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 on Form 10-
Item 1A "Risk Factors" included in the Company's 2021 Annual Report for a
discussion of important factors, including COVID-19 or a future pandemic, and
changing climate conditions, that could cause actual results to differ
materially from the results described, or implied by, the forward-looking
statements contained herein.
All dollar amounts included in Item 2 herein are in thousands.
Results of Operations
The consolidated net income for the Company was
ended
ended
The major components of the Company's operating revenues and net income were as
follows:
Three Months Ended March 31,
2022 2021
Revenues:
Net premiums earned $ 69,587 $ 63,135
Fee and other income 428 317
Net investment income 1,653 1,536
Net investment gains (losses) (5,528 ) 5,811
Total revenues $ 66,140 $ 70,799
Components of net income:
Net premiums earned $ 69,587 $ 63,135
Losses and loss adjustment expenses 40,129 36,889
Amortization of deferred policy acquisition costs and
other underwriting and general expenses
23,404 21,238 Underwriting gain 6,054 5,008 Fee and other income 428 317 Net investment income 1,653 1,536 Net investment gains (losses) (5,528 ) 5,811 Income before income taxes 2,607 12,672 Income tax expense 568 2,890 Net income $ 2,039$ 9,782 Net Premiums Earned Three Months Ended March 31, 2022 2021 Net premiums earned: Direct premium$ 73,399 $ 68,743 Assumed premium 1,861 1,448 Ceded premium (5,673 ) (7,056 ) Total net premiums earned$ 69,587 $ 63,135 31
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The Company's net premiums earned for the three months ended
increased
Three Months Ended March 31,
2022 2021
Net premiums earned:
Private passenger auto $ 18,742 $ 17,498
Non-standard auto 14,378 13,258
Home and farm 19,212 17,454
Crop (13 ) 47
Commercial 14,188 12,338
All other 3,080 2,540
Total net premiums earned $ 69,587 $ 63,135
Below are comments regarding net premiums earned by business segment:
Private passenger auto - Net premiums earned for the first quarter of 2022
increased
new business growth and recent rate increases in
Non-standard auto - Net premiums earned for the first quarter of 2022 increased
benefit from the improved economic environment in the
non-standard auto business is concentrated.
Home and farm - Net premiums earned for the first quarter of 2022 increased
business and exposure growth in
Crop - Net premiums earned by the Company for the first quarter of any year are
the result of minor prior crop year premium adjustments which typically occur
annually during first quarter. Multi-peril crop and crop hail insurance premiums
are generally written in the second quarter and earned ratably over the
remainder of the calendar year.
Commercial - Net premiums earned for the first quarter of 2022 increased
or 15.0%, from the first quarter of 2021. The increase was primarily driven by
exposure growth as well as continued increases in both rate and new business
production.
All other - Net premiums earned for the first quarter of 2022 increased
21.3%, from the first quarter of 2021. Net premiums earned increased as a result
of our increased participation during 2021 in an assumed domestic and
international reinsurance pool of business. As of
made the decision to non-renew its participation in these pools. However, these
results are communicated one to three months following the end of the reporting
period. Accordingly, these results are generally reflected in the Company's
financial statements on a quarter lag basis.
