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$10,169 for the three months endedSeptember 30, 2022 , compared to net loss of$4,859 for the three months endedSeptember 30, 2021 . The consolidated net loss for the Company was$54,766 for the nine months endedSeptember 30, 2022 , compared to net income of$2,189 for the nine months endedSeptember 30, 2021 . The major components of the Company's revenues and net income (loss) were as follows: Three Months Ended Nine Months Ended September 30, September 30, 2022 2021 2022 2021 Revenues: Net premiums earned$ 89,532 $ 82,173 $ 243,615 $ 221,589 Fee and other income 476 501 1,319 1,338 Net investment income 2,035 1,713 5,703 4,959 Net investment gains (losses) (2,868 ) 222 (19,532 ) 10,734 Total revenues 89,175 84,609 231,105 238,620 Components of net income (loss): Net premiums earned 89,532 82,173 243,615 221,589 Losses and loss adjustment expenses 78,917 65,742 227,641 165,549 Amortization of deferred policy acquisition costs and other underwriting and general expenses 23,501 25,348
73,151 70,175 Underwriting loss (12,886 ) (8,917 ) (57,177 ) (14,135 ) Fee and other income 476 501 1,319 1,338 Net investment income 2,035 1,713 5,703 4,959 Net investment gains (losses) (2,868 ) 222 (19,532 ) 10,734 Income (loss) before income taxes (13,243 ) (6,481 ) (69,687 ) 2,896 Income tax expense (benefit) (3,074 ) (1,622 ) (14,921 ) 707 Net income (loss)$ (10,169 ) $ (4,859 ) $ (54,766 ) $ 2,189 33 Table of Contents Net Premiums Earned Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net premiums earned: Direct premium$ 102,173 $ 93,740$ 269,823 $ 249,542 Assumed premium 2,460 1,336 6,012 6,300 Ceded premium (15,101 ) (12,903 ) (32,220 ) (34,253 ) Total net premiums earned $ 89,532 $ 82,173$ 243,615 $ 221,589
The Company's net premiums earned for the three months ended
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net premiums earned:
Private passenger auto $ 19,813 $ 18,491 $ 57,818 $ 54,057
Non-standard auto 17,579 14,889 47,469 43,045
Home and farm 19,751 18,775 58,919 54,602
Crop 14,566 12,724 26,848 21,124
Commercial 15,884 14,798 45,103 41,156
All other 1,939 2,496 7,458 7,605
Total net premiums earned $ 89,532 $ 82,173 $ 243,615 $ 221,589 Below are comments regarding net premiums earned by business segment:
Private passenger auto - Net premiums earned for the three months endedSeptember 30, 2022 , increased$1,322 , or 7.1%, compared to the same period in 2021. Net premiums earned for the nine months endedSeptember 30, 2022 , increased$3,761 , or 7.0%, compared to the same period in 2021. Results were driven by continued new business growth and rate increases inSouth Dakota andNebraska . Non-standard auto - Net premiums earned for the three months endedSeptember 30, 2022 , increased$2,690 , or 18.1%, compared to the same period in 2021. Net premiums earned for the nine months endedSeptember 30, 2022 , increased$4,424 , or 10.3%, compared to the same period in 2021. Results were driven by new business growth, increased retention, and rate increases in theChicago market where our non-standard auto business is concentrated. Home and farm - Net premiums earned for the three months endedSeptember 30, 2022 , increased$976 , or 5.2%, compared to the same period in 2021. Net premiums earned for the nine months endedSeptember 30, 2022 , increased$4,317 , or 7.9%, compared to the same period in 2021. Results were driven by increasing insured property values as a result of using higher inflationary factors in the underwriting of home and farm risks. Crop - Net premiums earned for the three months endedSeptember 30, 2022 , increased$1,842 , or 14.5%, compared to the same period in 2021. Net premiums earned for the nine months endedSeptember 30, 2022 , increased$5,724 , or 27.1%, compared to the same period in 2021. Results were driven by the impact of higher commodity prices on our multi-peril crop insurance direct written premiums. 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. Commercial - Net premiums earned for the three months endedSeptember 30, 2022 , increased$1,086 , or 7.3%, compared to the same period in 2021. Net premiums earned for the nine months endedSeptember 30, 2022 , increased$3,947 , or 9.6%, compared to the same period in 2021. Results were driven by increasing insured values as a result of using higher inflationary factors as well as continued increases in both price and new business premiums. All other - Net premiums earned for the three months endedSeptember 30, 2022 , decreased$557 , or 22.3%, compared to the same period in 2021. Net premiums earned for the nine months endedSeptember 30, 2022 , decreased$147 , or 1.9%, compared to the same period in 2021. Results were driven by the Company's decision to non-renew its participation in an assumed domestic and international reinsurance pool of business as ofJanuary 1, 2022 . 34 Table of Contents
Losses and Loss Adjustment Expenses
