NI HOLDINGS, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is intended to provide a more comprehensive review of
the Company's operating results and financial condition than can be obtained
from reading the Unaudited Consolidated Financial Statements alone. This
discussion should be read in conjunction with the Unaudited Consolidated
Financial Statements and the notes thereto included in "Part I. Item 1.
Financial Statements." Some of the information contained in this discussion and
analysis or set forth elsewhere in this Quarterly Report on Form 10-Q
constitutes forward-looking statements that involve risks and uncertainties.
Please see "Forward-Looking Statements" and "Part II. Item 1A. Risk Factors"
included elsewhere in this Quarterly Report. You should also review "Risk
Factors" included in the Company's 2020 Annual Report for a discussion of
important factors that could cause actual results to differ materially from the
results described, or implied by, the forward-looking statements contained
herein.
All dollar amounts included in Item 2 herein are in thousands.
Results of Operations
property and casualty insurance and crop insurance industries in general. The
operating results of
insurance industry are subject to significant variations due to competition,
weather, catastrophic events, changes in regulation, general economic
conditions, rising medical expenses, judicial trends, fluctuations in interest
rates, and other changes in the investment environment.
be, influenced by market conditions. Pricing in the property and casualty
insurance industry historically has been cyclical. During a soft market cycle,
price competition is more significant than during a hard market cycle and makes
it difficult to attract and retain properly priced business. During a hard
market cycle, it is more likely that insurers will be able to increase their
rates or profit margins. A hard market typically has a positive effect on
premium growth. The markets that
requires management to regularly monitor the Company's performance and
competitive position by line of business and geographic market to schedule
appropriate rate actions.
Premiums in the multi-peril crop insurance business are primarily influenced by
the number of acres, commodity prices, and types of crops insured because the
rates are established by the
Department of Agriculture
expected loss experience of the multi-peril crop insurance 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 generally 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 risk
period, recognition of earned premiums may be accelerated 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, home and
farm) are generally written and earned throughout the year based on their
coverage periods. Losses on this business are also incurred throughout the year,
but usually are more frequent and/or severe during periods of weather-related
activity.
Premiums in the commercial lines of business are generally written and earned
throughout the year. Losses on this business are also incurred throughout the
year.
For more information on the Company's results of operations by segment, see Note
19 to the Unaudited Consolidated Financial Statements, included elsewhere in
this Form 10-Q.
Beginning in
related economic conditions began to impact the Company's results. The immediate
financial impact to the Company was volatility in our investment portfolio and
significant declines in fair value on the Company's equity investments,
attributable to the disruption in global financial markets. The Company's
underwriting results, especially in the private passenger auto and non-standard
auto segments, were impacted during the second and third quarters of 2020 as a
result of fewer miles being driven and the increased unemployment rate in our
During the first nine months of 2021, we have continued to see a reduced impact
from COVID-19 as economic activity has returned to near pre-pandemic levels.
However, a possible resurgence of COVID-19 could impact our results.
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The below discussion of results of operations for
non-GAAP financial measures, including loss and LAE ratio, expense ratio,
combined ratio, premiums written, and underwriting gain (loss). For a
description of these non-GAAP financial measures, see the section titled
"Non-GAAP Financial Measures" below.
