Item 1. Business
Item 1. Business
All dollar amounts,
except per share amounts, 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 (“Nodak Mutual”) from a mutual to stock form of organization and the creation of a mutual holding company. The conversion
was completed on March 13, 2017. Immediately following the conversion, all of the outstanding shares of common stock of Nodak Insurance
Company (“Nodak Insurance,” the successor to Nodak Mutual Insurance Company) were issued to Nodak Mutual Group, Inc. (“Nodak
Mutual Group”), which then contributed the shares to NI Holdings in exchange for 55% of the outstanding shares of common stock of
NI Holdings. Nodak Insurance then became a wholly-owned stock subsidiary of NI Holdings. Prior to completion of the conversion, NI Holdings
conducted no business and had no assets or liabilities. As a result of the conversion, NI Holdings became the holding company for Nodak
Insurance and its existing subsidiaries. Concurrent with the conversion, on March 13, 2017, the Company completed an initial public offering
(“IPO”) of 10,350,000 shares of common stock at a price of $10.00 per share. The Company received net proceeds of $93,145
from the offering, after deducting the underwriting discounts and offering expenses. The newly issued shares of NI Holdings were available
for public trading on March 16, 2017.
These consolidated financial statements include the financial
position and results of operations of NI Holdings and the following other entities:
● Nodak Insurance – a wholly-owned subsidiary of NI Holdings;
● Nodak Agency, Inc. (“Nodak Agency”) – a wholly-owned subsidiary of Nodak Insurance;
● American West Insurance Company (“American West”) – a wholly-owned subsidiary of Nodak Insurance;
● Primero Insurance Company (“Primero”) – an indirect wholly-owned subsidiary of Nodak Insurance;
● Battle Creek Insurance Company (“Battle Creek”) – a wholly-owned subsidiary of Nodak Insurance, formerly Battle
Creek Mutual Insurance Company. Battle Creek Mutual Insurance Company became affiliated with Nodak Insurance in 2011 and, prior to January
2, 2024, was controlled by Nodak Insurance via a surplus note. The terms of the surplus note allowed Nodak Insurance to appoint two-thirds
of the Battle Creek Mutual Insurance Company Board of Directors. As of January 2, 2024, the North Dakota Secretary of State approved the
conversion of Battle Creek Mutual Insurance Company from a mutual insurance company to a stock insurance company. In accordance with the
approved plan of conversion, the name of Battle Creek Mutual Insurance Company became Battle Creek Insurance Company, the surplus note
was considered paid in full as of the conversion date, and Battle Creek became a wholly-owned subsidiary of Nodak Insurance;
● Direct Auto Insurance Company (“Direct Auto”) – a wholly-owned subsidiary of NI Holdings; and
● Westminster American Insurance Company (“Westminster”) – a wholly-owned subsidiary of NI Holdings until it was sold
to Scott Insurance Holdings, LLC (“Scott Insurance Holdings”) on June 30, 2024.
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A chart of the corporate structure as of December 31, 2024, and a
more complete description of each of the NI Holdings subsidiaries, is included below.
NI HOLDINGS, INC.
ORGANIZATIONAL CHART
Nodak Mutual Group, Inc.
≥ 60%
ownership
NI Holdings, Inc.
100%
100%
ownership
ownership
Direct Auto Insurance Company
Nodak Insurance Company
100%
100%
100%
100%
ownership
ownership
ownership
ownership
Nodak Agency, Inc.
American West Insurance Company
Battle Creek Insurance Company
Tri-State, Ltd
100%
ownership
Primero Insurance Company
The executive offices of NI Holdings and Nodak
Insurance are located at 1101 First Avenue North, Fargo, North Dakota 58102, and the main office phone number is 701-298-4200. NI Holdings’
website address is www.niholdingsinc.com . The Company makes available on its website, free of charge, its Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) as soon as reasonably practicable after it electronically
files such material with, or furnish it to, the United States Securities and Exchange Commission (“SEC”). Information contained
on such website is not incorporated by reference into this 2024 Annual Report, and such information should not be considered to be part
of this 2024 Annual Report.
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Subsidiary and Affiliate Companies
Intercompany
Reinsurance Pooling Arrangement
Effective January 1, 2020, all of our insurance subsidiary and
affiliate companies entered into an intercompany reinsurance pooling agreement. Nodak Insurance is the lead company of the pool, and assumes
the net premiums, net losses, and underwriting expenses from each of the other four companies. Nodak Insurance then retrocedes balances
back to each company, while retaining its own share of the pool’s net underwriting results, based on individual pool percentages
established in the respective pooling agreement. This arrangement allows each insurance company to rely upon the capacity of the pool’s
total statutory capital and surplus. As a result, they are evaluated by A.M. Best Company, Inc. (“AM Best”) on a group basis
and hold a single combined financial strength rating, long-term issuer credit rating, and financial size category. Subsequent to the June
30, 2024, date of sale, Westminster is no longer a member of the pool, and the pooling percentages for the remaining insurance subsidiaries
were updated based on their respective surplus as a percentage of the pool as of December 31, 2023.
Nodak Insurance Company
Nodak Insurance is the largest domestic property and casualty insurance
company based in North Dakota, offering private passenger auto, homeowners, farmowners, commercial multi-peril, crop hail, and Federal
multi-peril crop insurance coverages through its captive agents in the state.
