These consolidated financial statements of NI Holdings include the financial position and results of operations of NI Holdings and seven other entities:
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”. The non-GAAP financial measures that NI Holdings presents may not be compatible 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.
NI Holdings’ liabilities for unpaid losses and LAE are summarized below:
After the immediate economic impacts of the COVID-19 pandemic in the first half of the year, capital markets staged a strong rally during the second half of 2020, aided by significant fiscal and monetary support from world central banks to help the global economy. In the United States, the benchmark S&P 500 index rebounded to finish with a gain of 16.3% for the year, or a total return of about 18%, including dividends. Despite rising slightly from the second quarter, U.S. 10-year Treasury rates remained 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.
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.
Management reviews the reasonableness of the pricing provided by the independent pricing service by employing various analytical procedures. Management reviews all securities to identify recent downgrades, significant changes in pricing, and pricing anomalies on individual securities relative to other similar securities. This will include looking for relative consistency across securities in common sectors, durations, and credit ratings. This review will also include all fixed income securities rated lower than “A” by Moody’s 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 years ended December 31, 2020, 2019, or 2018. The classification within the fair value hierarchy is then confirmed based on the final conclusions from the pricing review.
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.
The consolidated net income for NI Holdings was $41,344 for the year ended December 31, 2020 compared to $26,500 for the year ended December 31, 2019. The major components of NI Holdings’ operating revenues and net income for the two periods were as follows:
NI Holdings’ net losses and LAE for the year ended December 31, 2020 decreased $1,237, or 0.7%, to $168,473 compared to $169,710 for the year ended December 31, 2019, due primarily to improved loss experience in the private passenger auto, non-standard auto, and home and farm segments. This decrease is understated as the prior year’s losses and LAE did not include Westminster. The Company’s loss and LAE ratio decreased significantly.
At December 31, 2020, total liabilities increased $70,375, or 35.5%, from December 31, 2019. Unpaid losses and loss adjustment expenses increased due primarily to Westminster liabilities. Unearned premiums increased due to Westminster acquired amounts of $16,611 and additional growth in Westminster.
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.
Years Ended December 31, 2020, 2019 and 2018 (dollar amounts in thousands)
Battle Creek Mutual Insurance Company (“Battle Creek”, an affiliated company with Nodak Insurance); and
Nodak Agency, a wholly-owned subsidiary of Nodak Insurance, is an inactive shell corporation.
In 2018, the Company incurred $118 of acquisition-related costs. These expenses did not impact the pro forma amounts presented above.
The Company paid $17,000 in cash consideration to the private shareholders of Direct Auto. The acquisition of Direct Auto did not include any contingent consideration. The following table summarizes the consideration transferred to acquire Direct Auto and the amounts of identified assets acquired and liabilities assumed at the acquisition date:
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, 2018 for public business entities. For private companies and emerging growth companies, this guidance is effective for annual reporting periods beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. 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. 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.