Three and Nine Months ended
The consolidated net loss for
the nine months ended
the nine months ended
The major components ofNI Holdings' operating revenues and net income (loss) were as follows: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Revenues: Net premiums earned$ 82,173 $ 73,342 $ 221,589 $ 214,120 Fee and other income 501 524 1,338 1,332 Net investment income 1,713 1,886 4,959 5,875 Net capital gain on investments 222 5,102 10,734 1,380 Total revenues 84,609 80,854 238,620 222,707 Components of net income: Net premiums earned 82,173 73,342 221,589 214,120 Losses and loss adjustment expenses 65,742 53,836 165,549 136,622 Amortization of deferred policy acquisition costs and other underwriting and general expenses 25,348 22,144 70,175 61,928 Underwriting gain (loss) (8,917 ) (2,638 ) (14,135 ) 15,570 Fee and other income 501 524 1,338 1,332 Net investment income 1,713 1,886 4,959 5,875 Net capital gain on investments 222 5,102 10,734 1,380 Income (loss) before income taxes (6,481 ) 4,874 2,896 24,157 Income tax expense (benefit) (1,622 ) 1,188 707 5,259 Net income (loss)$ (4,859 ) $ 3,686 $ 2,189 $ 18,898 38
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Net Premiums Earned
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net premiums earned:
Direct premium $ 93,740 $ 79,455 $ 249,542 $ 224,300
Assumed premium 1,336 1,372 6,300 5,655
Ceded premium (12,903 ) (7,485 ) (34,253 ) (15,835 )
Total net premiums earned
increased
2020
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net premiums earned:
Private passenger auto $ 18,491 $ 17,947 $ 54,057 $ 52,632
Non-standard auto 14,889 13,839 43,045 40,124
Home and farm 18,775 18,548 54,602 53,937
Crop 12,724 9,719 21,124 33,450
Commercial 14,798 10,773 41,156 26,967
All other 2,496 2,516 7,605 7,010
Total net premiums earned
Below are comments regarding significant changes in the net premiums earned by
business segment:
Private passenger auto - Net premiums earned for the third quarter of 2021
increased
the first nine months of 2021 increased
months of 2020. Premiums have been impacted by continued soft market conditions
in the segment.
Non-standard auto - Net premiums earned for the third quarter of 2021 increased
first nine months of 2021 increased
of 2020. The segment has benefited from the improved economic environment in the
Home and farm - Net premiums earned for the third quarter of 2021 increased
nine months of 2021 increased
The relatively flat premium growth on both a quarterly and year-to-date basis
was due to competitive market conditions in this segment and the related rate
reduction taken in early 2021 in the
business.
Crop - Net premiums earned for the third quarter of 2021 increased
30.9%, from the third quarter of 2020. Net premiums earned for the first nine
months of 2021 decreased
The increase in third quarter 2021 was primarily the result of accelerated
recognition of premiums earned in 2020 prior to the third quarter. This
acceleration was due to high levels of prevented-plant claims in the spring of
2020 which shortened the period of risk. On a year-to-date basis, direct earned
premiums increased by
multi-peril crop business. However, this increase was offset by a large increase
in ceded earned premiums as a result of significant multi-peril crop losses from
this year's extreme drought conditions across North and
placed a higher number of multi-peril crop policies in the assigned risk fund of
the Standard Reinsurance Agreement for 2021, resulting in higher levels of
premiums and losses being ceded to the federal government.
Commercial - Net premiums earned for the third quarter of 2021 increased
or 37.4%, from the third quarter of 2020. Net premiums earned for the first nine
months of 2021 increased
The increase
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in both periods was primarily driven by growth in our Westminster commercial
business as a result of a continuation of favorable market conditions, the
positive impact of Westminster's financial size category, and the AM Best rating
upgrade.
All other - Net premiums earned for the third quarter of 2021 decreased$20 , or 0.8%, from the third quarter of 2020. Net premiums earned for the first nine months of 2021 increased$595 , or 8.5%, from the first nine months of 2020. Net premiums earned increased modestly through nine months related to our participation in an assumed domestic and international reinsurance pool of business. Losses and LAE Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net losses and LAE: Direct losses and LAE$ 87,453 $ 59,936 $ 201,630 $ 153,203 Assumed losses and LAE 2,308 2,436 5,216 3,538 Ceded losses and LAE (24,019 ) (8,536 ) (41,297 ) (20,119 ) Total net losses and LAE$ 65,742 $ 53,836 $ 165,549 $ 136,622
increased
2020
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net losses and LAE:
Private passenger auto $ 17,130 $ 13,570 $ 44,289 $ 33,323
Non-standard auto 9,620 9,425 25,910 23,560
Home and farm 16,155 13,437 41,995 30,835
Crop 12,482 9,225 22,375 30,699
Commercial 7,770 5,577 25,433 14,529
All other 2,585 2,602 5,547 3,676
Total net losses and LAE $ 65,742 $ 53,836 $ 165,549 $ 136,622
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Loss and LAE ratio:
Private passenger auto 92.6% 75.6% 81.9% 63.3%
Non-standard auto 64.6% 68.1% 60.2% 58.7%
Home and farm 86.0% 72.4% 76.9% 57.2%
Crop 98.1% 94.9% 105.9% 91.8%
Commercial 52.5% 51.8% 61.8% 53.9%
All other 103.6% 103.4% 72.9% 52.4%
Total loss and LAE ratio 80.0% 73.4% 74.7% 63.8%
Below are comments regarding significant changes in the net losses and LAE, and
the net loss and LAE ratios, by business segment:
Private passenger auto - The net loss and LAE ratio deteriorated 17.0 percentage
points and 18.6 percentage points in the three- and nine-month periods ended
the three- and nine-month periods ended
periods in 2020 was a result of a return to average loss frequency due to
increased miles driven by our insureds compared to 2020 when pandemic-related
restrictions were still in place. Loss experience in 2021 has also been
adversely impacted by an increase in uninsured/underinsured motorist liability
claims frequency. The continued soft market has limited our ability to implement
the needed rate increases while still remaining competitive.
