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 on Form 10-Q. You should also review Part I, Item 1A "Risk Factors" included in the Company's 2021 Annual Report for a discussion of important factors, including COVID-19 or a future pandemic, and changing climate conditions, 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

The consolidated net income for the Company was $2,039 for the three months ended March 31, 2022, compared to net income of $9,782 for the three months ended March 31, 2021.



The major components of the Company's operating revenues and net income were as
follows:

                                                             Three Months Ended March 31,
                                                                2022               2021
Revenues:
Net premiums earned                                        $        69,587      $    63,135
Fee and other income                                                   428              317
Net investment income                                                1,653            1,536
Net investment gains (losses)                                       (5,528 )          5,811
Total revenues                                             $        66,140      $    70,799

Components of net income:
Net premiums earned                                        $        69,587      $    63,135
Losses and loss adjustment expenses                                 40,129           36,889

Amortization of deferred policy acquisition costs and other underwriting and general expenses

                             23,404           21,238
Underwriting gain                                                    6,054            5,008

Fee and other income                                                   428              317
Net investment income                                                1,653            1,536
Net investment gains (losses)                                       (5,528 )          5,811
Income before income taxes                                           2,607           12,672
Income tax expense                                                     568            2,890
Net income                                                 $         2,039      $     9,782


Net Premiums Earned

                                 Three Months Ended March 31,
                                2022                          2021
Net premiums earned:
Direct premium             $        73,399                  $ 68,743
Assumed premium                      1,861                     1,448
Ceded premium                       (5,673 )                  (7,056 )
Total net premiums earned  $        69,587                  $ 63,135


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The Company's net premiums earned for the three months ended March 31, 2022 increased $6,452, or 10.2%, compared to the three months ended March 31, 2021.



                                 Three Months Ended March 31,
                                2022                          2021
Net premiums earned:
Private passenger auto     $        18,742                  $ 17,498
Non-standard auto                   14,378                    13,258
Home and farm                       19,212                    17,454
Crop                                   (13 )                      47
Commercial                          14,188                    12,338
All other                            3,080                     2,540
Total net premiums earned  $        69,587                  $ 63,135

Below are comments regarding net premiums earned by business segment:

Private passenger auto - Net premiums earned for the first quarter of 2022 increased $1,244, or 7.1%, from the first quarter of 2021, driven by continued new business growth and recent rate increases in South Dakota and Nebraska.

Non-standard auto - Net premiums earned for the first quarter of 2022 increased $1,120, or 8.4%, from the first quarter of 2021. The segment has continued to benefit from the improved economic environment in the Chicago market where our non-standard auto business is concentrated.

Home and farm - Net premiums earned for the first quarter of 2022 increased $1,758, or 10.1%, from the first quarter of 2021, driven by continued new business and exposure growth in South Dakota and Nebraska.

Crop - Net premiums earned by the Company for the first quarter of any year are the result of minor prior crop year premium adjustments which typically occur annually during first quarter. Multi-peril crop and crop hail insurance premiums are generally written in the second quarter and earned ratably over the remainder of the calendar year.

Commercial - Net premiums earned for the first quarter of 2022 increased $1,850, or 15.0%, from the first quarter of 2021. The increase was primarily driven by exposure growth as well as continued increases in both rate and new business production.

All other - Net premiums earned for the first quarter of 2022 increased $540, or 21.3%, from the first quarter of 2021. Net premiums earned increased as a result of our increased participation during 2021 in an assumed domestic and international reinsurance pool of business. As of January 1, 2022, the Company made the decision to non-renew its participation in these pools. However, these results are communicated one to three months following the end of the reporting period. Accordingly, these results are generally reflected in the Company's financial statements on a quarter lag basis.



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Losses and Loss Adjustment Expenses



                                                             Three Months Ended March 31,
                                                                2022               2021
Net losses and loss adjustment expenses:
Direct losses and loss adjustment expenses                 $        45,495      $    37,578
Assumed losses and loss adjustment expenses                             10              948
Ceded losses and loss adjustment expenses                           (5,376 )         (1,637 )
Total net losses and loss adjustment expenses              $        40,129      $    36,889

The Company's net losses and loss adjustment expenses for the three months ended March 31, 2022 increased $3,240, or 8.8%, compared to the three months ended March 31, 2021.



