1、UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington,D.C.20549FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31,2016 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the
2、 transition period from _ to _Commission file number 001-37973NI HOLDINGS,INC.(Exact name of registrant as specified in its charter)NORTH DAKOTA(State or other jurisdiction ofincorporation or organization)81-2683619(IRS EmployerIdentification No.)1101 First Avenue NorthFargo,North Dakota(Address of
3、principal executive offices)58102(Zip Code)(701)298-4200Registrants telephone number,including area codeSecurities registered pursuant to Section 12(b)of the Act:Common Stock,$0.01 par value per shareTitle of each class)NASDAQ Capital Market(Name of each exchange on which registered)Securities regis
4、tered pursuant to Section 12(g)of the Act:NONEIndicate by check mark if the registrant is a well-known seasoned issuer,as defined in Rule 405 of the Securities Act.Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)of the Act.Yes No
5、 Indicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934during the preceding 12 months(or for such shorter period that the registrant was required to file such reports),and(2)has been subject to such fili
6、ngrequirements for the past 90 days.Yes NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,if any,every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T(232.405 of this chapter)during the pr
7、eceding 12 months(or for such shorter period thatthe registrant was required to submit and post such files).Yes No Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein,and will not be contained,to the bestof registrants knowledge,in
8、 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K.Indicate by checkmark whether the registrant is a large accelerated filer,an accelerated filer,a non-accelerated filer,or a smaller reporting company.See thedefinitio
9、ns of“large accelerated filer”,“accelerated filer”and“smaller reporting company”in Rule 12b-2 of the Exchange Act.Large accelerated filer Accelerated filerNon-accelerated filer(Do not check if a smaller reporting company)Smaller reporting companyIndicate by checkmark whether the registrant is a shel
10、l company(as defined in Rule 12b-2 of the Exchange Act).Yes No The number of the Registrants common shares outstanding on March 31,2017 was 23,000,000.No preferred shares are issued or outstanding.Documents incorporated by ReferenceNone TABLE OF CONTENTS Page CERTAIN IMPORTANT INFORMATION1 FORWARD-L
11、OOKING STATEMENTS1 PART I 3 Item 1.Business3Item 1A.Risk Factors19Item 1B.Unresolved Staff Comments29Item 2.Properties29Item 3.Legal Proceedings29Item 4.Mine Safety Disclosures29 PART II 30 Item 5.Market for Registrants Common Equity,Related Shareholder Matters and Issuer Purchases of Equity Securit
12、ies30Item 6.Selected Financial Data31Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations32Item 7A.Quantitative and Qualitative Information about Market Risk52Item 8.Financial Statements and Supplementary Data54Item 9.Changes in and Disagreements with Accountan
13、ts on Accounting and Financial Disclosure81Item 9A.Controls and Procedures81Item 9B.Other Information81 PART III 82 Item 10.Directors,Executive Officers and Corporate Governance82Item 11.Executive Compensation85Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockh
14、older Matters89Item 13.Certain Relationships and Related Transactions,and Director Independence89Item 14.Principal Accounting Fees and Services91 PART IV 92 Item 15.Exhibits92Item 16.Form 10-K Summary93 i Table of Contents CERTAIN IMPORTANT INFORMATIONUnless the context otherwise requires,as used in
15、 this annual report on Form 10-K:“NI Holdings,”“the Company,”“we,”“us”and“our”refer to NI Holdings,Inc.,together with Nodak Mutual and its subsidiaries and BattleCreek,for periods discussed prior to completion of the conversion,and for periods discussed after completion of the conversion refer to NI
16、Holdings,Inc.and all of its subsidiaries and Battle Creek;“Mutual Holding Company”and“Nodak Mutual Group”refer to Nodak Mutual Group,Inc.,which is the majority shareholder of NIHoldings;the“conversion”refers to the series of transactions by which Nodak Mutual Insurance Company converted from a mutua
17、l insurancecompany to a stock insurance company and became a wholly owned subsidiary of NI Holdings;“Nodak Insurance Company”refers to Nodak Mutual Insurance Company after the conversion;“Nodak Mutual”refers to Nodak Mutual Insurance Company prior to the conversion;“members”refers to the policyholde
18、rs of Nodak Mutual,who are the named insureds under insurance policies issued by Nodak MutualInsurance Company;and“Battle Creek”refers to Battle Creek Mutual Insurance Company.Battle Creek is not a subsidiary of Nodak Insurance Company,but all ofits insurance policies are reinsured by Nodak Insuranc
19、e Company through a 100%quota share reinsurance agreement and Battle Creek iscontrolled by Nodak Insurance Company as a result of an affiliation agreement between Battle Creek and Nodak Insurance Company.Battle Creek is consolidated with Nodak Insurance Company for financial accounting purposes.FORW
20、ARD-LOOKING STATEMENTSThis document contains forward-looking statements,which can be identified by the use of such words as“estimate,”“project,”“believe,”“could,”“may,”“intend,”“anticipate,”“plan,”“may,”“seek,”“expect”and similar expressions.These forward-looking statements include:statements of goa
21、ls,intentions and expectations;statements regarding prospects and business strategy;andestimates of future costs,benefits and results.The forward-looking statements are subject to numerous assumptions,risks and uncertainties,including,among other things,the factors discussedunder the heading“Risk Fa
22、ctors”that could affect the actual outcome of future events.All of these factors are difficult to predict and many are beyond our control.These important factors include those discussed under“Risk Factors”and those listed below:material changes to the federal crop insurance program;future economic c
23、onditions in the markets in which we compete that are less favorable than expected;the effect of legislative,judicial,economic,demographic and regulatory events in the jurisdictions where we do business;our ability to enter new markets successfully and capitalize on growth opportunities either throu
24、gh acquisitions or the expansion of ourproducer network;financial market conditions,including,but not limited to,changes in interest rates and the stock markets causing a reduction of investmentincome or investment gains and a reduction in the value of our investment portfolio;heightened competition
25、,including specifically the intensification of price competition,the entry of new competitors and the developmentof new products by new or existing competitors,resulting in a reduction in the demand for our products;1Table of Contents changes in general economic conditions,including inflation,unempl
26、oyment,interest rates and other factors;estimates and adequacy of loss reserves and trends in loss and loss adjustment expenses;changes in the coverage terms required by state laws with respect to minimum auto liability insurance,including higher minimum limits;our inability to obtain regulatory app
27、roval of,or to implement,premium rate increases;our ability to obtain reinsurance coverage at reasonable prices or on terms that adequately protect us and to collect amounts that we believewe are entitled to under such reinsurance;the potential impact on our reported net income that could result fro
28、m the adoption of future accounting standards issued by the PublicCompany Accounting Oversight Board or the Financial Accounting Standards Board or other standard-setting bodies;unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;the potential
29、impact of fraud,operational errors,systems malfunctions,or cybersecurity incidents;adverse litigation or arbitration results;andadverse changes in applicable laws,regulations or rules governing insurance holding companies and insurance companies,and tax oraccounting matters including limitations on
30、premium levels,increases in minimum capital and reserves,and other financial viabilityrequirements,and changes that affect the cost of,or demand for our products.Because forward-looking information is subject to various risks and uncertainties,actual results may differ materially from that expressed
31、 or impliedby the forward-looking information.2Table of Contents PART IItem 1.BusinessOverviewNI Holdings is a North Dakota business corporation that is the stock holding company of Nodak Insurance Company and became such in connectionwith the conversion of Nodak Mutual Insurance Company from the mu
32、tual to stock form of organization and the creation of a mutual holding company.Theconversion was consummated on March 13,2017.Immediately following the conversion,all of the outstanding shares of common stock of Nodak InsuranceCompany were issued to Nodak Mutual Group,which then contributed the sha
33、res to NI Holdings in exchange for 55%of the outstanding shares of commonstock of NI Holdings.Nodak Insurance Company then became a wholly owned stock subsidiary of NI Holdings.Prior to completion of the conversion,NIHoldings conducted no business and had no assets or liabilities.As a result of the
34、conversion,NI Holdings became the holding company for Nodak InsuranceCompany and its existing subsidiaries.Nodak Mutual was formed in 1946 to offer property and casualty insurance to members of the North Dakota Farm Bureau.Nodak Mutuals bylawsprovide that a person must be a member and remain a membe
35、r of the North Dakota Farm Bureau in order to become and remain a policyholder of NodakMutual.Such bylaws also require that certain members of the board of directors of Nodak Mutual must be members of the North Dakota Farm Bureau.Thebylaws of Nodak Insurance Company continue to require policyholders
36、 to be members of the North Dakota Farm Bureau and provide that four members ofthe board of directors of Nodak Insurance Company must be members of the board of directors of the North Dakota Farm Bureau.Similarly,one-third of themembers of the board of directors of Nodak Mutual Group must be persons
37、 designated by the North Dakota Farm Bureau.The North Dakota Farm Bureau has granted Nodak Mutual a nonexclusive,nontransferable license to use the name“Farm Bureau”and the“FB”logo and associated trademarks to market Nodak Mutual products,including insurance products.Nodak Mutual has held this licen
38、se since the insurancecompanys inception in 1946,and the current version of the license agreement has been in place since 2002.Although the current license agreement expiredon March 31,2017,the license and a new agreement between North Dakota Farm Bureau and Nodak Insurance Company became effective
39、April 1,2017,with a new expiration date of September 30,2017.The agreement has historically been renewed annually by a vote of the Nodak Mutual board of directors.Under the license agreement,Nodak Mutual is required to pay to the North Dakota Farm Bureau an annual royalty payment equal to 1.3%of Nod
40、ak Mutualswritten premiums(excluding multi-peril crop insurance premiums),subject to a maximum royalty payment of$1,269,728 and a minimum payment of$900,000.The maximum royalty payment is adjusted annually based upon the Consumer Price Index as of June 1.Nodak Insurance Companys subsidiaries include
41、 American West Insurance Company and Primero Insurance Company.Battle Creek MutualInsurance Company is an affiliate of Nodak Insurance Company.A more complete description of each of the Nodak Insurance Company subsidiaries isincluded below.Nodak Insurance Company and Battle Creek have been assigned“
42、A”ratings by AM Best,which is the third highest out of 15 possibleratings.American West is rated A-and Primero is unrated.The consolidated financial statements presented herein reflect the consolidated financial positionand results of operations of Nodak Insurance Company,American West,Battle Creek
