for the year ended December 31, 2019 compared to the prior year. This increase is attributable to the increase in invested assets, due primarily to the acquisition of Direct Auto. The weighted average gross yield on invested assets remained steady at 2.5% in 2019 compared to 2018.
As of December 31, 2019, our overall book yield for our combined fixed income and equity portfolio was 2.8% and the average duration for our fixed income security portfolio was 3.5 years. The Direct Auto cash and cash equivalents acquired at the date of purchase have now been fully invested in accordance with our investment policy.
NI Holdings had realized capital gains on investment of $3,246 for the year ended December 31, 2019, compared to $3,974 the prior year.
For the year ended December 31, 2019, NI Holdings had annualized return on average equity, after non-controlling interest, of 9.1% compared to annualized return on average equity, after non-controlling interest, of 11.8% for the year ended December 31, 2018. Average equity is calculated as the average between beginning and ending equity excluding non-controlling interest for the period.
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.
For the year ended December 31, 2020, net cash provided by investing activities totaled $200 compared to $30,458 used by investing activities a year ago. In 2020, the initial cash installment payment for Westminster was $703 more than the cash and cash equivalents received in the acquisition. During 2020, the sales and maturities of securities approximated the purchase of new securities. Normally, the excess cash generated from operations would be invested in longer term investments. However, the implementation of the intercompany pooling reinsurance agreement necessitated substantial cash transfers between the insurance company subsidiaries during December, 2020, which were not fully reinvested in longer-term investments by year-end. The prior year reflects the impact of investing excess cash generated from operations into longer term investments, partially offset by sales and maturities of fixed income securities.
The amount available for payment of dividends from Nodak Insurance to us during 2021 without the prior approval of the North Dakota Insurance Department is approximately $21,628 based upon the policyholders’ surplus of Nodak Insurance at December 31, 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 and paid a $6,000 dividend to NI Holdings during the year ended December 31, 2020. No dividends were declared or paid by Nodak Insurance during the years ended December 31, 2019 or 2018.
We have audited the accompanying consolidated balance sheets of NI Holdings, Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
These Consolidated Financial Statements of NI Holdings include the financial position and results of operations of NI Holdings and seven other entities:
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.
We have categorized our investment portfolio as “available-for-sale” and have reported the portfolio at fair value. Unrealized gains and losses on fixed income securities, and on equity securities prior to January 1, 2019, net of income taxes, are reported in accumulated other comprehensive income. Effective January 1, 2019, in accordance with a change in accounting principle, changes in unrealized gains and losses on equity securities began to be reported as a component of net capital gain on investments in our operating results.
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.
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.
These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Direct Auto’s operations 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 intangibles had been applied from January 1, 2018, with the related income tax effects.
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 continues to be led by its president and other key management 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.
The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2019:
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.
We have completed our final analysis of the assets and liabilities acquired and assigned fair values to the acquired distribution network, state insurance licenses, Westminster trade name, and VOBA intangible assets of $6,700, $1,800, $500, and $4,750, 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.
In January 2020, the Company adopted amended guidance from the FASB that shortened the amortization period of premiums on certain fixed income securities held at a premium to the earliest call date rather than through the maturity date of the callable security. The adoption of this guidance did not materially impact the Company’s financial position, results of operations, or cash flows.
In March 2020, the Company adopted modified disclosure requirements from the FASB relating to the fair value of assets and liabilities. The modifications primarily related to Level 3 fair value measurements. The Company does not currently carry any Level 3 assets or liabilities. As a result, there was no impact to the Company’s financial statement disclosures.
In June 2016, the FASB issued a new standard that will require timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The guidance will require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the guidance requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Finally, the guidance amends the accounting for credit losses on available-for-sale fixed income securities and purchased financial assets with credit deterioration. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 for 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. Based on our evaluation, adoption of this new standard will not have a significant impact on our financial position, results of operations, and cash flows.
Fixed income securities with a fair value of $6,093 at December 31, 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.
As of December 31, 2020, we held 67 fixed income securities with unrealized losses. As of December 31, 2019, we held 88 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 that had fair values less than 80% of amortized cost for the preceding 12-month period.
Prices provided by independent pricing services and independent broker quotes can vary widely, even for the same security.
Our available-for-sale investments are comprised of a variety of different securities, which are classified into levels based on the valuation technique and inputs used in their valuation. The valuation of cash equivalents and equity securities are generally based on Level I inputs, which use the market-approach valuation technique. The valuation of our fixed income securities generally incorporates significant Level II inputs using the market and income approach techniques. We may assign a lower level to inputs typically considered to be Level II based on our assessment of liquidity and relative level of uncertainty surrounding inputs. There were no assets or liabilities classified at Level III at December 31, 2020 or 2019.
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:
There were no liabilities measured at fair value on a recurring basis at December 31, 2020 or 2019.
The Company actively monitors and evaluates the financial condition of the reinsurers and develops estimates of the uncollectible amounts due from reinsurers. Such estimates are made based on periodic evaluation of balances due from reinsurers, judgments regarding reinsurers’ solvency, known disputes, reporting characteristics of the underlying reinsured business, historical experience, current economic conditions, and the state of reinsurer relations in general. Collection risk is mitigated from reinsurers by entering into reinsurance arrangements only with reinsurers that have strong credit ratings and statutory surplus above certain levels. The Company’s reinsurance recoverables on paid and unpaid losses were due from reinsurance companies with A.M. Best ratings of “A” or higher.