Nodak Insurance was formed in 1946 to offer property
and casualty insurance to members of the North Dakota Farm Bureau (“NDFB”), and benefits from a strong marketing affiliation
with that organization. Nodak Insurance’s bylaws provide that a person must be a member and remain a member of the NDFB in order
to become and remain a policyholder of Nodak Insurance. Nodak Insurance’s bylaws also require that four members of the Board of
Directors of Nodak Insurance must be members of the NDFB. Similarly, one-third of the members of the Board of Directors of Nodak Mutual
Group must be persons designated by the NDFB.
The NDFB has granted Nodak Insurance a nonexclusive,
nontransferable license to use the name “Farm Bureau” and the “FB” logo and associated trademarks to market Nodak
Insurance products. Nodak Insurance has held this license since the insurance company’s inception in 1946, and the current version
of the license agreement has been in place since 2002. The current license agreement between the NDFB and Nodak Insurance renewed on October
1, 2024, with an expiration date of September 30, 2025. The agreement has historically been renewed annually by a vote of the Nodak Insurance
Board of Directors. Under the current license agreement, Nodak Insurance is required to pay to the NDFB an annual royalty payment equal
to 1.3% of Nodak Insurance’s written premiums (excluding multi-peril crop insurance premiums), subject to a minimum annual payment
of $900 and a maximum annual payment of $1,672. The maximum royalty payment is adjusted annually based upon the June index month for the
Consumer Price Index.
As of December 31, 2024, Nodak Insurance distributed
its insurance products through 63 exclusive agents appointed by Nodak Insurance.
Nodak Agency, Inc.
Nodak Agency is an inactive shell corporation.
Tri-State, Ltd.
Tri-State, Ltd. is an inactive shell corporation.
American West Insurance Company
American West is a property and casualty insurance
company licensed in eight states in the Midwest and Western regions of the United States (“U.S.”). American West began writing
policies in 2002 and primarily writes private passenger auto, homeowners, and farm coverages in South Dakota. American West also writes
private passenger auto coverage in North Dakota, as well as crop hail and Federal multi-peril crop insurance coverages in Minnesota and
South Dakota. As of December 31, 2024, American West distributed its products through independent agents in 63 contracted agencies.
Primero Insurance Company
Primero is a wholly-owned subsidiary of Tri-State,
Ltd. Tri-State, Ltd. is an inactive shell corporation 100% owned by Nodak Insurance. Primero is a property and casualty insurance company
writing non-standard automobile coverage in the states of Nevada, Arizona, North Dakota, and South Dakota during 2024. Primero was acquired
by Nodak Insurance in 2014. As of December 31, 2024, Primero no longer writes coverage in the state of Nevada. Primero distributed its
policies through independent agents in 216 contracted agencies in the three remaining states.
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Battle Creek Insurance Company
Battle Creek is a property and casualty insurance
company writing private passenger auto, homeowners, and farm coverages solely in the state of Nebraska. As of December 31, 2024, Battle
Creek distributed its policies through independent agents in 113 contracted agencies. 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.
On January 2, 2024, Battle Creek issued 300,000
shares of its common stock to Nodak Insurance at a $10.00 per share par value and became a wholly-owned subsidiary of Nodak Insurance.
Because we concluded that we controlled Battle Creek prior to January 2, 2024, we consolidated the financial statements of Battle Creek,
and Battle Creek’s policyholders’ interest in Battle Creek was reflected as a non-controlling interest in shareholders’
equity in our Consolidated Balance Sheets for NI Holdings (“Consolidated Balance Sheets”) and its net income or loss was excluded
from net income or loss attributed to NI Holdings in our Consolidated Statements of Operations for NI Holdings (“Consolidated Statements
of Operations”). Subsequent to January 2, 2024, Battle Creek is fully consolidated in our Consolidated Balance Sheets and Consolidated
Statements of Operations and, as such, no longer reflected as a non-controlling interest.
Direct Auto Insurance Company
Direct Auto is a property and casualty insurance
company licensed in Illinois. Direct Auto began writing non-standard automobile coverage in 2007, and was acquired by NI Holdings on August
31, 2018, via a stock purchase agreement. As of December 31, 2024, Direct Auto distributed its policies through independent agents in
156 contracted agencies, concentrated primarily in the Chicago area.
Westminster American Insurance Company
Westminster is a property and casualty insurance
company licensed in 18 states and the District of Columbia. Westminster is headquartered in Owings Mills, Maryland and underwrites commercial
multi-peril insurance in the states of Delaware, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Pennsylvania, South Carolina,
Tennessee, Virginia, and the District of Columbia. Westminster was sold to Scott Insurance Holdings on June 30, 2024. Subsequent to the
date of sale, Westminster is reflected as discontinued operations within our Consolidated Balance Sheets and Consolidated Statements of
Operations. For additional information see Part II, Item 8, Note 20 “Discontinued Operations” of this 2024 Annual Report.
General Information
Nodak Insurance markets and distributes its policies through
its captive agents, while all other companies utilize the independent agent distribution channel. Additionally, all of the Company’s
insurance subsidiary and affiliate companies are rated “A” Excellent by AM Best.
The same executive management team provides oversight
and strategic direction for the entire organization. Nodak Insurance provides common product oversight, pricing practices, and underwriting
standards, as well as underwriting and claims administration, to itself, American West, and Battle Creek. Primero and Direct Auto personnel
manage the day-to-day operations of their respective companies. Westminster personnel managed the day-to-day operations of their company
prior to the date of sale.
The consolidated financial statements of NI Holdings
presented herein include the financial position and results of operations of NI Holdings, Direct Auto, Westminster (as discontinued operations),
and Nodak Insurance, including Nodak Insurance’s subsidiaries of American West, Primero and Battle Creek. Each of the insurance
companies is subject to examination and comprehensive regulation by the insurance department of its state of domicile, North Dakota.
