NI HOLDINGS, INC. 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 loss for the Company was$46,636 for the three months ended June, 2022, compared to net loss of$2,734 for the three months ended June, 2021. The consolidated net loss forNI Holdings was$44,597 for the six months endedJune 30, 2022 , compared to net income of$7,048 for the six months endedJune 30, 2021 . The major components of the Company's operating revenues and net income were as follows: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Revenues: Net premiums earned$ 84,496 $ 76,281 $ 154,083 $ 139,416 Fee and other income 415 520 843 837 Net investment income 2,015 1,710 3,668 3,246 Net investment gains ) (losses) (11,136 ) 4,701 (16,664 10,512 Total revenues 75,790 83,212 141,930 154,011 Components of net income: Net premiums earned 84,496 76,281 154,083 139,416 Losses and loss adjustment expenses 108,595 62,918 148,724 99,807 Amortization of deferred policy acquisition costs and other underwriting and general expenses 26,246 23,589 49,650 44,827 Underwriting loss (50,345 ) (10,226 ) (44,291 ) (5,218 ) Fee and other income 415 520 843 837 Net investment income 2,015 1,710 3,668 3,246 Net investment gains (losses) (11,136 ) 4,701 (16,664 ) 10,512 Income (loss) before income taxes (59,051 ) (3,295 ) (56,444 ) 9,377 Income tax expense (benefit) (12,415 ) (561 ) (11,847 ) 2,329 Net income (loss)$ (46,636 ) $ (2,734 ) $ (44,597 ) $ 7,048 Net Premiums Earned Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net premiums earned: Direct premium$ 94,251 $ 87,059 $ 167,650 $ 155,802 Assumed premium 1,691 3,516 3,552 4,964 Ceded premium (11,446 ) (14,294 ) (17,119 ) (21,350 ) Total net premiums earned$ 84,496 $ 76,281 $ 154,083 $ 139,416 The Company's net premiums earned for the three months endedJune 30, 2022 , increased$8,215 , or 10.8%, compared to the three months endedJune 30, 2021 . Net premiums earned for the six months endedJune 30, 2022 , increased$14,667 , or 10.5%, compared to the six months endedJune 30, 2021 . Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Net premiums earned: Private passenger auto$ 19,265 $ 18,068 $ 38,007 $ 35,566 Non-standard auto 15,512 14,898 29,890 28,156 Home and farm 19,955 18,373 39,167 35,827 Crop 12,295 8,353 12,282 8,400 Commercial 15,031 14,020 29,219 26,358 All other 2,438 2,569 5,518 5,109 Total net premiums earned$ 84,496 $ 76,281 $ 154,083 $ 139,416 35
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Below are comments regarding net premiums earned by business segment:
Private passenger auto - Net premiums earned for the second quarter of 2022 increased$1,197 , or 6.6%, from the second quarter of 2021. Net premiums earned for the first six months of 2022 increased$2,441 , or 6.9% from the first six months of 2021. Results were driven by continued new business growth and rate increases inSouth Dakota andNebraska . Non-standard auto - Net premiums earned for the second quarter of 2022 increased$614 , or 4.1%, from the second quarter of 2021. Net premiums earned for the first six months of 2022 increased$1,734 , or 6.2% from the first six months of 2021. Results were driven by new business growth and recent rate increases in theChicago market where our non-standard auto business is concentrated. Home and farm - Net premiums earned for the second quarter of 2022 increased$1,582 , or 8.6%, from the second quarter of 2021. Net premiums earned for the first six months of 2022 increased$3,340 , or 9.3% from the first six months of 2021. Results were driven by increasing insured property values as a result of increased inflationary factors. Crop - Net premiums earned for the second quarter of 2022 increased$3,942 , or 47.2%, from the second quarter of 2021. Net premiums earned for the first six months of 2022 increased$3,882 , or 46.2% from the first six months of 2021. This increase was driven by a 20.4% increase in direct written premium for multi-peril crop insurance due to higher commodity prices. In addition, earned premiums increased as a result of ceding significantly less multi-peril crop insurance business into the Assigned Risk fund in 2022 compared to the prior year. 36
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Commercial - Net premiums earned for the second quarter of 2022 increased$1,011 , or 7.2%, from the second quarter of 2021. Net premiums earned for the first six months of 2022 increased$2,861 , or 10.9% from the first six months of 2021. These increases were primarily driven by increasing insured values as a result of inflationary factors as well as continued increases in both price and new business production. All other - Net premiums earned for the second quarter of 2022 decreased$131 , or 5.1%, from the second quarter of 2021 as a result of the Company's decision to non-renew its participation in an assumed domestic and international reinsurance pool of business as ofJanuary 1, 2022 . Net premiums earned for the first six months of 2022 increased$409 , or 8.0% from the first six months of 2021 as a result of our increased participation during 2021 in the assumed domestic and international reinsurance pool of business. These results are communicated to the Company 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, and as a result, the first quarter of 2022 continued to be impacted by our participation in these pools.
