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 Consolidated Financial Statements alone. The discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in "Item 8. Financial Statements and Supplementary Data." Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K constitutes forward-looking information that involves risks and uncertainties. Please see "Forward-Looking Information" and "Item 1A. Risk Factors" for more information. You should review "Risk Factors" 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, except per share amounts, are in thousands.
Overview
These consolidated financial statements of
•
•
•
American West - a wholly-owned subsidiary of
•
Primero - an indirect wholly-owned subsidiary of
•
•
Direct Auto - a wholly-owned subsidiary of
•
On
On
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Marketplace Conditions and Trends
Beginning in
The property and casualty insurance industry is affected by recurring industry cycles known as "hard" and "soft" markets. A soft cycle is characterized by intense competition resulting in lower pricing in order to compete for business. A hard market, generally considered a beneficial industry trend, is characterized by reduced competition that results in higher pricing.
We monitor the marketplace both on a regional and line of business basis. The private passenger marketplace continues to be a very competitive and challenging pricing environment, due to improved results and increased competitive pressure in the market. Rates for private passenger auto remain competitive across the country. The non-standard auto market also remains competitive with companies seeking to grow this line of business. Two large acquisitions took place in the non-standard auto segment during the third quarter, indicating that others in the marketplace are recognizing profitable opportunities associated with this segment. As opposed to most personal lines, the commercial multi-peril market in which we participate continued to harden, with accelerating positive rate changes in both liability and especially property during 2020.
Unlike property and casualty insurance, the total crop insurance premiums
written each year vary mainly based on prevailing commodity prices for the type
of crops planted, because the aggregate number of acres planted usually does not
vary much from year to year. Because the premiums that are charged for crop
insurance are established by the RMA, which is a division of the
Principal Revenue Items
The Company derives its revenue primarily from net premiums earned, net investment income, and net capital gain 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.
Due to the nature of the crop planting and harvesting cycle and the deadlines
for filing and processing claims under the federal crop insurance program,
insurance premiums for crop insurance are recognized and earned during the
period of risk, which usually begins in spring and ends with harvest in the
fall. In the case of prevented planting claims, the period of risk is shortened
to the date a valid prevented planting claim is filed, as the Company believes
the period of risk has ended. Under the federal crop insurance program, farmers
must purchase crop insurance with respect to spring planted crops by
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Net investment income and net capital gain (loss) on investments
Beginning in 2019, in accordance with a change in accounting principle, changes in unrealized gains and losses on the Company's investments in equity securities are included in net income as a part of net capital gains and losses on investments. These gains and losses may be significant given the size of the equity securities holdings and the inherent volatility in equity securities prices. Prior to 2019, the changes in unrealized gains and losses pertaining to such investments were recorded in other comprehensive income. The changes in unrealized gains and losses on fixed income securities continue to be recorded in other comprehensive income, net of income taxes. The new accounting treatment has no effect on total shareholders' equity.
Principal Expense Items
Losses and Loss Adjustment Expenses
Losses and LAE represent the largest expense item and include (1) claim payments made, (2) estimates for future claim payments and changes in those estimates from prior periods, and (3) costs associated with investigating, defending, and adjusting claims, including legal fees.
Amortization of deferred policy acquisition costs and other underwriting and general expenses
Expenses incurred to underwrite risks are referred to as policy acquisition costs. Policy acquisition costs consist of commission expenses, state premium taxes, and certain other underwriting expenses that vary with and are primarily related to the writing and acquisition of new and renewal business. These policy acquisition costs are deferred and amortized over the effective period of the related insurance policies. Other underwriting and general expenses consist of salaries, professional fees, office supplies, depreciation, and all other operating expenses not otherwise classified separately.
Income taxes
Current income taxes represent amounts paid to the federal government and certain states whose payment is based upon net income (subject to regulatory adjustments) generated by the Company. As noted above, it does not include state premium taxes that are based purely on the collection of policyholder premiums.
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Non-GAAP Financial Measures
Loss and LAE ratio
The loss and LAE ratio is the ratio (expressed as a percentage) of losses and
LAE incurred to premiums earned.
Expense ratio
The expense ratio is the ratio (expressed as a percentage) of amortization of deferred policy acquisition costs and other underwriting and general expenses (attributable to insurance operations) to premiums earned, and measures our operational efficiency in producing, underwriting, and administering the Company's insurance business.