43、and Primero.Each of the insurance companies is subject to examinationand comprehensive regulation by the insurance department of its state of domicile.Nodak Insurance Company writes multi-peril crop,crop hail,private passenger automobile,farmowners,homeowners,and commercial property andliability pol
44、icies in North Dakota.Only members of the North Dakota Farm Bureau Federation can purchase insurance coverage from Nodak InsuranceCompany.Nodak Insurance Company distributes its insurance products through approximately 65 exclusive agents appointed by Nodak InsuranceCompany.At December 31,2016,Nodak
45、 Mutual had consolidated assets and equity of$278.7 million and$153.4 million,respectively,and for the year endedDecember 31,2016,Nodak Mutual had consolidated direct premiums written of$180.9 million,net premiums earned of$152.8 million,and net income afternoncontrolling interest of$4.6 million.The
46、 executive offices of Nodak Insurance Company are located at 1101 1st Avenue North,Fargo,North Dakota 58102,and its phone number is 701-298-4200.Nodak Insurance Companys web site address is .Information contained on such website is not incorporated by reference intothis Annual Report on Form 10-K,an
47、d such information should not be considered to be part of this Annual Report on Form 10-K.American West Insurance Company(“American West”)American West is licensed to write insurance in eight states in the Midwest and Western regions of the United States,but currently issues policies inSouth Dakota,
48、Minnesota,and North Dakota.American West currently issues multi-peril crop,crop hail,3Table of Contents farmowners,private passenger auto,and homeowners insurance primarily in South Dakota.American West distributes its products through independentagents located in approximately 104 offices.Battle Cr
49、eek Mutual Insurance Company(“Battle Creek”)Battle Creek issues private passenger automobile,homeowners,and farmowners policies in Nebraska.Battle Creek distributes its policies throughindependent agents located in approximately 288 offices.Battle Creek became affiliated with Nodak Mutual in 2011,an
50、d Nodak Mutual providesunderwriting,claims management,policy administration and other administrative services to Battle Creek.Under a 100%quota share reinsurance agreement,Battle Creek cedes 100%of its net premium income to Nodak Mutual and Nodak Mutual fully reinsures all of Battle Creeks risk unde
51、r its insurance policies.In connection with entering into the affiliation agreement,Nodak Mutual purchased a$3.0 million surplus note issued by Battle Creek.The surplus notebears interest at an annual rate of 1.0%and is payable on December 30,2040.Battle Creek must obtain the prior approval of the N
52、ebraska Director ofInsurance before making any payment of interest or principal on the surplus note.Pursuant to the affiliation agreement,so long as the surplus note remains outstanding or the 100%quota share reinsurance is in effect,Nodak Mutualis entitled to appoint two-thirds of the directors of
53、Battle Creek.The affiliation agreement can be terminated by mutual written agreement of Battle Creek andNodak Mutual,or by either party if there is a material breach of the agreement by the other party and such breach is not cured within 15 days after writtennotice of such breach is given by the ter
54、minating party to the other party.If Battle Creek terminated the quota share reinsurance agreement,it would not havesufficient statutory capital to continue to operate.Primero Insurance Company(“Primero”)Primero writes only non-standard automobile insurance in Nevada,Arizona,North Dakota,and South D
55、akota.Primero was acquired by NodakMutual in 2014.Primero distributes its policies through approximately 612 independent agents.Crop InsuranceCrop insurance is purchased by agricultural producers,including farmers,ranchers,and others to protect themselves against either the loss of theircrops due to
56、 natural disasters,such as hail,drought,and floods,or the loss of revenue due to declines in the prices of agricultural products.The two generalcategories of crop insurance are called crop-yield insurance and crop-revenue insurance.Crop-yield insurance protects against a reduction in the yield perac
57、re 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 also provides protection against declines in the price of the particular crop.Most of the multi-peril crop insurance policies written
58、 providethe 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.Moreimportantl
59、y,Congress permitted private sector insurers to market and administer federal insurance policies in exchange for an opportunity to earn a profitthrough bearing a portion of the risk.Congress also authorized a premium subsidy for the farmers and ranchers.As a result,there was a rapid increase in thea
60、cres insured from approximately 26 million acres in 1980 to 100 million acres in 1990.The Federal Crop Insurance Reform Act of 1994 made participationin the crop insurance program mandatory for farmers to be eligible to participate in other government support programs and provided a minimum level of
61、 freecatastrophic risk coverage for insured and noninsured crops.In 2016,there were approximately 23.5 million acres insured in North Dakota,16.6 million acresin South Dakota,17.7 million acres in Minnesota,and 291.2 million acres nationwide.Nodak Mutual,through its Battle Creek affiliate,writes a v
62、ery smallamount of crop insurance in Nebraska.Nodak Mutual crop insurance policies cover approximately 1.9 million acres in North Dakota,and American Westcrop insurance policies cover approximately 19,000 acres in South Dakota and approximately 131,000 acres in Minnesota.Market OverviewWe are the fo
63、urth largest property and casualty insurer in North Dakota where we had 2016 direct written premium of$135.1 million representing5.6%of a$2.4 billion market.In our other primary markets,we have a much smaller market presence.We are the 36th largest writer in the$4.5 billionNebraska market,the 54th l
64、argest writer in the$2.4 billion South Dakota market,and the 108th largest writer in the$11.2 billion Minnesota market where wefocus almost exclusively on multi-peril crop insurance.Organic Growth StrategyGiven our market presence in each of our key states,we believe we have ample opportunity to inc
65、rease business in our primary markets organically.Strategies we employ to grow organically include:4Table of Contents Continued emphasis on our relationship with the North Dakota Farm Bureau,a key advocacy group for agricultural and rural interests thatenjoys a high and favorable profile throughout
66、the state;Using the cost advantage created by our low expense ratio compared to peers(26.0%expense ratio in 2016 compared to an averageexpense ratio of our peers of 32.7%)to selectively expand market share in our primary markets;Expansion and enhancement of agency relationships in Nebraska and South
67、 Dakota,including the use of technology such as mobile apps,online quoting,and policy issuance initiatives to make it easy for independent agents and insureds to do business with us;Selective expansion of Primero in its core markets of Nevada and Arizona as well as expansion of the nonstandard auto
68、product in our coreupper Midwest market area;Excellent claims service for all insureds;andSelective expansion of our participation in the federal multi-peril crop insurance program where we have experience and have developedexpertise.External Growth StrategyWe successfully acquired Primero in 2014 a
69、nd acquired control of Battle Creek in 2011.American West was acquired in 2001.We believe that withthe additional capital we raised through our initial public offering,we will be able to selectively make acquisitions that complement our strategy.Areas ofinterest include acquisition of a commercial w
70、riter and geographic expansion.The acquisition of a commercial writer would help us to better balance ourbook of business among personal lines insurance,multi-peril crop insurance,and commercial lines insurance where we currently write only a limited amountof business.Selective geographic expansion
71、would help to diversify weather-related risk.Although we are open to acquisitions throughout the United States,the ability to expand in South Dakota through acquisition where our presence is not yet significant would be attractive and would bridge the market betweenour North Dakota and Nebraska fran
72、chises.The completion of our initial public offering supplied additional capital needed to support substantially increased premium volume,which weexpect to result from the implementation of both our organic and external growth strategies.Products and ServicesPersonal linesNodak Mutual,Battle Creek,a
73、nd American West each write private passenger auto,homeowners,and farmowners policies in the respective states inwhich they issue policies.Collectively,personal lines accounted for approximately$115.8 million or 64.0%of the total premiums written by the companieson a consolidated basis during 2016.C
74、ommercial linesIn addition to the personal lines described above,Nodak Mutual and American West write commercial coverages,primarily commercial multi-perilinsurance.Collectively,commercial lines accounted for approximately$5.4 million or 3.0%of the total premiums written by the companies on aconsoli
75、dated basis during 2016.Crop InsuranceCrop hail and multi-peril crop insurance policies are also offered by Nodak Mutual,Battle Creek,and American West.Collectively,crop insuranceaccounted for approximately$48.9 million or 27.0%of the total premiums written by the companies on a consolidated basis d
76、uring 2016.Nonstandard AutoPrimero writes only nonstandard auto insurance with a focus on minimum limit auto liability coverage.Primeros total premiums written during2016 were$10.8 million,which accounted for 6.0%of the total premiums written by the companies on a consolidated basis in 2016.5Table o
77、f Contents Marketing and DistributionOur marketing philosophy is to sell profitable business in our core states,using a focused,cost-effective distribution system.Nodak InsuranceCompany distributes its insurance products through approximately 65 exclusive agents.American West,Battle Creek and Primer
78、o rely on independentproducers.We view these independent producers as important partners because they are in a position to recommend either our insurance products or those ofa competitor to their customers.We consider our relationships with these producers to be good.We review our producers annually
79、 with respect to both premium volume and profitability.Our producers will be monitored primarily by our three-person marketing staff,who also have principal responsibility for recruiting and training exclusive agents in North Dakota and independent producers inother states.We hold annual seminars fo
80、r producers and conduct training programs that provide both technical training about our products and sales trainingabout how to effectively market our products.For the year ended December 31,2016,none of our producers were responsible for more than 5%of the direct premiums written by our insurancec
81、ompanies.Producers are compensated through a fixed base commission.Agents receive commission as a percentage of premiums(generally 5%to 15%)astheir primary compensation from us.The Risk Management Agency of the United States Department of Agriculture(“RMA”)establishes the maximumcommission that can
82、be paid to producers with respect to crop insurance policies.Battle Creek and American West pay profit sharing commissions to theiragencies based on various annual agency premium thresholds and the difference between the agencys loss ratio and the loss ratio goal established by theinsurance company.