The following tables present information, organized by our primary operating segments, about incurred and paid claims development as of December 31, 2020, net of reinsurance, as well as cumulative claim frequency and the total of IBNR reserves plus expected development on reported claims. The cumulative number of reported claims represents open claims, claims closed with payment, and claims closed without payment. It does not include an estimated amount for unreported claims. The number of claims is measured by claim event (such as a car accident or storm damage) and an individual claim event may result in more than one reported claim (such as a car accident with both property and liability damages). The Company considers a claim that does not result in a liability as a claim closed without payment. The segment information presented in the tables is prior to the effects of the intercompany reinsurance pooling agreement.
The tables include unaudited information about incurred and paid claims development (a) for the years ended December 31, 2011 through 2015 for the Private Passenger Auto, Primero Non-Standard Auto, Home and Farm, and Crop segments, (b) through 2017 for the Direct Auto Non-Standard Auto information, and (c) through 2019 for the Westminster Commercial information, which we present as supplementary information.
The following table presents required supplementary information about average historical claims duration as of December 31, 2020:
Amortization expense was $5,224, $1,711, and $3,507 during the years ended December 31, 2020, 2019 and 2018, respectively. The VOBA intangible asset of $4,750 acquired in the Westminster transaction was fully amortized during 2020.
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.
For the year ended December 31, 2020, the pooling share percentages by insurance company subsidiary were:
We were organized by the NDFB to provide insurance protection for its members. We have a royalty agreement with the NDFB that recognizes the use of their trademark and provides royalties to the NDFB based on the premiums written on Nodak Insurance’s insurance policies. Royalties paid to the NDFB were $1,370, $1,352, and $1,315 during the years ended December 31, 2020, 2019, and 2018 respectively. Royalty amounts payable of $113 and $115 were accrued as a liability to the NDFB at December 31, 2020 and 2019, respectively.
During 2020, Nodak Insurance paid $1,129 of membership dues on behalf of its NDFB members in North Dakota in response to the COVID-19 pandemic.
The amount available for payment of dividends from Nodak Insurance to NI Holdings during 2021 without the prior approval of the North Dakota Insurance Department is $21,628 based upon the policyholders’ surplus of Nodak Insurance at December 31, 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 and paid a $6,000 dividend to NI Holdings during the year ended December 31, 2020. No dividends were declared or paid by Nodak Insurance during the years ended December 31, 2019 or 2018.
The following tables illustrate the impact of including Battle Creek in our Consolidated Balance Sheets and Statements of Operations prior to intercompany eliminations:
The Company sponsors a money purchase plan that covers all eligible employees. Plan costs are funded annually as they are earned. The Company reported expenses related to the money purchase plan totaling $900, $618, and $598 during the years ended December 31, 2020, 2019, and 2018, respectively.
The Company also sponsors a 401(k) plan with an automatic contribution to all eligible employees and a matching contribution for eligible employees of 50% up to 3% of eligible compensation. Primero, Direct Auto, and Westminster also sponsor 401(k) plans. The Company reported expenses related to the 401(k) plans totaling $651, $516, and $475 during the years ended December 31, 2020, 2019, and 2018, respectively. All fees associated with both plans are deducted from the eligible employee accounts.
It is anticipated that the only assets held by the ESOP will be shares of the Company’s common stock. Participants in the ESOP cannot direct the investment of any assets allocated to their accounts. The initial ESOP participants are employees of Nodak Insurance. The employees of Primero, Direct Auto, and Westminster do not participate in the ESOP. American West and Battle Creek have no employees.
The Company recognized compensation expense of $374, $405, and $400 during the years ended December 31, 2020, 2019, and 2018, respectively, related to the ESOP.
Nodak Insurance has a $5,000 line of credit with Wells Fargo Bank, N.A. The terms of the line of credit include a floating interest rate with a floor rate of 3.25%. There were no outstanding amounts during the years ended December 31, 2020, 2019, or 2018. This line of credit is scheduled to expire on January 30, 2022.
As of December 31, 2020, we have minimum future commitments under non-cancellable leases as follows:
On February 28, 2018, our Board of Directors approved an authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock. We completed the repurchase of 191,265 shares of our common stock for $2,966 during 2018, and an additional 116,034 shares for $2,006 during 2019. During the six months ended June 30, 2020, we completed the repurchase of 402,056 shares of our common stock for $4,996 to close out this authorization.
On May 4, 2020, our Board of Directors approved an additional authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock. During the year ended December 31, 2020, we completed the repurchase of 454,443 shares of our common stock for $7,238 under this new authorization.
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.
Earnings per share is 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 21,772,475, 22,179,747, and 22,358,858 for the years ended December 31, 2020, 2019, and 2018, respectively.
We have five primary reportable operating segments, which consist of private passenger auto insurance, non-standard auto insurance, home and farm insurance, crop insurance, and commercial insurance. A sixth segment captures all other insurance coverages we sell, including our assumed reinsurance lines of business. We operate only in the United States, and no single customer or agent provides 10 percent or more of our revenues. The following tables provide available information of these segments for the years ended December 31, 2020, 2019, and 2018. For presentation in these tables, “LAE” refers to loss adjustment expenses.
The ratios presented in these tables are non-GAAP financial measures under Securities and Exchange Commission rules and regulations. The non-GAAP ratios may not be comparable to similarly-named measures reported by other companies. These ratios are used widely in the property and casualty insurance industry.
We do not assign or allocate all Consolidated Statement of Operations or Consolidated Balance Sheet line items to our operating segments. Those line items include investment income, net capital gain on investments, other income excluding non-standard auto insurance fees, and income taxes within the Consolidated Statement of Operations. For the Consolidated Balance Sheet, those items include cash and investments, property and equipment, other assets, accrued expenses, federal income taxes recoverable or payable, and shareholders’ equity.
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, 2020 and 2019 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 Westminster to NI Holdings during 2021 without the prior approval of the Maryland Insurance Administration is $505 based upon the statutory net investment income of Westminster for the year ended December 31, 2020 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 year ended December 31, 2020.