Losses and Loss Adjustment Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Net losses and loss adjustment expenses:
Direct losses and loss adjustment expenses $ 110,670 $ 76,599 $ 156,165 $ 114,177
Assumed losses and loss adjustment expenses 1,535 1,960 1,545 2,908
Ceded losses and loss adjustment expenses (3,610 ) (15,641 )
(8,986 ) (17,278 )
Total net losses and loss adjustment expenses
The Company's net losses and loss adjustment expenses for the three months endedJune 30, 2022 , increased$45,677 , or 72.6%, compared to the three months endedJune 30, 2021 . The Company's net losses and loss adjustment expenses for the six months endedJune 30, 2022 , increased$48,917 , or 49.0%, compared to the six months endedJune 30, 2021 . Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Net losses and loss adjustment expenses: Private passenger auto$ 16,854 $ 14,905 $ 31,565 $ 27,159 Non-standard auto 4,133 11,490 12,624 16,290 Home and farm 61,831 18,208 68,671 25,840 Crop 10,330 9,332 10,164 9,893 Commercial 12,991 7,264 23,008 17,663 All other 2,456 1,719 2,692 2,962 Total net losses and loss adjustment expenses$ 108,595 $ 62,918 $ 148,724 $ 99,807 Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Loss and loss adjustment expenses ratio: Private passenger auto 87.5% 82.5% 83.1% 76.4% Non-standard auto 26.6% 77.1% 42.2% 57.9% Home and farm 309.9% 99.1% 175.3% 72.1% Crop 84.0% 111.7% 82.8% 117.8% Commercial 86.4% 51.8% 78.7% 67.0% All other 100.7% 66.9% 48.8% 58.0% Total loss and loss adjustment expenses ratio 128.5% 82.5%
96.5% 71.6%
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 5.0 percentage points and 6.7 percentage points in the three- and six-month periods endedJune 30, 2022 , compared to the same periods in 2021. These increases were driven by elevated loss severity due to inflationary factors and increased weather-related comprehensive losses inNebraska andSouth Dakota . We are addressing the increasing frequency and severity through aggressive underwriting actions and planned rate increases. Non-standard auto - The net loss and loss adjustment expense ratio decreased 50.5 percentage points and 15.7 percentage points in the three- and six-month periods endedJune 30, 2022 , compared to the same periods in 2021. These decreases were driven by favorable prior year reserve development in second quarter of 2022 along with other successful strategic underwriting initiatives taken in ourLas Vegas market, partially offset by elevated loss severity as a result of inflationary factors. Continued rate increases will be necessary to combat the increasing severity as a result of the inflationary factors. Home and farm - The net loss and loss adjustment expense ratio increased 210.8 percentage points and 103.2 percentage points in the three- and six-month periods endedJune 30, 2022 , compared to the same periods in 2021. These increases were driven by catastrophe losses inNebraska andSouth Dakota during second quarter of 2022. Catastrophe losses for the Home and Farm segment in the second quarters of 2022 and 2021 accounted for 211.6 percentage points and 41.8 percentage points, respectively, of the net loss and loss adjustment expense ratio. Crop - The net loss and loss adjustment expense ratio decreased 27.7 percentage points and 35.0 percentage points in the three- and six-month periods endedJune 30, 2022 , compared to the same periods in 2021. This improvement was due to improved crop growing conditions in 2022 in comparison to the extreme drought conditions faced in 2021. 37
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Commercial - The net loss and loss adjustment expense ratio increased 34.6 percentage points and 11.7 percentage points in the three- and six-month periods endedJune 30, 2022 , compared to the same periods in 2021. These increases were driven by increased frequency and severity of fire losses in the Westminster book of business during second quarter of 2022. The remaining portion of the Commercial segment also produced unprofitable results due to severe weather during the current quarter. All other - The net loss and loss adjustment expense ratio increased 33.8 percentage points in the three-month period endedJune 30, 2022 , compared to the same period for 2021. The increase for the second quarter of 2022 was driven by our share of a significant catastrophe loss occurrence within a reciprocal catastrophe pool that we participate in. The net loss and loss adjustment expense ratio decreased 9.2 percentage points in the six-month period endedJune 30, 2022 compared to the same period for 2021. The year-to-date loss and loss adjustment expense ratio was also impacted by 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 decreased$3,642 , or 18.3%, in the three months endedJune 30, 2022 , compared to the same period in 2021, and decreased$1,606 , or 4.8%, in the six months endedJune 30, 2022 compared to the same period in 2021. These decreases are the result of the Company refining the methodology for calculating deferred policy acquisition costs and the related amortization during the third quarter of 2021 and the impact of the previous methodology on the first six months of 2021. The effects of the change in methodology are partially offset by premium growth and the related deferrable policy acquisition costs.