Market Overview for Continuing Operations
We market our personal lines products in the upper
Midwest states of North Dakota, Nebraska, South Dakota, and Minnesota. We offer non-standard auto insurance in the states of Illinois,
Arizona, Nevada, South Dakota, and North Dakota. We offer commercial multi-peril insurance in the states of North Dakota and South Dakota.
The following chart shows our direct premiums written during the last two years and our relative market share within each of our states
during the year ended December 31, 2023:
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Year Ended
December 31, 2024
Year Ended December 31, 2023
Direct Premiums
Written
Direct Premiums
Written
Market Size
Rank in
State
North Dakota
$ 167,713
$ 163,505
$ 3,827,000
5 th
Illinois
78,523
86,348
35,939,000
59 th
Nebraska
53,244
50,698
7,573,000
32 nd
South Dakota
32,421
29,660
3,970,000
30 th
Arizona
5,180
4,077
17,959,000
163 rd
Minnesota
3,786
4,008
17,081,000
140 th
Nevada
1,434
2,938
8,562,000
139 th
Total direct premiums written
$ 342,301
$ 341,234
Market size information is not yet available for the year ended December 31, 2024.
Growth Strategy
We believe we have many opportunities to grow
our business. Strategies we employ to achieve this growth include:
● continued emphasis on our relationship with the NDFB, a key advocacy group for agricultural and rural interests which enjoys a high
profile and favorable reputation throughout North Dakota;
● expansion and enhancement of independent agency relationships, including the use of technology such as mobile apps, online quoting,
and policy issuance initiatives to make it easy for agents and insureds to do business with us;
● capitalizing on our excellent claims service for all insureds;
● selective expansion of our insurance products in states where we currently operate, as well as those states where we hold insurance
licenses; and
● consideration of strategic acquisitions and investment opportunities in businesses that align with our growth objectives.
Corporate Capital Strategy
Our philosophy is to deploy capital in a manner
that provides long-term protection for our policyholders and creates long-term value for our shareholders. This philosophy is supported
by a number of underlying strategies implemented across the organization that are focused on preservation of capital, including:
● prioritizing the use of data and modeling tools to help estimate the frequency and severity of risks within our insurance portfolio;
● maintaining a conservatively managed investment portfolio that supports our insurance operations under a wide range of operating and
market conditions;
● ensuring our reinsurance program is designed to provide sufficient protection against material insurance exposures including, but
not limited to, catastrophes caused by weather-related events; and
● relying upon our Enterprise Risk Management framework to identify, quantify, and manage a broad range of risks across the organization.
We view our capital position to consist of three
layers, each of which has a specific size and purpose:
● The first layer of capital, which we refer to as “regulatory capital,” is the amount of capital needed to satisfy state
insurance regulatory requirements while supporting our growth objectives. This capital is held by each of our insurance company subsidiaries.
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● The second layer of capital is considered “contingency capital.” While our regulatory capital is, by definition, a cushion
for absorbing financial consequences of adverse events, such as loss reserve development, litigation, weather catastrophes, and investment
market corrections, we view that as a base and hold additional capital for even more extreme operating conditions. This capital is generally
also held by each of our insurance company subsidiaries.
● The third layer of capital is classified as “excess capital” and represents the excess of the sum of the first two layers.
This capital is available for deployment by NI Holdings in conjunction with our excess capital deployment priorities.
Our excess capital deployment priorities are to
(1) invest in existing businesses where we see opportunities for profitable growth, (2) make strategic investments and acquisitions that
enhance our businesses and achieve appropriate risk-adjusted returns over time, and (3) return capital to shareholders through share repurchases
or shareholder dividends.
Insurance Products by Segment
Our consolidated financial results from continuing
operations include our Private Passenger Auto, Non-Standard Auto, Home and Farm, Crop, and All Other reporting segments. Information regarding
products and services offered in each segment is included below. Additionally, revenues, underwriting results, and identifiable assets
and liabilities for each segment are shown in Part II, Item 8, Note 21 “Segment Information.” The financial performance of
each segment is discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Private Passenger Auto
Nodak Insurance, Battle Creek, and American West
each write private passenger auto insurance to provide protection against liability for bodily injury and property damage arising from
automobile accidents as well as protection against loss from damage to automobiles owned by the insured. Private passenger auto accounted
for $97,209 (28.4%) of direct premiums written by the Company on a consolidated basis during 2024.
Non-Standard Auto
Primero and Direct Auto write non-standard auto
insurance with a focus on minimum-limit auto liability coverage. Non-standard auto insurance accounted for $87,467 (25.6%) of direct premiums
written by the Company on a consolidated basis during 2024.
Home and Farm
Nodak Insurance, Battle Creek, and American West
each write homeowners and farmowners policies to provide coverage for damage to buildings, equipment, and contents for a variety of perils,
including fire, lightning, wind, hail, and theft. These policies also cover liability arising from injury to other persons or their property
while on the insured’s premises. Home and farm accounted for $107,203 (31.3%) of direct premiums written by the Company on a consolidated
basis during 2024.
Crop
Nodak Insurance, American West, and Battle Creek
offer crop hail and multi-peril crop insurance policies. Multi-peril crop insurance is a federal program that protects against crop yield
losses from all types of natural causes and loss of revenue due to declines in the prices of agricultural products. Crop hail insurance
is a private insurance product designed to provide protection against losses to farmers’ crops due primarily to hail damage. Collectively,
crop insurance accounted for $36,421 (10.6%) of direct premiums written by the Company on a consolidated basis during 2024.
