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
our 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 Form 10-Q constitutes forward-looking statements that involve risks and
uncertainties. Please see "Forward-Looking Statements" included elsewhere in
this Form 10-
Report should also be reviewed 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
Our consolidated net loss was
compared to net income of
The major components of revenues and net income (loss) are shown below:
Three Months Ended March 31,
2023 2022
Revenues:
Net premiums earned $ 77,627 $ 69,587
Fee and other income 274 428
Net investment income 2,239 1,653
Net investment gains (losses) 1,416 (5,528 )
Total revenues $ 81,556 $ 66,140
Components of net income (loss):
Net premiums earned $ 77,627 $ 69,587
Losses and loss adjustment expenses 58,825 40,129
Amortization of deferred policy acquisition costs and
other underwriting and general expenses
28,244 23,404 Underwriting gain (loss) (9,442 ) 6,054 Fee and other income 274 428 Net investment income 2,239 1,653 Net investment gains (losses) 1,416 (5,528 ) Income (loss) before income taxes (5,513 ) 2,607 Income tax expense (benefit) (1,013 ) 568 Net income (loss)$ (4,500 ) $ 2,039 Net Premiums Earned Three Months Ended March 31, 2023 2022 Net premiums earned: Direct premium$ 85,474 $ 73,399 Assumed premium 576 1,861 Ceded premium (8,423 ) (5,673 ) Total net premiums earned$ 77,627 $ 69,587 30 Table of Contents
Our net premiums earned for the three months ended
Three Months Ended March 31,
2023 2022
Net premiums earned:
Private passenger auto $ 19,653 $ 18,742
Non-standard auto 20,879 14,378
Home and farm 19,991 19,212
Crop (725 ) (13 )
Commercial 16,017 14,188
All other 1,812 3,080
Total net premiums earned
Below are comments regarding net premiums earned by business segment:
Private passenger auto - Net premiums earned for the three months ended
31, 2023
increase was driven by significant rate increases in
and
actions taken to improve profitability.
Non-standard auto - Net premiums earned for the three months ended
2023
increase was driven by new business growth, increased retention, and significant
rate increases in the
concentrated.
Home and farm - Net premiums earned for the three months ended
increased
driven by rate increases along with increased insured property values, which
were primarily the result of higher inflationary factors. These premium
increases were partially offset by lower levels of new business as a result of
underwriting actions taken to improve profitability.
Crop - Net premiums earned for the first quarter of any year are the result of
minor prior crop year premium adjustments which typically occur annually during
the first quarter. The majority of crop 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 three months ended
increased
was driven by increased insured values which were primarily the result of higher
inflationary factors as well as continued increases in rate and new business
premiums.
All other - Net premiums earned for the three months ended
decreased
was driven by the decision to non-renew our participation in an assumed domestic
and international reinsurance pool of business as of
Losses and Loss Adjustment Expenses
Three Months Ended March 31,
2023 2022
Net losses and loss adjustment expenses:
Direct losses and loss adjustment expenses
Assumed losses and loss adjustment expenses
90 10 Ceded losses and loss adjustment expenses (12,126 ) (5,376 )
Total net losses and loss adjustment expenses
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Our net losses and loss adjustment expenses for the three months ended March 31,
2023 , increased $18,696 , or 46.6%, compared to the three months ended March 31,
2022 .
Three Months Ended March 31,
2023 2022
Net losses and loss adjustment expenses:
Private passenger auto $ 15,625 $ 14,711
Non-standard auto 17,038 8,491
Home and farm 8,719 6,840
Crop (773 ) (166 )
Commercial 18,114 10,017
All other 102 236
Total net losses and loss adjustment expenses
Three Months Ended March 31,
2023 2022
Loss and loss adjustment expense ratio:
Private passenger auto 79.5% 78.5%
Non-standard auto 81.6% 59.1%
Home and farm 43.6% 35.6%
Crop n/a n/a
Commercial 113.1% 70.6%
All other 5.6% 7.7%
Total loss and loss adjustment expense ratio 75.8% 57.7%
Below are comments regarding significant changes in the net losses and loss
adjustment expenses, and the net loss and loss adjustment expense ratios, by
business segment:
Private passenger auto - The net loss and loss adjustment expense ratio
increased 1.0 percentage point in the three-month period ended
compared to the same period in 2022. Both periods were affected by elevated loss
costs due to continued high levels of inflation. Additionally, 2023 was impacted
by elevated winter weather-related losses.
Non-standard auto - The net loss and loss adjustment expense ratio increased
22.5 percentage points in the three-month period ended
to the same period in 2022. The increase was driven by elevated loss severity as
a result of inflationary factors as well as unfavorable prior year development
on loss reserves. We continue to take significant rate and underwriting actions
as a result of the increased loss activity.
Home and farm - The net loss and loss adjustment expense ratio increased 8.0
percentage points in the three-month period ended
the same period in 2022. This increase was driven by elevated winter
weather-related property losses due to heavy snowfall in the Midwest that caused
ice dams and roof collapses.
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 the first quarter.
Commercial - The net loss and loss adjustment expense ratio increased 42.5
points in the three-month period ended
period in 2022. This higher loss ratio was driven by unfavorable prior year
reserve development attributable to freeze claims from Winter Storm Elliott as
well as increased severity of liability losses. We are in the process of taking
significant rate and underwriting actions to improve the segment's
profitability.
All other - The net loss and loss adjustment expense ratio decreased 2.1
percentage points in the three-month period ended
the same period in 2022. This decrease was driven by improved loss experience in
the excess casualty line of business.