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Non-standard auto - The net loss and LAE ratio was relatively consistent with
the prior year, improving 3.5 percentage points and deteriorating 1.5 percentage
points in the three- and nine-month periods ended
the same periods in 2020. Direct Auto has experienced modest elevations in loss
frequency and severity compared to 2020 despite increased miles being driven
compared to 2020. Overall net losses and LAE have increased on both a quarterly
and year-to-date basis due to strong year-to-date direct written premium growth
at Direct Auto. These profitable results, on both a quarterly and
year-to-date-basis, have been offset by Primero's higher loss frequency and
severity due largely to the continued economic challenges in the
market.
Home and farm - The net loss and LAE ratio deteriorated 13.6 percentage points
and 19.7 percentage points in the three- and nine-month periods ended
30, 2021
average weather-related losses in 2021. These losses included the June
catastrophe event in
in
Crop - The net loss and LAE ratio deteriorated 3.2 percentage points and 14.1
percentage points in the three- and nine-month periods ended
compared to the same periods in 2020. The extreme drought conditions across
North and
losses. However, in anticipation of the dry weather, we placed a higher number
of multi-peril crop policies in the assigned risk fund of the Standard
Reinsurance Agreement for 2021, resulting in increased premiums and losses ceded
to the federal government.
Commercial - The net loss and LAE ratio deteriorated 0.7 percentage points and
7.9 percentage points in the three- and nine-month periods ended
2021
was primarily due to increased fire loss frequency in the Westminster book of
business during the first and second quarters. Westminster had a strong third
quarter as the Company continued to benefit from favorable market conditions,
along with experiencing improved loss frequency and severity.
All other - The net loss and LAE ratio deteriorated 0.2 percentage points and
20.5 percentage points in the three- and nine-month periods ended
2021
nine-month periods ended
was primarily due to elevated loss severity in our assumed domestic and
international reinsurance pool of business, in particular anticipated losses
associated with Hurricane Ida.
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
ended
These expenses increased
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Underlying expenses $ 21,167 $ 21,825 $ 71,683 $ 70,414
Deferral of policy
acquisition costs (8,717 ) (14,742 ) (47,879 ) (47,763 )
Other underwriting
and general expenses 12,450 7,083 23,804 22,651
Amortization of
deferred policy
acquisition costs 12,898 15,061 46,371 39,277
Total reported
expenses $ 25,348 $ 22,144 $ 70,175 $ 61,928
Underlying expenses for the three months ended
ended
Expense deferrals were
compared to 2020, while amortization of those costs was
Expense deferrals were
compared to 2020, while amortization of those costs was
These nine-month increases were primarily due to strong year-over-year growth in
our commercial and non-standard auto segments which generally pay higher agent
commissions than our other lines, partially offset by adjustments to our
methodology primarily impacting our private passenger auto and home and farm
segments. In addition, under acquisition accounting, there was no deferred
policy acquisition costs reported on the acquisition balance sheet of
Westminster, which had the impact of decreasing 2020 amortization of deferred
policy acquisition costs relative to future years. Offsetting this impact, the
Company recorded an intangible asset, referred to as the value of business
acquired, on its acquisition
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balance sheet which was amortized during 2020 as a component of other
underwriting and general expenses. As our mix of business has shifted and these
premiums continue to be earned, the related deferral and amortization of
expenses have also changed.