All Other
In addition to the products described above, Nodak
Insurance, American West, and Battle Creek write commercial and excess liability coverages. Collectively, these other coverages accounted
for $14,002 (4.1%) of the direct premiums written by the Company on a consolidated basis during 2024. This segment also includes an assumed
reinsurance book of business, with $820 of assumed premiums written on a consolidated basis during 2024. The majority of these assumed
premiums written are related to a domestic and international reinsurance pool for which the Company made the decision to non-renew its
participation as of January 1, 2022, and the associated assumed premiums represent run-off of this business.
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Crop Insurance
Crop insurance is purchased by agricultural producers,
including farmers, ranchers, and others to protect themselves against either the loss of their crops (yield) due to natural disasters
such as hail, freezing, plant disease, drought, and floods, or the loss of revenue due to declines in the prices of agricultural products.
The two general categories of crop insurance are referred to as “crop-yield insurance” and “crop-revenue insurance.”
Crop-yield insurance protects against a reduction in the yield per acre from the historical average yield in a specified area, such as
a county or National Oceanic and Atmospheric Administration weather grid, while crop-revenue insurance provides protection against declines
in the price of the particular crop. Most of the multi-peril crop insurance policies written today combine both yield and revenue protection,
with the revenue component providing the policyholder with the option to calculate price-based losses on the higher of the prevailing
price when the crop is planted or the price at harvest.
Beginning in 1980, the U.S. Congress expanded
the federal crop insurance program to cover more crops and regions of the country. More importantly, Congress permitted private sector
insurers to market and administer federal insurance policies in exchange for an opportunity to earn a profit while bearing a portion of
the insurance risk. Congress also authorized a premium subsidy for the farmers and ranchers. As a result, there was a rapid increase in
the acres insured from approximately 26 million acres in 1980 to 100 million acres in 1990. The Federal Crop Insurance Reform Act of 1994
made participation in the crop insurance program mandatory for farmers to be eligible to participate in other government support programs
and provided a minimum level of free catastrophic risk coverage for insured and noninsured crops.
American Farm Bureau Insurance Services (“AFBIS”)
underwrites all of our, as well as several other state Farm Bureau affiliated insurers, multi-peril crop and crop hail insurance policies.
AFBIS also processes and administers all claims made by policyholders under such policies. We reimburse AFBIS for its actual loss adjustment
expense with respect to the policies issued by us and pay AFBIS a percentage of the premiums we receive with respect to such policies.
Marketing and Distribution
Our marketing philosophy is to sell profitable
business using a focused, cost-effective distribution system. Nodak Insurance distributes its insurance products through exclusive agents
in North Dakota, while American West, Battle Creek, Primero, and Direct Auto rely on independent agents.
We review our agents with respect to both premium
volume and profitability. Our captive agents for Nodak Insurance are hired and trained by our sales staff in North Dakota, while the independent
agents for our other companies are appointed by the underwriting or marketing staff for each respective company. We hold regular training
sessions when we introduce new products or product changes, and we identify specific topics that may help our agents more effectively
market our products.
For the year ended December 31, 2024, no individual
agent was responsible for more than 5% of the Company’s direct premiums written.
Agents are compensated through a fixed base commission
structure. Agents receive commission as a percentage of premiums as their primary compensation from us. The Risk Management Agency of
the U.S. Department of Agriculture (“RMA”) establishes the maximum commission that can be paid to agents with respect to crop
insurance policies. Nodak Insurance, Battle Creek, American West, and Direct Auto pay annual profit-sharing commissions with respect to
all property and casualty (non-crop) business based on company-specific production metrics related to premiums and profitability.
Our marketing efforts are further supported by
our claims philosophy, which is designed to provide prompt and efficient service and claims processing, resulting in a positive experience
for agents and policyholders. We believe that these positive experiences contribute to achieving higher policyholder retention and new
business growth over time. While we rely on our captive and independent agents for distribution and customer support, underwriting and
claim handling responsibilities are retained by us. Many of our agents have had direct relationships with us for a number of years.
Underwriting, Risk Assessment, and Pricing
We strive to be disciplined in our pricing by
pursuing rate increases to maintain or improve our underwriting profitability while still being able to attract and retain customers.
We utilize pricing reviews that we believe will help us price risks more accurately, maintain appropriate policyholder retention, and
support the production of profitable new business. These pricing reviews involve
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evaluating our claims experience and loss trends on a
periodic basis to identify changes in the frequency and severity of our claims. We then consider whether our premium rates are adequate
relative to the level of underwriting risk as well as the sufficiency of our underwriting guidelines.
The nature of our business requires that we remain
sensitive to the marketplace and the pricing strategies of our competitors. Using the market information as a reference point, we typically
set our prices based on our estimated future costs. From time to time, we may reduce our discounts or apply a premium surcharge to achieve
an appropriate return. Pricing flexibility allows us to provide a fair rate commensurate with the assumed risk. If our pricing strategy
cannot yield sufficient premium to cover our costs on a particular type of risk, we may choose not to underwrite that risk. It is our
philosophy not to sacrifice profitability for premium growth.
Enterprise Risk Management
Our Company is subject to significant risks, including
the normal risks of a property and casualty insurance company. These risks are discussed in more detail in Part I, Item 1A, “Risk
Factors.”
We consider an enterprise-wide risk management
program to be an integral part of managing our business and a key element in our approach to corporate governance. Our Enterprise Risk
Management Committee (the “ERMC”) is responsible for the alignment of operational risk management strategies as the coordination
point for enterprise-level direction setting with regard to risk management issues. The multi-disciplinary ERMC regularly monitors risk
reports and metrics regarding a variety of continuing and emerging risks that may adversely affect the Company, its shareholders, its
policyholders, or other stakeholders. The Audit Committee of the Board of Directors oversees risk management and regularly receives reports
from the ERMC.
