The following discussion is intended to provide a more comprehensive review of
the Company's operating results and financial condition than can be obtained
from reading the Unaudited Consolidated Financial Statements alone. This
discussion should be read in conjunction with the Unaudited Consolidated
Financial Statements and the notes thereto included in "Part I. Item 1.
Financial Statements." Some of the information contained in this discussion and
analysis or set forth elsewhere in this Quarterly Report on Form 10-Q
constitutes forward-looking statements that involve risks and uncertainties.
Please see "Forward-Looking Statements" and "Part II. Item 1A. Risk Factors"
included elsewhere in this Quarterly Report. You should also review "Risk
Factors" included in the Company's Annual Report on Form 10-K for a discussion
of important factors that could cause actual results to differ materially from
the results described, or implied by, the forward-looking statements contained
herein.
All dollar amounts included in Item 2 herein are in thousands.
Overview
NI Holdings is a North Dakota business corporation that is the stock holding
company of Nodak Insurance Company and became such in connection with the
conversion of Nodak Mutual Insurance Company from a mutual to stock form of
organization and the creation of a mutual holding company. The conversion was
consummated on March 13, 2017. Immediately following the conversion, all of the
outstanding shares of common stock of Nodak Insurance Company were issued to
Nodak Mutual Group, which then contributed the shares to NI Holdings in exchange
for 55% of the outstanding shares of common stock of NI Holdings. Nodak
Insurance Company then became a wholly-owned stock subsidiary of NI Holdings.
Prior to completion of the conversion, NI Holdings conducted no business and had
no assets or liabilities. As a result of the conversion, NI Holdings became the
holding company for Nodak Insurance Company and its existing subsidiaries.
These consolidated financial statements of NI Holdings include the financial
position and results of operations of NI Holdings and seven other entities:
•
Nodak Insurance - a wholly-owned subsidiary of NI Holdings;
•
Nodak Agency - a wholly-owned subsidiary of Nodak Insurance;
•
American West - a wholly-owned subsidiary of Nodak Insurance;
•
Primero - an indirect, wholly-owned subsidiary of Nodak Insurance;
•
Battle Creek - an affiliated company of Nodak Insurance;
•
Direct Auto - a wholly-owned subsidiary of NI Holdings; and
•
Westminster - a wholly-owned subsidiary of NI Holdings.
Battle Creek is managed by Nodak Insurance, and Nodak Insurance reinsures 100%
of the risk on all insurance policies issued by Battle Creek.
Nodak Agency is an inactive shell corporation.
On August 31, 2018, NI Holdings completed the acquisition of 100% of the common
stock of Direct Auto Insurance Company ("Direct Auto") from private shareholders
and Direct Auto became a consolidated subsidiary of the Company. The results of
Direct Auto are included as part of the Company's non-standard auto business
segment following the closing date.
On January 1, 2020, NI Holdings completed the acquisition of 100% of the common
stock of Westminster from the private shareholder of Westminster and Westminster
became a consolidated subsidiary of the Company. The results of Westminster are
included as part of the Company's commercial business segment following the
closing date.
Nodak Insurance offers property and casualty insurance, crop hail, and
multi-peril crop insurance to members of the North Dakota Farm Bureau through
captive agents in North Dakota. American West and Battle Creek offer similar
insurance coverage through independent agents in South Dakota and Minnesota, and
Nebraska, respectively. Primero offers nonstandard auto insurance coverage in
Arizona, Nevada, North Dakota, and South Dakota. Direct Auto offers nonstandard
auto insurance coverage in Illinois. Westminster offers commercial multi-peril
insurance in the Mid-Atlantic region of the United States.
All insurance subsidiaries of NI Holdings are rated "A" by A.M. Best, which is
the third highest out of a possible 15 ratings.
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A chart of the corporate structure follows:
NI HOLDINGS, INC.
ORGANIZATIONAL CHART
Nodak Mutual Group, Inc.
? 55%
ownership
NI Holdings, Inc.
100% 100% 100%
ownership ownership ownership
Direct Auto
Insurance Westminster American
Company Nodak Insurance Company Insurance Company
100% 100% 100%
ownership ownership Affiliation ownership
Nodak Agency, American West Battle Creek Mutual Tri-State, Ltd
Inc. Insurance Company Insurance Company
100%
ownership
Primero Insurance Company
The following tables provide selected amounts from the Company's Unaudited
Consolidated Statements of Operations and Unaudited Consolidated Balance Sheets.
Additional information can be found later in this section.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Direct premiums
written $ 112,759 $ 103,243 $ 175,731 $ 158,896
Net premiums
earned 82,006 65,114 140,778 115,620
Net income
before
non-controlling
interest 18,767 2,515 15,212 16,311
June 30, 2020 December 31, 2019
Total assets $ 624,434 $ 508,159
Shareholders' equity 324,723 309,803
Marketplace Conditions and Trends
The global pandemic associated with the novel coronavirus COVID-19 continued to
impact the Company's results of operations during the quarter. Decreased
economic activity restricted top-line growth, and while our investment portfolio
performance improved, the volatile financial markets continued to have a
negative impact on overall returns. These top-line growth impacts were partially
offset by reduced loss frequency in our private passenger and non-standard auto
segments, due to decreased overall miles driven during the quarter.
The actual long-term impact of the pandemic on the property and casualty
industry continues to be highly uncertain and will not be fully known for some
time.
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We monitor the marketplace both on a regional and line of business basis. The
private passenger market place would best be described as stable with ample
capacity to grow business with a challenging pricing environment. Rates for
private passenger are competitive across the upper Midwest. The non-standard
auto market is competitive with companies seeking to grow this line, but,
similar to the private passenger auto line, pricing is difficult and results
challenging. In the property lines of business, companies are increasing prices
in the loss prone areas and holding prices steady in non-loss states.
Unlike our other insurance segments, crop insurance premiums written each year
fluctuate primarily based on prevailing commodity prices for the type of crops
insured, as the aggregate number of acres insured generally remains consistent
from year to year. Because the premiums that are charged for crop insurance are
established by the Risk Management Agency ("RMA"), which is a division of the
United States Department of Agriculture, and the policy forms and terms are also
established by the RMA, insurers do not compete on price or policy terms and
conditions. Moreover, because participation in other federal farm programs by a
farmer is conditioned upon participation in the federal crop insurance program,
most farmers obtain crop insurance on their plantings each year.
Principal Revenue Items
The Company derives its revenue primarily from net premiums earned, net
investment income, and net capital gain (loss) on investments.
Gross and net premiums written
Gross premiums written is equal to direct premiums written and assumed premiums
before the effect of ceded reinsurance. Gross premiums written are recognized
upon sale of new insurance contracts or renewal of existing contracts. Net
premiums written is equal to gross premiums written less premiums ceded or paid
to reinsurers (ceded premiums written).
Premiums earned
Premiums earned is the earned portion of net premiums written. Gross premiums
written include all premiums recorded by an insurance company during a specified
policy period. Insurance premiums on property and casualty policies are
recognized in proportion to the underlying risk insured and are earned ratably
over the duration of the policies or, in the case of crop insurance, over the
period of risk to the Company. At the end of each accounting period, the portion
of the premiums that is not yet earned is included in unearned premiums and is
realized as revenue in subsequent periods over the remaining term of the policy
or period of risk. NI Holdings' property and casualty policies, other than some
of our auto lines and the non-standard auto policies, typically have a term of
twelve months. For example, for an annual policy that is written on July 1,
2019, one-half of the premiums would be earned in 2019 and the other half would
be earned in 2020.
Due to the nature of the crop planting and harvesting cycle and the deadlines
for filing and processing claims under the federal crop insurance program,
insurance premiums for crop insurance are recognized and earned during the
period of risk, which usually begins in spring and ends with harvest in the
fall. In the case of prevented planting claims, the period of risk is shortened
to the date a valid prevented planting claim is filed, as the Company believes
the period of risk has ended. Under the federal crop insurance program, farmers
must purchase crop insurance with respect to spring planted crops by March 15.
By July 15, the farmer must report the number of acres he has planted in each
crop. On September 1, the insurer bills the farmer for the insurance premium,
which is due and payable by the farmer by October 1. If the farmer does not pay
the premium by such date, the insurer must essentially provide a loan to the
farmer in an amount equal to the premium at an annual interest rate of 15%
because the insurer is required to pay the farmer's portion of the premium to
the Federal Crop Insurance Corporation ("FCIC") by November 15, regardless of
whether the farmer pays the premium to the insurer. Except for claims occurring
in the spring (primarily for prevented planting and required replanting claims),
claims are required to be filed with the FCIC by December 15. A different cycle
exists for crops planted in the fall, such as winter wheat, but the vast
majority of crop insurance written by NI Holdings covers crops planted in the
spring.
Net investment income and net capital gain (loss) on investments
NI Holdings invests its surplus and the funds supporting its insurance
liabilities (including unearned premiums and unpaid losses and loss adjustment
expenses) in cash, cash equivalents, equity securities, and fixed income
securities. Investment income includes interest and dividends earned on invested
assets, and is reported net of investment-related expenses. Net capital gains
and losses on investments are reported separately from net investment income. NI
Holdings recognizes realized capital gains when investments are sold for an
amount greater than their cost or amortized cost (in the case of fixed income
securities) and recognizes realized capital losses when investments are written
down as a result of an other-than-temporary impairment or sold for an amount
less than their cost or amortized cost, as applicable.
Beginning in 2019, in accordance with a change in accounting principle, changes
in unrealized gains and losses on the Company's investments in equity securities
are included in net income as part of net capital gains and losses on
investments. These
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gains and losses may be significant given the size of the equity securities
holdings and the inherent volatility in equity securities prices. Prior to 2019,
the changes in unrealized gains and losses pertaining to such investments were
recorded in other comprehensive income. The changes in unrealized gains and
losses on fixed income securities continue to be recorded in other comprehensive
income, net of income taxes. The new accounting treatment has no effect on total
shareholders' equity.