83、The commission is paid with respect to all property and casualty(non-crop)business earned within the calendar year.Nodak Mutualpays a profit sharing commission to its agents only with respect to farmowners business originated by such agents.Our marketing efforts are further supported by our claims p
84、hilosophy,which is designed to provide prompt and efficient service and claimsprocessing,resulting in a positive experience for producers and policyholders.We believe that these positive experiences result in higher policyholderretention and new business opportunities when communicated by producers
85、and policyholders to potential customers.While we rely on our independentagents for distribution and customer support,underwriting and claim handling responsibilities are retained by us.Many of our agents have had directrelationships with us for a number of years.Underwriting,Risk Assessment and Pri
86、cingOur underwriting philosophy is aimed at consistently generating profits through sound risk selection and pricing discipline.Through ourmanagement and underwriting staff,we regularly establish rates and rating classifications for our insureds based on loss and loss adjustment expense(“LAE”)experi
87、ence we have developed over the years,and the loss and LAE experience for the entire property and casualty insurance market.We have various ratingclassifications based on location,type of business,and other liability factors.The nature of our business requires that we remain sensitive to the marketp
88、lace and the pricing strategies of our competitors.Using the marketinformation as our background,we normally set our prices based on our estimated future costs.From time to time,we may reduce our discounts or apply apremium surcharge to achieve an appropriate return.Pricing flexibility allows us to
89、provide a fair rate commensurate with the assumed liability.If our pricingstrategy cannot yield sufficient premium to cover our costs on a particular type of risk,we may determine not to underwrite that risk.It is our philosophy notto sacrifice profitability for premium growth.Our competitive strate
90、gy in underwriting is to provide very high quality service to our producers and insureds by responding quickly and effectivelyto information requests and policy submissions.We maintain information on all aspects of our business,which is regularly reviewed to determine bothagency and policyholder pro
91、fitability.Specific information regarding individual insureds is monitored to assist us in making decisions about policy renewalsor modifications.Our underwriting staff,which also underwrites coverage issued by American West and Battle Creek,includes 22 employees with over 282 combinedyears of exper
92、ience in property and casualty underwriting.Primero employs 4 underwriters in connection with its nonstandard auto insurance business.All ofthe underwriting for our crop insurance is underwritten by American Farm Bureau Insurance Services,as described in a later section.We strive to be disciplined i
93、n our pricing by pursuing rate increases to maintain or improve our underwriting profitability while still being able toattract and retain customers.We utilize pricing reviews that we believe will help us price risks more accurately,improve account retention,and support theproduction of profitable n
94、ew business.Our pricing reviews involve evaluating our claims experience and loss trends on a periodic basis to identify changesin 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 thesufficiency of
95、our underwriting guidelines.6Table of Contents Claims and Litigation ManagementOur claims management philosophy involves:(i)aggressive closure of claims through prompt and thorough investigation of the facts related to theclaim;(ii)equitable settlement of meritorious claims;and(iii)vigorous defense
96、of unfounded claims as to coverage,liability or the amount claimed.Ourclaims team supports our underwriting strategy by working to provide a timely,good faith claims handling response to our policyholders.Claims excellenceis achieved by timely investigation and handling of claims,settlement of merit
97、orious claims for equitable amounts,maintenance of adequate case reserves,and control of claims loss adjustment expenses.Claims on insurance policies are received directly from the insured or through our producers.Our claims department supports our producerrelationship strategy by working to provide
98、 a consistently responsive level of claim service to our policyholders.Our insurance subsidiaries are required byapplicable insurance laws and regulations to maintain reserves for payment of losses and loss adjustment expenses for reported claims and for claims incurredbut not reported,arising from
99、policies that have been issued.Generally,these laws and regulations require that we provide for the ultimate cost of thoseclaims without regard to how long it takes to settle them or the time value of money.The determination of reserves involves actuarial and statisticalprojections of what we expect
100、 to be the cost of the ultimate settlement and administration of such claims 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 actuaries utilize standard actuarial tec
101、hniques to project ultimate losses based on our paid and incurred loss information,as well as drawing fromindustry data.These projections are done using actual loss dollars and claim counts.We analyze loss trends and claims frequency and severity to determineour“best estimate”of the required reserve
102、s.We then record this best estimate in the financial statements of the applicable insurance company.Our reservemethodology is discussed in greater detail in“Managements Discussion and Analysis of Financial Condition and Results of Operations.”Our Vice President of Operations supervises a staff of 41
103、 employees with over 357 years of combined experience in processing property and casualtyinsurance claims.All claims made under our multi-peril crop and crop hail insurance policies are processed and administered by American Farm BureauInsurance Services.American Farm Bureau Insurance ServicesAmeric
104、an Farm Bureau Insurance Services(“AFBIS”)underwrites all of the crop hail insurance policies issued by us and approximately 21 otherinsurers.AFBIS also processes and administers all claims made by policyholders under such policies.We reimburse AFBIS for its actual loss adjustmentexpense with respec
105、t to the policies issued by us and pay AFBIS a percentage of the premiums we received with respect to such policies.Nodak Mutual is ashareholder of AFBIS,along with each of the other insurers for whom AFBIS provides such services.AFBIS retains three percent of its revenues and pays allremaining prof
106、its to Nodak Mutual and the other shareholders of AFBIS.Nodak Mutual did not receive any material distributions from AFBIS in 2014,2015or 2016.Fee IncomeNodak Mutuals agents also act as producers for Farm Bureau Life Insurance Company,and Nodak Mutual receives commission income inconnection with the
107、 distribution of such policies for Farm Bureau Life Insurance Company.Farm Bureau Life Insurance Company is affiliated with the IowaFarm Bureau Federation.In 2016,2015 and 2014,such fee income totaled$450,634,$455,440 and$470,401,respectively.TechnologyOur insurance operations rely on commercially a
108、vailable software to provide the information management systems platform that runs ouraccounting,policy underwriting and issuance,and claims processing functions.These systems permit us to integrate the accounting and reporting functionsof all of our insurance operations.We utilize on-site servers f
109、or our information systems with daily backup of data.We have adopted a disaster recovery plantailored to meet our needs and geographic location.We will seek to continuously invest in new technology to maximize our business opportunities whileprotecting our interests and those of our clients.Reinsura
110、nceReinsurance Ceded.In accordance with insurance industry practice,we reinsure a portion of our exposure and pay to the reinsurers a portion of thepremiums received on all policies reinsured.Insurance policies written by us are reinsured with other insurance companies principally to:reduce net liab
111、ility on individual risks;mitigate the effect of individual loss occurrences;7Table of Contents stabilize underwriting results;decrease leverage;andincrease our underwriting capacity.Reinsurance does not legally discharge the insurance company issuing the policy from primary liability for the full a
112、mount due under the reinsuredpolicies.However,the assuming reinsurer is obligated to reimburse the company issuing the policy to the extent of the coverage ceded.A primary factor in the selection of reinsurers from whom we purchase reinsurance is their financial strength.Our reinsurance arrangements
113、 aregenerally renegotiated annually.For the year ended December 31,2016,Nodak Mutual ceded to reinsurers$32.1 million of written premiums,compared to$33.4 million of written premiums for the year ended December 31,2015 and$26.1 million of written premiums for the year ended December 31,2014.The char
114、t below illustrates the reinsurance coverage under Nodak Mutuals excess of loss treaty for individual casualty risks:Losses Incurred Retained by NodakMutual Ceded Under Reinsurance Treaty Up to$600,000 100%0.0%$11,400,000 in excess of$600,000 0.0%100%The chart below illustrates the reinsurance cover
115、age under Nodak Mutuals excess of loss treaties for individual property risks:Losses Incurred Retained by NodakMutual Ceded UnderReinsurance Treaty Up to$500,000 100%0.0%$19,500,000 in excess of$500,000 0.0%100%As a group at December 31,2016,Nodak Mutual,American West,and Battle Creek retained$5,000
116、,000 of losses from catastrophic events and hadreinsurance under various reinsurance agreements up to$74.6 million in excess of their$5,000,000 retained risk.Effective January 1,2017,the catastropheretention amount was increased to$10,000,000.The insolvency or inability of any reinsurer to meet its
117、obligations to us could have a material adverse effect on our results of operations or financialcondition.Nodak Mutuals reinsurance providers,the majority of whom are longstanding partners that understand our business,are all carefully selected withthe help of our reinsurance brokers.Nodak Mutual mo
118、nitors the solvency of reinsurers through regular review of their financial statements and,if available,their A.M.Best ratings.All of our current reinsurance partners have at least an“A-”rating from A.M.Best.According to A.M.Best,companies with a rating of“A-”or better“have an excellent ability to m
119、eet their ongoing obligations to policyholders.”We have experienced no significant difficulties collectingamounts due from reinsurers.Reinsurance for multi-peril crop insurance is provided by the Federal Crop Insurance Corporation(“FCIC”).Insurers can assign each policy issued toeither its“assigned
120、risk”or“commercial”fund.The FCIC retains an increasing percentage of underwriting losses at successively higher loss ratios whileceding an increasing percentage of the premium at lower loss ratios.The commercial fund permits insurers to retain more of the underwriting gains and losses,while the assi
121、gned risk fund cedes most of the risk to the FCIC.The exact treatment of the commercial fund varies by state groups.In Group 1,which includesIllinois,Indiana,Iowa,Minnesota and Nebraska,the FCIC retains a larger share of the underwriting gains and a smaller portion of the underwriting losseswhen com
122、pared to all other states.Aggregate stop loss reinsurance is purchased for crop hail and multi-peril insurance.We purchase fifty percentage points ofcoverage above a 100%direct loss ratio for crop hail.The coverage purchased protects above the worst case loss ratio the industry has experienced in th
