NI Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2023

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-Q. Part I, Item 1A, “Risk Factors” included in our 2022 Annual 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 income was $298 for the three months ended September 30, 2023, compared to net loss of $10,169 for the three months ended September 30, 2022. Our consolidated net loss was $12,437 for the nine months ended September 30, 2023, compared to net loss of $54,766 for the nine months ended September 30, 2022.

The major components of revenues and net loss are shown below:

Net Premiums Earned

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Our net premiums earned for the three months ended September 30, 2023, increased $1,238, or 1.4%, compared to the three months ended September 30, 2022. Net premiums earned for the nine months ended September 30, 2023, increased $18,928, or 7.8%, compared to the nine months ended September 30, 2022.

Below are comments regarding net premiums earned by business segment:

Private passenger auto – Net premiums earned for the third quarter of 2023 increased $1,422, or 7.2%, from the third quarter of 2022. Net premiums earned for the first nine months of 2023 increased $3,613, or 6.2% from the first nine months of 2022. Results were driven by significant rate increases in North Dakota, South Dakota, and Nebraska, partially offset by lower new business production as a result of underwriting actions taken to improve profitability.

Non-standard auto – Net premiums earned for the third quarter of 2023 increased $3,652, or 20.8%, from the third quarter of 2022. Net premiums earned for the first nine months of 2023 increased $16,285, or 34.3% from the first nine months of 2022. Results were driven by new business growth, improved retention, and significant rate increases in the Chicago market where our non-standard auto business is concentrated.

Home and farm – Net premiums earned for the third quarter of 2023 increased $1,558, or 7.9%, from the third quarter of 2022. Net premiums earned for the first nine months of 2023 increased $2,795, or 4.7% from the first nine months of 2022. Results were 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 production as a result of underwriting actions taken to improve profitability.

Crop – Net premiums earned for the third quarter of 2023 decreased $4,820, or 33.1%, from the third quarter of 2022. Net premiums earned for the first nine months of 2023 decreased $4,490, or 16.7% from the first nine months of 2022. These decreases were driven by lower commodity prices and lower muti-peril crop insurance rates, combined with fewer acres insured in the current year.

Commercial – Net premiums earned for the third quarter of 2023 decreased $133, or 0.8%, from the third quarter of 2022. Net premiums earned for the first nine months of 2023 increased $3,307, or 7.3% from the first nine months of 2022. The current quarter decrease was driven by higher levels of ceded premium. The year-to-date increase was driven by prior period new business growth, increased insured values which were primarily the result of higher inflationary factors, and continued increases in rate, partially offset by higher levels of ceded premium and the impact of underwriting actions taken to improve profitability.

All other – Net premiums earned for the third quarter of 2023 decreased $441, or 22.7%, from the third quarter of 2022. Net premiums earned for the first nine months of 2023 decreased $2,582, or 34.6%, from the first nine months of 2022. These decreases were driven by the decision to non-renew our participation in an assumed domestic and international reinsurance pool of business as of January 1, 2022.

Losses and Loss Adjustment Expenses

Our net losses and loss adjustment expenses for the three months ended September 30, 2023, decreased $15,353, or 19.5%, compared to the three months ended September 30, 2022. Our net losses and loss adjustment expenses for the nine months ended September 30, 2023, decreased $27,746, or 12.2%, compared to the nine months ended September 30, 2022.

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 decreased 24.5 percentage points and 6.6 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, compared to the same periods in 2022. Both periods were affected by lower loss frequency in the current year, partially offset by elevated loss costs due to continued high levels of inflation during the current year and elevated winter weather-related losses in the first quarter of 2023.

Non-standard auto – The net loss and loss adjustment expense ratio increased 20.7 percentage points and 26.7 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, compared to the same periods in 2022. These increases were driven by elevated loss severity as a result of inflationary factors as well as unfavorable prior year loss reserve development. We continue to take significant rate and underwriting actions as a result of these elevated losses and challenging market conditions.