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Table of Contents
Underwriting and General Expenses and Expense Ratio
Three Months Ended March 31,
2023 2022
Underwriting and general expenses:
Amortization of deferred policy acquisition costs $ 18,588 $ 15,623
Other underwriting and general expenses 9,656 7,781
Total underwriting and general expenses 28,244 23,404
Expense ratio 36.4% 33.6%
The expense ratio is calculated by dividing other underwriting and general
expenses and amortization of deferred policy acquisition costs by net premiums
earned. The expense ratio measures a company's operational efficiency in
producing, underwriting, and administering its insurance business. The overall
expense ratio increased 2.8 percentage points in the three-month period ended
amortization of deferred policy acquisition costs is due to higher deferrable
costs resulting from significant premium growth in the non-standard auto and
commercial segments, which generally pay higher agent commissions than our other
segments, compared to the prior year quarter. The primary drivers of the
increase in other underwriting and general expenses were the impact of continued
high levels of inflation and the favorable impact on the prior year quarter of
the runout of the 2021 crop year multi-peril crop insurance business which
reduced overall expenses for that period.
Underwriting Gain (Loss) and Combined Ratio
Three Months Ended March 31,
2023 2022
Underwriting gain (loss):
Private passenger auto $ (2,390 ) $ (1,737 )
Non-standard auto (5,153 ) (204 )
Home and farm 5,067 6,399
Crop 16 705
Commercial (8,183 ) (1,165 )
All other 1,201 2,056
Total underwriting gain (loss)
Three Months Ended March 31,
2023 2022
Combined ratio:
Private passenger auto 112.2% 109.3%
Non-standard auto 124.7% 101.4%
Home and farm 74.7% 66.7%
Crop n/a n/a
Commercial 151.1% 108.2%
All other 33.7% 33.2%
Combined ratio 112.2% 91.3%
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 (loss) changed
three-month period ended
three-month period ended
factors discussed in the Loss and Loss Adjustment Expenses section above.
The overall combined ratio increased 20.9 percentage points in the three-month
period ended
were driven by the factors discussed in the Loss and Loss Adjustment Expenses
section above.
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Fee and Other Income
We had fee and other income of
compared to
largely attributable to the non-standard auto segment and is a key component in
measuring its profitability. Fee and other income on this business decreased to
ended
market. Additionally, the higher fee and other income in the prior year was
primarily driven by miscellaneous income from the sale of property.
Net Investment Income
The following table shows 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,
2023 2022
Average cash and invested assets $ 405,608 $ 499,385
Net investment income $ 2,239 $ 1,653
Gross return on average cash and invested assets 3.1% 2.1%
Net return on average cash and invested assets 2.2% 1.3%
Net investment income increased
compared to the three months ended
driven by the rising interest rate environment as well as a higher allocation of
invested assets to private placement securities and high dividend yield
equities.
Gross and net return on average cash and invested assets increased
year-over-year, driven by the higher net investment income along with a decrease
in average cash and invested assets (measured at fair value). This decrease was
driven by unfavorable fixed income and equity market conditions particularly
during the middle and later stages of 2022, along with investment sales as a
result of elevated weather-related losses in 2022.
Net Investment Gains (Losses)
Net investment gains (losses) consisted of the following:
Three Months Ended March 31,
2023 2022
Gross realized gains $ 12,731 $ 1,119
Gross realized losses, excluding credit impairment losses (1,145 ) (181 )
Net realized gains 11,586 938
Change in net unrealized gains on equity securities (10,170 ) (6,466 )
Net investment gains (losses) $ 1,416 $ (5,528 )
We had net realized gains of
compared to gains of
increase in net realized gains was the result of a strategic liquidation of a
portfolio of equity securities. The gross realized gains from the sale of these
securities were largely offset by the elimination of the unrealized gain
position of these securities. No credit impairment losses were reported during
any of the periods presented.
We experienced a decrease in net unrealized gains on equity securities of
portfolio liquidation noted above offset by the impact of changes in fair value
attributable to favorable equity markets during the quarter. We experienced a
decrease in net unrealized gains on equity securities of
months ended
attributable to unfavorable equity markets.
Our 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. The fixed income portion of
the portfolio experienced net unrealized gains of
ended
three months ended
changes in
securities is not reflected in net income; rather it is reflected as a separate
component (net of income taxes) of other comprehensive income.
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Table of Contents
Income (Loss) before Income Taxes
For the three months ended
compared to pre-tax income of
This change was largely attributable to unfavorable prior year loss development
in the non-standard auto and commercial segments, partially offset by
significantly higher 2023 net investment gains.
Income Tax Expense (Benefit)
We recorded an income tax benefit of
2023
31, 2022
compared to an effective tax rate of 21.8% for the first quarter of 2022. The
first quarter 2023 effective tax rate was impacted by the true-up of a prior
year tax accrual.
Net Income (Loss)
For the three months ended
non-controlling interest of
three months ended
unfavorable prior year loss development in the non-standard auto and commercial
segments, partially offset by significantly higher 2023 net investment gains.
Return on Average Equity
For the three months ended
equity, after non-controlling interest, of (6.7%) compared to annualized return
on average equity, after non-controlling interest, of 2.3% for the three months
ended
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. We are 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 2022 Annual Report. There have been
no changes in our critical accounting policies from
Liquidity and Capital Resources
We expect to generate sufficient funds from our operations and maintain a high
degree of liquidity in our investment portfolio to meet the demands of claim
settlements and operating expenses for the foreseeable future. The primary
sources of funds are premium collections, investment earnings, fixed income
maturities, and the remaining proceeds from our 2017 IPO.
The change in cash and cash equivalents for the three months ended
2023
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