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net losses and loss adjustment
expenses:
Direct losses and loss adjustment
expenses $ 94,446 $
87,453
868 2,308 2,413 5,216
Ceded losses and loss adjustment
expenses (16,397 ) (24,019 ) (25,383 ) (41,297 )
Total net losses and loss adjustment
expenses $ 78,917 $ 65,742 $ 227,641 $ 165,549 The Company's net losses and loss adjustment expenses for the three months endedSeptember 30, 2022 , increased$13,175 or 20.0%, compared to the three months endedSeptember 30, 2021 . The Company's net losses and loss adjustment expenses for the nine months endedSeptember 30, 2022 , increased$62,092 , or 37.5%, compared to the nine months endedSeptember 30, 2021 . Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net losses and loss adjustment expenses: Private passenger auto$ 20,354 $ 17,130 $ 51,918 $ 44,289 Non-standard auto 11,958 9,620 24,582 25,910 Home and farm 28,822 16,155 97,492 41,995 Crop 6,974 12,482 17,135 22,375 Commercial 9,812 7,770 32,821 25,433 All other 997 2,585 3,693 5,547 Total net losses and loss adjustment expenses$ 78,917 $ 65,742 $ 227,641 $ 165,549 Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Loss and loss adjustment expenses ratio: Private passenger auto 102.7% 92.6% 89.8% 81.9% Non-standard auto 68.0% 64.6% 51.8% 60.2% Home and farm 145.9% 86.0% 165.5% 76.9% Crop 47.9% 98.1% 63.8% 105.9% Commercial 61.8% 52.5% 72.8% 61.8% All other 51.4% 103.6% 49.5% 72.9% Total loss and loss adjustment expenses ratio 88.1% 80.0% 93.5% 74.7%
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 10.1 percentage points and 7.9 percentage points in the three- and nine-month periods endedSeptember 30, 2022 , compared to the same periods in 2021. These increases were driven by elevated loss costs due to continued high levels of inflation and increased weather-related comprehensive losses inNebraska andSouth Dakota . We are addressing this increased frequency and severity through recent aggressive underwriting actions and rate increases. Non-standard auto - The net loss and loss adjustment expense ratio increased 3.4 percentage points in the three-month period endedSeptember 30, 2022 , compared to the same period in 2021. This increase was driven by elevated loss costs due to continued high levels of inflation. The net loss and loss adjustment expense ratio decreased 8.4 percentage points in the nine-month period endedSeptember 30, 2022 , compared to the same period for 2021 due to successful implementation of various strategic initiatives as well as rate increases taken in early 2022. Home and farm - The net loss and loss adjustment expense ratio increased 59.9 percentage points and 88.6 percentage points in the three- and nine-month periods endedSeptember 30, 2022 , compared to the same periods in 2021. These increases were driven by catastrophe losses inNebraska andSouth Dakota that occurred during second quarter of 2022 as well as a catastrophe that occurred during the third quarter of 2022 inNorth Dakota . The losses from the catastrophe events that occurred during second quarter continued to adversely develop with additional losses being reported during the third quarter. Catastrophe losses, net of reinsurance, for the Home and Farm segment accounted for 73.6 percentage points of the net loss and loss adjustment expense ratio for the three months endedSeptember 30, 2022 , and did not have a negative impact for the same period in 2021. Catastrophe losses, net of reinsurance, for the Home and Farm segment accounted for 96.3 percentage points of the net loss and loss adjustment expense ratio for the nine months endedSeptember 30, 2022 , compared to 13.5 percentage points for the same period for 2021. 35
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Crop - The net loss and loss adjustment expense ratio decreased 50.2 percentage points and 42.1 percentage points in the three- and nine-month periods endedSeptember 30, 2022 , compared to the same periods in 2021. This improvement was due to more favorable crop growing conditions in 2022 in comparison to the extreme drought conditions faced in 2021. Commercial - The net loss and loss adjustment expense ratio increased 9.3 percentage points and 11.0 percentage points in the three- and nine-month periods endedSeptember 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, which continued into the third quarter. OurNorth Dakota commercial business experienced elevated weather-related losses which also contributed to these loss ratio increases. All other - The net loss and loss adjustment expense ratio decreased 52.2 percentage points and 23.4 percentage points in the three- and nine-month periods endedSeptember 30, 2022 , compared to the same periods for 2021. The decreases were driven by the Company's decision to non-renew its participation in an assumed domestic and international reinsurance pool of business as ofJanuary 1, 2022 . 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.