NI Holdings' portfolio of investments is managed by Conning, Inc., Disciplined
Growth Investors, CIBC Personal Wealth Management, and Morgan Stanley Wealth
Management. These investment managers have discretion to buy and sell securities
in accordance with the investment policy approved by our Board of Directors.
Principal Expense Items
NI Holdings' expenses consist primarily of losses and loss adjustment expenses
("LAE"), amortization of deferred policy acquisition costs, other underwriting
and general expenses, and income taxes.
Losses and Loss Adjustment Expenses
Losses and LAE represent the largest expense item and include (1) claim payments
made, (2) estimates for future claim payments and changes in those estimates
from prior periods, and (3) costs associated with investigating, defending, and
adjusting claims, including legal fees.
Amortization of deferred policy acquisition costs and other underwriting and
general expenses
Expenses incurred to underwrite risks are referred to as policy acquisition
costs. Policy acquisition costs consist of commission expenses, state premium
taxes, and certain other underwriting expenses that vary with and are primarily
related to the writing and acquisition of new and renewal business. These policy
acquisition costs are deferred and amortized over the effective period of the
related insurance policies. Other underwriting and general expenses consist of
salaries, professional fees, office supplies, depreciation, and all other
operating expenses not otherwise classified separately.
Income taxes
Current income taxes represent amounts paid to the federal government and
certain states whose payment is based upon net income (subject to regulatory
adjustments) generated by the Company. As noted above, it does not include state
premium taxes that are based purely on the collection of policyholder premiums.
NI Holdings uses the asset and liability method of accounting for deferred
income taxes. Deferred income taxes arise from the recognition of temporary
differences between financial statement carrying amounts and the income tax
bases of its assets and liabilities. A valuation allowance is provided when it
is more likely than not that some portion of the deferred income tax asset will
not be realized. The effect of a change in tax rates is recognized in the period
of the enactment date. Total income taxes reflect both current income taxes and
the change in the net deferred income tax asset or liability, excluding amounts
attributed to accumulated other comprehensive income.
Non-GAAP Financial Measures
NI Holdings evaluates its insurance operations in the way it believes will be
most meaningful and representative of its business results. Some of these
measurements are "non-GAAP financial measures" under Securities and Exchange
Commission rules and regulations. GAAP is the acronym for "accounting principles
generally accepted in the United States of America". The non-GAAP financial
measures that NI Holdings presents may not be compatible to similarly-named
measures reported by other companies. The non-GAAP financial measures described
in this section are used widely in the property and casualty insurance industry,
and are the expense ratio, loss and LAE ratio, combined ratio, written premiums,
ratio of net written premiums to statutory surplus, underwriting gain, and
return on average equity.
NI Holdings measures growth by monitoring changes in gross premiums written and
net premiums written. The Company measures underwriting profitability by
examining its loss and LAE ratio, expense ratio, and combined ratio. It also
measures profitability by examining underwriting gain (loss), net income (loss),
and return on average equity.
Loss and LAE ratio
The loss and LAE ratio is the ratio (expressed as a percentage) of losses and
LAE incurred to premiums earned. NI Holdings measures the loss and LAE ratio on
an accident year and calendar year loss basis to measure underwriting
profitability. An accident year loss ratio measures losses and LAE for insured
events occurring in a particular year, regardless of when they are reported, as
a
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percentage of premiums earned during that year. A calendar year loss ratio
measures losses and LAE for insured events occurring during a particular year
and the change in loss reserves from prior policy years as a percentage of
premiums earned during that year.
Expense ratio
The expense ratio is the ratio (expressed as a percentage) of amortization of
deferred policy acquisition costs and other underwriting and general expenses
(attributable to insurance operations) to premiums earned, and measures our
operational efficiency in producing, underwriting, and administering the
Company's insurance business.
Combined ratio
The Company's combined ratio is the ratio (expressed as a percentage) of the sum
of losses and LAE incurred and expenses to premiums earned, and measures its
overall underwriting profit. Generally, if the combined ratio is below 100%, NI
Holdings is making an underwriting profit. If the combined ratio is above 100%,
it is not profitable without investment income and may not be profitable if
investment income is insufficient.
Premiums written
Premiums written represent a measure of business volume most relevant on an
annual basis for the Company's business model. This measure includes the amount
of premium purchased by policyholders as of the policy's effective date, whereas
premiums earned as presented in the Consolidated Statement of Operations matches
the amount of premium to the period of risk for those insurance policies. The
Company's insurance policies are sold with a variety of effective periods,
including annual, semi-annual, and monthly.
Net premiums written to statutory surplus ratio
The net premiums written to statutory surplus ratio represents the ratio of net
premiums written to statutory surplus. This ratio is designed to measure the
ability of the Company to absorb above-average losses and the Company's
financial strength. In general, a low premium to surplus ratio is considered a
sign of financial strength because the Company has an adequate provision for
adverse development of loss reserves within the Company's current book of
business and provides a capacity to write more business. Statutory surplus is
determined using accounting principles prescribed or permitted by the insurance
subsidiaries' state of domicile and differs from GAAP equity.
Underwriting gain (loss)
Underwriting gain (loss) measures the pre-tax profitability of insurance
operations. It is derived by subtracting losses and LAE, amortization of
deferred policy acquisition costs, and other underwriting and general expenses
from net premiums earned. Each of these items is presented as a caption in NI
Holdings' Consolidated Statements of Operations.
Net income (loss) and return on average equity
NI Holdings uses net income (loss) to measure its profit and uses return on
average equity to measure its effectiveness in utilizing equity to generate net
income. In determining return on average equity for a given period, net income
(loss) is divided by the average of the beginning and ending equity attributable
to NI Holdings for that period.
Critical Accounting Policies
General
The preparation of financial statements in accordance with GAAP requires both
the use of estimates and judgment relative to the application of appropriate
accounting policies. NI Holdings is required to make estimates and assumptions
in certain circumstances that affect amounts reported in its Consolidated
Financial Statements and related footnotes. NI Holdings evaluates these
estimates and assumptions on an ongoing basis based on historical developments,
market conditions, industry trends, and other information that it believes to be
reasonable under the circumstances. There can be no assurance that actual
results will conform to its estimates and assumptions and that reported results
of operations will not be materially adversely affected by the need to make
accounting adjustments to reflect changes in these estimates and assumptions
from time to time. The Company believes the following policies are the most
sensitive to estimates and judgments.
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Unpaid Losses and Loss Adjustment Expenses
How reserves are established
With respect to its traditional property and casualty insurance products, the
Company maintains reserves for the payment of claims (indemnity losses) and
expenses related to adjusting those claims (loss adjustment expenses, or "LAE").
The Company's liability for unpaid losses and LAE consists of (1) case reserves,
which are reserves for claims that have been reported to it, and (2) reserves
for claims that have been incurred but have not yet been reported and for the
future development of case reserves ("IBNR").
When a claim is reported to NI Holdings, its claims personnel establish a case
reserve for the estimated amount of the ultimate payment to the extent it can be
determined or estimated. The amount of the loss reserve for the reported claim
is based primarily upon an evaluation of coverage, liability, damages suffered,
and any other information considered pertinent to estimating the exposure
presented by the claim. Each claim is contested or settled individually based
upon its merits, and some property and casualty claims may take years to
resolve, especially in the unusual situation that legal action is involved. Case
reserves are reviewed on a regular basis and are updated as new information
becomes available.
When a catastrophe occurs, which in the Company's case usually involves the
weather perils of wind and hail, NI Holdings utilizes mapping technology through
geographic coding of its property risks to overlay the path of the storm. This
enables the Company to establish estimated damage amounts based on the wind
speed and size of the hail for case or per claim loss amounts. This process
allows the Company to determine within a reasonable time (5 - 7 days) an
estimated number of claims and estimated losses from the storm. If the Company
estimates the damages to be in excess of its retained catastrophe amount,
reinsurers are notified immediately of a potential loss so that the Company can
quickly recover reinsurance payments once the retention is exceeded.
In addition to case reserves, NI Holdings maintains estimates of reserves for
losses and LAE incurred but not reported. These reserves include estimates for
the future development of case reserves. Some claims may not be reported for
several years. As a result, the liability for unpaid losses and LAE includes
significant estimates for IBNR.
The Company estimates multi-peril crop insurance losses on a quarterly basis
based upon historical loss patterns, current crop conditions, current weather
patterns, and input from crop adjusters. These estimates have proven to be
reasonably accurate indicators of the Company's anticipated losses for this line
of business.
NI Holdings utilizes an independent actuary to assist with the estimation of its
liability for unpaid losses and LAE. This actuary prepares estimates by first
deriving an actuarially based estimate of the ultimate cost of total losses and
LAE incurred as of the financial statement date based on established actuarial
methods described below. The Company then reduces the estimated ultimate loss
and LAE by loss and LAE payments and case reserves carried as of the financial
statement date. The actuarially determined estimate is based upon indications
from one of the following actuarial methodologies or uses a weighted average of
these results. The specific method used to estimate the ultimate losses varies
depending on the judgment of the actuary as to what is the most appropriate
method for the property and casualty business. The Company's management reviews
these estimates and supplements the actuarial analysis with information not
fully incorporated into the actuarially based estimate, such as changes in the
external business environment and internal company processes. NI Holdings may
adjust the actuarial estimates based on this supplemental information in order
to arrive at the amount recorded in the Consolidated Financial Statements.
NI Holdings accrues its ultimate liability for unpaid losses and LAE by using
the following actuarial methodologies:
Bornhuetter-Ferguson Method - The Bornhuetter-Ferguson Method is a blended
method that explicitly takes into account both actual loss development to date
and expected future loss emergence. This method is applied on both a paid loss
basis and an incurred loss basis. This method uses selected loss development
patterns to calculate the expected percentage of losses unpaid (or unreported).
The expected future loss component of the method is calculated by multiplying
earned premium for the given exposure period by a selected a priori (i.e.
deductive) loss ratio. The resulting dollars are then multiplied by the expected
percentage of unpaid (or unreported) losses described above. This provides an
estimate of future paid (or reported) losses that is then added to actual paid
(or incurred) loss data to produce the estimated ultimate loss.