Home and farm – The net loss and loss adjustment expense ratio decreased 80.0 percentage points and 99.6 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, compared to the same periods in 2022. These decreases in net loss and loss adjustment expense ratios were driven by the much-improved loss experience as a result of having no catastrophe losses during 2023 compared to 2022, combined with improved non-catastrophe weather losses and the significant underwriting actions we have implemented to address the profitability on these lines of business. Catastrophe losses for the Home and Farm segment accounted for 96.3 percentage points of the net loss and loss adjustment expense ratio for the nine months ended September 30, 2022.

Crop – The net loss and loss adjustment expense ratio decreased 10.0 percentage points and 14.0 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, compared to the same periods in 2022. These decreases were driven by improved crop growing conditions compared to the prior year.

Commercial – The net loss and loss adjustment expense ratio increased 3.4 percentage points and 23.3 percentage points in the three- and nine-month periods ended September 30, 2023, respectively, compared to the same periods in 2022. These increases were driven by unfavorable prior year reserve development and elevated loss severity, partially offset by higher ceded losses. We continue to take significant rate and underwriting actions and continue to evaluate additional measures to improve the segment’s profitability.

All other – The net loss and loss adjustment expense ratio decreased 44.1 percentage points and 40.1 percentage points in the three-and nine-month periods ended September 30, 2023, respectively, compared to the same period for 2022. These decreases were driven by improved loss experience related to the excess liability lines of business.

Underwriting and General Expenses and Expense Ratio

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 5.7 percentage points and 3.2 percentage points in the three-and nine-month periods ended September 30, 2023, respectively, compared to the same periods in 2022. The increase in both the current quarter and year-to-date amortization of deferred policy acquisition costs was driven by higher deferrable costs resulting from overall premium growth compared to the prior year, including significant growth in the non-standard auto segment which generally pays higher agent commissions than our other segments. The increase in both the current quarter and year-to-date other underwriting and general expenses was due to 2022 expenses being impacted by multi-peril crop insurance final settlements as well as the impact of continued high levels of inflation.

Underwriting Gain (Loss) and Combined Ratio

Underwriting gain (loss) measures the pre-tax profitability of our insurance operations. It is derived by subtracting losses and loss adjustment expenses, amortization of deferred policy acquisition costs, and other underwriting and general expenses from net premiums earned. The combined ratio represents the sum of these losses and expenses as a percentage of net premiums earned and measures our overall underwriting profit.

The total underwriting loss decreased $11,035, or 85.6%, for the three-month period ended September 30, 2023, compared to the same period in 2022. The total underwriting loss decreased $32,650, or 57.1%, for the nine-month period ended September 30, 2023, compared to the same period in 2022. These results were driven by the factors discussed in the Loss and Loss Adjustment Expenses section above.

The overall combined ratio decreased 12.4 percentage points in the three-month period ended September 30, 2023, compared to the same period in 2022. The overall combined ratio decreased 14.2 percentage points in the nine-month period ended September 30, 2023, compared to the same period in 2022. These results were driven by the factors discussed in the Loss and Loss Adjustment Expenses section above.

Fee and Other Income

We had fee and other income of $455 and $1,228 for the three and nine months ended September 30, 2023, respectively, compared to $476 and $1,319 for the three and nine months ended September 30, 2022, respectively. Fee income is largely attributable to the non-standard auto segment and is a key component in measuring its profitability. The decrease in fee and other income for the nine-month period ended September 30, 2023, was driven by a shifting mix of business in the Chicago market as well as miscellaneous income from the sale of property in the first quarter of the prior year.

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:

Net investment income increased $716 for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. Net investment income increased $1,792 for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. These increases were primarily driven by the rising interest rate environment which resulted in higher reinvestment rates in our fixed income portfolio.

Gross and net return on average cash and invested assets increased year-over-year, driven by the higher net investment income and a higher proportion of the equity portfolio being invested in high dividend yield equities in 2023, along with a decrease in average cash and invested assets (measured at fair value). This decrease in average cash and invested assets was driven by lower fixed income fair values caused by an increasing interest rate environment and challenging equity market conditions particularly during the middle and later stages of 2022, combined with investment sales as a result of an unusually high number of weather-related losses in 2022.