123、e past15 years and more than double the worst case loss ratio Nodak Mutual has experienced.We purchase forty-five percentage points of coverage for multi-perilcrop above a 105%loss ratio after the FCIC reinsurance protection.This represents the worst loss exposure given the FCIC formula,thereby capp
124、ing themulti-peril loss ratio at 105%.The following table sets forth the largest amounts of loss and LAE recoverable by Nodak Mutual from reinsurers as of December 31,2016(dollars inthousands)and the current A.M.Best Rating of each as of August 1,2016.8Table of Contents Reinsurance Company Loss&LAE
125、Recoverable On Unpaid Claims Percentage of TotalRecoverable A.M.Best RatingAmerican Agricultural Insurance Company$2,782 38.7%A-Aspen Insurance UK LTD 375 5.2%A-Federal Crop Insurance Corporation 579 8.0%NRHannover Rueck SE 695 9.7%A+Maiden Reinsurance Company of the US 1,072 14.9%A-Partner Reins Co
126、mpany of the US 570 7.9%AQBE Reinsurance Corporation 939 13.1%AOther 180 2.5%A+Total$7,192 100%Reinsurance Assumed.Nodak Mutual assumes 100%of the risk under policies written by Battle Creek.Except for Battle Creek,Nodak Mutualgenerally does not assume risks from other insurance companies.However,No
127、dak Mutual is required by statute to participate in certain residual marketpools.This participation requires Nodak Mutual to assume business for property exposures that are not insured in the voluntary marketplace.Nodak Mutualparticipates in these residual markets pro rata on a market share basis.Th
128、rough American Agriculture Insurance Company,Nodak Mutual participates in both domestic and international property insurance pools.Annually,Nodak Mutual reviews the available pools and selects the pools in which it will participate.No multi-peril crop or crop hail insurance policies areincluded in s
129、uch pools.Participation in such pools provides Nodak Mutual with the opportunity to diversify its risk while increasing its annual earnedpremiums.In 2016,2015 and 2014,Nodak Mutual assumed$3.7 million,$3.5 million,and$4.1 million of premiums,respectively,from such pools.Beginning on January 1,2016,N
130、odak Mutual assumed 100%of the crop hail premiums and losses from American West Insurance Company andRural Mutual Insurance Company(a company affiliated with the Wisconsin Farm Bureau Federation).The business was then pooled with Nodak Mutualscrop hail business and proportionately retro-ceded back t
131、o each participant.This crop hail pool allows Nodak Mutual and American West to diversify theirrisk across an additional geographic region.Loss and LAE ReservesNodak Mutual is required by applicable insurance laws and regulations to maintain reserves for payment of loss and LAE.These reserves areest
132、ablished for both reported claims and for claims incurred but not reported(“IBNR”),arising from the policies we have issued.The laws and regulationsrequire that provision be made for the ultimate cost of those claims without regard to how long it takes to settle them or the time value of money.Thede
133、termination of reserves involves actuarial and statistical projections of what we expect to be the cost of the ultimate settlement and administration of suchclaims.The reserves are set based on facts and circumstances then known,estimates of future trends in claims severity,and other variable factor
134、s such asinflation and changing judicial theories of liability.Estimating the ultimate liability for losses and LAE is an inherently uncertain process.Therefore,the reserve for losses and LAE does not representan exact calculation of that liability.Our reserve policy recognizes this uncertainty by m
135、aintaining reserves at a level providing for the possibility of adversedevelopment relative to the estimation process.We do not discount our reserves to recognize the time value of money.When a claim is reported to us,our claims personnel establish a“case reserve”for the estimated amount of the ulti
136、mate payment.This estimatereflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of our claims staff.In estimating theappropriate reserve,our claims staff considers the nature and value of the specific claim,the severity of injury or damage
137、,and the policy provisions relatingto the type of loss,to the extent determinable at the time.Case reserves are adjusted by our claims staff as more information becomes available.It is ourpolicy to settle each claim as expeditiously as possible.We maintain IBNR reserves to provide for already incurr
138、ed claims that have not yet been reported and developments on reported claims.The IBNRreserve is determined by estimating our ultimate net liability for both reported and IBNR claims and then subtracting the case reserves and paid losses andLAE for reported claims.Each quarter,Nodak Mutual computes
139、its estimated ultimate liability using its principles and procedures.However,because the establishment ofloss reserves is an inherently uncertain process,we cannot assure you that ultimate losses will not exceed the 9Table of Contents established loss reserves.Adjustments in aggregate reserves,if an
140、y,are reflected in the operating results of the period during which such adjustments aremade.The following table provides a reconciliation of beginning and ending unpaid losses and LAE reserve balances of Nodak Mutual for the years endedDecember 31,2016,2015 and 2014,prepared in accordance with GAAP
141、.Years ended December 31,2016 2015 2014 Balance at beginning of year:Unpaid losses and loss adjustment expenses$45,342$50,518$46,899 Reinsurance recoverable on unpaid losses 5,109 5,676 4,841 Net balance at beginning of year 40,233 44,842 42,058 Tri-State Acquisition Liability for unpaid loss and LA
142、E$5,172 Reinsurance ceded Net liability assumed 5,172 Incurred related to:Current year 123,264 92,764 97,274 Prior years (4,756)(8,888)(7,968)Total Incurred 118,508 83,876 89,306 Paid related to:Current year 90,772 70,290 75,422 Prior years 15,529 18,195 16,272 Total paid 106,301 88,485 91,694 Balan
143、ce at end of year:Unpaid losses and loss adjustment expenses 59,632 45,342 50,518 Reinsurance recoverable on unpaid losses 7,192 5,109 5,676 Net balance at end of year$52,440$40,233$44,842 The estimation process for determining the liability for unpaid losses and LAE inherently results in adjustment
144、s each year for claims incurred(butnot paid)in preceding years.Negative amounts reported for claims incurred related to prior years are a result of claims being settled for amounts less thanoriginally estimated(favorable development).Positive amounts reported for claims incurred related to prior yea
145、rs are a result of claims being settled foramounts greater than originally estimated(unfavorable or adverse development).Reconciliation of Reserve for Loss and LAEThe following table shows the development of Nodak Mutuals reserves for unpaid loss and LAE from 2006 through 2016 per generally accepted
146、accounting principles(“GAAP”).The top line of the table shows the liabilities at the balance sheet date,including losses incurred but not yet reported.Theupper portion of the table shows the cumulative amounts subsequently paid as of successive years with respect to the liability.The lower portion o
147、f the tableshows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year.The estimates change as moreinformation becomes known about the frequency and severity of claims for individual years.The redundancy(deficiency)exists when the re-e
148、stimatedliability for each reporting period is less(greater)than the prior liability estimate.The“cumulative redundancy(deficiency)”depicted in the table,for anyparticular calendar year,represents the aggregate change in the initial estimates over all subsequent calendar years.Gross deficiencies and
149、 redundancies may be significantly more or less than net deficiencies and redundancies due to the nature and extent ofapplicable reinsurance.10Table of Contents As of December 31,2016 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (Dollars in thousands)Liability forunpaid loss andLAE,net ofr
150、einsurancerecoverables$30,083$30,360$29,698$30,908$28,266$23,302$25,466$42,058$44,842$40,233$52,440 Cumulativeamount ofliability paidthrough One year later 7,703 10,740 13,550 12,247 11,691 11,911 5,056 16,249 18,166 14,932 Two years later 11,246 13,553 17,278 16,323 12,362 9,053 8,654 20,899 20,802
151、 Three years later 13,476 14,813 17,489 16,408 15,104 11,245 11,636 21,224 Four years later 13,940 15,399 17,619 17,552 15,536 13,195 11,631 Five years later 14,252 15,348 17,774 17,838 16,662 13,092 Six years later 14,092 15,492 17,955 18,682 16,627 Seven years later 14,167 15,537 18,617 18,405 Eig
152、ht years later 14,204 16,171 18,139 Nine years later 14,838 15,667 Ten years later 14,335 LiabilityEstimated After One year later 22,890 24,082 22,989 26,363 24,049 18,691 22,337 34,074 35,926 34,880 Two years later 19,106 19,831 23,100 23,492 19,815 20,144 18,788 30,380 33,058 Three years later 16,
153、782 17,835 21,931 20,763 20,518 17,678 16,620 28,871 Four years later 15,776 17,586 20,082 21,516 19,356 16,294 15,459 Five years later 15,812 16,989 20,031 20,724 18,403 15,184 Six years later 15,363 16,927 19,531 19,836 17,841 Seven years later 15,438 16,860 19,251 19,306 Eight years later 15,408
154、16,720 18,696 Nine years later 15,339 16,082 Ten years later 14,623 Cumulative totalredundancy(deficiency)Gross liability end of year 39,111 38,913 53,770 51,413 39,332 38,852 38,007 46,900 50,518 45,342 59,632 Reinsurancerecoverable 9,028 8,553 24,072 20,505 11,066 15,550 12,541 4,842 5,676 5,109 7
155、,192 Net liability endof year 30,083 30,360 29,698 30,908 28,266 23,302 25,466 42,058 44,842 40,233 52,440 Gross re-estimatedliability latest 19,546 24,943 34,815 31,784 26,844 30,178 25,061 32,804 38,610 40,251 Re-estimatedreinsurancerecoverables latest 4,923 8,861 16,119 12,478 9,003 14,994 9,602
156、3,933 5,552 5,371 Net re-estimatedliability-latest 14,623 16,082 18,696 19,306 17,841 15,184 15,459 28,871 33,058 34,880 Gross cumulativeredundancy(deficiency)19,565 13,970 18,955 19,629 12,488 8,674 12,946 14,096 11,907 5,091 InvestmentsNodak Mutuals investments in debt and equity securities are cl
157、assified as available for sale and are carried at fair value with unrealized gains andlosses reflected as a component of equity net of taxes.The goal of Nodak Mutuals investment activities is to complement and support its overall mission.Assuch,the investment portfolios goal is to maximize after-tax
158、 investment income and price appreciation while maintaining the portfolios target risk profile.11Table of Contents An important component of Nodak Mutuals operating results has been the return on invested assets.Nodak Mutuals investment objectives are(i)growth and preservation of capital,(ii)achievi
159、ng favorable returns on invested assets through investment in high quality income producing assets,and(iii)assuring proper levels of liquidity to fund expected operating needs.See“Item 7A.Quantitative and Qualitative Information about Market Risk.”In addition to any investments prohibited by the ins
160、urance laws and regulations of North Dakota and any other applicable states,Nodak Mutualsinvestment policy prohibits the following investments and investing activities:Commodities and futures contractsOptions(except covered call options)Non-investment grade debt obligations at time of purchaseIntere
161、st only,principal only,and residual tranche collateralized mortgage obligationsPrivate placementsForeign currency tradingLimited partnerships other than publicly traded master limited partnershipsConvertible securitiesVenture capital investmentsReal estate propertiesSecurities lendingPortfolio lever
162、aging,i.e.,margin transactionsShort sellingNodak Mutuals investment committee approved its investment policy and reviews the policy periodically.Nodak Mutuals investment portfolio ismanaged by Conning,Inc.The following table sets forth information concerning Nodak Mutuals investments(dollars in thou