                                                             Three Months Ended March 31,
                                                                2022               2021
Net losses and loss adjustment expenses:
Private passenger auto                                     $        14,711      $    12,254
Non-standard auto                                                    8,491            4,800
Home and farm                                                        6,840            7,632
Crop                                                                  (166 )            561
Commercial                                                          10,017           10,399
All other                                                              236            1,243
Total net losses and loss adjustment expenses              $        40,129      $    36,889


                                                Three Months Ended March 31,
                                                        2022              2021
Loss and loss adjustment expense ratio:
Private passenger auto                                           78.5%    70.0%
Non-standard auto                                                59.1%    36.2%
Home and farm                                                    35.6%    43.7%
Crop                                                               n/a      n/a
Commercial                                                       70.6%    84.3%
All other                                                         7.7%    48.9%
Total loss and loss adjustment expense ratio                     57.7%    58.4%

Below are comments regarding significant changes in the net losses and loss adjustment expenses, and the net loss and loss adjustment expense ratios, by business segment:

Private passenger auto - The net loss and loss adjustment expense ratio increased 8.5 percentage points in the three-month period ended March 31, 2022 compared to the same period in 2021. The increase was driven by elevated loss frequency as a result of increased severe winter weather activity and an increase in the number of uninsured/underinsured motorist liability claims compared to the prior year quarter. Loss experience for the quarter was also adversely impacted by elevated severity due to inflationary factors. We are in the process of taking necessary rate actions as a result of the increased loss activity.

Non-standard auto - The net loss and loss adjustment expense ratio increased 22.9 percentage points in the three-month period ended March 31, 2022 compared to the same period in 2021. The increase was driven by elevated loss severity as a result of inflationary factors as well as elevated loss frequency primarily due to increased miles driven in our Chicago and Las Vegas markets. We are in the process of taking necessary rate and underwriting actions as a result of the increased loss activity.

Home and farm - The net loss and loss adjustment expense ratio improved 8.1 percentage points in the three-month period ended March 31, 2022 compared to the same period in 2021. This segment is typically more profitable during first and fourth quarters as a result of lower levels of severe weather activity.

Crop - The net losses and loss adjustment expenses during the first quarter of any year are reflective of minor prior crop year adjustments which typically occur annually during first quarter.



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Commercial - The net loss and loss adjustment expense ratio improved 13.7 points in the three-month period ended March 31, 2022 compared to the same period in 2021. This improvement was primarily due to decreased fire loss frequency in the Westminster book of business in 2022.

All other - The net loss and loss adjustment expense ratio improved 41.2 percentage points in the three-month period ended March 31, 2022 compared to the same period in 2021. This improvement was the result of favorable prior year development in our assumed domestic and international reinsurance pool of business.

Amortization of Deferred Policy Acquisition Costs

Amortization of deferred policy acquisition costs increased $2,036, or 15.0%, in the three months ended March 31, 2022 compared to the same period in 2021. This increase was primarily due to strong year-over-year growth in our commercial and non-standard auto segments which generally pay higher agent commissions than our other lines, as well as growth in our other segments.

Other Underwriting and General Expenses

Other underwriting and general expenses increased $130, or 1.7%, in the three months ended March 31, 2022 compared to the same period in 2021. This increase primarily reflected the impact of strategic initiatives and higher business volumes.

Underwriting Gain (Loss) and Combined Ratio



                                 Three Months Ended March 31,
                                2022                          2021
Underwriting gain (loss):
Private passenger auto     $        (1,737 )                $   (115 )
Non-standard auto                     (204 )                   4,044
Home and farm                        6,399                     4,211
Crop                                   705                    (1,050 )
Commercial                          (1,165 )                  (2,676 )
All other                            2,056                       594
Total underwriting gain    $         6,054                  $  5,008




                          Three Months Ended March 31,
                                 2022              2021
Combined ratio:
Private passenger auto                   109.3%    100.7%
Non-standard auto                        101.4%     69.5%
Home and farm                             66.7%     75.9%
Crop                                        n/a       n/a
Commercial                               108.2%    121.7%
All other                                 33.2%     76.6%
Combined ratio                            91.3%     92.1%

Underwriting gain (loss) measures the pre-tax profitability of our insurance operations. It is derived by subtracting losses and loss adjustment expenses, amortization of deferred policy acquisition costs, and other underwriting and general expenses from net premiums earned. The combined ratio represents the sum of these losses and expenses as a percentage of net premiums earned, and measures our overall underwriting profit.

The total underwriting gain increased $1,047, or 20.9%, for the three-month period ended March 31, 2022 compared to the same period in 2021.

The overall combined ratio improved 0.8 percentage points in the three-month period ended March 31, 2022 compared to the same periods in 2021.

Fee and Other Income

The Company had fee and other income of $428 for the three months ended March 31, 2022, compared to $317 for the three months ended March 31, 2021. Fee income attributable to the non-standard auto segment is a key component in measuring its profitability. Fee income on this business increased slightly to $388 for the three months ended March 31, 2022 from $332 for the three months ended March 31, 2021.



