Description

NI Holdings Inc

NI Holdings Inc is a mutual holding company that controls Nodak Insurance. The stock is a unique security. I see a path to the stock trading for over $22 within the next year.

There are currently effectively two parts of the company- the insurance business and the the excess capital at the holdco.

The Insurance Business

Unlike many MHCs which are poorly run or sub-scale banks, this company is a decent quality small insurance business. Over the past four years, the underwriting profit (inclusive of fee and other income)/net premiums earned has been 11.4%, 15.0%, -2.5% and 7.8% or an average of 7.9%.

The stat combined ratio from 2010-2015 was 90.8%, 112.1%, 84.7%, 95.4%, 90.2%, 86.5% for an average of 93.3%.

The company has demonstrated extreme conservatism in reserving as demonstrated by the triangle on page 13 of the 2017 10-K.

The company also states in the 2017 10-K that they “believe that the market is in a ‘firming’ phase in response to higher frequency and severity of weather-related events in our markets as well as the rest of the world.”

A normalized model for the business assumes a premium to surplus ratio of 1.00 and a combined ratio of 93%. The insurance business has $183.8mm of stat surplus. This leads to $12.9mm of underwriting profit. The business would also generate $1.65mm of fee and other income. The total investments at the insurance companies (ex holdco) are $314mm - $86mm or $228mm. Using a 3% yield and a 21% tax rate, the insurance profit would be $16.9mm or a 9.2% return on surplus.

I believe as a standalone entity the insurance business would be worth more than book.

The Holdco Cash and Investments

The holdco has $86mm in cash and investments and $83.6mm in capital. This is a function of the interesting history of the demutualization process. The company and their bankers played a large role in getting the North Dakota law allowing the demutualization passed. Many of the typical MHC rules/constraints don’t apply here. For example, they were allowed to buy back stock immediately. The mutual is also allowed to waive dividends. Finally, they were not required to inject capital raised in the offering into the insurance company.

I think this flexibility could lead to the ability to create significant value using the holdco cash. On March 5, 2018 they announced a $10mm repurchase plan. Whereas the $8mm plan executed last year was to offset restricted stock grants, this plan seems to be about creating value in the event that the stock price declines. This should mitigate downside in the share price.

How should we value the stock?

There are several ways to look at valuation for a MHC. The first way is based on fully converted book value. Based on 14% leakage on the second-step (which is likely high given the size of first step ESOP and restricted stock), the current valuation is 85.6% of TBV. 100% implies a target price of $21.77.

We can also look at the market cap of the minority shares compared to the earnings power of the business. To the extent, you can execute a second-step at or above book, all of the earnings power is accruing to the minority shareholders. The normalized earnings power outlined above of $16.9mm would be $1.74 per minority share. This implies a current price of <10x and a target multiple of $22/1.74or 12.6x. This earnings analysis is supported also by the statements by the company that the mutual intends to waive dividends.

Risks

The biggest risk is a value destroying acquisition and on the flip side the biggest potential windfall could come from a great acquisition. Every indication from management if there is an acquisition it would be a relatively small commercial lines acquisition which shouldn’t move the needle dramatically on value.

2011 and 2016 results were wrecked by bad North Dakota weather. This could happen again although year-to-year earnings should not really matter that much.

The company generated $10.9, $9.3 and $7.0mm in crop insurance profits in the last three years respectively. Material changes to the federal crop insurance programs could harm those profits.

Catalyst

Homerun scenarios could include mutual acquisitions like those executed by Investors Savings Bank before their second-step. Given NODK’s position as the only insurance MHC, they are in a unique position to make mutual acquisitions.

The company would also benefit from a large share repurchase. Given the sizable earnings and the small minority value, the company can buy back significant amounts of minority shares over time.