Other Underwriting and General Expenses
Other underwriting and general expenses increased$6,299 , or 170.1%, in the three months endedJune 30, 2022 , compared to the same period in 2021, and increased$6,429 , or 56.6%, in the six months endedJune 30, 2022 compared to the same period in 2021. These increases are the result of the Company refining the methodology for calculating deferred policy acquisition costs and the related amortization during the third quarter of 2021. Utilizing the previous methodology resulted in higher deferrable expenses for the first six months of 2021 and lower other underwriting and general expenses.
Underwriting Gain (Loss) and Combined Ratio
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Underwriting gain (loss):
Private passenger auto $ (3,142 ) $ (1,604 ) $ (4,879 ) $ (1,719 )
Non-standard auto 4,512 (3,117 ) 4,308 927
Home and farm (47,932 ) (4,908 ) (41,533 ) (697 )
Crop 356 (2,410 ) 1,061 (3,460 )
Commercial (3,536 ) 1,579 (4,701 ) (1,097 )
All other (603 ) 234 1,453 828
Total underwriting gain (loss) $ (50,345 ) $ (10,226 ) $ (44,291 ) $ (5,218 )
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Combined ratio:
Private passenger auto 116.3% 108.9% 112.8% 104.8%
Non-standard auto 70.9% 120.9% 85.6% 96.7%
Home and farm 340.2% 126.7% 206.0% 101.9%
Crop 97.1% 128.9% 91.4% 141.2%
Commercial 123.5% 88.7% 116.1% 104.2%
All other 124.7% 90.9% 73.7% 83.8%
Combined ratio 159.6% 113.4% 128.7% 103.7%
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 loss increased $40,119 , or 392.3%, for the three-month
period ended June 30, 2022 , compared to the same period in 2021. The total
underwriting loss increased $39,073 , or 748.8%, for the six-month period ended
June 30, 2022 , compared to the same period in 2021. These results were driven by
the factors discussed in the Loss and Loss Adjustment Expenses section above.
The overall combined ratio increased 46.2 percentage points in the three-month
period ended June 30, 2022 , compared to the same periods in 2021. The overall
combined ratio increased 25.0 percentage points in the six-month period ended
June 30, 2022 , compared to the same periods in 2021. These results were driven
by the factors discussed in the Loss and Loss Adjustment Expenses section above.
Fee and Other Income
The Company had fee and other income of$415 for the three months endedJune 30, 2022 , compared to$520 for the three months endedJune 30, 2021 . Fee income attributable to the non-standard auto segment is a key component in measuring its profitability. Fee income on this business decreased to$254 for the three months endedJune 30, 2022 , from$361 for the three months endedJune 30, 2021 , due to a reduction in policies that generate fee income. The Company had fee and other income of$843 for the six months endedJune 30, 2022 , compared to$837 for the six months endedJune 30, 2021 . Fee income on the non-standard auto business decreased slightly to$642 for the six months endedJune 30, 2022 , from$693 for the six months endedJune 30, 2021 , due to a reduction in policies that generate fee income.
Net Investment Income
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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 Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Average cash and invested assets
$ 2,015 $ 1,710 $
3,668
Gross return on average cash and invested assets 2.4% 2.0% 2.3% 2.0% Net return on average cash and invested assets 1.7% 1.4%
1.5% 1.3%
Net investment income increased$305 for the three months endedJune 30, 2022 , compared to the three months endedJune 30, 2021 . Net investment income increased$422 for the six months endedJune 30, 2022 , compared to the six months endedJune 30, 2021 . These increases were primarily driven by an increase in the overall portfolio book value (measured at cost or amortized cost) as well as a higher allocation of invested assets to private placement securities and high dividend yield equities.