Combined ratio
The Company's combined ratio is the ratio (expressed as a percentage) of the sum
of losses and LAE incurred and expenses to premiums earned, and measures its
overall underwriting profit. Generally, if the combined ratio is below 100%,
Premiums written
Premiums written represent a measure of business volume most relevant on an annual basis for the Company's business model. This measure includes the amount of premium purchased by policyholders as of the policy's effective date, whereas premiums earned as presented in the Consolidated Statement of Operations matches the amount of premium to the period of risk for those insurance policies. The Company's insurance policies are sold with a variety of effective periods, including annual, semi-annual, and monthly.
Net premiums written to statutory surplus ratio
The net premiums written to statutory surplus ratio represents the ratio of net premiums written to statutory surplus. This ratio is designed to measure the ability of the Company to absorb above-average losses and the Company's financial strength. In general, a low premium to surplus ratio is considered a sign of financial strength because the Company has an adequate provision for adverse development of loss reserves within the Company's current book of business and provides a capacity to write more business. Statutory surplus is determined using accounting principles prescribed or permitted by the insurance subsidiaries' state of domicile and differs from GAAP equity.
Underwriting gain (loss)
Underwriting gain (loss) measures the pre-tax profitability of insurance
operations. It is derived by subtracting losses and LAE, amortization of
deferred policy acquisition costs, and other underwriting and general expenses
from net premiums earned. Each of these items is presented as a caption in
Net income (loss) and return on average equity
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Table of Contents Critical Accounting Policies General
The preparation of financial statements in accordance with GAAP requires both
the use of estimates and judgment relative to the application of appropriate
accounting policies.
Unpaid Losses and Loss Adjustment Expenses
How reserves are established
With respect to its traditional property and casualty insurance products, the Company maintains reserves for the payment of claims (indemnity losses) and expenses related to adjusting those claims (LAE). The Company's liability for unpaid losses and LAE
consists of (1) case reserves, which are reserves for claims that have been reported to it, and (2) reserves for claims that have been incurred but have not yet been reported and for the future development of case reserves.
LAE consist of two components - allocated loss adjustment expenses ("ALAE") and unallocated loss adjustment expenses ("ULAE"). ALAE are defense and cost containment expenses, including legal fees, court costs, and investigation fees, which are linked to the settlement of specific individual claims or losses. ULAE are expenses that generally cannot be associated with a specific claim, including internal costs such as salaries and other overhead costs, and also represent estimates of future costs to administer claims.
When a claim is reported to
When a catastrophe occurs, which in the Company's case usually involves the
weather perils of wind and hail,
In addition to case reserves,
The Company estimates multi-peril crop insurance losses on a quarterly basis based upon historical loss patterns, current crop conditions, current weather patterns, and input from crop loss adjusters. These estimates have proven to be reasonably accurate indicators of the Company's anticipated losses for this line of business.
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Bornhuetter-Ferguson Method - The Bornhuetter-
Paid and Case Incurred Loss Development Method - The Paid and Case Incurred Loss Development Method utilizes ratios of cumulative paid or case incurred losses or LAE at each age of development as a percent of the preceding development age. Selected ratios are then multiplied together to produce a set of loss development factors which when applied to the most current data value, by accident year, develop the estimated ultimate losses or LAE. Ultimate losses or LAE are then selected for each accident year from the various methods employed.
Ratio of Paid ALAE to Paid Loss Method - The Ratio of Paid ALAE to Paid Loss Method utilizes the ratio of paid ALAE to paid losses and is similar to the Paid and Case Incurred Method described above, except that the data projected are the ratios of paid ALAE to paid losses. The projected ultimate ratio is then multiplied by the selected ultimate losses, by accident year, to yield the ultimate ALAE. ALAE reserves are calculated by subtracting paid losses from ultimate ALAE.
The process of estimating loss reserves involves a high degree of judgment and
is subject to a number of variables. These variables can be affected by both
internal and external events, such as changes in claims handling procedures,
inflation, legal trends, increases in the state-dictated minimum liability
limits in the recent case of nonstandard auto insurance, and legislative
changes, among others. The impact of many of these items on ultimate costs for
losses and loss adjustment expenses is difficult to estimate. Loss reserve
estimation is also affected by the volume of claims, the potential severity of
individual claims, the determination of occurrence date for a claim, and
reporting lags (the time between the occurrence of the policyholder event and
when it is actually reported to the insurer). Informed judgment is applied
throughout the process, including the application of various individual
experiences and expertise to multiple sets of data and analyses.