Net Investment Gains (Losses)

Net investment gains (losses) consisted of the following:

We had net realized gains of $531 and $11,998 for the three and nine months ended September 30, 2023, respectively, compared to net realized gains of $83 and $2,048 for the three and nine months ended September 30, 2022, respectively. The year-to-date increase in net realized gains was primarily the result of a strategic liquidation of a portfolio of equity securities in the first quarter of 2023. 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 $1,758 and $11,983 during the three and nine months ended September 30, 2023, respectively, and a decrease in net unrealized gains on equity securities of $2,951 and $21,580 during the three and nine months ended September 30, 2022, respectively. The current period year-to-date change in net unrealized gains on equity securities was driven by the equity portfolio liquidation noted above, additional sales of equity securities during the current quarter, and the impact of changes in fair value attributable to equity market volatility. The prior year decreases were driven by the impact of changes in fair value 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 losses of $9,183 and net unrealized losses of $6,068 during the three and nine months ended September 30, 2023, respectively, compared to net unrealized losses of $12,727 and $49,947 during the three and nine months ended September 30, 2022, respectively. The changes were primarily the result of changes in U.S. interest rates. The change in the fair value of fixed income securities is not reflected in net income; rather it is reflected as a separate component (net of income taxes) of other comprehensive income.

Income (Loss) before Income Taxes

For the three months ended September 30, 2023, we had a pre-tax income of $128 compared to a pre-tax loss of $13,243 for the three months ended September 30, 2022. For the nine months ended September 30, 2023, we had a pre-tax loss of $15,789 compared to pre-tax loss of $69,687 for the nine months ended September 30, 2022. These year-over-year improvements were largely attributable to the significant catastrophe losses during the second and third quarters of 2022 and significantly higher investment losses during the first nine months of 2022, partially offset by year-to-date unfavorable prior year reserve development during 2023 combined with year-to-date favorable prior year reserve development during 2022.

Income Tax Expense (Benefit)

We recorded an income tax benefit of $170 for the three months ended September 30, 2023, compared to an income tax benefit of $3,074 for the three months ended September 30, 2022. Our effective tax rate for the third quarter of 2023 was (132.8)% compared to an effective tax rate of 23.2% for the third quarter of 2022. The elevated 2023 third quarter effective tax rate was driven by the level of net income during the period and small modifications made to the annual effective income tax rate between the second and third quarters of 2023.

We recorded an income tax benefit of $3,352 for the nine months ended September 30, 2023, compared to income tax benefit of $14,921 for the nine months ended September 30, 2022. Our effective tax rate for the first nine months of 2023 was 21.2% compared to an effective tax rate of 21.4% for the first nine months of 2022.

Net Income (Loss)

For the three months ended September 30, 2023, we had net income before non-controlling interest of $298 compared to a net loss of $10,169 for the three months ended September 30, 2022. For the nine months ended September 30, 2023, we had a net loss before non-controlling interest of $12,437 compared to net loss of $54,766 for the nine months ended September 30, 2022. These year-over-year improvements were largely attributable to the significant catastrophe losses during the second and third quarters of 2022 and significantly higher investment losses during the first nine months of 2022, partially offset by year-to-date unfavorable prior year reserve development during 2023 combined with year-to-date favorable prior year reserve development during 2022.

Return on Average Equity

For the three months ended September 30, 2023, we had annualized return on average equity, after non-controlling interest, of 0.4% compared to annualized return on average equity, after non-controlling interest, of (15.4)% for the three months ended September 30, 2022.

For the nine months ended September 30, 2023, we had annualized return on average equity, after non-controlling interest, of (6.7)% compared to annualized return on average equity, after non-controlling interest, of (24.3)% for the nine months ended September 30, 2022.

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. 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 December 31, 2022.

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. Our primary sources of funds are premium collections, investment earnings, and fixed income maturities.

The change in cash and cash equivalents for the nine months ended September 30, 2023 and 2022, were as follows:

For the nine months ended September 30, 2023, net cash used by operating activities totaled $3,021 compared to $24,680 a year ago. This decrease was primarily driven by lower claim payments during the current period and higher levels of cash received for premiums.

