NI Holdings, Inc.: Form 10-Q for the period ended Sep 30, 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. Unless otherwise noted, the information in the following discussion is being presented for our continuing operations. 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 Third Quarter Consolidated Results of Continuing Operations

• Net loss of $2,705, or $0.13 per share basic and diluted
• Net premiums earned of $83,270
• Net investment income of $2,811
• Net unfavorable prior year reserve development of $5,329
• Underwriting loss of $9,170
• Combined ratio of 111.0%
• Operating cash flows of $3,204

2024 Third Quarter Consolidated Financial Condition

• Total cash and investments of $373,403
• Total assets of $559,897
• Unpaid losses and loss adjustment expenses of $159,069
• Total liabilities of $318,526
• Shareholders’ equity of $241,371

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Results of Continuing Operations

Our consolidated net loss from continuing operations was $2,705 for the three months ended September 30, 2024, compared to net income from continuing operations of $805 for the three months ended September 30, 2023. Our consolidated net loss from continuing operations was $3,248 for the nine months ended September 30, 2024, compared to net income from continuing operations of $43 for the nine months ended September 30, 2023.

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

Net Premiums Earned

Our net premiums earned for the three months ended September 30, 2024, increased $6,852, or 9.0%, compared to the three months ended September 30, 2023. Net premiums earned for the nine months ended September 30, 2024, increased $20,199, or 9.3%, compared to the nine months ended September 30, 2023.

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Below are comments regarding net premiums earned by business segment:

Private Passenger Auto – Net premiums earned for the third quarter of 2024 increased $1,377, or 6.5%, compared to the same period in 2023. Net premiums earned for the first nine months of 2024 increased $5,754, or 9.4% from the first nine months of 2023. Results were driven by new business growth in North Dakota as well as significant rate increases in North Dakota, South Dakota, and Nebraska, partially offset by lower new business and retention levels in South Dakota and Nebraska as a result of underwriting actions taken to improve profitability.

Non-Standard Auto – Net premiums earned for the third quarter of 2024 increased $1,770, or 8.4%, compared to the same period in 2023. Net premiums earned for the first nine months of 2024 increased $10,979, or 17.2% from the first nine months of 2023. Results were driven by prior period new business growth in Illinois and Arizona as well as significant rate increases in the Chicago market where our non-standard auto business is concentrated, partially offset by lower retention compared to prior year periods.

Home and Farm – Net premiums earned for the third quarter of 2024 increased $2,170, or 10.2%, compared to the same period in 2023. Net premiums earned for the first nine months of 2024 increased $5,103, or 8.3% from the first nine months of 2023. Results were driven by new business growth in North Dakota, rate increases, and 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 third quarter of 2024, increased $1,139, or 11.7%, compared to the same period in 2023. Net premiums earned for the first nine months of 2024 decreased $2,043, or 9.1% from the first nine months of 2023. The increase in the third quarter of 2024 was driven by the recognition during the prior year quarter of a reduction in the acres insured for the prior year. The year-to-date decrease was driven by lower commodity prices in the current year.

All Other – Net premiums earned for the third quarter of 2024, increased $396, or 13.7%, compared to the same period in 2023. Net premiums earned for the first nine months of 2024 increased $406, or 4.6%, from the first nine months of 2023. Results were driven by rate and insured value increases for the commercial and excess lines of business, partially offset by the continued run-off of our participation in an assumed domestic and international reinsurance pool of business.

Losses and Loss Adjustment Expenses

Our net losses and loss adjustment expenses for the three months ended September 30, 2024, increased $11,943, or 22.5%, compared to the three months ended September 30, 2023. Our net losses and loss adjustment expenses for the nine months ended September 30, 2024, increased $20,243, or 13.1%, compared to the nine months ended September 30, 2023.

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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 16.0 percentage points and 15.8 percentage points in the three- and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023. The decrease in the third quarter of 2024 was driven by improved loss frequency in Nebraska and South Dakota during the current year quarter. The year-to-date decrease was driven by the improved loss frequency in the current year quarter as well as lower levels of weather-related losses in the current year due to the mild winter in the Midwest compared to elevated winter weather-related losses in the prior year. Both periods were positively affected by earned premium growth.

Non-Standard Auto – The net loss and loss adjustment expense ratio increased 0.4 percentage points in the three-month period ended September 30, 2024, compared to the same period in 2023. Although the year-over-year ratios were relatively consistent, the current year quarter was impacted by unfavorable prior year reserve development related to elevated bodily injury losses. The net loss and loss adjustment expense ratio decreased 2.6 percentage points in the nine-month period ended September 30, 2024, compared to the same period in 2023. This decrease was primarily driven by earned premium growth resulting from new business growth and significant rate increases.

Home and Farm – The net loss and loss adjustment expense ratio increased 27.9 percentage points and 18.3 percentage points in the three- and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023. These increases in net loss and loss adjustment expense ratios were driven by higher non-catastrophe weather-related losses in North Dakota and Nebraska during 2024 compared to the prior year partially offset by earned premium growth in the current year.