163、sands).December 31,2016 2015 2014 Cost or Amortized Cost Estimate Fair Value Cost or Amortized Cost Estimated FairValue Cost or Amortized Cost Estimated FairValue U.S.Government and agencies$5,834$6,050$1,961$2,060$1,466$1,580 States,territories and possessions and political subdivisions 68,915 69,3
164、96 69,218 71,724 61,873 64,687 Corporate securities 50,610 51,170 49,490 48,883 40,072 41,338 Residential mortgage-backed securities 22,750 22,637 21,407 21,462 18,541 18,832 Commercial mortgage-backed securities 8,033 8,096 6,370 6,414 5,254 5,339 Asset backed securities 4,118 4,121 2,905 2,900 1,3
165、84 1,392 Total Fixed Income Securities 160,260 161,470 151,351 153,443 128,590 133,168 Equity Securities 11,511 25,917 12,330 27,783 11,125 29,238 Total$171,771$187,387$163,681$181,226$139,715$162,406 The table below sets forth the maturity profile of Nodak Mutuals debt securities at December 31,201
166、6.Expected maturities could differ fromcontractual maturities because borrowers may have the right to call or prepay obligations,with or without call or prepayment penalties(dollars in thousands).12Table of Contents December 31,2016 Amortized Cost Estimated FairValue(1)Less than one year$10,935$11,0
167、69 One through five years 45,904 46,891 Five through ten years 55,430 55,619 Greater than ten years 13,090 13,037 Mortgage/asset-backed securities 34,901 34,854 Total debt securities$160,260$161,470 (1)Debt securities are carried at fair value.See Note 2 in Nodak Mutuals financial statements.At Dece
168、mber 31,2016,the average maturity of Nodak Mutuals fixed income investment portfolio was 5.14 years and the average duration was 4.39years.As a result,the fair value of Nodak Mutuals investments may fluctuate significantly in response to changes in interest rates.In addition,Nodak Mutualmay experien
169、ce investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rateenvironments.Nodak Mutual uses quoted values and other data provided by independent pricing services as inputs in its process for determining fair values of itsinve
170、stments.The pricing services cover substantially all of the securities in Nodak Mutuals portfolio for which publicly quoted values are not available.Thepricing services evaluations represent an exit price,a good faith opinion as to what a buyer in the marketplace would pay for a security in a curren
171、t sale.Thepricing is based on observable inputs either directly or indirectly,such as quoted prices in markets that are active,quoted prices for similar securities at themeasurement date,or other inputs that are observable.Nodak Mutuals investment manager provides it with pricing information that it
172、 utilizes,together with information obtained from independentpricing services,to determine the fair value of its fixed maturity securities.After performing a detailed review of the information obtained from the pricingservice,no adjustment was made to the values provided.Nodak Mutuals average cash a
173、nd invested assets,net investment income and return on average cash and invested assets for the years endedDecember 31,2016,2015 and 2014 were as follows(dollars in thousands):Years Ended December 31,2016 2015 2014 Average cash and invested assets$202,735$191,987$178,265 Net investment income 4,246
174、4,184 4,133 Return on average cash and invested assets 2.1%2.2%2.3%A.M.Best RatingA.M.Best rates insurance companies based on factors of concern to policyholders.The rating evaluates the claims paying ability of a company,andis not a recommendation on the merits of an investment in our common stock.
175、Nodak Mutual and Battle Creek are rated“A”by A.M.Best,which is the third highest out of 15 possible ratings.A.M.Best has assigned NodakMutual a“positive outlook”and Battle Creek a“stable outlook.”American West is rated A-(stable outlook),and Primero is unrated because the nature of itsbusiness is no
176、t ratings sensitive.In evaluating a companys financial and operating performance,A.M.Best reviews:the companys profitability,leverage and liquidity;its book of business;the adequacy and soundness of its reinsurance;the quality and estimated fair value of its assets;the adequacy of its reserves and s
177、urplus;its capital structure;the experience and competence of its management;and 13Table of Contents its marketing presence.If we are unable to maintain at least an“A-”rating from A.M.Best,it may impair our ability to compete effectively.CompetitionThe property casualty and crop insurance markets ar
178、e highly competitive.Nodak Insurance Company competes with stock insurance companies,mutual companies,and other underwriting organizations.Our largest competitors in North Dakota for personal auto and homeowners are State Farm,Progressive,American Family,QBE,Farmers Union,and Auto-Owners.In South Da
179、kota and Nebraska,we have small market shares and our competitors arethe large national and regional companies as well as Farmers Mutual of Nebraska.Based on 2015 data,Nodak Insurance Company is the largest writer offarmowners insurance in North Dakota.Our largest competitors are Farmers Union,North
180、 Star Mutual,and American Family.In Nebraska and South Dakota,we have a small farmowners market share,which is dominated by the large national and regional carriers.Certain of these competitors have substantiallygreater financial,technical,and operating resources than we do and may be able to offer
181、lower rates or higher commissions to their producers.Total reported premiums written for multi-peril crop insurance in 2016 was$853 million in North Dakota and$587 million in Minnesota.The directwritten premiums of Nodak Mutual for multi-peril crop insurance in North Dakota were$38.7 million in 2016
182、,$40.0 million in 2015,and$42.3 million in2014.In Minnesota,our multi-peril crop insurance premiums were$3.5 million in 2016,$2.7 million in 2015 and$2.5 million in 2014.Nodak Mutual wroteless than$1.0 million in crop insurance in Nebraska and South Dakota for each of the last three years.The princi
183、pal competitors in our markets for multi-perilcrop insurance are Chubb,RCIS,QBE,and Great American.Accordingly,we believe our company can prudently expand its crop insurance business in itsexisting territories.The premiums for crop insurance are established by the RMA,and,accordingly,we compete with
184、 other insurance companies on factors such asagency relationships,claim service,and market reputation in the crop insurance market.We believe that our relationship with the North Dakota Farm Bureauand our leading market share play are significant factors in maintaining and expanding our market share
185、 of the crop insurance business in North Dakota.With respect to writing property and casualty insurance,we compete on a number of factors such as pricing,agency relationships,policy support,claim service,and market reputation.Like other writers of property and casualty insurance,our policy terms var
186、y from state to state based on the maximumprescribed limits in each state,as established by state law.We believe our company differentiates itself from many larger companies competing for thisbusiness by focusing on ease of doing business and providing excellent claims service with local,knowledgeab
187、le employees.To compete successfully in the property and casualty insurance market,we rely on our ability to:identify insureds that are most likely to produce anunderwriting profit;operate with a disciplined underwriting approach;practice prudent claims management;reserve appropriately for unpaid cl
188、aims;andprovide quality service and competitive commissions to our independent and captive agents.RegulationGeneralWe are subject to extensive regulation,particularly at the state level.The method,extent,and substance of such regulation varies by state,butgenerally has its source in statutes and reg
189、ulations that establish standards and requirements for conducting the business of insurance and that delegateregulatory authority to state insurance regulatory agencies.In general,such regulation is intended for the protection of those who purchase or use insuranceproducts,not the companies that wri
190、te the policies.These laws and regulations have a significant impact on our business and relate to a wide variety ofmatters including accounting methods,agent and company licensure,claims procedures,corporate governance,examinations,investing practices,policyforms,pricing,trade practices,reserve ade
191、quacy,and underwriting standards.State insurance laws and regulations require our insurance company subsidiaries to file financial statements with state insurance departmentseverywhere they do business,and the operations of such companies and their respective accounts are subject to examination by t
192、hose departments at anytime.Our insurance company subsidiaries prepare statutory financial statements in accordance with accounting practices and procedures prescribed orpermitted by the state in which they are domiciled.North Dakota generally conforms to National Association of Insurance Commission
193、ers(“NAIC”)practicesand procedures,so its examination reports and other filings generally are accepted by other states.Premium rate regulation varies greatly among jurisdictions and lines of insurance.In the states in which our insurance company subsidiaries writeinsurance,premium rates for the vari
194、ous lines of insurance are subject to either prior approval or limited 14Table of Contents review upon implementation.The premium rates for multi-peril crop insurance are established by the RMA.See“Item 1.Business Crop Insurance.”Many jurisdictions have laws and regulations that limit an insurers ab
195、ility to withdraw from a particular market.For example,states may limit aninsurers ability to cancel or non-renew policies.Laws and regulations that limit cancellation and non-renewal may restrict our ability to exit unprofitablemarketplaces in a timely manner.Crop InsuranceThe crop hail and multi-p
196、eril 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 theFCIC,the RMA provides premium s
197、ubsidies to farmers and sets the commission percentages that can be paid to agents.The RMA also provides oversight tothe approved insurance providers(“AIPs”).The AIPs are required to use the policies,premium rates,and loss adjustment procedures set by the RMA withoutmodification and are required to
198、issue a policy to any eligible applicant regardless of risk or profitability.Not more often than every five years,the AIPsrenegotiate the contract with the RMA,known as the Standard Reinsurance Agreement,or SRA,which outlines items such as reporting requirements andclaims handling procedures,proport
199、ional and non-proportional reinsurance terms,and the level of administrative and operating reimbursement paid toinsurers.The RMA also conducts audits of insurers with respect to claims and loss adjustment procedures.ExaminationsExaminations are conducted every three to five years by the Departments
200、of Insurance where the insurance companies are domiciled.Nodak Mutualand American West were last examined by the Department as of December 31,2011.The examination did not result in any adjustments to the financialposition,nor were there any substantive qualitative matters indicated in the examinatio
201、n report that had a material adverse impact on the operations of eithercompany.Battle Creek was last examined by the Nebraska Insurance Department as of December 31,2011,and the last examination of Primero by theNevada Insurance Department was as of December 31,2012.NAIC Risk-Based Capital Requireme
202、ntsNorth Dakota and most other states have adopted the NAIC system of risk-based capital requirements that require insurance companies to calculateand report information under a risk-based formula.These risk-based capital requirements attempt to measure statutory capital and surplus needs based on t