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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 March 31,
                                                                 2022              2021
Average cash and invested assets                           $        499,385     $   494,914
Net investment income                                      $          1,653     $     1,536

Gross return on average cash and invested assets                       2.1%            2.0%
Net return on average cash and invested assets                         1.3%            1.2%

Net investment income increased $117 for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. This increase was primarily driven by an increase in average invested assets, partially offset by the continued impact of lower reinvestment rates in the fixed income securities portfolio.

The Company's net return on average cash and invested assets increased year-over-year, driven by a combination of factors. The dividend yield in our equity portfolio increased as a result of a higher allocation to high dividend securities, partially offset by a persistent low reinvestment rate environment and ongoing maturities of existing holdings with higher embedded yields.

Net Investment Gains (Losses)

Net investment gains (losses) consisted of the following:



                                                             Three Months Ended March 31,
                                                                2022               2021
Gross realized gains                                       $         1,119      $     4,025

Gross realized losses, excluding other-than-temporary impairment losses

                                                     (181 )           (123 )
Net realized gains                                                     938            3,902
Change in net unrealized gains on equity securities                 (6,466 )          1,909
Net investment gains (losses)                              $        (5,528 )    $     5,811

The Company had net realized gains of $938 for the three months ended March 31, 2022, compared to gains of $3,902 for the three months ended March 31, 2021. The Company reported no other-than-temporary losses during any of the periods presented.

The Company experienced a decrease in net unrealized gains on equity securities of $6,466 during the three months ended March 31, 2022 driven by the impact of changes in fair value attributable to unfavorable equity markets. The Company experienced an increase in net unrealized gains on equity securities of $1,909 during the three months ended March 31, 2021 driven by the impact of changes in fair value attributable to favorable equity markets. In addition to the impact of the overall equity markets, the Company's sales activity (and resulting gains and losses) will impact the level and direction of the change in the net unrealized gain or loss of its equity securities portfolio. During the three months ended March 31, 2022, the Company had net realized gains on its equity securities of $895, compared to net realized gains of $3,801 during the three months ended March 31, 2021.

The Company's fixed income 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. The fixed income portion of the portfolio experienced net unrealized losses of $20,937 during the three months ended March 31, 2022, compared to net unrealized losses of $7,157 during the three months ended March 31, 2021. The change was primarily the result of an increase in U.S. interest rates, with 5-year and 10-year U.S. Treasury yields increasing during the quarter by 120 basis points and 83 basis points, respectively. The change in the fair value of fixed income securities is not reflected in net income; rather it is reflected as a separate component (net of income taxes) of other comprehensive income.

Income before Income Taxes

For the three months ended March 31, 2022, the Company had pre-tax income of $2,607 compared to pre-tax income of $12,672 for the three months ended March 31, 2021. The decrease in pre-tax income was largely attributable to the change in net investment gains/losses attributable to the impact of equity markets on the Company's equity securities portfolio, partially offset by an improvement in underwriting results.



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Income Tax Expense

The Company recorded income tax expense of $568 for the three months ended March 31, 2022, compared to income tax expense of $2,890 for the three months ended March 31, 2021. Our effective tax rate for the first quarter of 2022 was 21.8% compared to an effective tax rate of 22.8% for the first quarter of 2021. A portion of the effective tax rate is attributable to Illinois state income taxes.

Net Income

For the three months ended March 31, 2022, the Company had net income before non-controlling interest of $2,039 compared to net income of $9,782 for the three months ended March 31, 2021. The decrease was largely attributable the change in net investment gains/losses attributable to the impact of equity markets on the Company's equity securities portfolio, partially offset by an improvement in underwriting results.

Return on Average Equity

For the three months ended March 31, 2022, the Company had annualized return on average equity, after non-controlling interest, of 2.3% compared to annualized return on average equity, after non-controlling interest, of 11.2% for the three months ended March 31, 2021.

Average equity is calculated as the average between beginning and ending equity excluding non-controlling interest for the period.

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 Unaudited 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 Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented in our 2021 Annual Report. There have been no changes in our critical accounting policies from December 31, 2021.

Liquidity and Capital Resources

The Company 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 IPO, which we planned 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. The terms of the acquisition agreement included payment of 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. The first two installments were paid in January 2021 and January 2022. The Company anticipates using the net proceeds from the IPO to satisfy the remaining obligation in December 2022.

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.



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The change in cash and cash equivalents for the three months ended March 31, 2022 and 2021 were as follows:

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