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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