North Dakota’s Nodak Mutual Seeking to Convert to a Stock Company

A North Dakota mutual insurer with ties to the Farm Bureau is awaiting a decision from the state insurance commissioner as to whether it can proceed with a plan to convert to a stock insurance company.

Nodak Mutual Insurance Co. was founded by the Farm Bureau in 1946 to provide insurance products to farmers and ranchers in North Dakota, according to Nodak Mutual Executive Vice President and CEO Jim Alexander. Testifying at a hearing before North Dakota Insurance Commissioner Adam Hamm in mid-November, Alexander said the company wants to convert in order to raise capital for growth and expansion.

Without the conversion, Alexander said the primary method of raising capital as a mutual insurer is through borrowing. The capital raised through a stock offering would “allow us to further our plans [and] our strategy of growth through acquisitions and internal expansion,” Alexander said.

Nodak was created to offer property/casualty insurance products to members of the Farm Bureau organization in North Dakota. Today, through around 65 exclusive Nodak Mutual agents, the company writes automobile, farm owners, homeowners, crop/hail, commercial property and liability insurance in the state, Alexander said.

The conversion would essentially create three entities — Nodak Insurance (NI) Holdings, Nodak Mutual Group and Nodak Insurance Co.

Special counsel to Nodak Mutual, Scott Spenser with the law firm of Stevens & Lee, testified at the hearing that should the conversion be approved, NI Holdings “will be majority controlled by the mutual holding company. It is that company, NI holdings, that will engage in offering stock. Then there’s the conversion of Nodak Mutual into a stock company, the result of which would be that Nodak Insurance Company would be 100 percent owned by NI Holdings.”

Alexander said the relationship with the Farm Bureau would continue as it is today. “Under the new structure Nodak … will maintain the royalty agreement with the Farm Bureau. … In order to purchase from Nodak Insurance Company you will have to be a member of the Farm Bureau.”

The royalty agreement allows Nodak use of the Farm Bureau logo, Alexander said. The agreement “provides payment of 1.3 percent of written premium on an annual basis, not including the multi-peril crop insurance. … Multi-peril crop insurance is not a membership line of business because it is regulated by federal government.”

Nodak currently has affiliate relationships with three other insurance companies, Alexander said — American West, which is licensed to write business in eight states and currently writes three states, including crop insurance in Minnesota written through independent agents, and farm owners, homeowners and crop insurance in South Dakota, also written through independent agents; Nebraska-based Battle Creek Mutual Insurance Co., which has around 280 offices in Nebraska and markets homeowners, farm owners, private passenger auto and crop insurance in that state; and Primero Insurance Co., which is based in Nevada and offers non-standard auto insurance through independent agents in Arizona, Nevada, and North and South Dakota.

Alexander said the conversion would not change Nodak’s affiliation with those companies.

Adequate Capitalization

Ed Moody, director of insurance company licensing and examinations for the North Dakota Insurance Department, testified that Nodak currently has adequate capitalization and that is not expected to change if and when the conversion to a stock company takes place.

The proceeds from the stock offering would cover the conversion expenses, Moody said. “There will be no diminishment in the value of Nodak Insurance Company … so therefore [it] will have sufficient capital to conduct its operations.”

The Conversion Plan

Under the conversion plan, Nodak Mutal Group would own no less than a 55 percent share of NI Holdings, Alexander said. The remaining 45 percent share in NI Holdings would be offered to policyholders, then to members of the employee stock ownership plan (ESOP) and, later, to other investors.

The company hopes to raise around $90 million with the sale of stock in NI Holdings. Feldman Financial Advisors appraised Nodak at a value of $200 million, plus or minus 15 percent. The $90 million represents 45 percent of that appraisal amount, Alexander said.

On Jan. 21, 2016, when Nodak went on record with its conversion plan, the company had 27, 915 policyholders. Those policyholders would be given subscription rights to purchase stock at $10 per share.

Each eligible policyholder would receive the exact same number of subscription rights — 322, Alexander said. If a policyholder chooses not to not to participate and buy stock, they may redeem their subscription rights for a value of 67 cents each, or for a total of $216.

Alexander said that amount “was arrived at by taking 9 million shares of stock divided by the number of policyholders on the record date.”

A Different Valuation

The public accounting firm, RSM, also performed a financial analysis of NI Holders, valuing the company at $217 million (plus or minus 15 percent) and came up with a price of 80 cents per subscription right.

Asked why RSM’s valuation and rate per subscription right varied from that of Feldman Financial, Paul Siebrasse, a principal at RSM, testified he wasn’t really surprised that there is a difference.

“It would be highly unusual if we came to the same number,” he said. He said the timing of the separate valuations — they were conducted approximately six months apart — could have been a factor.

He explained that “because NI Holdings is not actively traded … we do not have a history of transactions from which we can derive a historical measure of NI Holdings’ stock volatility.”

A “perfect comparable does not exist,” Siebrasse said. Because of that NSM looked at the experience of eight separate public companies and relied on a comparison with those guideline companies for the valuation.

“We looked at equity value versus equity volatility” and made a “judgment call,” he said.

“I stand by our conclusion. I think our number is the right number,” Siebrasse said.

The Nodak hearing took place on Nov. 15. At the end of testimony, Commissioner Hamm said the record would remain open for 10 days and comments from interested parties would continue to be accepted.

In an email to Insurance Journal on Dec. 7, Sara R. Behrens, an attorney for the insurance department, said there is not an exact timeline for the commissioner to make a decision on Nodak’s application to convert to a stock company. However, she said she anticipated a decision in the “next few weeks.”

Topics Carriers Agribusiness