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 2020 Annual Report 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.
Results of Operations
Premiums in the multi-peril crop insurance business are primarily influenced by
the number of acres, commodity prices, and types of crops insured because the
rates are established by the
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, home and farm) are generally written and earned throughout the year based on their coverage periods. Losses on this business are also incurred throughout the year, but usually are more frequent and/or severe during periods of weather-related activity.
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.
For more information on the Company's results of operations by segment, see Note 19 to the Unaudited Consolidated Financial Statements, included elsewhere in this Form 10-Q.
Beginning in
During the first nine months of 2021, we have continued to see a reduced impact from COVID-19 as economic activity has returned to near pre-pandemic levels. However, a possible resurgence of COVID-19 could impact our results.
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The below discussion of results of operations for
Three and Nine Months ended
The consolidated net loss for
The major components ofNI Holdings' operating revenues and net income (loss) were as follows: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Revenues: Net premiums earned$ 82,173 $ 73,342 $ 221,589 $ 214,120 Fee and other income 501 524 1,338 1,332 Net investment income 1,713 1,886 4,959 5,875 Net capital gain on investments 222 5,102 10,734 1,380 Total revenues 84,609 80,854 238,620 222,707 Components of net income: Net premiums earned 82,173 73,342 221,589 214,120 Losses and loss adjustment expenses 65,742 53,836 165,549 136,622 Amortization of deferred policy acquisition costs and other underwriting and general expenses 25,348 22,144 70,175 61,928 Underwriting gain (loss) (8,917 ) (2,638 ) (14,135 ) 15,570 Fee and other income 501 524 1,338 1,332 Net investment income 1,713 1,886 4,959 5,875 Net capital gain on investments 222 5,102 10,734 1,380 Income (loss) before income taxes (6,481 ) 4,874 2,896 24,157 Income tax expense (benefit) (1,622 ) 1,188 707 5,259 Net income (loss)$ (4,859 ) $ 3,686 $ 2,189 $ 18,898 38
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Table of Contents Net Premiums Earned Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net premiums earned: Direct premium$ 93,740 $ 79,455 $ 249,542 $ 224,300 Assumed premium 1,336 1,372 6,300 5,655 Ceded premium (12,903 ) (7,485 ) (34,253 ) (15,835 )
Total net premiums earned
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net premiums earned: Private passenger auto$ 18,491 $ 17,947 $ 54,057 $ 52,632 Non-standard auto 14,889 13,839 43,045 40,124 Home and farm 18,775 18,548 54,602 53,937 Crop 12,724 9,719 21,124 33,450 Commercial 14,798 10,773 41,156 26,967 All other 2,496 2,516 7,605 7,010
Total net premiums earned
Below are comments regarding significant changes in the net premiums earned by business segment:
Private passenger auto - Net premiums earned for the third quarter of 2021
increased
Non-standard auto - Net premiums earned for the third quarter of 2021 increased
Home and farm - Net premiums earned for the third quarter of 2021 increased
Crop - Net premiums earned for the third quarter of 2021 increased
Commercial - Net premiums earned for the third quarter of 2021 increased
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in both periods was primarily driven by growth in our Westminster commercial business as a result of a continuation of favorable market conditions, the positive impact of Westminster's financial size category, and the AM Best rating upgrade.
