NI Holdings, Inc.: Form 10-Q for the period ended Mar 31, 2024

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 2023 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, except per share data, are in thousands.

Financial Highlights

2024 First Quarter Consolidated Results of Operations

• Net income of $6,419, or $0.31 per share basic and $0.30 per share diluted
• Net premiums earned of $85,557
• Net investment income of $3,553
• Net unfavorable prior year reserve development of $1,284
• Underwriting gain of $2,387
• Combined ratio of 97.2%
• Operating cash flows of $16,146

2024 First Quarter Consolidated Financial Condition

• Total cash and investments of $449,946
• Total assets of $674,525
• Unpaid losses and loss adjustment expenses of $225,006
• Total liabilities of $418,679
• Shareholders’ equity of $255,846

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Results of Operations

Our consolidated net income was $6,419 for the three months ended March 31, 2024, compared to a net loss of $4,500 for the three months ended March 31, 2023.

The major components of our revenues and net income (loss) for the two periods are shown below:

Net Premiums Earned

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Our net premiums earned for the three months ended March 31, 2024, increased $7,930, or 10.2%, compared to the three months ended March 31, 2023.

Below are comments regarding significant changes in net premiums earned by business segment:

Private passenger auto – Net premiums earned for the three months ended March 31, 2024, increased $2,449, or 12.5%, compared to the same period in 2023. This increase was driven by significant rate increases in North Dakota, South Dakota, and Nebraska, partially offset by lower new business levels in South Dakota and Nebraska as a result of underwriting actions taken to improve profitability.

Non-standard auto – Net premiums earned for the three months ended March 31, 2024, increased $4,110, or 19.7%, compared to the same period in 2023. This increase was driven by new business growth in Arizona and Illinois as well as significant rate increases in the Chicago market where our non-standard auto business is concentrated.

Home and farm – Net premiums earned for the three months ended March 31, 2024, increased $1,423, or 7.1%, compared to the same period in 2023. This increase was driven by rate increases along with increased insured property values, which were primarily the result of higher inflationary factors. These increases were partially offset by lower retention rates and new business levels in Nebraska and South Dakota as a result of underwriting actions taken to improve profitability.

Crop – Net premiums earned for the first quarter of any year are typically the result of prior crop year premium adjustments that correspond to the current year settlement of prior crop year claims. 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 March 31, 2024, increased $1,121, or 7.0%, compared to the same period in 2023. This increase was driven by significant rate increases partially offset by lower retention rates and new business levels as a result of underwriting actions taken to improve profitability.

All other – Net premiums earned for the three months ended March 31, 2024, decreased $349, or 19.3%, compared to the same period in 2023 primarily driven by the continued run-off of our participation in an assumed domestic and international reinsurance pool of business.

Losses and Loss Adjustment Expenses

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Our net losses and loss adjustment expenses for the three months ended March 31, 2024, decreased $6,616, or 11.2%, compared to the three months ended March 31, 2023.

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 28.4 percentage points in the three-month period ended March 31, 2024, compared to the same period in 2023. This decrease was driven by the earned premium growth as well as lower levels of weather-related losses in the current year quarter due to the mild winter in the Midwest compared to elevated winter weather-related losses in the prior year quarter. Both periods were affected by elevated loss costs due to continued high levels of inflation.

Non-standard auto – The net loss and loss adjustment expense ratio decreased 14.1 percentage points in the three-month period ended March 31, 2024, compared to the same period in 2023. This decrease was primarily driven by earned premium growth resulting from significant rate increases. The reduction in net losses and loss adjustment expenses is attributable to the underwriting actions taken in recent periods, which was partially offset by continued elevated loss severity as a result of inflationary factors and unfavorable prior year development on loss reserves.

Home and farm – The net loss and loss adjustment expense ratio increased 13.3 percentage points in the three-month period ended March 31, 2024, compared to the same period in 2023. This increase was driven by elevated farm fire losses in the current quarter compared to the same period in 2023.

Crop – The net losses and loss adjustment expenses during the first quarter of any year are typically the result of the current year settlement of prior crop year claims. The majority of crop insurance losses and loss adjustment expenses are generally incurred in the last three quarters of the calendar year.

Commercial – The net loss and loss adjustment expense ratio decreased 37.8 points in the three-month period ended March 31, 2024, compared to the same period in 2023. This decrease is the result of taking significant rate increases and underwriting actions in recent periods to improve this segment’s profitability. In addition, the higher loss ratio in the prior year quarter was driven by unfavorable prior year reserve development attributable to freeze claims from Winter Storm Elliott.

All other – The net loss and loss adjustment expense ratio increased 30.1 percentage points in the three-month period ended March 31, 2024, compared to the same period in 2023. This increase was driven by unfavorable loss experience in the excess casualty line 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 decreased 0.2 percentage points in the three-month period ended March 31, 2024, compared to the same period in 2023. The increase in the amortization of deferred policy acquisition costs is due to higher deferrable costs resulting from significant premium growth compared to the prior year quarter, including significant growth in the non-standard auto segment which generally pays higher agent commissions than our other segments.

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 gain (loss) improved $11,829 to a gain of $2,387 for the three-month period ended March 31, 2024, from a loss of $9,442 for the three-month period ended March 31, 2023. These results were driven by the factors discussed in the Loss and Loss Adjustment Expenses section above.