Paid and Case Incurred Loss Development Method - The Paid and Case Incurred Loss
Development Method utilizes ratios of cumulative paid or case incurred losses or
LAE at each age of development as a percent of the preceding development age.
Selected ratios are then multiplied together to produce a set of loss
development factors which when applied to the most current data value, by
accident year, develop the estimated ultimate losses or LAE. Ultimate losses or
LAE are then selected for each accident year from the various methods employed.
Ratio of Paid ALAE to Paid Loss Method - This method utilizes the ratio of paid
allocated loss adjustment expense ("ALAE") to paid losses and is similar to the
Paid and Case Incurred Method described above, except that the data projected
are the ratios of paid ALAE to paid losses. The projected ultimate ratio is then
multiplied by the selected ultimate losses, by accident year, to yield ultimate
ALAE. ALAE reserves are calculated by subtracting paid losses from ultimate
ALAE.
The process of estimating loss reserves involves a high degree of judgment and
is subject to a number of variables. These variables can be affected by both
internal and external events, such as changes in claims handling procedures,
inflation, legal trends, increases in the state-dictated minimum liability
limits in the recent case of nonstandard auto insurance, and legislative
changes, among others. The impact of many of these items on ultimate costs for
claims and claim adjustment expenses is difficult to estimate. Loss reserve
estimation is also affected by the volume of claims, the potential severity of
individual claims, the determination of occurrence date for a claim, and
reporting lags (the time between the occurrence of the policyholder event and
when it is actually reported to the insurer). Informed judgment is applied
throughout the process, including the application of various individual
experiences and expertise to multiple sets of data and analyses. NI Holdings
continually refines its estimates of unpaid losses and LAE in a regular ongoing
process as historical loss experience develops and additional claims are
reported and settled. NI Holdings considers all significant facts and
circumstances known at the time the liabilities for unpaid losses and LAE are
established.
There is an inherent amount of uncertainty in the establishment of liabilities
for unpaid losses and LAE. This uncertainty is greatest in the current and most
recent accident years due to the relative newness of the claims being reported
and the relatively small percentage of these claims that have been reported,
investigated, and adjusted by the Company's claims staff. Therefore, the
reserves
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carried in these more recent accident years are generally more conservative than
those carried for older accident years. As the Company has the opportunity to
investigate and adjust the reported claims, both the case and IBNR reserves are
adjusted to more closely reflect the ultimate expected loss.
Other factors that have or can have an impact on the Company's case and IBNR
reserves include but are not limited to those described below.
Changes in liability law and public attitudes regarding damage awards
Laws governing liability claims and judicial interpretations thereof can change
over time, which can expand the scope of coverage anticipated by insurers when
initially establishing reserves for claims. In addition, public attitudes
regarding damage awards can result in judges and juries granting higher
recoveries for damages than expected by claims personnel when claims are
presented. In addition, these changes can result in both increased claim
frequency and severity as both plaintiffs and their legal counsel perceive the
opportunity for higher damage awards. Reserves established for claims that
occurred in prior years would not have anticipated these legal changes and,
therefore, could prove to be inadequate for the ultimate losses paid by the
Company, causing the Company to experience adverse development and higher loss
payments in future years.
Change in claims handling and/or setting case reserves
Changes in Company personnel and/or the approach to how claims are reported,
adjusted, and reserved may affect the reserves established by the Company. As
discussed above, the setting of IBNR reserves is not an exact science and
involves the expert judgment of an actuary. One actuary's reserve opinion may
differ slightly from another actuary's opinion. This is the primary reason why
the IBNR reserve estimate is customarily reported as a range by a company's
actuary, which provides a company with an acceptable "range" to use in
establishing its best estimate for IBNR reserves.
Economic inflation
A sudden and extreme increase in the economic inflation rate could have a
significant impact on the Company's case and IBNR reserves. When establishing
case reserves, claims personnel generally establish an amount that in their
opinion will provide a conservative amount to settle the loss. If the time to
settle the claim extends over a period of years, the initial reserve may not
anticipate an economic inflation rate that is significantly higher than the
current inflation rate. This can also apply to IBNR reserves. Should the
economic inflation rate increase significantly, it is likely that the Company
may not anticipate the need to adjust the IBNR reserves accordingly, which could
lead to the Company being deficient in its IBNR reserves.
Increases or decreases in claim severity for reasons other than inflation
Factors exist that can drive the cost to settle claims for reasons other than
standard inflation. For example, demand surge caused by a very large catastrophe
(as in the case of Hurricane Katrina) has an impact on not only the availability
and cost of building materials such as roofing and other materials, but also on
the availability and cost of labor. Other factors such as increased vehicle
traffic in an area not designed to handle the increased congestion and increased
speed limits on busy roads are examples of changes that could cause claim
severity to increase beyond what the Company's historic reserves would reflect.
In addition, unexpected increases in the labor costs and healthcare costs that
underlie insured risks, changes in costs of building materials, or changes in
commodity prices for insured crops may cause fluctuations in the ultimate
development of the case reserves. During 2018, the state of Nevada mandated the
incorporation of higher minimum liabilities for nonstandard auto insurance
policies written in the state. Similar mandates have become effective in July
2020 in the state of Arizona. While it is certain that these actions increase
the average claim cost experienced in the state, the actual amount is subject to
judgement until further claim experience is obtained.
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Actual settlement experience different from historical data trends
When establishing IBNR reserves, the Company's actuary takes into account many
of the factors discussed above. One of the more important factors that is
considered when setting reserves is the past or historical claim settlement
experience. Our actuary considers factors such as the number of files entering
litigation, payment patterns, length of time it takes Company claims personnel
to settle the claims, and average payment amounts when estimating reserve
amounts. Should future settlement patterns change due to the legal environment,
Company claims handling philosophy, or personnel, it may have an impact on the
future claims payments, which could cause existing reserves to either be
redundant (excessive) or deficient (below) compared to the actual loss amount.
Change in Reporting Lag
As discussed above, NI Holdings and its actuary utilize historical patterns to
provide an accurate estimate of what will take place in the future. Should we
experience an unexpected delay in reporting time (claims are slower to be
reported than in the past), our actuary or we may underestimate the anticipated
number of future claims, which could cause the ultimate loss we may experience
to be underestimated. A lag in reporting may be caused by changes in how claims
are reported (online vs. through company personnel), the type of business or
lines of business the Company is writing, the Company's distribution system
(direct writer, independent agent, or captive agent), and the geographic area
where the Company chooses to insure risk.
Due to the inherent uncertainty underlying loss reserve estimates, final
resolution of the estimated liability for unpaid losses and LAE may be higher or
lower than the related loss reserves at the reporting date. Therefore, actual
paid losses, as claims are settled in the future, may be materially higher or
lower in amount than current loss reserves. The Company reflects adjustments to
the liability for unpaid losses and LAE in the results of operations during the
period in which the estimates are changed.
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Actuarial Loss Reserves
NI Holdings' liabilities for unpaid losses and LAE are summarized below:
June 30, December 31,
2020 2019
Case reserves $ 108,583 $ 90,210
IBNR reserves 7,431 3,040
Liability for unpaid losses and LAE $ 116,014 $ 93,250
Reinsurance recoverables on losses 9,011
4,045
Net unpaid losses and LAE $ 107,003 $ 89,205
The following table provides case and IBNR reserves for unpaid losses and LAE by
segment.
June 30, 2020
Case Reserves IBNR Reserves Total Reserves
Private passenger auto $ 13,614 $ 5,756 $ 19,370
Non-standard auto 54,618 (11,788 ) 42,830
Home and farm 7,910 3,307 11,217
Crop 19,347 812 20,159
Commercial 9,093 4,617 13,710
All other 4,001 4,727 8,728
Liability for unpaid losses and LAE $ 108,583 $ 7,431 $ 116,014
Reinsurance recoverables on losses
7,833 1,178 9,011
Net unpaid losses and LAE $ 100,750 $ 6,253 $ 107,003
December 31, 2019
Case Reserves IBNR Reserves Total Reserves
Private passenger auto $ 14,115 $ 5,777 $ 19,892
Non-standard auto 55,623 (11,645 ) 43,978
Home and farm 7,098 3,405 10,503
Crop 8,411 168 8,579
Commercial 731 345 1,076
All other 4,232 4,990 9,222
Liability for unpaid losses and LAE $ 90,210 $ 3,040 $ 93,250
Reinsurance recoverables on losses
2,867 1,178 4,045
Net unpaid losses and LAE $ 87,343 $ 1,862 $ 89,205
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Sensitivity of Major Assumptions Underlying the Liabilities for Unpaid Losses
and Loss Adjustment Expenses
Management has identified the impact on earnings of various factors used in
establishing loss reserves so that users of the Company's financial statements
can better understand how development on prior years' reserves might impact the
Company's results of operations.
Total Reserves
As of June 30, 2020, the impact of a 1% change in our estimate for unpaid losses
and LAE, net of reinsurance recoverables, on our net income, after federal
income taxes of 21%, would be approximately $845.
Inflation
Inflation is not explicitly selected in the loss reserve analysis. However,
historical inflation is embedded in the estimated loss development factors. The
following table displays the impact on net income after federal income taxes of
21%, resulting from various changes from the inflation factor implicitly
embedded in the estimated payment pattern as of December 31, 2019, which is
deemed consistent with June 30, 2020, excluding the addition of the Westminster
liability for unpaid losses and LAE. A change in inflation may or may not fully
impact loss payments in the future because some of the underlying expenses have
already been paid. The table below assumes that any change in inflation will be
fully reflected in future loss payments. This variance in future IBNR emergence
could occur in one year or over multiple years, depending when the change is
recognized.
Change in Inflation Impact on After-Tax Earnings
-1% $ (1,103 )
1% 1,128
3% 3,463
5% 5,910
Inflation includes actual inflation as well as social inflation which includes
future emergence of new classes of losses or types of losses, change in judicial
awards, and any other changes beyond assumed levels that impact the cost of
claims.
Case Reserves
When a claim is reported, claims personnel establish a case reserve for the
estimated amount of the ultimate payment to the extent it can be determined or
estimated. It is possible that the level of adequacy in the case reserve may
differ from historical levels and/or the claims reporting pattern may change.