Underwriting Gain (Loss) and Combined Ratio
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Underwriting gain (loss):
Private passenger auto $ (4,531 ) $ (726 ) $ (6,250 ) $ 5,061
Non-standard auto (741 ) (726 ) 186 1,082
Home and farm (4,007 ) (396 ) (4,704 ) 8,000
Crop (622 ) (1,048 ) (4,082 ) (791 )
Commercial 1,771 907 674 596
All other (787 ) (649 ) 41 1,622
Total underwriting gain (loss)
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Combined ratio:
Private passenger auto 124.5% 104.0% 111.6% 90.4%
Non-standard auto 105.0% 105.2% 99.6% 97.3%
Home and farm 121.3% 102.1% 108.6% 85.2%
Crop 104.9% 110.8% 119.3% 102.4%
Commercial 88.0% 91.6% 98.4% 97.8%
All other 131.5% 125.8% 99.5% 76.9%
Combined ratio 110.9% 103.6% 106.4% 92.7%
The results from underwriting operations decreased
three- and nine-month periods ended
periods in 2020.
The overall combined ratio deteriorated 7.3 percentage points and 13.7
percentage points in the three- and nine-month periods ended
compared to the same periods in 2020.
The primary drivers behind the elevated combined ratio on both a quarterly and
year-to-date basis were the extreme drought conditions across North and
Dakota
frequency of private passenger and non-standard auto physical damage claims; and
higher levels of uninsured/underinsured motorist liability claims in private
passenger auto.
These elevated losses have been partially offset by continued profitable and
strong growth from Direct Auto in the non-standard segment, along with increased
profitability and growth from Westminster's commercial business, particularly
during the third quarter.
Fee and Other Income
2020
component in measuring its profitability. Fee income on this business decreased
slightly to
three months ended
2020
for the nine months ended
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Net Investment Income
The following table sets forth our average cash and invested assets, net
investment income, and return on average cash and invested assets for the
reported periods:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Average cash and
invested assets $ 503,538 $ 457,238 $ 499,226 $ 437,845
Gross investment
income $ 2,536 $ 2,514 $ 7,519 $ 8,025
Investment expenses 823 628 2,560 2,150
Net investment
income $ 1,713 $ 1,886 $ 4,959 $ 5,875
Gross return on
average cash and
invested assets 2.0% 2.2% 2.0% 2.4%
Net return on
average cash and
invested assets 1.4% 1.7% 1.3% 1.8%
Investment income, net of investment expense, decreased
months ended
2020
months ended
2020
reinvestment rates in the fixed income portfolio.
The Company's fixed-income portfolio book yield declined 27 basis points
year-over-year, from 2.72% at
This was driven by a combination of factors, including a persistent low
reinvestment rate environment, ongoing maturities of existing holdings with high
embedded yields, and significant cash inflows to the investment portfolio from
the Company's business operations. The dividend yield of the equity
portfolio remained constant despite the ongoing rally in
given a rotation of the equity allocation into high dividend equities.
Net Capital Gain on Investments
Net capital gain on investments consisted of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Gross realized gains $ 2,805 $ 916 $ 9,766 $ 3,643
Gross realized
losses, excluding
other-than-temporary
impairment losses (72 ) (280 ) (256 ) (1,622 )
Net realized gain on
investments 2,733 636 9,510 2,021
Change in net
unrealized gain on
equity securities (2,511 ) 4,466 1,224 (641 )
Net capital gain on
investments $ 222 $ 5,102 $ 10,734 $ 1,380
for the three and nine months ended
to net realized capital gains of
ended
other-than-temporary losses during any of the periods presented.
the change in unrealized appreciation of its equity securities for the three and
nine months ended
2020
was a reflection of the market recovery in the third quarter of 2020 following
the severe declines experienced at the height of the COVID-19 lockdown.