All other - Net premiums earned for the third quarter of 2021 decreased$20 , or 0.8%, from the third quarter of 2020. Net premiums earned for the first nine months of 2021 increased$595 , or 8.5%, from the first nine months of 2020. Net premiums earned increased modestly through nine months related to our participation in an assumed domestic and international reinsurance pool of business. Losses and LAE Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net losses and LAE: Direct losses and LAE$ 87,453 $ 59,936 $ 201,630 $ 153,203 Assumed losses and LAE 2,308 2,436 5,216 3,538 Ceded losses and LAE (24,019 ) (8,536 ) (41,297 ) (20,119 ) Total net losses and LAE$ 65,742 $ 53,836 $ 165,549 $ 136,622
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net losses and LAE: Private passenger auto$ 17,130 $ 13,570 $ 44,289 $ 33,323 Non-standard auto 9,620 9,425 25,910 23,560 Home and farm 16,155 13,437 41,995 30,835 Crop 12,482 9,225 22,375 30,699 Commercial 7,770 5,577 25,433 14,529 All other 2,585 2,602 5,547 3,676 Total net losses and LAE$ 65,742 $ 53,836 $ 165,549 $ 136,622 Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Loss and LAE ratio: Private passenger auto 92.6% 75.6% 81.9% 63.3% Non-standard auto 64.6% 68.1% 60.2% 58.7% Home and farm 86.0% 72.4% 76.9% 57.2% Crop 98.1% 94.9% 105.9% 91.8% Commercial 52.5% 51.8% 61.8% 53.9% All other 103.6% 103.4% 72.9% 52.4% Total loss and LAE ratio 80.0% 73.4% 74.7% 63.8%
Below are comments regarding significant changes in the net losses and LAE, and the net loss and LAE ratios, by business segment:
Private passenger auto - The net loss and LAE ratio deteriorated 17.0 percentage
points and 18.6 percentage points in the three- and nine-month periods ended
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Non-standard auto - The net loss and LAE ratio was relatively consistent with
the prior year, improving 3.5 percentage points and deteriorating 1.5 percentage
points in the three- and nine-month periods ended
Home and farm - The net loss and LAE ratio deteriorated 13.6 percentage points
and 19.7 percentage points in the three- and nine-month periods ended
Crop - The net loss and LAE ratio deteriorated 3.2 percentage points and 14.1
percentage points in the three- and nine-month periods ended
Commercial - The net loss and LAE ratio deteriorated 0.7 percentage points and
7.9 percentage points in the three- and nine-month periods ended
All other - The net loss and LAE ratio deteriorated 0.2 percentage points and
20.5 percentage points in the three- and nine-month periods ended
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
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Underlying expenses$ 21,167 $ 21,825 $ 71,683 $ 70,414 Deferral of policy acquisition costs (8,717 ) (14,742 ) (47,879 ) (47,763 ) Other underwriting and general expenses 12,450 7,083 23,804 22,651 Amortization of deferred policy acquisition costs 12,898 15,061 46,371 39,277 Total reported expenses$ 25,348 $ 22,144 $ 70,175 $ 61,928
Underlying expenses for the three months ended
Expense deferrals were
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balance sheet which was amortized during 2020 as a component of other underwriting and general expenses. As our mix of business has shifted and these premiums continue to be earned, the related deferral and amortization of expenses have also changed.
Underwriting Gain (Loss) and Combined Ratio
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Underwriting gain (loss): Private passenger auto$ (4,531 ) $ (726 ) $ (6,250 ) $ 5,061 Non-standard auto (741 ) (726 ) 186 1,082 Home and farm (4,007 ) (396 ) (4,704 ) 8,000 Crop (622 ) (1,048 ) (4,082 ) (791 ) Commercial 1,771 907 674 596 All other (787 ) (649 ) 41 1,622
Total underwriting gain (loss)
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Combined ratio: Private passenger auto 124.5% 104.0% 111.6% 90.4% Non-standard auto 105.0% 105.2% 99.6% 97.3% Home and farm 121.3% 102.1% 108.6% 85.2% Crop 104.9% 110.8% 119.3% 102.4% Commercial 88.0% 91.6% 98.4% 97.8% All other 131.5% 125.8% 99.5% 76.9% Combined ratio 110.9% 103.6% 106.4% 92.7%
The results from underwriting operations decreased
The overall combined ratio deteriorated 7.3 percentage points and 13.7
percentage points in the three- and nine-month periods ended
The primary drivers behind the elevated combined ratio on both a quarterly and
year-to-date basis were the extreme drought conditions across North and
These elevated losses have been partially offset by continued profitable and strong growth from Direct Auto in the non-standard segment, along with increased profitability and growth from Westminster's commercial business, particularly during the third quarter.