Reinsurance
We cede and assume certain premiums and losses to and from various
companies and associations under a variety of reinsurance agreements. We seek to limit the maximum net loss that can arise from large
risks or risks in concentrated areas of exposure through use of these agreements, either on an automatic basis under general reinsurance
contracts known as treaties or through facultative contracts on substantial individual risks.
Reinsurance contracts do not relieve us from our obligation to policyholders.
Additionally, failure of reinsurers to honor their obligations could result in significant losses to us. There can be no assurance that
reinsurance will continue to be available to us to the same extent, and at the same cost, as it has in the past. We may choose in the
future to reevaluate the use of reinsurance to increase or decrease the amounts of risk ceded to reinsurers.
For additional information, see Part II, Item 8, Note 6 “Reinsurance.”
Unpaid Losses and Loss Adjustment Expenses
We maintain reserves for unpaid losses and loss adjustment expenses.
Our liability for unpaid losses and loss adjustment expenses consists of (1) case reserves, which are reserves for claims that have been
reported to us, and (2) reserves for claims that have been incurred but not yet been reported and for the future development of case reserves
(“IBNR”). We determine a provision for the ultimate cost of those claims without regard to how long it takes to settle them
or the time value of money. The determination of reserves involves actuarial and statistical projections of what we expect to be the cost
of the ultimate settlement and administration of such claims. The liability for unpaid losses and loss adjustment expenses is set based
on facts and circumstances then known, estimates of future trends in claims severity, and other variable factors such as inflation and
changing judicial theories of liability. Our liability for unpaid losses and loss adjustment expenses is not discounted.
For additional information, see Part II, Item 7, “Critical
Accounting Policies” and Part II, Item 8, Note 8 “Unpaid Losses and Loss Adjustment Expenses.”
Investments
The majority of funds available for investments are deployed in
a widely diversified portfolio of high quality, liquid taxable U.S. government, tax-exempt and taxable U.S. municipal, taxable corporate,
and U.S. agency mortgage-backed bonds. We regularly monitor the effective duration of our fixed income investments, and our investment
purchases and sales are executed with the objective of having adequate funds available to satisfy our insurance and other obligations.
Generally, the expected principal and
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interest payments produced by our fixed income portfolio adequately fund the estimated runoff of
the Company’s insurance reserves. The substantial amount by which the fair value of the fixed income portfolio exceeds the value
of the net insurance liabilities, as well as the positive cash flow from newly sold policies and the large amount of high-quality liquid
bonds, contribute to the Company’s ability to fund claim payments without having to sell illiquid assets or access its credit facilities.
We also invest a much smaller percentage of the portfolio in private
placement debt offerings and equity securities, which have the potential for higher returns but also involve varying degrees of risk,
including higher volatility and/or less liquidity.
The Investment Committee of NI Holdings’ Board of Directors
reviews and approves the Company’s investment policy periodically. The investment portfolio is managed by Conning, Inc.
For additional information, see Part II, Item 7, “Critical
Accounting Policies” and Part II, Item 8, Note 4 “Investments.”
Financial Strength
Ratings are an important factor in assessing the
Company’s competitive position in the insurance industry. The Company is reviewed regularly by the independent rating agency AM
Best, who assigns a financial strength rating to the Company, which reflects its assessment of an insurer’s ability to meet its
financial obligations to policyholders. An insurer’s financial strength rating is one of the primary factors evaluated by those
in the market to purchase insurance. A poor rating indicates that there is an increased likelihood that the insurer could become insolvent
and therefore not able to fulfill its obligations under the insurance policies it issues. This rating can also affect an insurer’s
level of written premiums, the lines of business it can write, and, for insurers like us that are also public registrants, the market
value of its securities.
All of the Company’s insurance subsidiaries
and affiliate companies are rated “A” Excellent by AM Best, which is the third highest out of 15 possible ratings, under a
group rating due to the intercompany pooling reinsurance agreement. Effective May 10, 2024, AM Best affirmed a stable financial strength
outlook to the group.
Competition
The property casualty and crop insurance markets
are competitive. We compete with stock insurance companies, mutual insurance companies, and other underwriting organizations. Our largest
competitors in North Dakota for private passenger auto and homeowners include Progressive, State Farm, American Family, National General,
Farmers Union, and Auto-Owners insurance companies. In South Dakota and Nebraska, we have small market shares and our competitors are
the large national and regional companies as well as Farmers Mutual of Nebraska. In our non-standard auto markets, which are primarily
Illinois and Arizona, our primary competitors are regional carriers.
Based on 2023 data, Nodak Insurance is the second
largest writer of farmowners insurance in North Dakota. Our largest competitors include Farmers Union, North Star Mutual, American Family,
and Liberty Mutual insurance companies. In Nebraska and South Dakota, we have a small farmowners market share, which is dominated by the
large national and regional carriers.
The principal competitors in our markets for multi-peril
crop insurance include Chubb, QBE Insurance Group, Zurich, AgriSompo, and Great American Insurance Group. The premium rates for multi-peril
crop insurance are established by the RMA and, accordingly, we compete with other insurance companies on factors such as agency relationships,
claim service, and market reputation in the crop insurance market. We believe that our relationship with the NDFB and our leading market
share are significant factors in maintaining our market share of the crop insurance business in North Dakota. The Company’s multi-peril
crop insurance premiums for North Dakota were $30,641, $39,073, and $45,465 for the years ended December 31, 2024, 2023, and 2022, respectively.