Additionally, net realized gains taken on sales during third quarter 2021
contributed to the reduction in unrealized gains as equity markets remained
relatively flat. From a year-to-date comparison perspective, the net gain
increased in 2021 due to the continued strong performance in the
markets in comparison with 2020.
The Company's fixed income securities are classified as available for sale
because we will, from time to time, make sales of securities that are not
impaired, consistent with our investment goals and policies. At
2021
and net unrealized gains on equity securities of
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At
securities of
Income (Loss) before Income Taxes
For the three months ended
30, 2020
underwriting profitability.
For the nine months ended
30, 2020
underwriting profitability, partially offset by the increase in net capital gain
on investments.
Income Tax Expense (Benefit)
months ended
2021 was 25.0% compared to an effective tax rate of 24.4% for the third quarter
of 2020.
ended
2021 was 24.4% compared to an effective tax rate of 21.8% for the first nine
months of 2020.
A portion of the effective tax rate is due to
Net Income (Loss)
For the three months ended
non-controlling interest of
three months ended
to reduced underwriting profitability.
For the nine months ended
non-controlling interest of
nine months ended
attributable to reduced underwriting profitability, partially offset by the
increase in net capital gain on investments.
Return on Average Equity
For the three months ended
on average equity, after non-controlling interest, of -5.5% compared to
annualized return on average equity, after non-controlling interest, of 4.6% for
the three months ended
For the nine months ended
on average equity, after non-controlling interest, of 0.9% compared to
annualized return on average equity, after non-controlling interest, of 8.0% for
the nine months ended
Average equity is calculated as the average between beginning and ending equity
excluding non-controlling interest for the period.
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Financial Position
The major components of
September December
30, 2021 31, 2020
Assets:
Cash and investments $ 495,676 $ 494,363
Premiums and agents'
balances receivable 82,388 48,523
Deferred policy
acquisition costs 25,476 23,968
Reinsurance recoverables
on losses 42,678 8,710
Property and equipment 9,949 9,899
Receivable from Federal
Crop Insurance Corporation 9,362 6,646
Goodwill and other
intangibles 17,840 18,194
Other assets 13,117 7,300
Total assets $ 696,486 $ 617,603
Liabilities:
Unpaid losses and loss
adjustment expenses $ 179,576 $ 105,750
Unearned premiums 137,099 119,363
Deferred income taxes 6,100 8,757
Westminster consideration
payable 12,920 19,287
Other liabilities 16,815 15,574
Total liabilities 352,510 268,731
Shareholders' equity 343,976 348,872
Total liabilities and
shareholders' equity $ 696,486 $ 617,603
At
from
operations. Premiums and agents' balances receivable increased due to the
recognition of crop insurance written premiums. Reinsurance recoverables on
losses increased primarily due to significantly higher multi-peril crop losses
along with recoveries associated with the June catastrophe event in
Dakota
increased due to the significantly higher multi-peril crop losses. Deferred
policy acquisition costs increased primarily due to strong year-to-date premium
growth in the non-standard auto and commercial segments.
At
higher loss experience during the first nine months of 2021, especially the
multi-peril crop business. Unearned premiums increased due to an increase in
direct written premiums in all segments including the multi-peril crop business.
The first installment of
Westminster during the first quarter of 2021. Other liabilities increased due to
commission and other expense accruals.
Total shareholders' equity decreased by
net income of
a decrease of
which generally fluctuates with market interest rates at the measurement dates.
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Principal Revenue Items
The Company derives its revenue primarily from net premiums earned, net
investment income, and net capital gain (loss) on investments.
Gross and net premiums written
Gross premiums written is equal to direct premiums written and assumed premiums
before the effect of ceded reinsurance. Gross premiums written are recognized
upon sale of new insurance contracts or renewal of existing contracts. Net
premiums written is equal to gross premiums written less premiums ceded or paid
to reinsurers (ceded premiums written).