The overall combined ratio decreased 15.0 percentage points in the three-month period ended March 31, 2024, compared to the same period in 2023. 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 $412 for the three months ended March 31, 2024, compared to $274 for the three months ended March 31, 2023. Fee income is largely attributable to the non-standard auto segment and is a key component in measuring its profitability. Fee and other income on this business increased to $350 for the three months ended March 31, 2024, from $232 for the three months ended March 31, 2023, driven by growth in this segment.

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 $1,315 for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. This increase primarily resulted from higher long-term average fixed income yields and an increased year-over-year average level of cash and invested assets.

Gross and net return on average cash and invested assets increased year-over-year, primarily driven by the favorable interest rate environment that resulted in significantly higher net investment income on a slightly increased average fixed income securities balance (measured at fair value). In addition, the increase in investments in high dividend yield equities resulted in relatively consistent year-over-year net investment income despite a reduction in the average equities balance (measured at fair value). The increase in average cash and invested assets was driven by increases in cash and investments from the generation of positive operating cash flows during 2023 and the first quarter of 2024.

Net Investment Gains

Net investment gains consisted of the following:

We had net realized losses of $130 for the three months ended March 31, 2024, compared to net realized gains of $11,586 for the three months ended March 31, 2023. The elevated net realized gains in the prior year quarter were 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 an increase in net unrealized gains on equity securities of $1,958 during the three months ended March 31, 2024, driven by 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 $10,170 during the three months ended March 31, 2023, driven by the equity portfolio liquidation noted above, offset by the impact of changes in fair value attributable to favorable equity markets during the quarter.

Our fixed income securities are classified as available for sale because we will, from time to time, execute 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 $1,807 during the three months ended March 31, 2024, compared to net unrealized gains of $6,021 during the three months ended March 31, 2023. The change was 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 March 31, 2024, we had pre-tax income of $8,180 compared to a pre-tax loss of $5,513 for the three months ended March 31, 2023. This change was largely attributable to strong premium growth primarily due to significant rate increases, higher net investment income, improved loss experience due to favorable winter weather conditions combined with efforts to improve our underwriting risk selection, and a reduction in unfavorable prior year loss development during the current year.

Income Tax Expense (Benefit)

We recorded income tax expense of $1,761 for the three months ended March 31, 2024, compared to an income tax benefit of $1,013 for the three months ended March 31, 2023. Our effective tax rate for the first quarter of 2024 was 21.5% compared to an effective tax rate of 18.4% for the first quarter of 2023.

Net Income (Loss)

For the three months ended March 31, 2024, we had net income of $6,419 compared to a net loss before non-controlling interest of $4,500 for the three months ended March 31, 2023. This change was largely attributable to strong premium growth primarily due to significant rate increases, higher net investment income, improved loss experience due to favorable winter weather conditions combined with efforts to improve our underwriting risk selection, and a reduction in unfavorable prior year loss development during the current year, partially offset by the impact of income taxes.

Return on Average Equity

For the three months ended March 31, 2024, we had annualized return on average equity of 10.2% compared to annualized return on average equity, after non-controlling interest, of (6.7%) for the three months ended March 31, 2023. Average equity is calculated as the average between beginning and ending equity 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 2023 Annual Report. There have been no changes in our critical accounting policies from December 31, 2023.

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 three months ended March 31, 2024 and 2023 were as follows:

For the three months ended March 31, 2024, net cash provided by operating activities totaled $16,146 compared to net cash used of $4,351 in the prior year quarter. This change was primarily driven by lower levels of loss and loss adjustment payments as well as higher levels of cash received for premiums.

For the three months ended March 31, 2024, net cash used by investing activities totaled $4,143 compared to net cash provided of $19,428 in the prior year quarter. This change was attributable to the investment of excess cash in the current year as well as a strategic increase in the sales of equity securities in the prior year quarter for which some of the proceeds had not been reinvested as of March 31, 2023.

For the three months ended March 31, 2024, net cash used by financing activities totaled $178 compared to $794 a year ago. This decrease in cash used was attributable to a reduction in share repurchases.

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 the Company’s surplus as regards policyholders as of the preceding December 31, or (ii) the Company’s statutory net income for the preceding calendar year (excluding realized investment 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 2024 without the prior approval of the North Dakota Insurance Department. 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 three months ended March 31, 2024, or the year ended December 31, 2023.

Direct Auto re-domesticated from Illinois to North Dakota during 2021 and is now subject to the same dividend restrictions as Nodak Insurance. The amount available for payment of dividends from Direct Auto to NI Holdings during 2024 without the prior approval of the North Dakota Insurance Department is approximately $90 as of December 31, 2023. No dividends were declared or paid by Direct Auto during the three months ended March 31, 2024, or the year ended December 31, 2023.

Westminster re-domesticated from Maryland to North Dakota during 2021 and is now subject to the same dividend restrictions as Nodak Insurance. The amount available for payment of dividends from Westminster to NI Holdings during 2024 without the prior approval of the North Dakota Insurance Department is approximately $1,200 as of December 31, 2023. No dividends were declared or paid by Westminster during the three months ended March 31, 2024, or the year ended December 31, 2023.

The Company’s assessment of market risk as of March 31, 2024, 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 2023 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 Control 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 2023 Annual Report.