Total North Dakota multi-peril crop premiums for the industry were $1,231,110, $1,491,650, and $1,537,758 for the years ended December
31, 2024, 2023, and 2022, respectively.
With respect to writing property and casualty
insurance, competitive factors include pricing, agency relationships, policy support, claim service, and market reputation. Like other
writers of property and casualty insurance, our policy terms vary from state to state based on state regulations, competition, pricing,
and other factors including the prescribed minimum liability limits in each state. We believe our Company differentiates itself from many
larger companies competing for this business by focusing on ease of doing business and providing excellent claims service with local,
knowledgeable employees.
To compete successfully in the property and casualty
insurance market, we utilize data-driven insights and a disciplined underwriting approach to assess and price risks, practice prudent
claims management, reserve appropriately for unpaid claims, and provide quality service and competitive commissions to our independent
and captive agents.
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Regulation
General
We are subject to extensive regulation, particularly
at the state level. This regulation varies by state, but generally has its source in statutes and regulations that establish standards
and requirements for conducting the business of insurance and that delegate regulatory authority to state insurance regulatory agencies.
In general, such regulation is intended for the protection of those who purchase or use insurance products, not the companies that write
the policies. These laws and regulations have a significant impact on our business and relate to a wide variety of matters including accounting
methods, agent and company licensure, claims procedures, corporate governance, examinations, investing practices, policy forms, pricing,
trade practices, reserve adequacy, and underwriting standards.
State insurance laws and regulations require our
insurance company subsidiaries to file financial statements with state insurance departments everywhere they do business, and they are
subject to examination by the departments they are domiciled in at any time. Our insurance company subsidiaries prepare statutory-basis
financial statements in accordance with accounting practices and procedures prescribed or permitted by the state in which they are domiciled.
Our domiciliary states generally conform to National Association of Insurance Commissioners (“NAIC”) accounting practices
and procedures, so our examination reports and other filings generally are accepted by other states. As of December 31, 2024, all of our
insurance subsidiaries are domiciled in North Dakota.
The NAIC provides guidance to the states with
respect to standardized laws and regulations (including the accounting practices and procedures discussed above), which represent an effort
to standardize insurance industry practices across state lines, oftentimes referred to as “Model Regulations.” It should be
noted that these “model” laws are regulations that have no authority until the individual states pass them as part of the
state legislative process, which may, or may not, be done as suggested, or with modifications.
Premium rate regulation varies greatly among jurisdictions
and lines of insurance. In the states in which our insurance company subsidiaries write insurance, premium rates for the various lines
of insurance are subject to either prior approval or limited review upon implementation. The premium rates for multi-peril crop insurance
are established by the RMA. For additional information, see Part I, Item 1, “Crop Insurance.”
Many jurisdictions have laws and regulations that
limit an insurer’s ability to withdraw from a particular market. For example, states may limit an insurer’s ability to cancel
or non-renew policies. Laws and regulations that limit cancellation and non-renewal may restrict our ability to exit unprofitable marketplaces
in a timely manner.
Crop Insurance
The multi-peril crop insurance business is overseen
by the federal government through the RMA. The RMA outlines policy language, establishes premium rates, and develops loss adjustment procedures
for insurance programs under the federal crop insurance program. In addition, through the Federal Crop Insurance Corporation (“FCIC”),
the RMA provides premium subsidies to farmers and sets the commission percentages that can be paid to agents. All participating insurance
carriers are subject to the same Standard Reinsurance Agreement (“SRA”), which outlines items such as reporting requirements
and claims handling procedures, proportional and non-proportional reinsurance terms, and the level of administrative and operating reimbursement
paid to insurers. The RMA also provides oversight to the approved insurance providers (“AIPs”). The AIPs are required to use
the policies, premium rates, and loss adjustment procedures set by the RMA without modification and are required to issue a policy to
any eligible applicant regardless of risk or profitability. The RMA conducts audits of AIPs with respect to claims and loss adjustment
procedures.
American Agricultural Insurance Company is the
AIP through which we issue multi-peril crop insurance policies and is the holder of the SRA with the FCIC.
NAIC Risk-Based Capital Requirements
North Dakota and most other states have adopted
the NAIC system of risk-based capital requirements that require insurance companies to calculate and report information under a risk-based
formula. These risk-based capital requirements attempt to measure statutory capital and surplus needs based on the risks in a company’s
mix of products and investment portfolio. Under the formula, a company first determines its “authorized control level” risk-based
capital. This authorized control level takes into account (i) the risk with respect to the insurer’s assets; (ii) the risk of adverse
insurance experience with respect to the insurer’s liabilities and obligations; (iii) the interest rate risk with respect to the
insurer’s business; and (iv) all other business risks and such other relevant risks as are set forth in the risk-based capital instructions.
A company’s “total adjusted capital” is the sum of statutory capital and surplus and such other items as the risk-based
capital instructions may provide. The formula is designed to allow state insurance regulators to identify insufficiently capitalized companies.