Premiums earned
Premiums earned is the earned portion of net premiums written. Gross premiums
written include all premiums recorded by an insurance company during a specified
policy period. Insurance premiums on property and casualty policies are
recognized in proportion to the underlying risk insured and are earned ratably
over the duration of the policies or, in the case of crop insurance, over the
period of risk to the Company. At the end of each accounting period, the portion
of the premiums that is not yet earned is included in unearned premiums and is
realized as revenue in subsequent periods over the remaining term of the policy
or period of risk. The Company's property and casualty policies, other than
certain types of auto and non-standard auto policies, typically have a term of
twelve months.
Due to the nature of the crop planting and harvesting cycle and the deadlines
for filing and processing claims under the federal crop insurance program,
insurance premiums for crop insurance are recognized and earned during the
period of risk, which usually begins in spring and ends with harvest in the
fall. In the case of prevented planting claims, the period of risk is shortened
to the date a valid prevented planting claim is filed, when the Company believes
the period of risk has ended. Under the federal crop insurance program, farmers
must purchase crop insurance with respect to spring planted crops by
By
crop. On
which is due and payable by the farmer by
the premium by such date, the insurer must essentially provide a loan to the
farmer in an amount equal to the premium at an annual interest rate of 15%
because the insurer is required to pay the farmer's portion of the premium to
the
whether the farmer pays the premium to the insurer. Except for claims occurring
in the spring (primarily for prevented planting and required replanting claims),
claims are required to be filed with the FCIC by
exists for crops planted in the fall, such as winter wheat, but the vast
majority of crop insurance written by the Company covers crops planted in the
spring.
Net investment income and net capital gain (loss) on investments
The Company invests its excess cash in fixed income and equity securities.
Investment income includes interest and dividends earned on invested assets, and
is reported net of investment-related expenses. Net capital gains and losses on
investments are reported separately from net investment income. The Company
recognizes realized capital gains when investments are sold for an amount
greater than their cost or amortized cost (in the case of fixed income
securities) and realized capital losses when investments are written down as a
result of other-than-temporary impairments or are sold for an amount less than
their cost or amortized cost. The Company recognizes changes in unrealized gains
and losses of equity securities in net income as part of net capital gains and
losses on investments. These gains and losses may be significant given the fair
market value of the equity portfolio and the inherent volatility in equity
markets.
The changes in unrealized gains and losses on fixed income securities are
recorded in other comprehensive income (loss), net of income taxes.
The portfolio of investments for
managed by
managers have discretion to buy and sell securities in accordance with the
investment policy approved by our Board of Directors.
Principal Expense Items
The Company's expenses consist primarily of losses and loss adjustment expenses
("LAE"), amortization of deferred policy acquisition costs, other underwriting
and general expenses, and income taxes.
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Losses and Loss Adjustment Expenses
Losses and LAE represent the largest expense item and include (1) claim payments
made, (2) estimates for future claim payments and changes in those estimates
from prior periods, and (3) costs associated with investigating, defending, and
adjusting claims, including legal fees.
Amortization of deferred policy acquisition costs and other underwriting and
general expenses
Expenses incurred to underwrite risks are referred to as policy acquisition
costs. Policy acquisition costs consist of commission expenses, state premium
taxes, and certain other underwriting expenses that vary with and are primarily
related to the writing and acquisition of new and renewal business. These policy
acquisition costs are deferred and amortized over the effective period of the
related insurance policies. Other underwriting and general expenses consist of
salaries, professional fees, office supplies, depreciation, and all other
operating expenses not otherwise classified separately.
Income taxes
Current income taxes represent amounts paid or payable to the federal government
and certain states whose payment is based upon net income (subject to regulatory
adjustments) generated by the Company. As noted above, it does not include state
premium taxes that are based purely on the collection of policyholder premiums.
income taxes. Deferred income taxes arise from the recognition of temporary
differences between financial statement carrying amounts and the income tax
bases of its assets and liabilities. A valuation allowance is provided when it
is more likely than not that some portion of the deferred income tax asset will
not be realized. The effect of a change in tax rates is recognized in the period
of the enactment date. Total income taxes reflect both current income taxes and
the change in the net deferred income tax asset or liability, excluding amounts
attributed to accumulated other comprehensive income.