There is an inherent amount of uncertainty in the establishment of liabilities for unpaid losses and LAE. This uncertainty is greatest in the current and most recent accident years due to the relative newness of the claims being reported and the relatively small percentage of these claims that have been reported, investigated, and adjusted by the Company's claims staff. Therefore, the reserves carried in these more recent accident years are generally more conservative than those carried for older accident years. As the Company has the opportunity to investigate and adjust the reported claims, both the case and IBNR reserves are adjusted to more closely reflect the ultimate expected loss.
Other factors that have or can have an impact on the Company's case and IBNR reserves include but are not limited to those described below.
Changes in liability law and public attitudes regarding damage awards
Laws governing liability claims and judicial interpretations thereof can change over time, which can expand the scope of coverage anticipated by insurers when initially establishing reserves for claims. In addition, public attitudes regarding damage awards can result in judges and juries granting higher recoveries for damages than expected by claims personnel when claims are presented. In addition, these changes can result in both increased claim frequency and severity as both plaintiffs and their legal counsel perceive the opportunity for higher damage awards. Reserves established for claims that occurred in prior years would not have anticipated these legal changes and, therefore, could prove to be inadequate for the ultimate losses paid by the Company, causing the Company to experience adverse development and higher loss payments in future years.
Change in claims handling and/or setting case reserves
Changes in Company personnel and/or the approach to how claims are reported, adjusted, and reserved may affect the reserves established by the Company. As discussed above, the setting of IBNR reserves is not an exact science and involves the expert judgment of an actuary. One actuary's reserve opinion may differ slightly from another actuary's opinion. This is the primary reason why the IBNR reserve estimate is customarily reported as a range by a company's actuary, which provides a company with an acceptable "range" to use in establishing its best estimate for IBNR reserves.
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Economic inflation
A sudden and extreme increase in the economic inflation rate could have a significant impact on the Company's case and IBNR reserves. When establishing case reserves, claims personnel generally establish an amount that in their opinion will provide a conservative amount to settle the loss. If the time to settle the claim extends over a period of years, the initial reserve may not anticipate an economic inflation rate that is significantly higher than the current inflation rate. This can also apply to IBNR reserves. Should the economic inflation rate increase significantly, it is likely that the Company may not anticipate the need to adjust the IBNR reserves accordingly, which could lead to the Company being deficient in its IBNR reserves.
Increases or decreases in claim severity for reasons other than inflation
Factors exist that can drive the cost to settle claims for reasons other than
standard inflation. For example, demand surge caused by a very large
catastrophe, as in the case of a hurricane, has an impact on not only the
availability and cost of building materials such as roofing and other materials,
but also on the availability and cost of labor. Other factors such as increased
vehicle traffic in an area not designed to handle the increased congestion and
increased speed limits on busy roads are examples of changes that could cause
claim severity to increase beyond what the Company's historic reserves would
reflect. In addition, unexpected increases in the labor costs and healthcare
costs that underlie insured risks, changes in costs of building materials, or
changes in commodity prices for insured crops may cause fluctuations in the
ultimate development of the case reserves. During 2018, the state of
Actual settlement experience different from historical data trends
When establishing IBNR reserves, the Company's actuary takes into account many of the factors discussed above. One of the more important factors that is considered when setting reserves is the past or historical claim settlement experience. Our actuary considers factors such as the number of files entering litigation, payment patterns, length of time it takes Company claims personnel to settle the claims, and average payment amounts when estimating reserve amounts. Should future settlement patterns change due to the legal environment, Company claims handling philosophy, or personnel, it may have an impact on the future claims payments, which could cause existing reserves to either be redundant (excessive) or deficient (below) compared to the actual loss amount.
Change in Reporting Lag
As discussed above,
Due to the inherent uncertainty underlying loss reserve estimates, final resolution of the estimated liability for unpaid losses and LAE may be higher or lower than the related loss reserves at the reporting date. Therefore, actual paid losses, as claims are settled in the future, may be materially higher or lower in amount than current loss reserves. The Company reflects adjustments to the liability for unpaid losses and LAE in the results of operations during the period in which the estimates are changed.