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Losses and Loss Adjustment Expenses
Three Months Ended March 31,
2022 2021
Net losses and loss adjustment expenses:
Direct losses and loss adjustment expenses $ 45,495 $ 37,578
Assumed losses and loss adjustment expenses 10 948
Ceded losses and loss adjustment expenses (5,376 ) (1,637 )
Total net losses and loss adjustment expenses $ 40,129 $ 36,889
The Company's net losses and loss adjustment expenses for the three months ended
Three Months Ended March 31,
2022 2021
Net losses and loss adjustment expenses:
Private passenger auto $ 14,711 $ 12,254
Non-standard auto 8,491 4,800
Home and farm 6,840 7,632
Crop (166 ) 561
Commercial 10,017 10,399
All other 236 1,243
Total net losses and loss adjustment expenses $ 40,129 $ 36,889
Three Months Ended March 31,
2022 2021
Loss and loss adjustment expense ratio:
Private passenger auto 78.5% 70.0%
Non-standard auto 59.1% 36.2%
Home and farm 35.6% 43.7%
Crop n/a n/a
Commercial 70.6% 84.3%
All other 7.7% 48.9%
Total loss and loss adjustment expense ratio 57.7% 58.4%
Below are comments regarding significant changes in the net losses and loss
adjustment expenses, and the net loss and loss adjustment expense ratios, by
business segment:
Private passenger auto - The net loss and loss adjustment expense ratio
increased 8.5 percentage points in the three-month period ended
compared to the same period in 2021. The increase was driven by elevated loss
frequency as a result of increased severe winter weather activity and an
increase in the number of uninsured/underinsured motorist liability claims
compared to the prior year quarter. Loss experience for the quarter was also
adversely impacted by elevated severity due to inflationary factors. We are in
the process of taking necessary rate actions as a result of the increased loss
activity.
Non-standard auto - The net loss and loss adjustment expense ratio increased
22.9 percentage points in the three-month period ended
to the same period in 2021. The increase was driven by elevated loss severity as
a result of inflationary factors as well as elevated loss frequency primarily
due to increased miles driven in our
the process of taking necessary rate and underwriting actions as a result of the
increased loss activity.
Home and farm - The net loss and loss adjustment expense ratio improved 8.1
percentage points in the three-month period ended
same period in 2021. This segment is typically more profitable during first and
fourth quarters as a result of lower levels of severe weather activity.
Crop - The net losses and loss adjustment expenses during the first quarter of
any year are reflective of minor prior crop year adjustments which typically
occur annually during first quarter.
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Commercial - The net loss and loss adjustment expense ratio improved 13.7 points
in the three-month period ended
2021. This improvement was primarily due to decreased fire loss frequency in the
Westminster book of business in 2022.
All other - The net loss and loss adjustment expense ratio improved 41.2
percentage points in the three-month period ended
same period in 2021. This improvement was the result of favorable prior year
development in our assumed domestic and international reinsurance pool of
business.
Amortization of Deferred Policy Acquisition Costs
Amortization of deferred policy acquisition costs increased
the three months ended
increase was primarily due to strong year-over-year growth in our commercial and
non-standard auto segments which generally pay higher agent commissions than our
other lines, as well as growth in our other segments.
Other Underwriting and General Expenses
Other underwriting and general expenses increased
months ended
primarily reflected the impact of strategic initiatives and higher business
volumes.
Underwriting Gain (Loss) and Combined Ratio
Three Months Ended March 31,
2022 2021
Underwriting gain (loss):
Private passenger auto $ (1,737 ) $ (115 )
Non-standard auto (204 ) 4,044
Home and farm 6,399 4,211
Crop 705 (1,050 )
Commercial (1,165 ) (2,676 )
All other 2,056 594
Total underwriting gain $ 6,054 $ 5,008
Three Months Ended March 31,
2022 2021
Combined ratio:
Private passenger auto 109.3% 100.7%
Non-standard auto 101.4% 69.5%
Home and farm 66.7% 75.9%
Crop n/a n/a
Commercial 108.2% 121.7%
All other 33.2% 76.6%
Combined ratio 91.3% 92.1%
Underwriting gain (loss) measures the pre-tax profitability of our insurance
operations. It is derived by subtracting losses and loss adjustment expenses,
amortization of deferred policy acquisition costs, and other underwriting and
general expenses from net premiums earned. The combined ratio represents the sum
of these losses and expenses as a percentage of net premiums earned, and
measures our overall underwriting profit.
The total underwriting gain increased
period ended
The overall combined ratio improved 0.8 percentage points in the three-month
period ended
Fee and Other Income
The Company had fee and other income of
31, 2022
attributable to the non-standard auto segment is a key component in measuring
its profitability. Fee income on this business increased slightly to
the three months ended
31, 2021
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Net Investment Income
The following table sets forth our average cash and invested assets, net
investment income, and return on average cash and invested assets for the
reported periods:
Three Months Ended March 31,
2022 2021
Average cash and invested assets $ 499,385 $ 494,914
Net investment income $ 1,653 $ 1,536
Gross return on average cash and invested assets 2.1% 2.0%
Net return on average cash and invested assets 1.3% 1.2%
Net investment income increased
compared to the three months ended
driven by an increase in average invested assets, partially offset by the
continued impact of lower reinvestment rates in the fixed income securities
portfolio.