Crop – The net loss and loss adjustment expense ratio increased 19.0 percentage points and 9.0 percentage points in the three- and nine-month periods ended September 30, 2024, respectively, compared to the same periods in 2023. These increases were driven by slightly less favorable crop growing conditions compared to the prior year.

All Other – The net loss and loss adjustment expense ratio increased 71.1 percentage points and 31.8 percentage points in the three- and nine-month period ended September 30, 2024, compared to the same period in 2023. These increases were driven by elevated large loss experience compared to the prior year. The negative loss and loss adjustment expense ratio for the third quarter of 2023 was the result of an inter-segment reclassification of a large loss during the quarter.

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 1.6 percentage points and 1.2 percentage points in the three-and nine-month periods ended September 30, 2024, respectively, compared to the same periods 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, including significant growth in the Non-Standard Auto segment which generally pays higher agent commissions than our other segments. The increase in the other underwriting and general expenses is due to the costs incurred in the current quarter associated with the execution of the separation agreement with our former Chief Executive Officer.

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 increased $8,578 for the three-month period ended September 30, 2024, compared to the same period in 2023. The total underwriting loss increased $9,508 for the nine-month period ended September 30, 2024, compared to the same period in 2023. These results were driven by the factors discussed in the Loss and Loss Adjustment Expenses as well as the Underwriting and General Expenses and Expense Ratio sections above.

The overall combined ratio increased 10.2 percentage points in the three-month period ended September 30, 2024, compared to the same period in 2023. The overall combined ratio increased 3.7 percentage points in the nine-month period ended September 30, 2024, compared to the same period in 2023. These results were driven by the factors discussed in the Loss and Loss Adjustment Expenses as well as the Underwriting and General Expenses and Expense Ratio sections above.

Fee and Other Income

We had fee and other income of $491 and $1,590 for the three and nine months ended September 30, 2024, respectively, compared to $445 and $1,196 for the three and nine months ended September 30, 2023, respectively. 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 $281 and $971 for the three and nine months ended September 30, 2024, respectively, from $278 and $748 for the three and nine months ended September 30, 2023, respectively, 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 for continuing operations:

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Net investment income increased $690 for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. Net investment income increased $2,354 for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. These increases were primarily driven by the higher 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, primarily driven by the favorable interest rate environment that resulted in significantly higher net investment income on an increased average balance of fixed income securities as well as cash and cash equivalents (measured at fair value). In addition, the increase in investments in high dividend yield equities resulted in relatively consistent year-over-year dividend income despite a reduction in the average equities balance (measured at fair value). The increase in average cash and invested assets was driven by changes in the fair value of fixed income securities due to the interest rate environment as well as higher operating cash flows during the first nine months of 2024.

Net Investment Gains (Losses)

Net investment gains (losses) consisted of the following:

We had net realized gains of $45 and losses of $37 for the three and nine months ended September 30, 2024, respectively, compared to net realized gains of $509 and $12,046 for the three and nine months ended September 30, 2023, respectively. The elevated net realized gains in the nine months ended September 30, 2023, 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 of $2,367 and $3,325 in net unrealized gains on equity securities during the three and nine months ended September 30, 2024, respectively, attributable to overall favorable equity markets during the current quarter and year-to-date. We experienced a decrease in net unrealized gains on equity securities of $1,464 and $11,771 during the three and nine months ended September 30, 2023, respectively. The decrease in unrealized gains on equity securities during the nine months ended September 30, 2023, was driven by the equity portfolio liquidation noted above and the impact of changes in fair value attributable to equity market volatility.

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 $11,138 and $8,848 during the three and nine months ended September 30, 2024, respectively, compared to net unrealized losses of $8,718 and $5,741 during the three and nine months ended September 30, 2023, 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, 2024, we had a pre-tax loss of $3,456 compared to a pre-tax income of $1,019 for the three months ended September 30, 2023. The year-over-year change was largely attributable to higher non-catastrophe weather-related losses for Home and Farm in the states of North Dakota and Nebraska, unfavorable prior year loss reserve development for Non-Standard Auto, and expenses incurred related to the separation agreement with our former Chief Executive Officer, partially offset by net earned premium growth, improved loss experience for Private Passenger Auto, and higher net investment income.

For the nine months ended September 30, 2024, we had a pre-tax loss of $3,693 compared to pre-tax income of $54 for the nine months ended September 30, 2023. The year-over-year change was largely attributable to higher non-catastrophe weather-related losses for Home and Farm in the states of North Dakota and Nebraska, unfavorable prior year loss reserve development for Non-Standard Auto, and expenses incurred related to the separation agreement with our former Chief Executive Officer, partially offset by net earned premium growth, improved loss experience for Private Passenger Auto, and higher net investment income.

Income Tax Expense (Benefit)

We recorded an income tax benefit of $751 for the three months ended September 30, 2024, compared to an income tax expense of $214 for the three months ended September 30, 2023. Our effective tax rate for the third quarter of 2024 was 21.7% compared to an effective tax rate of 21.0% for the third quarter of 2023.