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Actuarial Loss Reserves
December 31,
2020 2019 2018
Case reserves $ 89,903 $ 90,210 $ 76,150
IBNR reserves 15,847 3,040 10,971
Liability for unpaid losses and LAE 105,750 93,250 87,121 Reinsurance recoverables on losses 8,710 4,045 2,232 Net unpaid losses and LAE
$ 97,040 $ 89,205 $ 84,889 The following tables provides case and IBNR reserves for unpaid losses and LAE by segment. December 31, 2020 Case Reserves IBNR Reserves Total Reserves Private passenger auto$ 14,984 $ 5,327 $ 20,311 Non-standard auto 50,702 (7,366 ) 43,336 Home and farm 7,705 4,032 11,737 Crop 756 15 771 Commercial 10,749 8,340 18,174 All other 5,007 5,499 10,506 Liability for unpaid losses and LAE 89,903 15,847 104,835 Reinsurance recoverables on losses 5,102 3,608 7,795 Net unpaid losses and LAE$ 84,801 $ 12,239 $ 97,040 December 31, 2019 Case Reserves IBNR Reserves Total Reserves Private passenger auto$ 14,115 $ 5,777$ 19,892 Non-standard auto 55,623 (11,645 ) 43,978 Home and farm 7,098 3,405 10,503 Crop 8,411 168 8,579 Commercial 731 345 1,076 All other 4,232 4,990 9,222 Liability for unpaid losses and LAE 90,210 3,040 93,250 Reinsurance recoverables on losses 2,867 1,178 4,045 Net unpaid losses and LAE$ 87,343 $ 1,862$ 89,205 December 31, 2018 Case Reserves IBNR Reserves Total Reserves Private passenger auto$ 13,298 $ 4,856$ 18,154 Non-standard auto 49,109 (2,323 ) 46,786 Home and farm 8,216 2,516 10,732 Crop 2,070 56 2,126 Commercial 427 216 643 All other 3,030 5,650 8,680 Liability for unpaid losses and LAE 76,150 10,971 87,121 Reinsurance recoverables on losses 1,201 1,031 2,232 Net unpaid losses and LAE$ 74,949 $ 9,940$ 84,889 50
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Sensitivity of Major Assumptions Underlying the Liabilities for Unpaid Losses and Loss Adjustment Expenses
Management has identified the impact on earnings of various factors used in establishing loss reserves so that users of the Company's financial statements can better understand how development on prior years' reserves might affect the Company's results of operations.
Total Reserves
As of
Inflation
Inflation is not explicitly selected in the loss reserve analysis. However,
historical inflation is embedded in the estimated loss development factors. The
following table displays the impact on net income, after federal income taxes of
21%, resulting from various changes from the inflation factor implicitly
embedded in the estimated payment pattern as of
Change in Inflation Impact on After-Tax Earnings
-1% $ (1,392 )
1% 1,429
3% 4,402
5% 7,540
Inflation includes actual inflation as well as social inflation that includes future emergence of new classes of losses or types of losses, change in judicial awards, and any other changes beyond assumed levels that affect the cost of claims.
Case Reserves
When a claim is reported, claims personnel establish a case reserve for the
estimated amount of the ultimate payment to the extent it can be determined or
estimated. It is possible that the level of adequacy in the case reserve may
differ from historical levels and/or the claims reporting pattern may change.
The following table displays the impact on net income, after federal income
taxes of 21%, which results from various changes to the level of case reserves
as of
Change in Case Reserves Impact on After-Tax Earnings
-10% $ 7,102
-5% 3,551
-2% 1,420
+2% (1,420 )
+5% (3,551 )
+10% (7,102 )
Investments
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Fair values of interest rate sensitive instruments may be affected by increases and decreases in prevailing interest rates that generally translate, respectively, into decreases and increases in fair values of fixed income securities. The fair values of interest rate sensitive instruments also may be affected by the credit worthiness of the issuer, prepayment options, relative values of other investments, the liquidity of the instrument, and other general market conditions.
For the year ended
December December
31, 2020 31, 2019 Change
Fixed income securities:
Gross unrealized gains $ 16,801 $ 7,595 $ 9,206
Gross unrealized losses (296 ) (354 ) 58
Net fixed income
securities unrealized
gains 16,505 7,241 9,264
Equity securities:
Gross unrealized gains 29,139 22,878 6,261
Gross unrealized losses (1,390 ) (982 ) (408 )
Net equity securities
unrealized gains 27,749 21,896 5,853
Net unrealized gains $ 44,254 $ 29,137 $ 15,117 The fixed income portion of the portfolio experienced an increase in net
unrealized gains of
After the immediate economic impacts of the COVID-19 pandemic in the first half
of the year, capital markets staged a strong rally during the second half of
2020, aided by significant fiscal and monetary support from world central banks
to help the global economy. In
During the fourth quarter of 2020, vaccine rollout and an agreement on the next
round of fiscal stimulus helped renew the risk-on sentiment, which led to new
highs in equities, tighter spreads, and a steeper
The strong recovery in the financial markets led to a substantial increase in
the Company's net unrealized gains from equity securities for the year ended
For the years ended
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For more information on the Company's investments, see Note 6 to the Consolidated Financial Statements, included elsewhere in this Form 10-K.