Non-GAAP Financial Measures
Our consolidated financial statements are prepared on the basis of GAAP. We also
prepare financial statements for each of our insurance company subsidiaries
based on statutory accounting principles and file them with insurance regulatory
authorities in the states where they do business. Management evaluates our
operations by monitoring key measures of growth and profitability. We believe
that disclosure of certain non-GAAP financial measures enhances investor
understanding of our financial performance. The following provides further
explanation of the key measures that management uses to evaluate our results:
Loss and LAE ratio
The loss and LAE ratio is the ratio (expressed as a percentage) of losses and
LAE incurred to premiums earned. The Company measures this ratio on an accident
and calendar year basis to measure underwriting profitability. An accident year
loss ratio measures losses and LAE for insured events occurring in a particular
year, regardless of when they are reported, as a percentage of premiums earned
during that year. A calendar year loss ratio measures losses and LAE for insured
events occurring during a particular year and the change in loss reserves from
prior policy years as a percentage of premiums earned during that year.
Expense ratio
The expense ratio is the ratio (expressed as a percentage) of amortization of
deferred policy acquisition costs and other underwriting and general expenses
(attributable to insurance operations) to premiums earned, and measures the
Company's operational efficiency in producing, underwriting, and administering
our insurance business.
Combined ratio
The Company's combined ratio is the ratio (expressed as a percentage) of the sum
of losses and LAE incurred and expenses to premiums earned, and measures our
overall underwriting profit. A combined ratio below 100% generally indicates a
profitable book of business.
Premiums written
Net premiums written comprise direct and assumed premiums written, less ceded
premiums written. Direct premiums written are the total policy premiums, net of
cancellations, associated with policies issued and underwritten by the Company.
Assumed premiums written are the total premiums associated with the insurance
risk transferred to us by other insurance and reinsurance companies pursuant to
reinsurance contracts. Ceded premiums written is the portion of direct premiums
written that we
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cede to our reinsurers under our reinsurance contracts. Net premiums earned are
recognized ratably over the life of a policy and differ from net premiums
written, which are recognized on the effective date of the policy.
Underwriting gain (loss)
Underwriting gain (loss) measures the pre-tax profitability of the Company's
insurance operations. It is derived by subtracting losses and LAE, amortization
of deferred policy acquisition costs, and other underwriting and general
expenses from net premiums earned. Each of these items is presented as a caption
in the Company's Consolidated Statements of Operations.
Critical Accounting Policies
The preparation of financial statements in accordance with GAAP requires both
the use of estimates and judgment relative to the application of appropriate
accounting policies. The Company is required to make estimates and assumptions
in certain circumstances that affect amounts reported in the Consolidated
Financial Statements and related footnotes. We evaluate these estimates and
assumptions on an ongoing basis based on historical developments, market
conditions, industry trends, and other information that we believe to be
reasonable under the circumstances. There can be no assurance that actual
results will conform to these estimates and assumptions or that reported results
of operations will not be materially and adversely affected by the need to make
accounting adjustments to reflect changes in these estimates and assumptions
from time to time. Our critical accounting policies are more fully described in
our Management's Discussion and Analysis of Financial Condition and Results
of Operations presented in Part II, Item 7 of our Annual Report on Form 10-K for
the year ended
accounting policies from
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Liquidity and Capital Resources
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
planned to use for strategic acquisitions.
In 2018, we used
we acquired Westminster for
terms of the acquisition agreement included payment of the remaining
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 installment was
paid during the first quarter of 2021.
We currently anticipate that cash generated from our operations and available
from our investment portfolio, along with the remaining IPO net proceeds, will
be sufficient to fund our operations.
The Company's philosophy is to provide sufficient cash flows from operations to
meet its obligations in order to minimize the forced sales of investments. The
Company maintains a portion of its investment portfolio in relatively short-term
and highly liquid assets to ensure the availability of funds.
The change in cash and cash equivalents for the nine months ended
2021
AM Best Affirms Credit Ratings of Wawanesa General Insurance Company and Wawanesa Life Insurance Company
NI Holdings, Inc. Files Results for Third Quarter and Nine Months Ended September 30, 2021
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