203、herisks in a companys mix of products and investment portfolio.Under the formula,a company first determines its“authorized control level”risk-basedcapital.This authorized control level takes into account(i)the risk with respect to the insurers assets;(ii)the risk of adverse insurance experience with
204、respect to the insurers liabilities and obligations,(iii)the interest rate risk with respect to the insurers business;and(iv)all other business risks and suchother relevant risks as are set forth in the risk-based capital instructions.A companys“total adjusted capital”is the sum of statutory capital
205、 and surplus andsuch other items as the risk-based capital instructions may provide.The formula is designed to allow state insurance regulators to identify weakly capitalizedcompanies.The requirements provide for four different levels of regulatory attention.The“company action level”is triggered if
206、a companys total adjustedcapital 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,thecompany must submit a comprehensive plan to the regulatory authority that discusses proposed corrective actions to i
207、mprove the capital position.The“regulatory action level”is triggered if a companys total adjusted capital is less than 1.5 times but greater than or equal to 1.0 times its authorized controllevel.At the regulatory action level,the regulatory authority will perform a special examination of the compan
208、y and issue an order specifying correctiveactions that must be followed.The“authorized control level”is triggered if a companys total adjusted capital is less than 1.0 times but greater than or equalto 0.7 times its authorized control level;at this level the regulatory authority may take action it d
209、eems necessary,including placing the company underregulatory control.The“mandatory control level”is triggered if a companys total adjusted capital is less than 0.7 times its authorized control level;at thislevel the regulatory authority is mandated to place the company under its control.The capital
210、levels of our insurance company subsidiaries have nevertriggered any of these regulatory capital levels.We cannot assure you,however,that the capital requirements applicable to such companies will not increasein the future.NAIC RatiosThe NAIC also has developed a set of 11 financial ratios referred
211、to as the Insurance Regulatory Information System(“IRIS”).On the basis ofstatutory financial statements filed with state insurance regulators,the NAIC annually calculates these IRIS ratios to assist state insurance regulators inmonitoring the financial condition of insurance companies.The NAIC has e
212、stablished an acceptable range for each of the IRIS financial ratios.If four or moreof its IRIS ratios fall outside the range deemed acceptable by the NAIC,an insurance company may receive inquiries from individual state insurancedepartments.During each of the years ended 15Table of Contents Decembe
213、r 31,2016,2015 and 2014,none of our insurance company subsidiaries produced results outside the acceptable range for more than two of the IRIStests.Enterprise Risk AssessmentIn 2012,the NAIC adopted the NAIC Amendments.The NAIC Amendments,when adopted by the various states,are designed to respond to
214、perceived gaps in the regulation of insurance holding company systems in the United States.One of the major changes is a requirement that an insuranceholding company systems ultimate controlling person submit annually to its lead state insurance regulator an“enterprise risk report”that identifiesact
215、ivities,circumstances or events involving one or more affiliates of an insurer that,if not remedied properly,are likely to have a material adverse effectupon the financial condition or liquidity of the insurer or its insurance holding company system as a whole.North Dakota requires insurers domicile
216、d inNorth Dakota to include an enterprise risk assessment in its annual report.Other changes include requiring a controlling person to submit prior notice to itsdomiciliary insurance regulator of its divestiture of control,having detailed minimum requirements for cost sharing and management agreemen
217、ts between aninsurer and its affiliates,and expanding of the agreements between an insurer and its affiliates to be filed with its domiciliary insurance regulator.In 2012,theNAIC also adopted the Own Risk Solvency Assessment(“ORSA”)Model Act.The ORSA Model Act,when adopted by the various states,will
218、 require aninsurance holding company systems chief risk officer to submit at least annually to its lead state insurance regulator a confidential internal assessmentappropriate to the nature,scale and complexity of an insurer,conducted by that insurer of the material and relevant risks identified by
219、the insurer associatedwith an insurers current business plan and the sufficiency of capital resources to support those risks.Although our insurance company subsidiaries areexempt from ORSA because of their size,Nodak Insurance Company intends to incorporate those elements of ORSA that it believes co
220、nstitute“bestpractices”into its annual internal enterprise risk assessment.Market Conduct RegulationState insurance laws and regulations include numerous provisions governing trade practices and the marketplace activities of insurers,includingprovisions governing the form and content of disclosure t
221、o consumers,illustrations,advertising,sales practices and complaint handling.State regulatoryauthorities generally enforce these provisions through periodic market conduct examinations.Guaranty Fund LawsAll states have guaranty fund laws under which insurers doing business in the state can be assess
222、ed to fund policyholder liabilities of insolventinsurance 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 theyears ended December 31,2016,2015 and 2014,we paid no assessments pursuant to state insurance guara
223、nty association laws.We establish reserves relatingto insurance companies that are subject to insolvency proceedings when we are notified of assessments by the guaranty associations.We cannot predict theamount and timing of any future assessments under these laws.See“Item 7.Managements Discussion an
224、d Analysis of Financial Condition and Results ofOperations.”Federal RegulationThe U.S.federal government generally has not directly regulated the insurance industry except for certain areas of the market,such as insurance forcrops,flood,nuclear and terrorism risks.However,the federal government has
225、undertaken initiatives or considered legislation in several areas that mayimpact the insurance industry,including tort reform,corporate governance,and the taxation of reinsurance companies.The Dodd-Frank Act established theFederal Insurance Office which is authorized to study,monitor and report to C
226、ongress on the insurance industry and to recommend that the FinancialStability Oversight Council designate an insurer as an entity posing risks to the U.S.financial stability in the event of the insurers material financial distressor failure.In December 2013,the Federal Insurance Office issued a rep
227、ort on alternatives to modernize and improve the system of insurance regulation in theUnited States,including by increasing national uniformity through either a federal charter or effective action by the states.Changes to federal legislation andadministrative policies in several areas,including chan
228、ges in federal taxation,can also significantly impact the insurance industry and us.See“Item 1.Business Crop Insurance.”We are also subject to the Fair and Accurate Credit Transactions Act of 2003(“FACTA”)and the Health Insurance Portability and AccountabilityAct of 1996(“HIPAA”),both of which requi
229、re us to protect the privacy of our customers information,including health and credit information.Sarbanes-Oxley Act of 2002Enacted in 2002,the stated goals of the Sarbanes-Oxley Act of 2002,or SOX,are to increase corporate responsibility,to provide for enhancedpenalties for accounting and auditing
230、improprieties at publicly traded companies,and to protect investors by improving the accuracy and reliability ofcorporate disclosures pursuant to the securities laws.As a public company,we will be subject to most of the provisions of SOX in 2017.16Table of Contents SOX includes very specific disclos
231、ure requirements and corporate governance rules and requires the SEC and securities exchanges to adoptextensive additional disclosure,corporate governance,and other related regulations.PrivacyAs mandated by the Gramm-Leach-Bliley Act,states continue to promulgate and refine laws and regulations that
232、 require financial institutions,including insurance companies,to take steps to protect the privacy of certain consumer and customer information relating to products or services primarilyfor personal,family or household purposes.A recent NAIC initiative that affected the insurance industry was the ad
233、option in 2000 of the Privacy ofConsumer Financial and Health Information Model Regulation,which assisted states in promulgating regulations to comply with the Gramm-Leach-BlileyAct.In 2002,to further facilitate the implementation of the Gramm-Leach-Bliley Act,the NAIC adopted the Standards for Safe
234、guarding CustomerInformation Model Regulation.Several states have now adopted similar provisions regarding the safeguarding of customer information.Nodak Mutual andits subsidiaries have each implemented procedures to comply with the Gramm-Leach-Bliley Acts related privacy requirements.OFACThe Treasu
235、ry Departments 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.OFACs regulation
236、s 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.JOBS ActWe are an“emerging growth company”(“EG
237、C”),as defined in the Jumpstart Our Business Startups Act of 2012(the“JOBS Act”),and we may takeadvantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies,such as reduced public company reporting,accounting
238、,and corporate governance requirements.We currently intend to avail ourselves of the reduceddisclosure obligations available under the JOBS Act.Section 107 of the JOBS Act also provides that an EGC can take advantage of the extended transition period provided in Section 7(a)(2)(B)of theSecurities Ac
239、t for complying with new or revised accounting standards.We will remain an EGC for up to five years following our initial public offering(“IPO”),or until the earliest of(i)the last day of the first fiscal yearin which our annual gross revenue exceeds$1 billion,(ii)the date that we become a“large acc
240、elerated filer”as defined in Rule 12b-2 under the SecuritiesExchange Act of 1934,as amended(the“Exchange Act”),which would occur if the market value of our common stock that is held by non-affiliates exceeds$700 million as of the last business day of our most recently completed second fiscal quarter
241、,or(iii)the date on which we have issued more than$1 billion innon-convertible debt during the preceding three year period.In addition,as an EGC,we are exempt from Section 14A(a)and(b)of the Securities Exchange Act of 1934,which require shareholder approval ofexecutive compensation and golden parach
242、utes.DividendsNorth Dakota law sets the maximum amount of dividends that may be paid by Nodak Insurance Company during any twelve-month period afternotice to,but without prior approval of,the North Dakota Insurance Department.This amount cannot exceed the lesser of(i)10%of the insurance companyssurp
243、lus as regards policyholders as of the preceding December 31,or(ii)the insurance companys 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 lifeinsurance
244、company may carry forward net income from the preceding two calendar years,not including realized capital gains,less any dividends actuallypaid during those two calendar years.As of December 31,2016,the amount available for payment of dividends by Nodak Insurance Company in 2017without the prior app