The Company's net return on average cash and invested assets increased
year-over-year, driven by a combination of factors. The dividend yield in our
equity portfolio increased as a result of a higher allocation to high dividend
securities, partially offset by a persistent low reinvestment rate environment
and ongoing maturities of existing holdings with higher embedded yields.
Net Investment Gains (Losses)
Net investment gains (losses) consisted of the following:
Three Months Ended March 31,
2022 2021
Gross realized gains $ 1,119 $ 4,025
Gross realized losses, excluding other-than-temporary
impairment losses
(181 ) (123 ) Net realized gains 938 3,902 Change in net unrealized gains on equity securities (6,466 ) 1,909 Net investment gains (losses)$ (5,528 ) $ 5,811
The Company had net realized gains of
2022
Company reported no other-than-temporary losses during any of the periods
presented.
The Company experienced a decrease in net unrealized gains on equity securities
of
changes in fair value attributable to unfavorable equity markets. The Company
experienced an increase in net unrealized gains on equity securities of
during the three months ended
fair value attributable to favorable equity markets. In addition to the impact
of the overall equity markets, the Company's sales activity (and resulting gains
and losses) will impact the level and direction of the change in the net
unrealized gain or loss of its equity securities portfolio. During the three
months ended
securities of
months ended
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
three months ended
during the three months ended
result of an increase in
points, respectively. The change in the fair value of fixed income securities is
not reflected in net income; rather it is reflected as a separate component (net
of income taxes) of other comprehensive income.
Income before Income Taxes
For the three months ended
31, 2021
in net investment gains/losses attributable to the impact of equity markets on
the Company's equity securities portfolio, partially offset by an improvement in
underwriting results.
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Income Tax Expense
The Company recorded income tax expense of
31, 2022
compared to an effective tax rate of 22.8% for the first quarter of 2021. A
portion of the effective tax rate is attributable to
taxes.
Net Income
For the three months ended
non-controlling interest of
three months ended
change in net investment gains/losses attributable to the impact of equity
markets on the Company's equity securities portfolio, partially offset by an
improvement in underwriting results.
Return on Average Equity
For the three months ended
average equity, after non-controlling interest, of 2.3% compared to annualized
return on average equity, after non-controlling interest, of 11.2% for the three
months ended
Average equity is calculated as the average between beginning and ending equity
excluding non-controlling interest for the period.
Critical Accounting Policies
The preparation of financial statements in accordance with GAAP requires both
the use of estimates and judgment relative to the application of appropriate
accounting policies. The Company is required to make estimates and assumptions
in certain circumstances that affect amounts reported in the Unaudited
Consolidated Financial Statements and related footnotes. We evaluate these
estimates and assumptions on an ongoing basis based on historical developments,
market conditions, industry trends, and other information that we believe to be
reasonable under the circumstances. There can be no assurance that actual
results will conform to these estimates and assumptions or that reported results
of operations will not be materially and adversely affected by the need to make
accounting adjustments to reflect changes in these estimates and assumptions
from time to time. Our critical accounting policies are more fully described in
Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" presented in our 2021 Annual Report. There have been no
changes in our critical accounting policies from
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
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 two installments
were paid in
net proceeds from the IPO to satisfy the remaining obligation in
We currently anticipate that cash generated from our operations and available
from our investment portfolio, along with the remaining IPO net proceeds, will
be sufficient to fund our operations.
The Company's philosophy is to provide sufficient cash flows from operations to
meet its obligations in order to minimize the forced sales of investments. The
Company maintains a portion of its investment portfolio in relatively short-term
and highly liquid assets to ensure the availability of funds.
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The change in cash and cash equivalents for the three months ended
2022
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