The following table displays the impact on net income after federal income taxes
of 21% that results from various changes to the level of case reserves as of
December 31, 2019, which is deemed consistent with June 30, 2020, excluding the
addition of the Westminster liability for unpaid losses and LAE. This variance
in future IBNR emergence could occur in one year or over multiple years,
depending when the change is recognized.
Change in Case Reserves Impact on After-Tax Earnings
-10% $ 7,127
-5% 3,563
-2% 1,425
+2% (1,425 )
+5% (3,563 )
+10% (7,127 )
Investments
NI Holdings' fixed income securities and equity securities are classified as
available-for-sale and carried at estimated fair value as determined by
management based upon quoted market prices or a recognized pricing service at
the reporting date for those or similar investments. Changes in unrealized
investment gains or losses on the fixed income securities, and on equity
securities through December 31, 2018, net of applicable income taxes, are
reflected directly in shareholders' equity as a component of other comprehensive
income (loss) and, accordingly, have no effect on net income (loss). Effective
January 1, 2019, changes in unrealized investment gains or losses on equity
securities will be recorded in net income (loss), rather than as a component of
other comprehensive income (loss). Investment income is recognized when earned,
and realized capital gains and losses on investments are recognized when
investments are sold, or an other-than-temporary impairment is recognized.
NI Holdings evaluates securities for other-than-temporary impairment ("OTTI") at
least on a quarterly basis. For periods subsequent to December 31, 2018, this
evaluation includes only fixed income securities. Prior to January 1, 2019, this
evaluation included both fixed income and equity securities. NI Holdings
assesses whether OTTI is present when the fair value of a security is less than
its amortized cost. OTTI is considered to have occurred with respect to fixed
income securities if (1) an entity intends to sell
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the security, (2) it is more likely than not an entity will be required to sell
the security before recovery of its amortized cost basis, or (3) the present
value of the expected cash flows is not sufficient to recover the entire
amortized cost basis. When assessing whether the cost or amortized cost basis of
the security will be recovered, the Company compares the present value of the
expected cash flows likely to be collected, based on an evaluation of all
available information relevant to the collectability of the security, to the
cost or amortized cost basis of the security. The shortfall of the present value
of the cash flows expected to be collected in relation to the cost of amortized
cost basis is referred to as the "credit loss". If there is a credit loss, the
impairment is considered to be other-than-temporary. If NI Holdings identifies
that an other-than-temporary impairment loss has occurred, it then determines
whether it intends to sell the security, or if it is more likely than not that
the Company will be required to sell the security prior to recovering the cost
or amortized cost basis less any current-period credit losses. If NI Holdings
determines that it does not intend to sell, and it is not more likely than not
that it will be required to sell the security, the amount of the impairment loss
related to the credit loss will be recorded in earnings, and the remaining
portion of the other-than-temporary impairment loss will be recognized in other
comprehensive income (loss), net of income taxes. If NI Holdings determines that
it intends to sell the security, or that it is more likely than not that it will
be required to sell the security prior to recovering its cost or amortized cost
basis less any current-period credit losses, the full amount of the
other-than-temporary impairment will be recognized in earnings.
Fair values of interest rate sensitive instruments may be affected by increases
and decreases in prevailing interest rates that generally translate,
respectively, into decreases and increases in fair values of fixed income
securities. The fair values of interest rate sensitive instruments also may be
affected by the credit worthiness of the issuer, prepayment options, relative
values of other investments, the liquidity of the instrument, and other general
market conditions.
For the six months ended June 30, 2020, NI Holdings' investment portfolio
experienced an increase in net unrealized gains of $1,659.
June 30, 2020 December 31, 2019 Change
Fixed income securities:
Gross unrealized gains $ 15,358 $ 7,595 $ 7,763
Gross unrealized losses (1,351 ) (354 ) (997 )
Net fixed income unrealized gains 14,007 7,241 6,766
Equity securities:
Gross unrealized gains 20,414 22,878 (2,464 )
Gross unrealized losses (3,625 ) (982 ) (2,643 )
Net equity unrealized gains 16,789 21,896 (5,107 )
Net unrealized gains $ 30,796 $ 29,137 $ 1,659
The fixed income portion of the portfolio experienced an increase in net
unrealized gains of $6,766 during the six months ended June 30, 2020. This
increase is driven primarily by the U.S. Federal Reserve's implementation of the
unprecedented efforts it announced in March to support the economy, including
buying large quantities of investment grade corporate bonds and corporate bond
ETFs, along with U.S. Treasuries. The net increase is reflected directly in
shareholders' equity as a component of accumulated other comprehensive income.
The equity portion of the portfolio experienced decreases in unrealized gains
and increases in unrealized losses, which are attributed to the unfavorable
conditions in the stock market during the six months ended June 30, 2020,
brought about by the COVID-19 pandemic and a significant drop in oil prices. The
net decrease of $5,107 is included in net capital gains (losses) on investments
on the Company's Consolidated Statements of Operations for the six months ended
June 30, 2020. The Company did benefit from improved market conditions during
the three months ended June 30, 2020, as the change in equity securities
resulted in a gain of $10,827 during this time frame.
NI Holdings has evaluated each security and taken into account the severity and
duration of any impairment, the current rating on the security (if any), and the
outlook for the issuer according to independent analysts. The Company's fixed
income portfolio is managed by Conning Asset Management, which specializes in
managing insurance company investment portfolios and participates in this
evaluation.
For the six months ended June 30, 2020, NI Holdings did not recognize any
other-than-temporary impairments of its investment securities. For the year
ended December 31, 2019, NI Holdings did not recognize any other-than-temporary
impairments of its investment securities.
For more information on the Company's investments, see Note 6 to the Unaudited
Consolidated Financial Statements, included elsewhere in this Form 10-Q.
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Fair Value Measurements
NI Holdings uses fair value measurements to record fair value adjustments to
certain assets to determine fair value disclosures. Investment securities
available for sale are recorded at fair value on a recurring basis.
Additionally, from time to time, NI Holdings may be required to record at fair
value other assets on a nonrecurring basis. These nonrecurring fair value
adjustments typically involve application of lower-of-cost-or-market accounting
or write-downs of individual assets. Accounting guidance on fair value
measurements and disclosures establishes a fair value hierarchy that prioritizes
the inputs to valuation methods used to measure fair value. The three levels of
the fair value hierarchy are as follows:
Level I:Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities.
Level II:Quoted prices in markets that are not active, or inputs that are
observable either directly or indirectly, for substantially the full term of the
asset or liability. Level II includes fixed income securities with quoted prices
that are traded less frequently than exchange traded instruments. Valuation
techniques include matrix pricing which is a mathematical technique used widely
in the industry to value fixed income securities without relying exclusively on
quoted market prices for the specific securities but rather by relying on the
securities' relationship to other benchmark quoted prices.
Level III:Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable (i.e., supported with
little or no market activity).
NI Holdings bases its fair values on the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. It is our policy to maximize the use of
observable inputs and minimize the use of unobservable inputs when developing
fair value measurements, in accordance with the fair value hierarchy. Fair value
measurements for assets where there exists limited or no observable market data
and, therefore, are based primarily upon the estimates of NI Holdings or other
third-parties, and are often calculated based on the characteristics of the
asset, the economic and competitive environment, and other such factors.
Management uses its best judgment in estimating the fair value of the Company's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts which NI
Holdings could have realized in a sale transaction on the dates indicated. The
estimated fair value amounts have been measured as of their respective
period-end and have not been re-evaluated or updated for purposes of our
financial statements subsequent to those respective dates. As such, the
estimated fair values of these financial instruments subsequent to the
respective reporting dates may be different than the amounts reported at each
period-end. Additionally, changes in the underlying assumptions used, including
discount rates and estimates of future cash flows, could significantly affect
the results of current or future valuations.
NI Holdings uses quoted values and other data provided by an independent pricing
service in its process for determining fair values of its investments. The
evaluations of such pricing services represent an exit price and a good faith
opinion as to what a buyer in the marketplace would pay for a security in a
current sale. This pricing service provides NI Holdings with one quote per
instrument. For fixed income securities that have quoted prices in active
markets, market quotations are provided. For fixed income securities that do not
trade on a daily basis, the independent pricing service prepares estimates of
fair value using a wide array of observable inputs including relevant market
information, benchmark curves, benchmarking of like securities, sector
groupings, and matrix pricing. The observable market inputs that the Company's
independent pricing service utilizes may include (listed in order of priority
for use) benchmark yields, reported trades, broker-dealer quotes, issuer
spreads, two-sided markets, benchmark securities, market bids/offers, and other
reference data on markets, industry, and the economy. Additionally, the
independent pricing service uses an option-adjusted spread model to develop
prepayment and interest rate scenarios. The pricing service did not use broker
quotes in determining fair values of the Company's investments at June 30, 2020
or December 31, 2019.
Should the independent pricing service be unable to provide a fair value
estimate, NI Holdings would attempt to obtain a non-binding fair value estimate
from a number of broker-dealers and would review this estimate in conjunction
with a fair value estimate reported by an independent business news service or
other sources. In instances where only one broker-dealer provides a fair value
for a fixed income security, NI Holdings would use that estimate. In instances
where NI Holdings would be able to obtain fair value estimates from more than
one broker-dealer, the Company would review the range of estimates and select
the most appropriate value based on the facts and circumstances. Should neither
the independent pricing service nor a broker-dealer provide a fair value
estimate, NI Holdings would develop a fair value estimate based on cash flow
analyses and other valuation techniques that utilize certain unobservable
inputs. Accordingly, NI Holdings classifies such a security as a Level III
investment.
The fair value estimates of NI Holdings' investments provided by the independent
pricing service at each period-end were utilized, among other resources, in
reaching a conclusion as to the fair value of its investments.