Fair Value Measurements
Level I:Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level II:Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level II includes fixed income securities with quoted prices that are traded less frequently than exchange traded instruments. Valuation techniques include matrix pricing which is a mathematical technique used widely in the industry to value fixed income securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted prices.
Level III:Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
Should the independent pricing service be unable to provide a fair value
estimate,
The fair value estimates of
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Management reviews the reasonableness of the pricing provided by the independent
pricing service by employing various analytical procedures. Management reviews
all securities to identify recent downgrades, significant changes in pricing,
and pricing anomalies on individual securities relative to other similar
securities. This will include looking for relative consistency across securities
in common sectors, durations, and credit ratings. This review will also include
all fixed income securities rated lower than "A" by Moody's or
For more information on the Company's fair value measurements, see Note 7 to the Consolidated Financial Statements, included elsewhere in this Form 10-K.
Deferred Policy Acquisition Costs and Value of Business Acquired
Certain direct policy acquisition costs consisting of commissions, state premium taxes, and other direct underwriting expenses that vary with and are primarily related to the production of business are deferred and amortized over the effective period of the related insurance policies as the underlying policy premiums are earned.
As in the case of previous acquisitions, no deferred policy acquisition costs
("DAC") were recorded in the acquisition of
At
December 31, 2020 2019
Deferred policy acquisition costs
The method followed in computing DAC limits the amount of deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and LAE, and certain other costs expected to be incurred as the premium is earned. Future changes in estimates, the most significant of which is expected losses and LAE, may require adjustments to DAC. If the estimation of net realizable value indicates that DAC are not recoverable, they would be written off or a premium deficiency reserve would be established.
Income Taxes
Current income taxes represent amounts paid to the federal government and
certain states whose payment is based upon net income (subject to regulatory
adjustments) generated by the Company.
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As of
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Results of Operations
Premiums in the multi-peril crop insurance business are primarily influenced by the number of acres and types of crops insured because the pricing is set by the RMA rather than individual insurance carriers. The expected experience of this business for the calendar year may also significantly affect the reported net earned premiums and losses due to the risk-sharing arrangement with the federal government. Multi-peril crop insurance premiums are generally written in the second quarter, and earned ratably over the period of risk, which extends into the fourth quarter. However, as was the case in 2020, if the Company experiences a higher than average number of prevented planting claims early in the season, additional earned premiums may be recognized in the second quarter due to the shortened risk period.
Premiums in the crop hail insurance business are also generally written in the second quarter, but earned over a shorter period of risk than multi-peril crop insurance.
Premiums in the personal lines of business (private passenger auto and home and farm) are generally written and earned throughout the year. Losses on this business are also incurred throughout the year, but usually are more frequent and/or severe during periods of weather-related activity in the second and third quarters.
Premiums in the commercial lines of business are generally written and earned throughout the year. Losses on this business are also incurred throughout the year, but generally are more frequent during the first and second quarters.
For more information on the Company's results of operations by segment, see Note 22 to the Consolidated Financial Statements, included elsewhere in this Form 10-K.
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Years ended
The consolidated net income forNI Holdings was$41,344 for the year endedDecember 31, 2020 compared to$26,500 for the year endedDecember 31, 2019 . The major components ofNI Holdings' operating revenues and net income for the two periods were as follows: Year Ended December 31, 2020 2019 Revenues: Net premiums earned$ 283,661 $ 246,438 Fee and other income 1,801 2,125 Net investment income 7,271 7,433 Net capital gain on investments 13,624 14,783 Total revenues$ 306,357 $ 270,779 Components of net income: Net premiums earned$ 283,661 $ 246,438 Losses and loss adjustment expenses 168,473 169,710 Amortization of deferred policy acquisition costs and other underwriting and general expenses 85,068 67,258 Underwriting gain 30,120 9,470 Fee and other income 1,801 2,125 Net investment income 7,271 7,433 Net capital gain on investments 13,624 14,783 Income before income taxes 52,816 33,811 Income taxes 11,472 7,311 Net income$ 41,344 $ 26,500