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The requirements provide for four different levels
of regulatory attention. The “company action level” is triggered if a company’s total adjusted capital is less than
2.0 times its authorized control level but greater than or equal to 1.5 times its authorized control level. At the company action level,
the company must submit a comprehensive plan to the regulatory authority that discusses proposed corrective actions to improve the capital
position. The “regulatory action level” is triggered if a company’s total adjusted capital is less than 1.5 times but
greater than or equal to 1.0 times its authorized control level. At the regulatory action level, the regulatory authority will perform
a special examination of the company and issue an order specifying corrective actions that must be followed. The “authorized control
level” is triggered if a company’s total adjusted capital is less than 1.0 times but greater than or equal to 0.7 times its
authorized control level. At this level, the regulatory authority may take action it deems necessary, including placing the company under
regulatory control. The “mandatory control level” is triggered if a company’s total adjusted capital is less than 0.7
times its authorized control level. At this level, the regulatory authority is mandated to place the company under its control. The capital
levels of our insurance subsidiary and affiliate companies all exceed the authorized control level and have never triggered any of these
regulatory capital levels. We cannot guarantee, however, that the capital requirements applicable to such companies will not increase
in the future, or that the underlying ratios will not erode.
NAIC Ratios
The NAIC has also developed a set of 13 financial
ratios referred to as the Insurance Regulatory Information System (“IRIS”). Based on statutory-basis financial statements
filed with state insurance regulators, the NAIC annually calculates these IRIS ratios to assist state insurance regulators in monitoring
the financial condition of insurance companies. The NAIC has established an acceptable range for each of the IRIS financial ratios. If
four or more of its IRIS ratios fall outside the range deemed acceptable by the NAIC, an insurance company may receive inquiries from
individual state insurance departments. However, a ratio falling outside the usual range may not necessarily be considered adverse. In
some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. During
the years ended December 31, 2024 and 2023, none of our insurance company subsidiaries produced results outside the acceptable range for
more than three of the IRIS tests. During the year ended December 31, 2022, our insurance company subsidiaries produced results outside
the acceptable range for as many as six of the IRIS tests, primarily driven by our significant net loss for the year that negatively impacted
IRIS ratios related to the operating ratio and certain ratios based on policyholders’ surplus.
Enterprise Risk Assessment
In 2012, the NAIC adopted various changes to its
Model Regulations (the “NAIC Amendments”). The NAIC Amendments, when adopted by the various states, are designed to respond
to perceived gaps in the regulation of insurance holding company systems in the U.S. The NAIC Amendments include a requirement that an
insurance holding company system’s ultimate controlling person submit annually to its lead state insurance regulator an “enterprise
risk report.” This enterprise risk report identifies the activities, circumstances, or events involving one or more affiliates of
an insurer that, if not remedied properly, are likely to have a material adverse effect upon the financial condition or liquidity of the
insurer or its insurance holding company system as a whole. The Company files a Form F Enterprise Report annually with each domiciliary
state in support of this requirement. The NAIC Amendments also include provisions requiring a controlling person to submit prior notice
to its domiciliary insurance regulator of its divestiture of control, having detailed minimum requirements for cost sharing and management
agreements between an insurer and its affiliates, and expanding of the agreements between an insurer and its affiliates to be filed with
its domiciliary insurance regulator.
In 2012, the NAIC also adopted the Own Risk Solvency
Assessment (“ORSA”) Model Act. The ORSA Model Act, when adopted by the various states, will require an insurance holding company
system’s chief risk officer to submit at least annually to its lead state insurance regulator a confidential report detailing its
own internal solvency assessment. Such an assessment is to be tailored to the nature, scale, and complexity of an insurer. This assessment
will include the material and relevant risks identified by the insurer associated with an insurer’s current business plan and the
sufficiency of capital resources to support those risks. Although our insurance company subsidiaries are exempt from ORSA because of their
size, we intend to incorporate those elements of ORSA that we believe constitute “best practices” into our internal enterprise
risk assessment.
Market Conduct Regulation
State insurance laws and regulations include numerous
provisions governing trade practices and the marketplace activities of insurers, including provisions governing the form and content of
disclosure to consumers, illustrations, advertising, sales practices, and complaint handling. State regulatory authorities generally enforce
these provisions through periodic market conduct examinations.
Guaranty Fund Laws
All states have guaranty fund laws under which
insurers doing business in the state can be assessed to fund policyholder liabilities of insolvent insurance companies. Under these laws,
an insurer is subject to assessment depending upon its market share in the state of a given line of business. For the years ended December
31, 2024, 2023, and 2022, we paid only minimal assessments pursuant to state insurance guaranty association laws. We establish reserves
relating to insurance companies that are subject to insolvency proceedings
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when it becomes probable that we will be subject to an assessment
and the amount of such assessment can be estimated. We cannot predict the amount and timing of any future assessments under these laws.
Federal Regulation
The U.S. federal government generally does not
directly regulate the insurance industry except for certain areas of the market, such as insurance for crops, flood, nuclear, and terrorism
risks. However, the federal government has undertaken initiatives or considered legislation in several areas that may affect the insurance
industry, including tort reform, corporate governance, and the taxation of reinsurance companies. The Dodd-Frank Act established the Federal
Insurance Office, which is authorized to study, monitor, and report to Congress on the insurance industry and to recommend that the Financial
Stability Oversight Council designate an insurer as an entity posing risks to the U.S. financial stability in the event of the insurer’s
material financial distress or failure. In December 2013, the Federal Insurance Office issued a report on alternatives to modernize and
improve the system of insurance regulation in the U.S., including by increasing national uniformity through either a federal charter or
effective action by the states. Changes to federal legislation and administrative policies in several areas, including changes in federal
taxation, can also significantly affect the insurance industry and us.
We are also subject to the Fair and Accurate Credit
Transactions Act of 2003 and the Health Insurance Portability and Accountability Act of 1996, both of which require us to protect the
privacy of our customers’ information, including health and credit information.