Management reviews the reasonableness of the pricing provided by the independent
pricing service by employing various analytical procedures. Management reviews
all securities to identify recent downgrades, significant changes in pricing,
and pricing anomalies on individual securities relative to other similar
securities. This will include looking for relative consistency across
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securities in common sectors, durations, and credit ratings. This review will
also include all fixed income securities rated lower than "A" by Moody's or
Standard & Poor's. If, after this review, management does not believe the
pricing for any security is a reasonable estimate of fair value, then it will
seek to resolve the discrepancy through discussions with the pricing service. In
its review, management did not identify any such discrepancies, and no
adjustments were made to the estimates provided by the pricing service, for the
six month period ended June 30, 2020 or the year ended December 31, 2019. The
classification within the fair value hierarchy is then confirmed based on the
final conclusions from the pricing review.
For more information on the Company's fair value measurements, see Note 7 to the
Unaudited Consolidated Financial Statements, included elsewhere in this Form
10-Q.
Deferred Policy Acquisition Costs and Value of Business Acquired
Certain direct policy acquisition costs consisting of commissions, state premium
taxes, and other direct underwriting expenses that vary with and are primarily
related to the production of business are deferred and amortized over the
effective period of the related insurance policies as the underlying policy
premiums are earned.
As in the case of previous acquisitions, no deferred policy acquisition costs
("DAC") were recorded in the acquisition of Westminster in accordance with
purchase accounting guidance. Rather, a separate intangible asset representing
the value of business acquired ("VOBA") was valued at $4,750 and established at
the closing date. This VOBA intangible asset will be amortized into expense as
the acquired unearned premiums are reported into income, in the same way as DAC.
Policy acquisition costs relating to new business written by Westminster were
deferred following the closing date. The release of the VOBA asset and the
establishment of new DAC generally offset each other over the twelve months
following the acquisition of Westminster.
At June 30, 2020 and December 31, 2019, DAC, the VOBA intangible asset, and the
related liability for unearned premiums were as follows:
June 30, 2020 December 31, 2019
Deferred policy acquisition costs $ 24,204 $ 15,399
Value of business acquired intangible asset 1,277 -
Liability for unearned premiums 137,212 89,276
The method followed in computing DAC limits the amount of deferred costs to
their estimated realizable value, which gives effect to the premium to be
earned, related investment income, losses and LAE, and certain other costs
expected to be incurred as the premium is earned. Future changes in estimates,
the most significant of which is expected losses and LAE, may require
adjustments to DAC. If the estimation of net realizable value indicates that DAC
are not recoverable, they would be written off or a premium deficiency reserve
would be established.
Income Taxes
Current income taxes represent amounts paid to the federal government and
certain states whose payment is based upon net income (subject to regulatory
adjustments) generated by the Company. NI Holdings uses the asset and liability
method of accounting for deferred income taxes. Deferred income taxes arise from
the recognition of temporary differences between financial statement carrying
amounts and the income tax bases of our assets and liabilities. A valuation
allowance is provided when it is more likely than not that some portion of the
deferred income tax asset will not be realized. Total income taxes reflect both
current income taxes and the change in the net deferred income tax asset or
liability, excluding amounts attributed to accumulated other comprehensive
income.
NI Holdings had gross deferred income tax assets of $8,336 at June 30, 2020 and
$6,294 at December 31, 2019, arising primarily from unearned premiums, loss
reserve discounting, and net operating loss carryforwards. A valuation allowance
is required to be established for any portion of the deferred income tax asset
for which the Company believes it is more likely than not that it will not be
realized. A valuation allowance of $594 was maintained at June 30, 2020 and
December 31, 2019.
NI Holdings had gross deferred income tax liabilities of $14,423 at June 30,
2020 and $10,290 at December 31, 2019, arising primarily from DAC, net
unrealized capital gains on investments, and intangible assets.
NI Holdings exercises significant judgment in evaluating the amount and timing
of recognition of the resulting income tax liabilities and assets. These
judgments require NI Holdings to make projections of future taxable income. The
judgments and estimates the Company makes in determining its deferred income tax
assets, which are inherently subjective, are reviewed on a continual basis as
regulatory and business factors change. Any reduction in estimated future
taxable income may require the Company to record a valuation allowance against
its deferred income tax assets.
As of June 30, 2020, NI Holdings had no material unrecognized income tax
benefits or accrued interest and penalties. Federal tax years 2014 through 2018
are open for examination.
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Results of Operations
NI Holdings' results of operations are influenced by factors affecting the
property and casualty insurance and crop insurance industries in general. The
operating results of the United States property and casualty industry and crop
insurance industry are subject to significant variations due to competition,
weather, catastrophic events, changes in regulation, general economic
conditions, rising medical expenses, judicial trends, fluctuations in interest
rates, and other changes in the investment environment.
NI Holdings premium levels and underwriting results have been, and continue to
be, influenced by market conditions. Pricing in the property and casualty
insurance industry historically has been cyclical. During a soft market cycle,
price competition is more significant than during a hard market cycle and makes
it difficult to attract and retain properly priced business. During a hard
market cycle, it is more likely that insurers will be able to increase their
rates or profit margins. A hard market typically has a positive effect on
premium growth. The markets that NI Holdings serve are diversified, which
requires management to regularly monitor the Company's performance and
competitive position by line of business and geographic market to schedule
appropriate rate actions.
Premiums in the multi-peril crop insurance business are primarily influenced by
the number of acres and types of crops insured because the pricing is set by the
RMA rather than individual insurance carriers. The expected experience of this
business for the calendar year may also significantly impact the reported net
earned premiums and losses due to the risk-sharing arrangement with the federal
government. Multi-peril crop insurance premiums are generally written in the
second quarter, and earned ratably over the period of risk, which extends into
the fourth quarter. However, if the Company experiences a higher than average
number of prevented planting claims early in the season, additional earned
premiums may be recognized in the second quarter due to the shortened risk
period.
Premiums in the crop hail insurance business are also generally written in the
second quarter, but earned over a shorter period of risk than multi-peril crop
insurance.
Premiums in the personal lines of business (private passenger auto and home and
farm) are generally written and earned throughout the year. Losses on this
business are also incurred throughout the year, but usually are more frequent
and/or severe during periods of weather-related activity in the second and third
quarters.
Premiums in the commercial lines of business are generally written and earned
throughout the year. Losses on this business are also incurred throughout the
year, but generally are more frequent during the winter months from water and
freeze claims.
For more information on the Company's results of operations by segment, see Note
22 to the Unaudited Consolidated Financial Statements, included elsewhere in
this Form 10-Q.
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Three Months ended June 30, 2020 and 2019
The consolidated net income for NI Holdings was $18,767 for the three months
ended June 30, 2020 compared to net income of $2,515 for the three months ended
June 30, 2019. The major components of NI Holdings' operating revenues and net
income for the two periods were as follows:
Three Months Ended
June 30,
2020 2019
Revenues:
Net premiums earned $ 82,006 $ 65,114
Fee and other income 446 646
Net investment income 2,018 1,778
Net capital gain on
investments 11,197 1,110
Total revenues $ 95,667 $ 68,648
Components of net income:
Net premiums earned $ 82,006 $ 65,114
Losses and loss adjustment
expenses 52,364 48,193
Amortization of deferred
policy acquisition costs and
other underwriting and
general expenses 19,625 16,940
Underwriting gain (loss) 10,017 (19 )
Fee and other income 446 646
Net investment income 2,018 1,778
Net capital gain on
investments 11,197 1,110
Income before income taxes 23,678 3,515
Income taxes 4,911 1,000
Net income $ 18,767 $ 2,515
Beginning in March 2020, the global pandemic associated with COVID-19 and
related economic conditions began to impact the Company's results. For the three
months ended June 30, 2020, the Company's underwriting results were impacted by
reduced net premiums earned in our non-standard auto segment. The Company also
experienced continued volatility in net unrealized investment gains and losses
driven by the impact of changes in fair value on the Company's equity
investments, attributable to the recent disruption in global financial markets.
For further discussion regarding the potential impacts of COVID-19 and related
economic conditions of the Company, see "Part II - Item 1A - Risk Factors".
Net Premiums Earned
NI Holdings' net premiums earned for the three months ended June 30, 2020
increased $16,892, or 25.9%, compared to a year ago.
Three Months Ended June 30,
2020 2019
Net premiums earned:
Private passenger auto $ 17,386 $ 16,686
Non-standard auto 13,134 15,271
Home and farm 17,768 17,253
Crop 23,552 13,000
Commercial 8,341 993
All other 1,825 1,911
Total net premiums earned $ 82,006 $ 65,114
Three Months Ended June 30,
2020 2019
Net premiums earned:
Direct premium $ 82,452 $ 69,499
Assumed premium 2,683 2,973
Ceded premium (3,129 ) (7,358 )
Total net premiums earned $ 82,006 $ 65,114
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Direct premiums earned for the second quarter of 2020 increased $12,953, or
18.6%, from the second quarter of 2019. The addition of the Westminster
commercial business contributed $8,968 in direct premiums earned during the
three months ended June 30, 2020. Crop segment direct premiums earned increased
$4,051 compared to last year related to the high claim volume of prevented
planting claims submitted for the current multi-peril crop season.
Assumed premiums earned decreased $290, due to less assumed crop hail business.
Ceded premiums earned decreased significantly, reflecting additional multi-peril
gain-sharing amounts from the federal government, partially offset by ceding of
the Westminster commercial business and increasing our overall reinsurance
coverage limits.
Our personal lines of business (private passenger auto, home and farm) continued
to grow in South Dakota and Nebraska. Our North Dakota business grew modestly.
Our non-standard auto premiums decreased year-over-year due to the COVID-19
pandemic, which negatively impacted policy counts in this segment across all
states. During the month of June, this trend of decreasing policy counts
moderated somewhat. At this time, we are unsure what impact the pandemic will
have on policy counts for the remainder of 2020.
Losses and LAE
NI Holdings' net losses and LAE for the three months ended June 30, 2020
increased $4,171, or 8.7%, compared to a year ago, due primarily to the addition
of Westminster. Despite the overall increase, the Company's loss and LAE ratio
decreased significantly.