The Company's net return on average cash and invested assets increased year-over-year, driven by a decrease in average cash and invested assets (measured at fair value) as a result of unfavorable market conditions for both fixed income and equity securities as well as higher net investment income.
Net Investment Gains (Losses)
Net investment gains (losses) consisted of the following:
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Gross realized gains $ 1,201 $ 2,936 $ 2,320 $ 6,961
Gross realized losses, excluding
other-than-temporary impairment
losses (174 ) (61 ) (355 ) (184 )
Net realized gains 1,027 2,875 1,965 6,777
Change in net unrealized gains on
equity securities (12,163 ) 1,826
(18,629 ) 3,735
Net investment gains (losses)
The Company had net realized gains of$1,027 and$1,965 for the three and six months endedJune 30, 2022 , compared to gains of$2,875 and$6,777 for the three and six months endedJune 30, 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$12,163 and$18,629 during the three and six months endedJune 30, 2022 , respectively, 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$1,826 and$3,735 during the three and six months endedJune 30, 2021 , respectively, 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 and six months endedJune 30, 2022 , the Company had net realized gains on its equity securities of$1,132 and$2,027 , respectively, compared to net realized gains of$2,550 and$6,351 during the three and six months endedJune 30, 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$16,283 and$37,220 during the three and six months endedJune 30, 2022 , respectively, compared to net unrealized gains (losses) of$2,835 and$(4,322) during the three and six months endedJune 30, 2021 . The changes were primarily the result of changes inU.S. interest rates. 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 (Loss) before Income Taxes
For the three months endedJune 30, 2022 , the Company had a pre-tax loss of$59,051 compared to a pre-tax loss of$3,295 for the three months endedJune 30, 2021 . The increase in pre-tax loss was largely attributable to the significant catastrophe losses inNebraska andSouth Dakota during the quarter, along with the change in net investment gains/losses attributable to the impact of equity markets on the Company's equity securities portfolio. For the six months endedJune 30, 2022 , the Company had a pre-tax loss of$56,444 compared to pre-tax income of$9,377 for the six months endedJune 30, 2021 . The decrease in pre-tax income was largely attributable to the significant catastrophe losses inNebraska andSouth Dakota during the second quarter of 2022, along with the change in net investment gains/losses attributable to the impact of equity markets on the Company's equity securities portfolio. 39
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Income Tax Expense (Benefit)
The Company recorded an income tax benefit of$12,415 for the three months endedJune 30, 2022 , compared to an income tax benefit of$561 for the three months endedJune 30, 2021 . Our effective tax rate for the second quarter of 2022 was 21.0% compared to an effective tax rate of 17.0% for the second quarter of 2021. The Company recorded an income tax benefit of$11,847 for the six months endedJune 30, 2022 , compared to income tax expense of$2,329 for the six months endedJune 30, 2021 . Our effective tax rate for the first six months of 2022 was 21.0% compared to an effective tax rate of 24.8% for the first six months of 2021.
A portion of the effective tax rate is attributable to
Net Income (Loss) For the three months endedJune 30, 2022 , the Company had a net loss before non-controlling interest of$46,636 compared to net loss of$2,734 for the three months endedJune 30, 2021 . The decrease was largely attributable to the significant catastrophe losses inNebraska andSouth Dakota during the quarter, along with the change in net investment gains/losses attributable to the impact of equity markets on the Company's equity securities portfolio. For the six months endedJune 30, 2022 , the Company had a net loss before non-controlling interest of$44,597 compared to net income of$7,048 for the six months endedJune 30, 2021 . The decrease was largely attributable to the significant catastrophe losses inNebraska andSouth Dakota during the second quarter of 2022, along with the change in net investment gains/losses attributable to the impact of equity markets on the Company's equity securities portfolio. Return on Average Equity For the three months endedJune 30, 2022 , the Company had annualized return on average equity, after non-controlling interest, of (61.4)% compared to annualized return on average equity, after non-controlling interest, of (3.0)% for the three months endedJune 30, 2021 . For the six months endedJune 30, 2022 , the Company had annualized return on average equity, after non-controlling interest, of (28.7)% compared to annualized return on average equity, after non-controlling interest, of 4.3% for the six months endedJune 30, 2021 .
Average equity is calculated as the average between beginning and ending shareholders' 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 fromDecember 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, which was paid in cash at closing. OnJanuary 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 inJanuary 2021 andJanuary 2022 . The Company anticipates using the net proceeds from the IPO to satisfy the remaining obligation inDecember 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. 40
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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
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