Fee and Other Income
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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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Average cash and invested assets$ 503,538 $ 457,238 $ 499,226 $ 437,845 Gross investment income$ 2,536 $ 2,514 $ 7,519 $ 8,025 Investment expenses 823 628 2,560 2,150 Net investment income$ 1,713 $ 1,886 $ 4,959 $ 5,875 Gross return on average cash and invested assets 2.0% 2.2% 2.0% 2.4% Net return on average cash and invested assets 1.4% 1.7% 1.3% 1.8%
Investment income, net of investment expense, decreased
The Company's fixed-income portfolio book yield declined 27 basis points
year-over-year, from 2.72% at
Net Capital Gain on Investments
Net capital gain on investments consisted of the following:
Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Gross realized gains$ 2,805 $ 916 $ 9,766 $ 3,643 Gross realized losses, excluding other-than-temporary impairment losses (72 ) (280 ) (256 ) (1,622 ) Net realized gain on investments 2,733 636 9,510 2,021 Change in net unrealized gain on equity securities (2,511 ) 4,466 1,224 (641 ) Net capital gain on investments$ 222 $ 5,102 $ 10,734 $ 1,380
The Company's fixed income securities are classified as available for sale
because we will, from time to time, make sales of securities that are not
impaired, consistent with our investment goals and policies. At
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At
Income (Loss) before Income Taxes
For the three months ended
For the nine months ended
Income Tax Expense (Benefit)
A portion of the effective tax rate is due to
Net Income (Loss)
For the three months ended
For the nine months ended
Return on Average Equity
For the three months ended
For the nine months ended
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
September December 30, 2021 31, 2020 Assets: Cash and investments$ 495,676 $ 494,363 Premiums and agents' balances receivable 82,388 48,523 Deferred policy acquisition costs 25,476 23,968 Reinsurance recoverables on losses 42,678 8,710 Property and equipment 9,949 9,899 Receivable from Federal Crop Insurance Corporation 9,362 6,646 Goodwill and other intangibles 17,840 18,194 Other assets 13,117 7,300 Total assets$ 696,486 $ 617,603 Liabilities: Unpaid losses and loss adjustment expenses$ 179,576 $ 105,750 Unearned premiums 137,099 119,363 Deferred income taxes 6,100 8,757 Westminster consideration payable 12,920 19,287 Other liabilities 16,815 15,574 Total liabilities 352,510 268,731 Shareholders' equity 343,976 348,872 Total liabilities and shareholders' equity$ 696,486 $ 617,603
At
At
Total shareholders' equity decreased by
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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. The Company's property and casualty policies, other than certain types of auto and non-standard auto policies, typically have a term of twelve months.
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, when 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
Net investment income and net capital gain (loss) on investments
The Company invests its excess cash in fixed income and equity 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. The Company 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 realized capital losses when investments are written down as a result of other-than-temporary impairments or are sold for an amount less than their cost or amortized cost. The Company recognizes changes in unrealized gains and losses of equity securities in net income as part of net capital gains and losses on investments. These gains and losses may be significant given the fair market value of the equity portfolio and the inherent volatility in equity markets.
The changes in unrealized gains and losses on fixed income securities are recorded in other comprehensive income (loss), net of income taxes.
The portfolio of investments for
Principal Expense Items
The Company's expenses consist primarily of losses and loss adjustment expenses ("LAE"), amortization of deferred policy acquisition costs, other underwriting and general expenses, and income taxes.
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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 or payable 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.
Non-GAAP Financial Measures
Our consolidated financial statements are prepared on the basis of GAAP. We also prepare financial statements for each of our insurance company subsidiaries based on statutory accounting principles and file them with insurance regulatory authorities in the states where they do business. Management evaluates our operations by monitoring key measures of growth and profitability. We believe that disclosure of certain non-GAAP financial measures enhances investor understanding of our financial performance. The following provides further explanation of the key measures that management uses to evaluate our results:
Loss and LAE ratio
The loss and LAE ratio is the ratio (expressed as a percentage) of losses and LAE incurred to premiums earned. The Company measures this ratio on an accident and calendar year 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 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 the Company's operational efficiency in producing, underwriting, and administering our 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 our overall underwriting profit. A combined ratio below 100% generally indicates a profitable book of business.
Premiums written
Net premiums written comprise direct and assumed premiums written, less ceded premiums written. Direct premiums written are the total policy premiums, net of cancellations, associated with policies issued and underwritten by the Company. Assumed premiums written are the total premiums associated with the insurance risk transferred to us by other insurance and reinsurance companies pursuant to reinsurance contracts. Ceded premiums written is the portion of direct premiums written that we
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cede to our reinsurers under our reinsurance contracts. Net premiums earned are recognized ratably over the life of a policy and differ from net premiums written, which are recognized on the effective date of the policy.
Underwriting gain (loss)
Underwriting gain (loss) measures the pre-tax profitability of the Company's 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 the Company's Consolidated Statements of Operations.
Critical Accounting Policies
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. The Company is required to make estimates and assumptions
in certain circumstances that affect amounts reported in the Consolidated
Financial Statements and related footnotes. We evaluate these estimates and
assumptions on an ongoing basis based on historical developments, market
conditions, industry trends, and other information that we believe to be
reasonable under the circumstances. There can be no assurance that actual
results will conform to these estimates and assumptions or that reported results
of operations will not be materially and adversely affected by the need to make
accounting adjustments to reflect changes in these estimates and assumptions
from time to time. Our critical accounting policies are more fully described in
our Management's Discussion and Analysis of Financial Condition and Results
of Operations presented in Part II, Item 7 of our Annual Report on Form 10-K for
the year ended
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Liquidity and Capital Resources
In 2018, we used
We currently anticipate that cash generated from our operations and available from our investment portfolio, along with the remaining IPO net proceeds, will be sufficient to fund our operations.
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 nine months ended
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