Three Months Ended June 30,
2020 2019
Net losses and LAE:
Private passenger auto $ 8,624 $ 11,922
Non-standard auto 8,195 11,820
Home and farm 10,860 13,467
Crop 19,107 8,766
Commercial 5,237 480
All other 341 1,738
Total net losses and LAE $ 52,364 $ 48,193
Three Months Ended June 30,
2020 2019
Loss and LAE ratio:
Private passenger auto 49.6% 71.4%
Non-standard auto 62.4% 77.4%
Home and farm 61.1% 78.1%
Crop 81.1% 67.4%
Commercial 62.8% 48.3%
All other 18.7% 90.9%
Total loss and LAE ratio 63.9% 74.0%
The Company's overall loss and LAE experience improved 10.1 percentage points
year-over-year, across most segments of the Company. Only the crop and
commercial segments reported increases in their loss and LAE ratios.
Losses were favorable year-over-year in private passenger and non-standard auto,
due to less frequency of losses as insureds drove fewer miles during the current
quarter. In home and farm, losses and LAE decreased as well, due to lower
weather-related losses.
The commercial business had increased losses due to Westminster's results being
added to the segment.
The 2019 multi-peril crop insurance business ended the year with less than 50%
of the corn in North Dakota harvested and we carried a significant number of
open claims as of December 31, 2019. Most of those claims have been settled
through the first half of the year as crops have been harvested or deemed
unsalvageable. This business experienced unfavorable loss development of $1,247
on a net basis during the current quarter.
The issues arising from the 2019 multi-peril crop season have impacted the 2020
season. A higher than normal number of prevented planting claims have been
submitted due to fields not harvested from the prior year, resulting in a
shortened risk period for these policies and an acceleration of premiums earned
during the quarter.
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During the three months ended June 30, 2020, reported losses and LAE included
$3,042 of net favorable development on prior accident years, compared to $2,701
of net favorable development on prior accident years during the three months
ended June 30, 2019. Net favorable development is the result of prior years'
claims settling for less than originally estimated, while net unfavorable
development is the result of prior years' claims settling for more than
originally estimated. Adjustments to our original estimates resulting from
claims are not made until the period in which there is reasonable evidence that
an adjustment to the reserve is appropriate. The net favorable development
reported in the second quarter of 2020 is primarily related to the Direct Auto
non-standard auto business.
Amortization of Deferred Policy Acquisition Costs and Other Underwriting and
General Expenses
Total underwriting and general expenses, including amortization of deferred
policy acquisition costs, increased $2,685, or 15.9%, during the three months
ended June 30, 2020 compared to a year ago.
Three Months Ended June 30,
2020 2019
Underlying expenses $ 24,665 $ 18,870
Deferral of policy
acquisition costs (19,869 ) (18,081 )
Other underwriting and
general expenses 4,796 789
Amortization of deferred
policy acquisition costs 14,829 16,151
Total reported expenses $ 19,625 $ 16,940
Underlying expenses were $5,795 higher in the three months ended June 30, 2020
compared to a year ago, driven primarily by Westminster's $5,232 of underlying
expenses, including $1,816 amortization of other intangibles.
Expense deferrals were $1,788 higher in the three months ended June 30, 2020
compared to 2019, while amortization of those costs was $1,322 lower in 2020 due
to less new business in 2020. The commercial business contributed $3,025 of new
expense deferrals and $922 of amortization in the second quarter of 2020.
The expense ratio of 23.9% for the three months ended June 30, 2020 was 2.1
percentage points lower than the expense ratio in the second quarter of 2019 due
primarily to the higher than normal multi-peril crop net premiums earned in the
current quarter.
Underwriting Gain (Loss)
Underwriting gain (loss) measures the pretax profitability of a company's
insurance business. It is derived by subtracting losses and LAE, amortization of
deferred policy acquisition costs, and other underwriting and general expenses
from net premiums earned.
Three Months Ended June 30,
2020 2019
Underwriting gain (loss):
Private passenger auto $ 4,427 $ (145 )
Non-standard auto (207 ) (1,708 )
Home and farm 2,203 (1,448 )
Crop 3,146 3,457
Commercial (520 ) 118
All other 968 (293 )
Total underwriting gain (loss) $ 10,017 $ (19 )
Three Months Ended June 30,
2020 2019
Combined ratio:
Private passenger auto 74.5% 100.9%
Non-standard auto 101.6% 111.2%
Home and farm 87.6% 108.4%
Crop 86.6% 73.4%
Commercial 106.2% 88.1%
All other 47.0% 115.3%
Total loss and LAE ratio 87.8% 100.0%
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Overall underwriting profitability improved significantly year-over-year across
all segments with the exception of crop and commercial.
The combined ratio for the private passenger auto segment improved
26.4 percentage points year-over-year. This improvement was driven by lower
claims frequency as a result of a reduction in miles driven during the COVID-19
pandemic. The overall impact of COVID-19 on the auto insurance industry in our
markets will continue to develop over time.
For the non-standard auto segment, some improvement in the combined ratio has
been realized as rate increases and underwriting actions had a positive impact
on the Primero book of business. As with the private passenger auto segment, we
expect to continue to see the impact of the COVID-19 pandemic play out over time
as people are driving less, especially in high population areas with high
incidents of the virus such as Las Vegas and Chicago.
The combined ratio for the home and farm segment improved substantially as North
Dakota experienced a lower amount of weather-related events in the second
quarter. The favorable impact from weather-related losses combined with some
modest rate adjustments helped lead to an excellent start to 2020 for these
lines of business.
For the commercial segment, the results of Westminster are now combined with the
commercial business of Nodak Insurance. Underwriting expenses during the second
quarter for Westminster continue to be impacted by amortization of their VOBA
intangible asset. Additionally, the COVID-19 pandemic continues to negatively
impact this segment as certain states within Westminster's operating territory
have mandated that insurers waive certain fees, offer renewals on all business,
and/or defer premium payments for collection at a later date. While some
requirements continue in a few states, most states have returned to normal
operations. However, these actions have increased expenses along with the
potential for higher uncollectable premiums.
For the crop segment, the combined ratio is elevated due to the high percentage
of unharvested corn that remained in the field (52% in North Dakota) from the
2019 season. As these fields were harvested, the losses were higher than
anticipated, resulting in additional adverse development for this segment during
the quarter. The current multi-peril crop loss ratio is also elevated due to the
large number of prevented planting claims submitted this spring.
Fee and Other Income
NI Holdings had fee and other income of $446 for the three months ended June 30,
2020, compared to $646 for the three months ended June 30, 2019. Fee income
attributable to the non-standard auto segment is a key component in measuring
its profitability. Fee income on this business decreased to $328 for the three
months ended June 30, 2020 from $506 for the three months ended June 30, 2019,
as the amount of new inforce polices in Primero has dropped considerably.
Primero has also temporarily waived some of its policy maintenance fees as a
response to the COVID-19 pandemic.
Net Investment Income
The following table sets forth our average cash and invested assets, net
investment income, and return on average cash and invested assets for the
reported periods:
Three Months Ended June 30,
2020 2019
Average cash and invested
assets $ 434,515 $ 394,526
Gross investment income $ 2,711 $ 2,337
Investment expenses 693 559
Net investment income $ 2,018 $ 1,778
Gross return on average cash
and invested assets 2.5% 2.4%
Net return on average cash
and invested assets 1.9% 1.8%
Investment income, net of investment expense, increased $240 for the three
months ended June 30, 2020 compared to a year ago. This increase is attributable
to the increase in invested assets, due primarily to the acquisition of
Westminster and increased year-to-date net cash from operating activities. The
weighted average gross yield on invested assets increased to 2.5% in 2020 from
2.4% in 2019.
As of June 30, 2020, our overall book yield for our combined fixed income and
equity portfolio was 2.7%, excluding Westminster. The average duration of our
fixed income securities was 3.7 years at June 30, 2020.
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Net Capital Gain (Loss) on Investments
NI Holdings had realized capital gains on investment of $370 for the three
months ended June 30, 2020, compared to realized capital losses of $227 a year
ago.
Effective January 1, 2019, in accordance with a change in accounting principle,
market fluctuations on our equity securities are reflected in the Company's
results of operations. NI Holdings reported a net gain of $10,827 attributed to
the change in unrealized appreciation of its equity securities for the three
months ended June 30, 2020, compared to a net gain of $1,337 for the three
months ended June 30, 2019. Prior to January 1, 2019, such unrealized gains and
losses were included in other comprehensive income. The significant gain in the
current quarter was the result of a partial rebound from the extensive losses
reported in first quarter due to the COVID-19 pandemic and the related economic
implications on businesses and the stock market. We anticipate additional
volatility throughout the remainder of the pandemic and economic recovery
period.
The Company recorded no other-than-temporary impairments in the three months
ended June 30, 2020 and 2019.
The Company's fixed income securities and equity securities are classified as
available for sale because it will, from time to time, make sales of securities
that are not impaired, consistent with our investment goals and policies. At
June 30, 2020, the Company had net unrealized gains on fixed income securities
of $14,007 and net unrealized gains on equity securities of $16,789. At December
31, 2019, the Company had net unrealized gains on fixed income securities of
$7,241 and net unrealized gains on equity securities of $21,896. The increase in
the fair value of our fixed income securities was driven primarily by the U.S.
Federal Reserve's implementation of the unprecedented efforts it announced in
March to support the economy, including buying large quantities of investment
grade corporate bonds and corporate bond ETFs, along with U.S. Treasuries.
NI Holdings has evaluated each security in a loss position and taken into
account the severity and duration of the impairment, the current rating on the
bond, and the outlook for the issuer according to independent analysts. NI
Holdings will continue to monitor these securities throughout the remainder of
the COVID-19 pandemic and economic recovery period.
Income before Income Taxes
For the three months ended June 30, 2020, NI Holdings had pre-tax income of
$23,678 compared to pre-tax income of $3,515 for the three months ended June 30,
2019. The increase in pre-tax results was largely attributable to the
significant improvement in loss experience and the pre-tax $9,490 fluctuation in
the change in net unrealized gains in our equity portfolio between the second
quarter of 2020 and 2019.