Beginning in
Net Premiums Earned
NI Holdings' net premiums earned for the year endedDecember 31, 2020 increased$37,223 , or 15.1%, to$283,661 compared to$246,438 for the year endedDecember 31, 2019 . Year Ended December 31, 2020 2019 Net premiums earned: Private passenger auto$ 72,009 $ 67,983 Non-standard auto 53,737 57,114 Home and farm 74,879 71,171 Crop 35,718 38,019 Commercial 38,288 4,097 All other 9,030 8,054 Total net premiums earned$ 283,661 $ 246,438 Year Ended December 31, 2020 2019 Net premiums earned: Direct premium$ 301,061 $ 257,661 Assumed premium 6,459 5,897 Ceded premium (23,859 ) (17,120 ) Total net premiums earned$ 283,661 $ 246,438 57
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Direct premiums earned for 2020 increased
Assumed premiums earned increased slightly, primarily related to the assumed
reinsurance business from
Our personal lines of business (private passenger auto, home and farm) continued
to grow significantly in
Losses and LAE
Year Ended December 31,
2020 2019
Net losses and LAE:
Private passenger auto $ 45,511 $ 52,696
Non-standard auto 30,347 32,654
Home and farm 36,745 45,601
Crop 31,379 32,091
Commercial 20,430 2,489
All other 4,061 4,179
Total net losses and LAE $ 168,473 $ 169,710
Year Ended December 31,
2020 2019
Loss and LAE ratio:
Private passenger auto 63.2% 77.5%
Non-standard auto 56.5% 57.2%
Home and farm 49.1% 64.1%
Crop 87.9% 84.4%
Commercial 53.4% 60.8%
All other 45.0% 51.9%
Total loss and LAE ratio 59.4% 68.9%
Net losses for private passenger auto and non-standard auto decreased in 2020 compared to the prior year, due primarily to improved loss frequency as insureds drove fewer miles, primarily during the second quarter of the year. In home and farm, losses and LAE decreased due primarily to a lower frequency of weather-related losses. During 2019, private passenger auto also experienced significant bodily injury and underinsured losses, as well as higher weather-related losses.
For the commercial business, while overall losses increased due to
The 2019 multi-peril crop insurance business ended the year with less than 50%
of the corn in
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During the year 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
Year Ended December 31,
2020 2019
Underlying expenses $ 93,637 $ 69,791
Deferral of policy acquisition costs (60,041 ) (48,721 )
Other underwriting and general expenses 33,596 21,070
Amortization of deferred policy acquisition costs 51,472 46,188
Total reported expenses $ 85,068 $ 67,258 Underlying expenses were
Deferrals of policy acquisition costs were
The expense ratio of 30.0% for the year ended
Underwriting Gain (Loss)
Underwriting gain (loss) measures the pretax profitability of a company's
insurance business. It is derived by subtracting losses and LAE, amortization of
deferred policy acquisition costs, and other underwriting and general expenses
from net premiums earned.
Year Ended December 31,
2020 2019
Underwriting gain (loss):
Private passenger auto $ 6,512 $ (3,599 )
Non-standard auto 2,651 3,383
Home and farm 17,260 5,464
Crop (468 ) 1,532
Commercial 1,500 745
All other 2,665 1,945
Total underwriting gain $ 30,120 $ 9,470
Year Ended December 31,
2020 2019
Combined ratio:
Private passenger auto 91.0% 105.3%
Non-standard auto 95.1% 94.1%
Home and farm 76.9% 92.3%
Crop 101.3% 96.0%
Commercial 96.1% 81.8%
All other 70.5% 75.9%
Total combined ratio 89.4% 96.2%
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The underwriting profitability of the Company for the year ended
The improvement in the private passenger auto combined ratio reflects elevated loss experience during 2019 and favorable loss experience during 2020. Losses during 2019 were impacted by weather-related losses and significant bodily injury and underinsured liability losses. During 2020, a reduction in miles driven due to the COVID-19 pandemic primarily during the second quarter resulted in decreased claims frequency. Claims frequency has mostly returned to normal levels, although the level of large claims has moderated from a year ago.
For the non-standard auto segment, the combined ratio increased slightly year-over-year. The loss and LAE ratio improved as claims frequency for this segment was reduced due to fewer miles driven. However, the expense ratio increased due to Direct Auto, which has a higher expense load than Primero, writing a higher proportion of business in the segment compared to the prior year.
The combined ratio for the home and farm segment improved substantially as we experienced a lower number of weather-related events in 2020. The favorable impact from fewer weather-related losses combined with modest rate adjustments resulted in a profitable year.
For the commercial segment, the results of
For the crop segment, the combined ratio was elevated due to the high percentage of unharvested corn that remained in the field from the 2019 season. As those fields were harvested, the losses were higher than anticipated, resulting in adverse development. The 2020 multi-peril crop ratio was also elevated due to the large number of prevented planting claims submitted during second quarter. The high combined ratio for multi-peril crop was partially offset by favorable loss experience in our crop hail business.