We recorded an income tax benefit of $445 for the nine months ended September 30, 2024, compared to income tax expense of $11 for the nine months ended September 30, 2023. Our effective tax rate for the first nine months of 2024 (excluding tax effects related to the loss on the sale of Westminster) was 12.0% compared to an effective tax rate of 20.4% for the first nine months of 2023. The effective tax rate for the first nine months of 2024 was impacted by a $346 valuation allowance on net operating loss carryforwards established as a result of the Battle Creek demutualization.

Net Income (Loss)

For the three months ended September 30, 2024, we had a net loss before non-controlling interest of $2,705 compared to net income of $805 for the three months ended September 30, 2023. The year-over-year change was largely attributable to higher non-catastrophe weather-related losses for Home and Farm in the states of North Dakota and Nebraska, unfavorable prior year loss reserve development for Non-Standard Auto, and expenses incurred related to the separation agreement with our former Chief Executive Officer, partially offset by net earned premium growth, improved loss experience for Private Passenger Auto, and higher net investment income.

For the nine months ended September 30, 2024, we had a net loss before non-controlling interest of $3,248 compared to net income of $43 for the nine months ended September 30, 2023. The year-over-year change was largely attributable to higher non-catastrophe weather-related losses for Home and Farm in the states of North Dakota and Nebraska, unfavorable prior year loss reserve development for Non-Standard Auto, and expenses incurred related to the separation agreement with our former Chief Executive Officer, partially offset by net earned premium growth, improved loss experience for Private Passenger Auto, and higher net investment income.

Return on Average Equity

For the three months ended September 30, 2024, we had annualized return on average equity, after non-controlling interest, of (4.5)% compared to annualized return on average equity, after non-controlling interest, of 1.3% for the three months ended September 30, 2023.

For the nine months ended September 30, 2024, we had annualized return on average equity, after non-controlling interest, of (1.9)% compared to annualized return on average equity, after non-controlling interest, of 0.2% for the nine months ended September 30, 2023.

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 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 continuing and discontinued operations for the nine months ended September 30, 2024 and 2023, were as follows:

For the nine months ended September 30, 2024, net cash provided by operating activities totaled $16,780 compared to $9,458 a year ago. This change was primarily driven by lower levels of loss and loss adjustment payments in the current year partially offset by higher levels of tax payments (net of refunds) in the current year.

For the nine months ended September 30, 2024, net cash provided by investing activities totaled $5,327 compared to net cash used of $2,021 a year ago. This change was primarily attributable to the proceeds from the sale of Westminster in the current year partially offset by an increase in net cash outflows for investment activities in the current year.

For the nine months ended September 30, 2024, net cash used by financing activities totaled $3,613 compared to $7,454 a year ago. This decrease in cash used was attributable to a reduction in share repurchases in the current year partially offset by the final pooling settlement between Nodak Insurance and Westminster.

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 nine months ended September 30, 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 nine months ended September 30, 2024, or the year ended December 31, 2023.

Westminster re-domesticated from Maryland to North Dakota during 2021 and was subject to the same dividend restrictions as Nodak Insurance. Westminster was sold on June 30, 2024. No dividends were declared or paid by Westminster to NI Holdings during the nine months ended September 30, 2024, or the year ended December 31, 2023. For additional information see Part I, Item 1, Note 19 “Discontinued Operations” of this Quarterly Report on Form 10-Q.

The Company’s assessment of market risk as of September 30, 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 Interim Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (“DCPs”), 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. As a result of the material weakness in the Company's internal control over financial reporting ("ICFR") discussed below, the Interim Chief Executive Officer and Chief Financial Officer have concluded that the Company’s DCPs, as of the end of the period covered by this report, were not effective in ensuring 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 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.

Material Weakness in Internal Control Over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

As previously disclosed in our Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2024, the Company did not design and maintain effective controls over its accounting for intercompany reinsurance pooling activity. Specifically, it lacked an effectively designed internal control related to the evaluation of pooling payable/receivable balances, including when a pool member is sold. This material weakness resulted in a material error and the restatement of the Company's consolidated financial statements for the three- and six-month periods ended June 30, 2024. Additionally, this material weakness could result in misstatements of the aforementioned accounts or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

Remediation Plan for Material Weakness

Upon identification of the material weakness, management developed a remediation plan, which included designing and implementing a new quarterly intercompany pooling reconciliation and review process to fully evaluate pooling payable/receivable balances in support of financial reporting for GAAP purposes. The material weakness will not be considered remediated until the remediation plan has been implemented and there has been sufficient time for the Company to conclude through testing that the controls are operating effectively. As the Company's management, under the oversight of the Audit Committee, continues to evaluate and improve the Company's ICFR, management may decide to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures identified. We can offer no assurance that these initiatives will ultimately have the intended effects.

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. Except for the identified material weakness above, 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.

Part II. -

OTHER INFORMATION

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.