Income Taxes
NI Holdings recorded income tax expense of $4,911 for the three months ended
June 30, 2020, compared to income tax expense of $1,000 for the three months
ended June 30, 2019. A portion of income tax expense relates to state income
taxes primarily for the state of Illinois. Our effective tax rate for the second
quarter of 2020 was 20.7% compared to an effective tax rate of 28.4% for the
second quarter of 2019. The effective tax rate for the second quarter of 2019
was unusually elevated due to the relative low amount of pre-tax income reported
for the period.
The valuation allowance against certain deferred income tax assets remained at
$594 as of June 30, 2020, the same amount as December 31, 2019.
Net Income
For the three months ended June 30, 2020, NI Holdings had net income before
non-controlling interest of $18,767 compared to net income of $2,515 for the
three months ended June 30, 2019. This increase in net income was largely
attributable to the significant improvement in loss experience and the $9,490
fluctuation in the change in net unrealized gains in our equity portfolio
between the second quarter of 2020 and 2019.
Return on Average Equity
For the three months ended June 30, 2020, NI Holdings had annualized return on
average equity, after non-controlling interest, of 24.2% compared to annualized
return on average equity, after non-controlling interest, of 3.4% for the three
months ended June 30, 2019. Average equity is calculated as the average between
beginning and ending equity excluding non-controlling interest for the period.
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Six Months ended June 30, 2020 and 2019
The consolidated net income for NI Holdings was $15,212 for the six months ended
June 30, 2020 compared to net income of $16,311 for the six months ended June
30, 2019. The major components of NI Holdings' operating revenues and net income
for the two periods were as follows:
Six Months Ended June 30,
2020 2019
Revenues:
Net premiums earned $ 140,778 $ 115,620
Fee and other income 808 1,110
Net investment income 3,989 3,521
Net capital (loss) gain on
investments (3,722 ) 8,969
Total revenues $ 141,853 $ 129,220
Components of net income:
Net premiums earned $ 140,778 $ 115,620
Losses and loss adjustment
expenses 82,786 74,427
Amortization of deferred
policy acquisition costs and
other underwriting and
general expenses 39,784 33,634
Underwriting gain 18,208 7,559
Fee and other income 808 1,110
Net investment income 3,989 3,521
Net capital (loss) gain on
investments (3,722 ) 8,969
Income before income taxes 19,283 21,159
Income taxes 4,071 4,848
Net income $ 15,212 $ 16,311
The global pandemic associated with the novel coronavirus COVID-19 continued to
impact the Company's results of operations during the six months ended June 30,
2020. Decreased economic activity restricted top-line growth and volatile
financial markets had a negative impact on the Company's equity investments and
overall investment returns. These top-line growth impacts were partially offset
by reduced loss frequency in our private passenger and non-standard auto
segments, due to decreased overall miles driven during the quarter.
The actual long-term impact of the pandemic on the property and casualty
industry continues to be highly uncertain and will not be fully known for some
time. For further discussion regarding the potential impacts of COVID-19 and
related economic conditions of the Company, see "Part II - Item 1A - Risk
Factors".
Net Premiums Earned
NI Holdings' net premiums earned for the six months ended June 30, 2020
increased $25,158, or 21.8%, compared to a year ago.
Six Months Ended June 30,
2020 2019
Net premiums earned:
Private passenger auto $ 34,685 $ 32,778
Non-standard auto 26,285 29,862
Home and farm 35,389 34,042
Crop 23,731 13,011
Commercial 16,194 1,982
All other 4,494 3,945
Total net premiums earned $ 140,778 $ 115,620
Six Months Ended June 30,
2020 2019
Net premiums earned:
Direct premium $ 144,845 $ 121,752
Assumed premium 4,283 3,999
Ceded premium (8,350 ) (10,131 )
Total net premiums earned $ 140,778 $ 115,620
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Direct premiums earned for the first half of 2020 increased $23,093, or 19.0%,
from the same period of 2019. The addition of the Westminster commercial
business contributed $17,315 in direct premiums earned during the six months
ended June 30, 2020. Crop segment direct premiums earned increased $4,051
compared to last year related to the high claim volume of prevented planting
claims submitted for the current multi-peril crop season.
Assumed premiums earned increased $284, primarily due to increasing our
participation in the assumed domestic and international business in our all
other segment. Ceded premiums earned decreased $1,781, reflecting additional
multi-peril gain-sharing amounts from the federal government, partially offset
by ceding of the Westminster commercial business and increasing our overall
reinsurance coverage limits.
Our personal lines of business (private passenger auto, home and farm) continued
to grow in South Dakota and Nebraska. Our North Dakota business grew modestly.
Our non-standard auto premiums decreased year-over-year due to the rate changes
implemented to address unprofitable results and increased policy liability
limits mandated by Nevada and Arizona which led to a decrease in the number of
vehicles insured. In addition, the COVID-19 pandemic has negatively impacted
policy counts in this segment. During the latter part of the second quarter, we
have seen a modest increase in new business for the non-standard auto line of
business.
Losses and LAE
NI Holdings' net losses and LAE for the six months ended June 30, 2020 increased
$8,359, or 11.2%, compared to a year ago, due primarily to the addition of
Westminster. The Company's loss and LAE ratio decreased significantly.
Six Months Ended June 30,
2020 2019
Net losses and LAE:
Private passenger auto $ 19,753 $ 22,027
Non-standard auto 14,135 18,976
Home and farm 17,398 21,469
Crop 21,474 8,740
Commercial 8,952 800
All other 1,074 2,415
Total net losses and LAE $ 82,786 $ 74,427
Six Months Ended June 30,
2020 2019
Loss and LAE ratio:
Private passenger auto 56.9% 67.2%
Non-standard auto 53.8% 63.5%
Home and farm 49.2% 63.1%
Crop 90.5% 67.2%
Commercial 55.3% 40.4%
All other 23.9% 61.2%
Total loss and LAE ratio 58.8% 64.4%
The Company's overall loss and LAE experience improved 5.6 percentage points
year-over-year, across most segments of the Company. Only the crop and
commercial segments reported increases in their loss and LAE ratios.
Losses were favorable year-over-year in private passenger and non-standard auto,
due to less frequency of losses as insureds drove fewer miles. In home and farm,
losses and LAE decreased as well, due to lower weather-related losses.
The commercial business had increased losses due to Westminster's results being
added to the segment.
The 2019 multi-peril crop insurance business ended the year with less than 50%
of the corn in North Dakota harvested and we carried a significant number of
open claims as of December 31, 2019. Most of those claims have been settled
during the first half of the year as crops have been harvested or deemed
unsalvageable. This business produced unfavorable loss development of $3,614 on
a net basis as these claims were adjusted and settled in 2020.
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The issues arising from the 2019 multi-peril crop season have impacted the 2020
season. A higher than normal number of prevented planting claims have been
submitted due to fields not harvested from the prior year, resulting in a
shortened risk period for these policies and an acceleration of premiums earned
for the first half of 2020.
During the six months ended June 30, 2020, reported losses and LAE included
$2,532 of net favorable development on prior accident years, compared to $7,670
of net favorable development on prior accident years during the six months ended
June 30, 2019. Net favorable development is the result of prior years' claims
settling for less than originally estimated, while net unfavorable development
is the result of prior years' claims settling for more than originally
estimated. Adjustments to our original estimates resulting from claims are not
made until the period in which there is reasonable evidence that an adjustment
to the reserve is appropriate.
Amortization of Deferred Policy Acquisition Costs and Other Underwriting and
General Expenses
Total underwriting and general expenses, including amortization of deferred
policy acquisition costs, increased $6,150, or 18.3%, during the six months
ended June 30, 2020 compared to a year ago.
Six Months Ended June 30,
2020 2019
Underlying expenses $ 48,589 $ 37,489
Deferral of policy
acquisition costs (33,021 ) (29,228 )
Other underwriting and
general expenses 15,568 8,261
Amortization of deferred
policy acquisition costs 24,216 25,373
Total reported expenses $ 39,784 $ 33,634
Underlying expenses were $11,100 higher in the six months ended June 30, 2020
compared to a year ago. Westminster contributed $9,509 of underlying expenses to
the current quarter, including $3,684 amortization of other intangibles.
Underlying expenses were also elevated due to costs related to the acquisition
of Westminster.
Expense deferrals were $3,793 higher in the six months ended June 30, 2020
compared to 2019, while amortization of those costs was $1,157 higher in 2020.
The commercial segment contributed $4,771 of new expense deferrals in 2020, and
$1,479 of amortization expense.
The expense ratio of 28.3% for the six months ended June 30, 2020 was 0.8
percentage points lower than the expense ratio in the second quarter of 2019 due
primarily to the higher than normal multi-peril crop net premiums earned
compared to a year-ago.
Underwriting Gain (Loss)
Underwriting gain (loss) measures the pretax profitability of a company's
insurance business. It is derived by subtracting losses and LAE, amortization of
deferred policy acquisition costs, and other underwriting and general expenses
from net premiums earned.
Six Months Ended June 30,
2020 2019
Underwriting gain (loss):
Private passenger auto $ 5,787 $ 1,092
Non-standard auto 1,807 249
Home and farm 8,397 2,138
Crop 256 3,163
Commercial (311 ) 472
All other 2,272 445
Total underwriting gain $ 18,208 $ 7,559
Six Months Ended June 30,
2020 2019
Combined ratio:
Private passenger auto 83.3% 96.7%
Non-standard auto 93.1% 99.2%
Home and farm 76.3% 93.7%
Crop 98.9% 75.7%
Commercial 101.9% 76.2%
All other 49.4% 88.7%
Total loss and LAE ratio 87.1% 93.5%
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The gain from underwriting operations increased 140.9% when compared to 2019.
The combined ratio decreased 6.4 percentage points during the same period.
The combined ratio for the private passenger auto segment improved 13.4
percentage points year-over-year. This improvement was driven by lower claims
frequency as a result of a reduction in miles driven during the COVID-19
pandemic. It remains unclear how long the pandemic will impact the frequency of
auto claims, as we do anticipate that frequency will return to historical levels
as people are beginning to return to normal driving habits.