Fee and Other Income
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:
Year Ended December 31,
2020 2019
Average cash and invested assets $ 449,148 $ 394,403
Gross investment income $ 10,519 $ 9,826
Investment expenses 3,248 2,393
Net investment income $ 7,271 $ 7,433
Gross return on average cash and invested assets 2.3% 2.5%
Net return on average cash and invested assets 1.6% 1.9%
Investment income, net of investment expense, decreased
As of
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Net Capital Gain on Investments
Effective
The Company recorded no OTTIs in the years ended
The Company's fixed income securities and equity securities are classified as
available for sale because it will, from time to time, make sales of securities
that are not impaired, consistent with our investment goals and policies. At
Income before Income Taxes
For the year ended
Income Taxes
The valuation allowance against certain deferred income tax assets was
Net Income
For the year ended
Return on Average Equity
For the year ended
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Years ended
The consolidated net income forNI Holdings was$26,500 for the year endedDecember 31, 2019 compared to$31,244 for the prior year. The major components ofNI Holdings' operating revenues and net income for the two periods were as follows: Year Ended December 31, 2019 2018 Revenues: Net premiums earned$ 246,438 $ 195,720 Fee and other income 2,125 6,496 Net investment income 7,433 6,180 Net capital gain on investments 14,783 3,974 Total revenues$ 270,779 $ 212,370 Components of net income: Net premiums earned$ 246,438 $ 195,720 Losses and loss adjustment expenses 169,710 119,088 Amortization of deferred policy acquisition costs and other underwriting and general expenses 67,258 54,117 Underwriting gain 9,470 22,515 Fee and other income 2,125 6,496 Net investment income 7,433 6,180 Net capital gain on investments 14,783 3,974 Income before income taxes 33,811 39,165 Income taxes 7,311 7,921 Net income$ 26,500 $ 31,244 Net Premiums Earned
Year Ended December 31,
2019 2018
Net premiums earned:
Private passenger auto $ 67,983 $ 62,465
Non-standard auto 57,114 27,964
Home and farm 71,171 64,677
Crop 38,019 28,699
Commercial 4,097 3,809
All other 8,054 8,106
Total net premiums earned
Year Ended December 31,
2019 2018
Net premiums earned:
Direct premium $ 257,661 $ 219,600
Assumed premium 5,897 6,514
Ceded premium (17,120 ) (30,394 )
Total net premiums earned $ 246,438 $ 195,720 Direct premiums earned for 2019 increased
Assumed premiums earned decreased slightly, primarily related to crop hail business from Rural Mutual. Ceded premiums earned decreased due to less gain-sharing of multi-peril crop premiums to the federal government.
Our personal lines of business (private passenger auto, home and farm) continued
their strong growth in
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Losses and LAE
NI Holdings' net losses and LAE for the year endedDecember 31, 2019 increased 42.5% to$169,710 compared to$119,088 for the year endedDecember 31, 2018 . The Company's loss and LAE ratio increased to 68.9% for 2019, compared to 60.8% for 2018. Year Ended December 31, 2019 2018 Loss and LAE ratio: Private passenger auto 77.5% 71.3% Non-standard auto 57.2% 51.3% Home and farm 64.1% 66.0% Crop 84.4% 41.5% Commercial 60.8% 39.5% All other 51.9% 50.5% Total loss and LAE ratio 68.9% 60.8%
The Company's overall loss and LAE experience deteriorated year-over-year, primarily with increases in the loss and LAE ratios in the private passenger auto, non-standard auto, crop, and commercial segments.
Net losses for private passenger auto increased in 2019 compared to the prior year, as third quarter weather activity and liability losses each increased compared to a year ago. The loss and LAE ratio for the home and farm segment was at the expected level, with favorable farmowners results offsetting unfavorable homeowners results.
Net losses for non-standard auto included a combination of favorable loss
experience development in Direct Auto, partially offset by unfavorable loss
experience development in Primero. In Primero, the statutory increase in minimum
liability limits in the state of
Our loss experience was above average levels for both our multi-peril crop
business and crop hail business for 2019, compared to favorable loss experience
during 2018. The wet spring and cool summer across
During 2019, reported losses and LAE included
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 24.3% to
Year Ended December 31,
2019 2018
Underlying expenses $ 69,791 $ 58,124
Deferral of policy acquisition costs (48,721 ) (35,863 )
Other underwriting and general expenses 21,070 22,261
Amortization of deferred policy acquisition costs 46,188 31,856
Total reported expenses $ 67,258 $ 54,117 Underlying expenses were
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Expense deferrals were
The expense ratio of 27.3% for the year ended
Underwriting Gain (Loss)
Underwriting gain (loss) measures the pretax profitability of a company's
insurance business. It is derived by subtracting losses and LAE, amortization of
deferred policy acquisition costs, and other underwriting and general expenses
from net premiums earned.