Privacy
We are subject to numerous U.S. federal and state
laws governing the collection, disclosure, and protection of personal and confidential information of our clients or employees. These
laws and regulations are increasing in complexity and number, change frequently, and may conflict. Congress, state legislatures, and regulatory
authorities are expected to consider additional regulation relating to privacy and other aspects of customer information.
As mandated by the Gramm-Leach-Bliley Act (“GLBA”),
states have promulgated laws and regulations that require financial institutions, including insurance companies, to take steps to protect
the privacy of certain consumer and customer information. The NAIC has adopted several provisions to facilitate the implementation of
the GLBA, including the Privacy of Consumer Financial and Health Information Model Regulation and the Standards for Safeguarding Customer
Information Model Regulation. Several states adopted similar provisions regarding the safeguarding of customer information. We have implemented
procedures to comply with the GLBA’s related privacy requirements.
In October 2017, the NAIC adopted the Insurance
Data Security Model Law (“IDSML”), which requires insurers, insurance agents, and other entities required to be licensed under
state insurance laws to develop and maintain a written information security program, conduct risk assessments, oversee the data security
practices of third-party service providers, and other related requirements. Several states in which we operate, including North Dakota,
have adopted the IDSML. Such enactments and regulations could raise compliance costs and subject us to the risk of regulatory enforcement
actions, penalties, and reputational harm. Any such events could potentially have an adverse impact on our business, financial condition,
or results of operations.
Office of Foreign Asset Control
The Treasury Department’s Office of Foreign
Asset Control (“OFAC”) maintains a list of “Specifically Designated Nationals and Blocked Persons” (the “SDN
List”). The SDN List identifies persons and entities that the government believes are associated with terrorists, rogue nations,
or drug traffickers. OFAC’s regulations prohibit insurers, among others, from doing business with persons or entities on the SDN
List. If the insurer finds and confirms a match, the insurer must take steps to block or reject the transaction, notify the affected person,
and file a report with OFAC.
Jumpstart Our Business Startups Act
of 2012
Until December 31, 2022, we were an emerging growth
company (“EGC”), as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We previously
took advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs,
such as reduced public company reporting, accounting, and corporate governance requirements. However, beginning on December 31, 2022,
we are no longer an EGC and no longer have the ability to delay adoption of these new or revised accounting standards or to take advantage
of reduced corporate governance disclosures.
Dividends
As an insurance holding company with no independent
operations or source of revenue, our capacity to pay dividends to our shareholders is based on the ability of our insurance company subsidiaries
to pay dividends to us. The ability of our subsidiaries to pay dividends to us is regulated by the laws of their state of domicile. Under
these laws, insurance companies must provide advance
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informational notice to the domicile state insurance regulatory authority prior to
payment of any dividend or distribution to its shareholders. Prior approval from the state insurance regulatory authority must be obtained
before payment of an “extraordinary dividend” as defined under the state’s insurance code. For additional information,
see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources,” and Part II, Item 8, Note 22 “Statutory Net Income (Loss), Capital and Surplus, and Dividend Restrictions.”
Holding Company Laws
Most states, including North Dakota, have enacted
legislation that regulates insurance holding company systems. Each insurance company in a holding company system is required to register
with the insurance supervisory agency of its state of domicile and furnish certain information, including information concerning the operations
of companies within the holding company group that may materially affect the operations, management, or financial condition of the insurers
within the group. Pursuant to these laws, the North Dakota Insurance Department requires prior disclosure of material transactions involving
an insurance company and its affiliates. Under these laws, the North Dakota Insurance Department will have the right to examine us at
any time.
All transactions within our consolidated group
affecting our insurance company subsidiaries must be fair and equitable. Notice of certain material transactions between NI Holdings and
any person or entity in our holding company system will be required to be given to the Department of Insurance of the applicable domiciliary
state. Certain transactions cannot be completed without the prior approval of the various Departments of Insurance.
Approval of the state insurance commissioner is
required prior to any transaction affecting the control of an insurer domiciled in that state. In North Dakota, the acquisition of 10%
or more of the outstanding voting securities of an insurer or its holding company is presumed to be a change in control. North Dakota
law also prohibits any person or entity from (i) making a tender offer for, or a request or invitation for tenders of, or seeking to acquire
or acquiring any voting security of a North Dakota insurer if, after the acquisition, the person or entity would be in control of the
insurer, or (ii) effecting or attempting to effect an acquisition of control of or merger with a North Dakota insurer, unless the offer,
request, invitation, acquisition, effectuation, or attempt has received the prior approval of the North Dakota Insurance Department.
Human Capital
Our key human capital management objectives are
to attract, retain, and develop talent to deliver on the Company’s strategy. To support these objectives, our human resources programs
are designed to recruit and retain talented individuals; provide training and development within the Company and the insurance industry;
reward and support employees through competitive pay and benefit programs; keep employees safe and healthy; and provide opportunities
for community involvement.
We offer comprehensive compensation and benefits
packages to our employees including a 401(k) Plan, Employee Stock Ownership Plan (“ESOP”), healthcare and insurance benefits,
health savings and flexible spending accounts, paid time off, and flexible work arrangements. We also offer stock-based compensation to
certain management personnel as a way to attract and retain key talent. For additional information, see Part II, Item 8, Note 12 “Benefit
Plans” and Note 18 “Share-Based Compensation” for further discussion of our benefit plans and stock-based compensation.
As of December 31, 2024, NI Holdings and its subsidiaries
had 216 total employees, of which 202 were full-time employees. Employee turnover averaged 29.0% during 2024, compared to 22.7% during
2023, and 25.2% during 2022. A significant portion of this turnover is related to Direct Auto, which generally experiences higher turnover.
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