245、roval of the North Dakota Insurance Department is approximately$13.9 million.“Extraordinary dividends”in excess of the foregoinglimitations may only be paid with prior notice to,and approval of,the North Dakota Insurance Department.See“Item 5.Market for the Registrants CommonEquity,Related Stockhold
246、er Matters and Issuer Purchases of Equity Securities Dividend Policy.”Holding Company LawsMost states,including North Dakota,have enacted legislation that regulates insurance holding company systems.Each insurance company in aholding company system is required to register with the insurance supervis
247、ory agency of its state of domicile 17Table of Contents and furnish certain information,including information concerning the operations of companies within the holding company group that may materially affectthe operations,management or financial condition of the insurers within the group.Pursuant t
248、o these laws,the North Dakota Insurance Department requiresdisclosure of material transactions involving an insurance company and its affiliates,and requires prior notice and/or approval of certain transactions,such as“extraordinary dividends”distributed by the insurance company.Under these laws,the
249、 North Dakota Insurance Department will have the right to examine usand Nodak Insurance Company at any time.All transactions within our consolidated group affecting our insurance company subsidiaries must be fair and equitable.Notice of certain materialtransactions between Nodak Insurance Company an
250、d any person or entity in our holding company system will be required to be given to the North DakotaInsurance Department.Certain transactions cannot be completed without the prior approval of the North Dakota Insurance Department.Approval of the state insurance commissioner is required prior to any
251、 transaction affecting the control of an insurer domiciled in that state.In NorthDakota,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.NorthDakota law also prohibits any person or entity from(i)making a te
252、nder offer for,or a request or invitation for tenders of,or seeking to acquire or acquiringany 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 toeffect an acquisition of control of or merger with
253、 a North Dakota insurer,unless the offer,request,invitation,acquisition,effectuation or attempt has receivedthe prior approval of the North Dakota Insurance Department.EmployeesAs of December 31,2016,Nodak Mutual and its subsidiaries had 129 full time employees.None of these employees are covered by
254、 a collectivebargaining agreement,and we believe that our employee relations are good.18Table of Contents Item 1A.Risk FactorsAn investment in the Companys common shares involves certain risks.The following is a discussion of the most significant risks and uncertaintiesthat may affect the Companys b
255、usiness,financial condition and future results.Risks Related to Our Business and IndustryCatastrophic or other significant natural or man-made losses may negatively affect our financial condition and operating results.As a property and casualty insurer,we are subject to claims from catastrophes that
256、 may have a significant negative impact on operating and financialresults.We have experienced catastrophe losses and can be expected to experience catastrophe losses in the future.Catastrophe losses can be caused byvarious events,including snow storms,ice storms,freezing temperatures,earthquakes,tor
257、nadoes,wind,hail,fires,and other natural or man-made disasters.The frequency,number and severity of these losses are unpredictable.The extent of losses from a catastrophe is a function of both the total amount of insuredexposure in the area affected by the event and the severity of the event.Approxi
258、mately 74.7%of Nodak Mutuals consolidated premiums in 2016 was written in North Dakota.Because Nodak Mutuals business isconcentrated in North Dakota,adverse developments from severe weather events such as hail storms,flooding or droughts affecting a large portion of NorthDakota would have a dispropo
259、rtionately greater effect on Nodak Mutuals financial condition and results of operations than if its business were lessgeographically concentrated.The incidence and severity of such events are inherently unpredictable.In recent years,changing climate conditions haveincreased the unpredictability,sev
260、erity and frequency of tornados and other storms.We attempt to reduce our exposure to catastrophe losses through the underwriting process and by obtaining reinsurance coverage.However,in theevent that we experience catastrophe losses,we cannot assure you that our unearned premiums,loss reserves and
261、reinsurance will be adequate to cover theserisks.In addition,because accounting rules do not permit insurers to reserve for catastrophic events until they occur,claims from catastrophic events couldcause substantial volatility in our financial results for any fiscal quarter or year and could have a
262、material adverse effect on our financial condition or resultsof operations.Our ability to write new business also could be adversely affected.Our financial condition and results of operations also are affected periodically by losses caused by natural perils such as those described above thatare not
263、deemed a catastrophe.If a number of these events occur in a short time period,it may materially affect our financial condition and results ofoperations.Any downgrade in our A.M.Best rating could affect our ability to write new business or renew our existing business,which would lead to adecrease in
264、revenue and net income.Third-party rating agencies,such as A.M.Best,periodically assess and rate the claims-paying ability of insurers based on criteria established by therating agencies.Ratings assigned by A.M.Best are an important factor influencing the competitive position of insurance companies.
265、A.M.Best ratings,whichare reviewed at least annually,represent independent opinions of financial strength and ability to meet obligations to policyholders and are not directedtoward the protection of investors.Therefore,our A.M.Best rating should not be relied upon as a basis for an investment decis
266、ion to purchase our commonstock.Nodak Mutual holds a financial strength rating of“A”(Excellent)by A.M.Best,the third highest rating out of 15 rating classifications.NodakMutual has held an“A”rating for the past five years.Our most recent rating by A.M.Best was issued on March 16,2017.Battle Creek al
267、so holds an“A”rating and American West holds an“A-”rating.Financial strength ratings are used by producers and customers as a means of assessing the financial strengthand quality of insurers.If our financial position deteriorates,we may not maintain our favorable financial strength rating from A.M.B
268、est.A downgrade of ourrating could severely limit or prevent us from writing desirable business or from renewing our existing business.In addition,a downgrade could negativelyaffect our ability to implement our strategy because it could cause our current or potential producers to choose other more h
269、ighly rated competitors or reduceour ability to obtain reinsurance.See“Item 1.Business A.M.Best Rating.”A significant percentage of Nodak Mutuals written premiums and net profits are generated from its multi-peril crop insurance business,andthe loss of such business as a result of a termination of o
270、r substantial changes to the Federal crop insurance program would have a material adverseeffect on the revenues and income of Nodak Insurance Company.In 2016,2015 and 2014,23.6%,24.9%and 27.6%,respectively,of Nodak Mutuals statutory net written premiums were generated from its multi-peril crop insur
271、ance line of business and 156.2%,50.4%and 85.3%of Nodak Mutuals statutory net income 19Table of Contents were attributable to this line of business.Through the Federal Crop Insurance Corporation,the United States government subsidizes insurance companies byassuming an increasingly higher portion of
272、losses incurred by farmers as a result of weather-related and other perils as well as commodity price fluctuations.The United States government also subsidizes the premium cost to farmers for multi-peril crop yield and revenue insurance.Without this risk assumption,losses incurred by insurance compa
273、nies would be higher and without the premium subsidy,the number of farmers purchasing multi-peril crop insurancewould decline significantly.Periodically,members of the United States Congress propose to significantly reduce the governments involvement in thefederal crop insurance program in an effort
274、 to reduce government spending.If legislation is adopted to reduce the amount of risk the government assumes,theamount of insurance premium subsidy provided to farmers or otherwise reduce the coverage provided under multi-peril crop insurance policies,losses wouldincrease and purchases of multi-peri
275、l crop insurance could experience a significant decline nationwide and in our market area.Such changes could have amaterial adverse effect on our revenues and income.Our results may fluctuate as a result of many factors,including cyclical changes in the insurance industry.Results of companies in the
276、 insurance industry,and particularly the property and casualty insurance industry,historically have been subject tosignificant fluctuations and uncertainties and have fluctuated in cyclical periods of low premium rates and excess underwriting capacity resulting fromincreased competition(a so-called“
277、soft market”),followed by periods of high premium rates and a shortage of underwriting capacity resulting fromdecreased competition(a so-called“hard market”).The industrys profitability can be affected significantly by:estimates of rising levels of actual costs that are not known by companies at the
278、 time they price their products;volatile and unpredictable developments,including man-made and natural catastrophes;changes in reserves resulting from the general claims and legal environments as different types of claims arise and judicial interpretationsrelating to the scope of insurers liability
279、develop;andfluctuations in interest rates,inflationary pressures and other changes in the investment environment,which affect returns on investedcapital and may impact the ultimate payout of losses.Fluctuations in underwriting capacity,demand and competition,and the impact on our business of the oth
280、er factors identified above,could have anegative impact on our results of operations and financial condition.Based on our analysis of the underwriting capacity and price competition in the currentmarket,we believe that we are neither in a“soft market”or“hard market”phase of the insurance industry cy
281、cle.If other insurers seek to expand the kinds oramounts of insurance coverage they offer,this could result in increased underwriting capacity and competition and declining pricing as some insurers seek tomaintain market share at the expense of underwriting discipline.Competition for potential acqui
282、sitions from other property and casualty insurers could increase the price that NI Holdings will be required topay in connection with future acquisitions.Over-capacity in the property and casualty market has led other market participants to seek acquisitions in order to generate revenue growth.These
283、market conditions may cause significant competition for acquisitions and increase the price for acquisitions.This competitive market could impedeexecution of NI Holdings growth strategy.Integration of existing businesses and future acquisitions may require a significant investment of managements tim
284、e and distract managementfrom the day to day operations of NI Holdings business.Nodak Mutual has spent considerable time and effort integrating Battle Creek Mutual Insurance Company and Primero Insurance Company in theareas of sales and marketing,operations,financial reporting,and employee benefits.