Year Ended December 31,
2019 2018
Underwriting gain (loss):
Private passenger auto $ (3,599 ) $ (589 )
Non-standard auto 3,383 4,093
Home and farm 5,464 2,012
Crop 1,532 13,611
Commercial 745 1,430
All other 1,945 1,958
Total underwriting gain $ 9,470 $ 22,515 The underwriting results of the Company for the year ended
Increased weather activity, and a higher frequency and severity of liability losses for the auto lines, resulted in lower 2019 underwriting results in our private passenger auto and commercial businesses. The homeowners' portion of the home and farm segment also experienced increased weather activity, although the underwriting results for the segment as a whole for 2019 were favorable compared to a year ago based on strong results for our farmowners' business.
The non-standard auto results decreased from last year, as the increase in underwriting gain from the new Direct Auto business was offset by the deterioration of the Primero business. The underwriting gain on crop insurance decreased, due to higher loss ratios for the multi-peril crop business and the crop hail line.
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:
Year Ended December 31,
2019 2018
Average cash and invested assets $ 394,403 $ 337,407
Gross investment income $ 9,826 $ 8,384
Investment expenses 2,393 2,204
Net investment income $ 7,433 $ 6,180
Gross return on average cash and invested assets 2.5% 2.5%
Net return on average cash and invested assets 1.9% 1.8%
Investment income, net of investment expense, increased
As of
Net Capital Gain on Investments
Effective
The Company recorded no other-than-temporary impairments in the year ended
The Company's fixed income securities and equity securities are classified as
available for sale because it will, from time to time, make sales of securities
that are not impaired, consistent with our investment goals and policies. At
Income before Income Taxes
For the year ended
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Income Taxes
The valuation allowance against certain deferred income tax assets was
Net Income
For the year ended
Return on Average Equity
For the year ended
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Financial Position
The major components of
December December
31, 2020 31, 2019
Assets:
Cash and investments $ 494,363 $ 419,923
Premiums and agents' balances
receivable 48,523 36,691
Deferred policy acquisition
costs 23,968 15,399
Receivable from Federal Crop
Insurance Corporation 6,646 14,230
Property and equipment 9,899 7,694
Goodwill and other
intangibles 18,194 2,912
Other assets 16,010 11,310
Total assets $ 617,603 $ 508,159
Liabilities:
Unpaid losses and loss
adjustment expenses $ 105,750 $ 93,250
Unearned premiums 119,363 89,276
Other liabilities 43,618 15,830
Total liabilities 268,731 198,356
Shareholders' equity 348,872 309,803
Total liabilities and equity $ 617,603 $ 508,159 At
At
Total equity increased by
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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 changes in cash and cash equivalents for the years ended
Year Ended December 31,
2020 2019 2018
Net cash flows from operating activities $ 51,010 $ 25,665 $ 20,955
Net cash flows from investing activities 200 (30,458 ) 23,397
Net cash flows from financing activities (12,265 ) (2,025 ) (2,996 )
Net increase (decrease) in cash and cash equivalents
For the year ended
For the year ended
For the year ended
As a standalone entity, and outside of the net proceeds from the IPO,
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The amount available for payment of dividends from
Direct Auto is restricted by the insurance laws of
The amount available for payment of dividends from Direct Auto to
The amount available for payment of dividends from
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Contractual Obligations Table
The following table summarizes, as of
Payments Due by Period
Contractual Less than More than
Obligations Total 1 year 1 - 3 years 3 - 5 years 5 years
Estimated
gross loss &
LAE payments $ 105,750 $ 53,203 $ 32,049 $ 12,253 $ 8,245
Acquisition of
Westminster 20,000 6,667 13,333 - -
Operating
lease
obligations 2,598 249 677 606 1,066
Total $ 128,348 $ 60,119 $ 46,059 $ 12,859 $ 9,311 The timing of the amounts of the gross loss and LAE payments is an estimate based on historical experience and the expectations of future payment patterns. The actual timing and amounts of these payments in the future may vary from the amounts stated above.
Off-Balance Sheet Arrangements
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 5 to the Consolidated Financial Statements, included elsewhere in this Form 10-K.
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