Expense Ratio
Three Months Ended September 30 ,
Nine Months Ended
2022 2021 2022 2021
Underwriting and general expenses:
Amortization of deferred policy
acquisition costs $ 17,589 $ 12,898 $ 49,456 $ 46,371
Other underwriting and general
expenses 5,912 12,450 23,695 23,804
Total underwriting and general
expenses $ 23,501 $ 25,348 $ 73,151 $ 70,175
Expense ratio 26.3% 30.8% 30.0% 31.7%
The expense ratio is calculated by dividing other underwriting and general expenses and amortization of deferred policy acquisition costs by net premiums earned. The expense ratio measures a company's operational efficiency in producing, underwriting, and administering its insurance business. The overall expense ratio decreased 4.5 percentage points in the three-month period endedSeptember 30, 2022 , compared to the same period in 2021. The Company refined its methodology for calculating deferred policy acquisition costs and the related amortization during the third quarter of 2021, which contributed to this decrease and the year-over-year changes in deferred policy acquisition costs and other underwriting and general expenses. The overall expense ratio decreased 1.7 percentage points in the nine-month period endedSeptember 30, 2022 , compared to the same period in 2021. The decreases for the three- and nine-month periods endedSeptember 30, 2022 , compared to the same periods in 2021, were driven by the impact of the significantly higher multi-peril crop insurance net premiums earned during 2022 in our crop segment, which operates at a significantly lower expense ratio relative to our other segments. 36 Table of Contents
Underwriting Gain (Loss) and Combined Ratio
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Underwriting gain (loss):
Private passenger auto $ (5,602 ) $ (4,531 ) $ (10,482 ) $ (6,250 )
Non-standard auto (778 ) (741 ) 3,530 186 Home and farm (14,467 ) (4,007 ) (55,998 ) (4,704 ) Crop 7,249 (622 ) 8,313 (4,082 ) Commercial 232 1,771 (4,470 ) 674 All other 480 (787 ) 1,930 41
Total underwriting gain (loss) $ (12,886 )$ (8,917 ) $ (57,177 ) $ (14,135 ) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Combined ratio: Private passenger auto 128.3% 124.5% 118.1% 111.5% Non-standard auto 104.4% 105.0% 92.6% 99.6% Home and farm 173.2% 121.3% 195.1% 108.6% Crop 50.2% 104.9% 69.0% 119.3% Commercial 98.6% 88.0% 109.9% 98.4% All other 75.2% 131.5% 74.1% 99.4% Combined ratio 114.4% 110.8% 123.5% 106.4% 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$3,969 or 44.5%, for the three-month period endedSeptember 30, 2022 , compared to the same period in 2021. The total underwriting loss increased$43,042 , or 304.5%, for the nine-month period endedSeptember 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 3.6 percentage points in the three-month period endedSeptember 30, 2022 , compared to the same period in 2021. The overall combined ratio increased 17.1 percentage points in the nine-month period endedSeptember 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. Fee and Other Income The Company had fee and other income of$476 for the three months endedSeptember 30, 2022 , compared to$501 for the three months endedSeptember 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$246 for the three months endedSeptember 30, 2022 , from$301 for the three months endedSeptember 30, 2021 , due to a reduction in policies that generate fee income. The Company had fee and other income of$1,319 for the nine months endedSeptember 30, 2022 , compared to$1,338 for the nine months endedSeptember 30, 2021 . Fee income on the non-standard auto business decreased slightly to$888 for the nine months endedSeptember 30, 2022 , from$994 for the nine months endedSeptember 30, 2021 , due to a reduction in policies that generate fee
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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Average cash and invested assets
$ 2,035 $ 1,713 $ 5,703 $ 4,959
Gross return on average cash and invested assets 2.6% 2.0% 2.4% 2.0% Net return on average cash and invested assets 1.9% 1.4% 1.6% 1.3% Net investment income increased$322 for the three months endedSeptember 30, 2022 , compared to the three months endedSeptember 30, 2021 . Net investment income increased$744 for the nine months endedSeptember 30, 2022 , compared to the nine months endedSeptember 30, 2021 . These increases were primarily driven by an increase in the fixed income portfolio average book value (measured at cost or amortized cost), the rising interest rate environment, 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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Gross realized gains $ 1,286 $ 2,805 $ 3,606 $ 9,766
Gross realized losses, excluding
other-than-temporary impairment losses (1,203 ) (72 ) (1,558 ) (256 )