285、Future acquisitions will require additional integration,particularly torealize the anticipated coordination designed to drive revenue growth and reduce costs.NI Holdings executive management staff is small,and there can beno assurance that acquisitions will be successfully executed and integrated.We
286、 may not be able to manage our growth effectively.We intend to grow our business in the future,which could require additional capital,systems development and skilled personnel.We cannot assureyou that we will be able to locate profitable business opportunities,meet our capital needs,expand our syste
287、ms and our internal controls effectively,allocateour human resources optimally,identify qualified employees or agents or incorporate effectively the components of any businesses we may acquire in oureffort to achieve growth.The failure to manage our growth effectively and maintain underwriting disci
288、pline could have a material adverse effect on ourbusiness,financial condition and results of operations.20Table of Contents We may not be able to grow our business if our insurance company subsidiaries cannot maintain and grow their agent relationships,or ifconsumers seek other distribution methods
289、offered by our competitors.Our ability to retain existing agents,and to attract new independent agents,is essential to the continued growth of our business.If independentagents find it easier to do business with our competitors,our agent base may erode and,as a result,be unable to retain existing bu
290、siness or generate sufficientnew business.While we believe that we have good relationships with our independent agents,we cannot be certain that these agents will continue to sell ourproducts instead of our competitors products.While our products are sold through either independent or captive agents
291、,our competitors may sell insurance through other delivery models,including the internet,direct marketing,or other emerging alternative distribution methods.To the extent that current and potential policyholders changetheir insurance shopping preferences,this may have an adverse effect on our abilit
292、y to grow,our financial position,and our results of operations.Our success depends on the ability of our insurance company subsidiaries to underwrite risks accurately and to price our commercial andpersonal lines insurance products accordingly.The nature of the insurance business is such that pricin
293、g must be determined before the underlying costs are fully known.This requires significantreliance on estimates and assumptions in setting prices.If our insurance subsidiaries fail to assess accurately the risks that they assume in our commercial andpersonal lines products,they may fail to charge ad
294、equate premium rates,which could impact our profitability and have a material adverse effect on ourfinancial condition,results of operations or cash flows.Their ability to assess their policyholder risks and to price their products accurately is subject to anumber of risks and uncertainties,includin
295、g,but not limited to:Competition from other providers of property and casualty insurance;Price regulation by insurance regulatory authorities;Selection and implementation of appropriate rating formulae or other pricing methodologies;Availability of sufficient reliable data;Uncertainties inherent in
296、estimates and assumptions generally;Adverse changes in claim results;Incorrect or incomplete analysis of available data;Our ability to predict policyholder retention,investment yields and the duration of liability for losses and LAE accurately;andUnanticipated effects of court decisions,legislation,
297、or regulation,including those related to legal liability for damages by our insureds.These risks and uncertainties could cause our insurance subsidiaries to underprice their policies,which would negatively affect their results ofoperations,or to overprice their policies,which could reduce their comp
298、etitiveness.Either such event could have a material adverse effect on their financialcondition,results of operations and cash flows.Under the federal crop insurance program,each insurer is required to accept every application for multi-peril crop insurance that we receive,and thepremiums and the pol
299、icy terms are set by the Risk Management Administration,which is the federal government agency administering the federal cropinsurance program.Accordingly,no policy underwriting is necessary in connection with our multi-peril crop insurance line of business.We,and several othercrop insurers,rely on
300、AFBIS to underwrite our crop hail insurance line of business.Unlike the multi-peril crop business,however,we have the ability todecline to issue any policy if we believe the policy will expose us to too much risk in a particular geographic area or if we are unwilling to insure the cropthat the polic
301、y would cover.If we accept the application for crop hail insurance,however,we could incur losses if AFBIS fails to adequately underwrite andprice such coverage.Our results and financial condition may be affected by a failure of our insurance subsidiaries to establish adequate loss and LAE reserves o
302、r byadverse development of prior year reserves.Nodak Mutual maintains reserves to cover amounts it estimates will be needed to pay for insured losses and for the expenses necessary to settleclaims.Estimating loss and LAE reserves is a difficult and complex process involving many variables and 21Tabl
303、e of Contents subjective judgments.Liability for losses and LAE is the largest liability of Nodak Mutual and represents the financial statement item most sensitive toestimation and judgment.In developing its estimates of losses and LAE,Nodak Mutual has evaluated and considered actuarial projection t
304、echniques basedon its assessment of facts and circumstances then known,historical loss experience data and estimates of anticipated trends.This process assumes that pastexperience,adjusted for the effects of current developments,changes in operations and anticipated trends,constitutes an appropriate
305、 basis for predictingfuture events.While Nodak Mutual believes that its loss and LAE reserves are appropriate,to the extent that such reserves prove to be inadequate orexcessive in the future,we would adjust them and incur a charge or credit to earnings,as the case may be,in the period the reserves
306、are adjusted.Any suchadjustment could have a material impact on our financial condition and results of operations.There can be no assurance that the estimates of such liabilitieswill not change in the future.For additional information on our loss and LAE reserves,see“Item 7.Managements Discussion an
307、d Analysis of FinancialCondition and Results of Operations.”We rely on our systems and employees,and those of certain third-party vendors and service providers in conducting our operations,andcertain failures,including internal or external fraud,operational errors,systems malfunctions,or cyber-secur
308、ity incidents,could materially adverselyaffect our operations.We are exposed to many types of operational risk,including the risk of fraud by employees and outsiders,clerical and recordkeeping errors andcomputer or telecommunications systems malfunctions.Our business depends on our ability to proces
309、s a large number of increasingly complex transactions.If any of our operational,accounting,or other data processing systems fail or have other significant shortcomings,we could be materially adversely affected.Similarly,we depend on our employees.We could be materially adversely affected if one or m
310、ore of our employees cause a significant operationalbreakdown or failure,either as a result of human error or intentional sabotage or fraudulent manipulation of our operations or systems.Third parties with whom we do business,including vendors that provide services or security solutions for our oper
311、ations,could also be sources ofoperational and information security risk to us,including from breakdowns,failures,or capacity constraints of their own systems or employees.Any of theseoccurrences could diminish our ability to operate our business,or cause financial loss,potential liability to insure
312、ds,inability to secure insurance,reputational damage or regulatory intervention,which could materially adversely affect us.We rely heavily on our operating systems in connection with issuing policies,paying claims,and providing the information we need to conduct ourbusiness.We also rely on the opera
313、ting systems of AFBIS in connection with various processes with respect to our multi-peril crop line of business.We maybe subject to disruptions of such operating systems arising from events that are wholly or partially beyond our control,which may include,for example,electrical or telecommunication
314、s outages,natural or man-made disasters,such as earthquakes,floods or tornados,or events arising from terrorist acts.Suchdisruptions may give rise to losses in service to insureds and loss or liability to us.In addition,there is the risk that our controls and procedures as well as ourbusiness contin
315、uity,disaster recovery and data security systems prove to be inadequate.The computer systems and network systems we and others use couldbe vulnerable to unforeseen problems.These problems may arise in both our internally developed systems and the systems of third-party service providers.Inaddition,o
316、ur computer systems and network infrastructure present security risks and could be susceptible to hacking,computer viruses or data breaches.Anysuch failure could affect our operations and could materially adversely affect our results of operations by requiring us to expend significant resources toco
317、rrect the defect,as well as by exposing us to litigation or losses not covered by insurance.Although we have business continuity plans and othersafeguards in place,our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operatingsy
318、stems and those of third-party service providers that support our business.Our operations rely on the secure processing,transmission and storage of confidential information in our computer systems and networks.Ourtechnologies,systems and networks may become the target of cyber-attacks or information
319、 security breaches that could result in the unauthorized release,gathering,monitoring,misuse,loss or destruction of our or our insureds confidential,proprietary and other information,or otherwise disrupt our or ourinsureds or other third parties business operations,which in turn may result in legal
320、claims,regulatory scrutiny and liability,reputational damage,theincurrence of costs to eliminate or mitigate further exposure and the loss of customers.Although to date we have not experienced any material losses relatingto cyber-attacks or other information security breaches,there can be no assuran
321、ce that we will not suffer such losses in the future.Our risk and exposure tothese matters remains heightened because of,among other things,the evolving nature of these threats and the outsourcing of some of our business operations.As a result,cyber-security and the continued development and enhance
322、ment of our controls,processes and practices designed to protect our systems,computers,software,data and networks from attack,damage or unauthorized access remain a priority.As cyber-threats continue to evolve,we may berequired to expend significant additional resources to continue to modify or enha
323、nce our protective measures or to investigate and remediate any informationsecurity vulnerabilities.Disruptions or failures in the physical infrastructure or operating systems that support our business and customers,or cyber-attacks or securitybreaches of the networks,systems or devices that our cus
324、tomers use to access our products and services could result in customer attrition,regulatory fines,penalties or intervention,reputational damage,reimbursement or other compensation costs,and/or additional compliance costs,any of which couldmaterially adversely affect our financial condition or resul
325、ts of operations.22Table of Contents Our revenues and financial results may fluctuate with interest rates,investment results and developments in the securities markets.Nodak Mutual invests the premiums it receives from policyholders until cash is needed to pay insured claims or other expenses.Invest
326、mentsecurities represent one of the largest categories of assets of Nodak Mutual.The fair value of its investment holdings is affected by general economicconditions and changes in the financial and credit markets.Nodak Mutual relies on the investment income produced by its investment portfolio to co
327、ntributeto its profitability.Changes in interest rates and credit quality may result in fluctuations in the income derived from,the valuation of,and in the case ofdeclines in credit quality,payment defaults on,our fixed-income securities.In addition,deteriorating economic conditions could impact the
328、 value of ourequity securities.Such conditions could give rise to significant realized and unrealized investment losses or the impairment of securities deemed other-than-temporary.These changes could have a material adverse effect on our financial condition,results of operations or cash flows.The in
329、vestment portfolio ofNodak Mutual is also subject to credit and cash flow risk,including risks associated with its investments in asset-backed and mortgage-backed securities.Because Nodak Mutuals investment portfolio is the largest component of its assets and a multiple of its policyholders equity,a
330、dverse changes in economicconditions could result in other-than-temporary impairments that are material to our financial condition and operating results.Such economic changes couldarise from overall changes in the financial markets or specific changes to industries,companies or municipalities in whi
331、ch we maintain investment holdings.See“Item 7.Quantitative and Qualitative Information about Market Risk.”Any acquisitions we make could disrupt our business and harm our financial condition or results of operations.As part of our growth strategy,we will continue to evaluate opportunities to acquire
332、 other property and casualty insurers and insurance-related feeincome businesses.Acquisitions that we may make or implement in the future entail a number of risks that could materially adversely affect our business andoperating results,including:Problems integrating the acquired operations with our
333、existing business;Operating and underwriting results of the acquired operations not meeting our expectations;Diversion of managements time and attention from our existing business;Need for financial resources above our planned investment levels;Difficulties in retaining business relationships with agents and policyholders of the acquired company;Risks associated with entering markets in which we l
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