For the nine months ended September 30, 2023, net cash used by investing activities totaled $2,021 compared to net cash provided of $18,639 a year ago. This change was primarily attributable to a decrease in maturities and sales of fixed income securities and an increase in purchases of fixed income securities in the current year compared to the prior year, partially offset by an increase in sales of equity securities and a decrease in purchases of equity securities.

For the nine months ended September 30, 2023, net cash used by financing activities totaled $7,454 compared to $10,305 a year ago. This decrease in cash used was attributable to an installment payment of $6,667 on the Westminster consideration payable during the first quarter of 2022, partially offset by an increase in share repurchases during the first nine months of 2023 compared to the first nine months of 2022.

As a holding company, a principal source of long-term liquidity will be dividend payments from our directly-owned subsidiaries.

Nodak Insurance is restricted by the insurance laws of North Dakota as to the amount of dividends or other distributions it may pay to NI Holdings. North Dakota law sets the maximum amount of dividends that may be paid by Nodak Insurance during any twelve-month period after notice to, but without prior approval of, the North Dakota Insurance Department. This amount cannot exceed the lesser of (i) 10% of surplus as regards policyholders as of the preceding December 31, or (ii) the statutory net income for the preceding calendar year (excluding realized capital gains), less any prior dividends paid during such twelve-month period. In addition, any insurance company other than a life insurance company may carry forward net income from the preceding two calendar years, not including realized investment gains, less any dividends actually paid during those two calendar years. Dividends in excess of this amount are considered “extraordinary” and are subject to the approval of the North Dakota Insurance Department.

There is no amount available for payment of dividends from Nodak Insurance to NI Holdings during 2023 without the prior approval of the North Dakota Insurance Department based upon the statutory net loss of Nodak Insurance during the year ended December 31, 2022. Prior to its payment of any dividend, Nodak Insurance will be required to provide notice of the dividend to the North Dakota Insurance Department. This notice must be provided to the North Dakota Insurance Department 30 days prior to the payment of an extraordinary dividend and 10 days prior to the payment of an ordinary dividend. The North Dakota Insurance Department has the power to limit or prohibit dividend payments if an insurance company is in violation of any law or regulation. These restrictions or any subsequently imposed restrictions may affect our future liquidity. No dividends were declared or paid by Nodak Insurance during the nine months ended September 30, 2023. The Nodak Insurance Board of Directors declared and Nodak Insurance paid dividends of $3,000 to NI Holdings during the year ended December 31, 2022.

Direct Auto re-domesticated from Illinois to North Dakota during 2021 and is now subject to the same dividend restrictions as Nodak Insurance. There is no amount available for payment of dividends from Direct Auto to NI Holdings during 2023 without the prior approval of the North Dakota Insurance Department based upon the statutory net loss of Direct Auto during the year ended December 31, 2022. No dividends were declared or paid by Direct Auto during the nine months ended September 30, 2023, or the year ended December 31, 2022.

Westminster re-domesticated from Maryland to North Dakota during 2021 and is now subject to the same dividend restrictions as Nodak Insurance. There is no amount available for payment of dividends from Westminster to NI Holdings during 2023 without the prior approval of the North Dakota Insurance Department based upon the statutory net loss of Westminster during the year ended December 31, 2022. No dividends were declared or paid by Westminster during the nine months ended September 30, 2023, or the year ended December 31, 2022.

The Company’s assessment of market risk as of September 30, 2023, indicates there have been no material changes in the quantitative and qualitative disclosures from those in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our 2022 Annual Report.

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as required by Rules 13a-15(b) and 15d-15(b) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were designed and functioning effectively to provide reasonable assurance that the information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”), and that such material information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosures. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

Changes in Internal Controls over Financial Reporting

In the ordinary course of business, we periodically review our system of internal control over financial reporting to identify opportunities to improve our controls and increase efficiency, while ensuring that we maintain an effective internal control environment. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes in our assessment of our risk factors from those set forth in Part I, Item 1A, “Risk Factors” in our 2022 Annual Report.