For the non-standard auto segment, some improvement in the combined ratio has
been realized as rate increases and underwriting actions had a positive impact
on the Primero book of business combined with the impact of COVID-19 on driving
habits. We do anticipate that frequency of auto claims will return to historical
levels similar to the private passenger auto segment.
The combined ratio for the home and farm segment improved substantially as North
Dakota experienced a lower amount of snowfall in the first quarter and
weather-related events in the second quarter, resulting in fewer collapse losses
on the farm line as well as wind and hail claims in both lines. The improved
weather losses combined with some modest rate adjustments has resulted in an
excellent start to 2020 for these lines of business.
For the commercial segment, the results of Westminster are now combined with the
commercial business of Nodak Insurance. Westminster experienced modest
unfavorable loss development of $849, and underwriting expenses continue to be
impacted by amortization of their VOBA intangible asset. The COVID-19 pandemic
continues to impact this segment as certain states within Westminster's
operating territory have mandated that insurers waive certain fees, offer
renewals on all business, and/or defer premium payments for collection at a
later date. While a few states continue these mandates, the majority of states
have returned to normal operating requirements with respect to policy
cancellations and premium payments.
For the crop segment, the combined ratio is elevated due to the high percentage
of unharvested corn that remained in the field (52% in North Dakota) from the
2019 season. As these fields were harvested, the losses were higher than
anticipated, resulting in adverse development for this segment. The current
multi-peril crop loss ratio is also elevated due to the large number of
prevented planting claims submitted this spring.
Fee and Other Income
NI Holdings had fee and other income of $808 for the six months ended June 30,
2020, compared to $1,110 for the six months ended June 30, 2019. Fee income
attributable to the non-standard auto segment is a key component in measuring
its profitability. Fee income on this business decreased to $657 for the six
months ended June 30, 2020 from $976 for the six months ended June 30, 2019, as
the number of inforce polices in Primero has dropped considerably. Primero has
also temporarily waived some of its policy maintenance fees in response to the
COVID-19 pandemic.
Net Investment Income
The following table sets forth our average cash and invested assets, net
investment income, and return on average cash and invested assets for the
reported periods:
Six Months Ended June 30,
2020 2019
Average cash and invested assets $ 414,034 $ 373,716
Gross investment income $ 5,511 $ 4,645
Investment expenses 1,522 1,124
Net investment income $ 3,989 $ 3,521
Gross return on average cash and invested assets 2.7% 2.5%
Net return on average cash and invested assets 1.9% 1.9%
Investment income, net of investment expense, increased $468 for the six months
ended June 30, 2020 compared to a year ago. This increase is attributable to the
increase in invested assets, due primarily to the acquisition of Westminster and
increased year-to-date net cash from operating activities. The weighted average
gross yield on invested assets increased to 2.7% in 2020 from 2.5% in 2019.
As of June 30, 2020, our overall book yield for our combined fixed income and
equity portfolio was 2.7%, excluding Westminster. The average duration for our
fixed income securities was 3.7 years at June 30, 2020.
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Net Capital Gain (Loss) on Investments
NI Holdings had realized capital gains on investment of $1,385 for the six
months ended June 30, 2020, compared to realized capital gains of $332 a year
ago.
Effective January 1, 2019, in accordance with a change in accounting principle,
market fluctuations on our equity securities are reflected in the Company's
results of operations. NI Holdings reported a net loss of $5,107 attributed to
the change in unrealized appreciation of its equity securities for the
six months ended June 30, 2020, compared to a net gain of $8,637 for the six
months ended June 30, 2019. Prior to January 1, 2019, such unrealized gains and
losses were included in other comprehensive income. The loss for the current
period was due to the COVID-19 pandemic and the related economic implications on
businesses and the stock market. We anticipate additional volatility throughout
the remainder of the pandemic and economic recovery period.
The Company recorded no other-than-temporary impairments in the six months ended
June 30, 2020 and 2019.
The Company's fixed income securities and equity securities are classified as
available for sale because it will, from time to time, make sales of securities
that are not impaired, consistent with our investment goals and policies. At
June 30, 2020, the Company had net unrealized gains on fixed income securities
of $14,007 and net unrealized gains on equity securities of $16,789. At December
31, 2019, the Company had net unrealized gains on fixed income securities of
$7,241 and net unrealized gains on equity securities of $21,896. The increase in
the fair value of our fixed income securities was driven primarily by the U.S.
Federal Reserve's implementation of the unprecedented efforts it announced in
March to support the economy, including buying large quantities of investment
grade corporate bonds and corporate bond ETFs, along with U.S. Treasuries.
NI Holdings has evaluated each security in a loss position and taken into
account the severity and duration of the impairment, the current rating on the
bond, and the outlook for the issuer according to independent analysts. NI
Holdings will continue to monitor these securities throughout the remainder of
the COVID-19 pandemic and economic recovery period.
Income before Income Taxes
For the six months ended June 30, 2020, NI Holdings had pre-tax income of
$19,283 compared to pre-tax income of $21,159 for the six months ended June 30,
2019. The decrease in pre-tax results was largely attributable to the $13,744
fluctuation in the change in net unrealized gains in our equity portfolio
between the first half of 2020 and 2019, partially offset by improved loss
experience in the private passenger auto, non-standard auto, home and farm, and
all other segments.
Income Taxes
NI Holdings recorded income tax expense of $4,071 for the six months ended June
30, 2020, compared to income tax expense of $4,848 for the six months ended June
30, 2019. A portion of income tax expense relates to state income taxes
primarily for the state of Illinois. Our effective tax rate for the first half
of 2020 was 21.1% compared to an effective tax rate of 22.9% for the first half
of 2019.
The valuation allowance against certain deferred income tax assets remained at
$594 as of June 30, 2020, the same amount as December 31, 2019.
Net Income
For the six months ended June 30, 2020, NI Holdings had net income before
non-controlling interest of $15,212 compared to net income of $16,311 for the
six months ended June 30, 2019. This decrease in net income was primarily
attributable to the fluctuation in the change in net unrealized gains in our
equity portfolio between the first half of 2020 and 2019, partially offset by
improved loss experience in the private passenger auto, non-standard auto, home
and farm, and all other segments.
Return on Average Equity
For the six months ended June 30, 2020, NI Holdings had annualized return on
average equity, after non-controlling interest, of 9.7% compared to annualized
return on average equity, after non-controlling interest, of 11.5% for the six
months ended June 30, 2019. Average equity is calculated as the average between
beginning and ending equity excluding non-controlling interest for the period.
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Financial Position
The major components of NI Holdings' financial position are as follows:
December
June 30, 2020 31, 2019
Assets:
Cash and investments $ 452,049 $ 419,923
Premiums and agents'
balances receivable 88,336 36,691
Deferred policy
acquisition costs 24,204 15,399
Receivable from Federal
Crop Insurance Corporation 12,294 14,230
Goodwill and other
intangibles 19,485 2,912
Other assets 28,066 19,004
Total assets $ 624,434 $ 508,159
Liabilities:
Unpaid losses and loss
adjustment expenses $ 116,014 $ 93,250
Unearned premiums 137,212 89,276
Other liabilities 46,485 15,830
Total liabilities 299,711 198,356
Shareholders' equity 324,723 309,803
Total liabilities and
equity $ 624,434 $ 508,159
At June 30, 2020, NI Holdings' total assets increased by $116,275, or 22.9%,
from December 31, 2019. Cash and investments increased due to increased fair
market values of our fixed income investments and the acquired Westminster
assets. Premiums and agents' balances receivable increased due to recognition of
the year's multi-peril crop premiums during the second quarter, in addition to
the acquired Westminster receivables. DAC increased due partly to both the
Westminster commercial business and the 2020 crop business. The receivable from
the Federal Crop Insurance Corporation decreased due to a partial collection of
past year amounts, partially offset by 2020 activity. Goodwill and other
intangibles recognized in the Westminster acquisition was $20,284, less $3,684
of amortization during the first half of 2020. Other assets also increased as a
result of property and equipment and reinsurance recoverables from the
Westminster acquisition.
At June 30, 2020, total liabilities increased by $101,355, or 51.1%, from
December 31, 2019. Unpaid losses and loss adjustment expenses increased due to
Westminster liabilities of $8,568 and crop losses relating to prevented planting
claims for the 2020 season of $11,581. Unearned premiums increased due to
Westminster acquired amounts of $16,611 and the recognition of this year's
multi-peril crop premiums of $19,713 to be earned over the remainder of the
year.
Total shareholders' equity increased by $14,920, or 4.8%, during the six months
ended June 30, 2020. The increase in shareholders' equity reflects a
consolidated net income of $15,212 for the six-month period, share repurchases
of $6,783, and higher fair market values across our fixed income investment
portfolio.
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Liquidity and Capital Resources
NI Holdings generates sufficient funds from its operations and maintains a high
degree of liquidity in its investment portfolio to meet the demands of claim
settlements and operating expenses. The primary sources of funds are premium
collections, investment earnings, and maturing investments. In 2017, we raised
$93,145 in net proceeds from our initial public offering, which we hoped to use
for strategic acquisitions.
In 2018, we used $17,000 for the acquisition of Direct Auto. On January 1, 2020,
we acquired Westminster for $40,000. We paid $20,000 at the time of closing. We
will pay the remaining $20,000, subject to certain adjustments, in three equal
installments on each of the first and second anniversaries of the closing, and
on the first business day of the month preceding the third anniversary of the
closing.
We currently anticipate that cash generated from our operations and available
from our investment portfolio, along with the remaining initial public offering
net proceeds, will be sufficient to fund our operations. The COVID-19 pandemic
has resulted in volatility in the credit and financial markets, which has
adversely affected our investment portfolio and could increase the cost of
capital and/or our ability to access additional capital if the need arises.
The Company's philosophy is to provide sufficient cash flows from operations to
meet its obligations in order to minimize the forced sales of investments. The
Company maintains a portion of its investment portfolio in relatively short-term
and highly liquid assets to ensure the availability of funds.
The change in cash and cash equivalents for the six months ended June 30, 2020
and 2019 were as follows:
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