Net realized gains 83 2,733 2,048 9,510
Change in net unrealized gains on equity
securities (2,951 ) (2,511 ) (21,580 ) 1,224
Net investment gains (losses) $ (2,868 ) $ 222$ (19,532 ) $ 10,734
The Company had net realized gains of
The Company experienced a decrease in net unrealized gains on equity securities of$2,951 and$21,580 during the three and nine months endedSeptember 30, 2022 , respectively, driven by changes in fair value attributable to unfavorable equity markets. The Company experienced a decrease of$2,511 and an increase of$1,224 in net unrealized gains on equity securities during the three and nine months endedSeptember 30, 2021 , driven by changes in fair value attributable to volatile 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 nine months endedSeptember 30, 2022 , the Company had net realized gains on its equity securities of$122 and$2,149 , respectively, compared to net realized gains of$2,614 and$8,964 during the three and nine months endedSeptember 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$12,727 and$49,946 during the three and nine months endedSeptember 30, 2022 , respectively, compared to net unrealized losses of$2,121 and$6,443 during the three and nine months endedSeptember 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. 38 Table of Contents
Income (Loss) before Income Taxes
For the three months endedSeptember 30, 2022 , the Company had a pre-tax loss of$13,243 compared to a pre-tax loss of$6,481 for the three months endedSeptember 30, 2021 . The increase in pre-tax loss was largely attributable to loss development on the significant catastrophe losses inNebraska andSouth Dakota that occurred during the second quarter, losses related to a catastrophe inNorth Dakota that occurred in the third quarter, and the change in net investment gains/losses attributable to the impact of equity markets on the Company's equity securities portfolio. For the nine months endedSeptember 30, 2022 , the Company had a pre-tax loss of$69,687 compared to pre-tax income of$2,896 for the nine months endedSeptember 30, 2021 . The decrease in pre-tax income was largely attributable to the significant catastrophe losses inNebraska ,South Dakota , andNorth Dakota , along with the change in net investment gains/losses attributable to the impact of equity markets on the Company's equity securities portfolio.
Income Tax Expense (Benefit)
The Company recorded an income tax benefit of$3,074 for the three months endedSeptember 30, 2022 , compared to an income tax benefit of$1,622 for the three months endedSeptember 30, 2021 . Our effective tax rate for the third quarter of 2022 was 23.2% compared to an effective tax rate of 25.0% for the third quarter of 2021. The Company recorded an income tax benefit of$14,921 for the nine months endedSeptember 30, 2022 , compared to income tax expense of$707 for the nine months endedSeptember 30, 2021 . Our effective tax rate for the first nine months of 2022 was 21.4% compared to an effective tax rate of 24.4% for the first nine months of 2021.
A portion of the effective tax rate is attributable to
Net Income (Loss) For the three months endedSeptember 30, 2022 , the Company had a net loss before non-controlling interest of$10,169 compared to net loss of$4,859 for the three months endedSeptember 30, 2021 . The decrease was largely attributable to the significant catastrophe losses inNebraska ,South Dakota , andNorth Dakota , 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 nine months endedSeptember 30, 2022 , the Company had a net loss before non-controlling interest of$54,766 compared to net income of$2,189 for the nine months endedSeptember 30, 2021 . The decrease was largely attributable to the significant catastrophe losses inNebraska ,South Dakota , andNorth Dakota , 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 endedSeptember 30, 2022 , the Company had annualized return on average equity, after non-controlling interest, of (15.4)% compared to annualized return on average equity, after non-controlling interest, of (5.5)% for the three months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2022 , the Company had annualized return on average equity, after non-controlling interest, of (24.3)% compared to annualized return on average equity, after non-controlling interest, of 0.9% for the nine months endedSeptember 30, 2021 .
Average equity is calculated as the average between beginning and ending shareholders' equity, excluding non-controlling interest for the period.
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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, 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 for the foreseeable future. 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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