What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-03-08 compared with 2022-03-09 · 118 added, 549 removed, 17 unchanged (98% of the section changed)

Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer Purchases of Equity Securities

Market Information

The Company’s common shares trade on the NASDAQ Capital Market under the symbol “NODK”.

As of February 28, 2022, there were approximately 575 shareholders of record for the Company’s common stock.

The Company’s common shares trade on the

NASDAQ Capital Market under the symbol “NODK”.

As of February 28, 2023, there were approximately 558 shareholders of record

for the Company’s common stock.

Stock Performance Graph

The following graph shows the cumulative total shareholder return (stock price increase plus dividends) on our common stock from March 16, 2017 (the first date that shares of our common stock were available for trading) through December 31, 2021, along with the corresponding returns for the Russell 2000 Index (as the broad stock market index) and the Dow Jones US P&C Insurance Index (as the published industry index).

The graph assumes that the value of the investment in the common stock and each index was $100 on March 16, 2017 and that all dividends were reinvested.

The following

graph shows the cumulative total shareholder return (stock price increase plus dividends) on our common stock from March 16, 2017

(the first date that shares of our common stock were available for trading) through December 31, 2022, along with the corresponding

returns for the Russell 2000 Index (as the broad stock market index) and the Standard & Poor’s (S&P) 1500 US P&C

Insurance Index (as the published industry index).

The price weighted Dow Jones US P&C Insurance Index historically presented

within the following graph was replaced in this Annual Report in favor of the market capitalization weighted S&P 1500 US P&C

Insurance Index.

The graph assumes that the value of the investment in the common stock and each index was $100 on March 16, 2017,

and that all dividends were reinvested.

Dividend Policy

Our Board of Directors continues to evaluate a potential policy of paying regular cash dividends, but has not decided on the amounts that may be paid, the frequency of any payment, or when any payments may begin.

Therefore, the timing and the amount of cash dividends that may be paid to shareholders in the future is uncertain.

In addition, the Board of Directors may declare and pay periodic special cash dividends in addition to, or in lieu of, regular cash dividends.

In determining whether to declare or pay any dividends, whether regular or special, the Board of Directors will take into account our financial condition and results of operations, income tax considerations, capital requirements, industry standards, and economic conditions.

Our Board of Directors continues to evaluate a

potential policy of paying regular cash dividends, but has not decided on the amounts that may be paid, the frequency of any payment,

or when any payments may begin.

Therefore, the timing and the amount of cash dividends that may be paid to shareholders in the future

is uncertain.

In addition, the Board of Directors may declare and pay periodic special cash dividends in addition to, or in lieu of, regular

cash dividends.

In determining whether to declare or pay any dividends, whether regular or special, the Board of Directors will take into

account our financial condition and results of operations, income tax considerations, capital requirements, industry standards, and economic

We cannot guarantee that we will pay dividends or that, if paid, we will not reduce or eliminate dividends in the future.

If we pay dividends to our shareholders, we also will be required to pay dividends to Nodak Mutual Group, unless Nodak Mutual Group elects to waive the receipt of dividends.

Because Nodak Mutual Group has no current plans to utilize any cash dividends that it may receive from us, we anticipate that it will waive its right to receive substantially all of the dividends that are paid to it by us or immediately return substantially all of such funds to us as an equity contribution.

However, because the Board of Directors of Nodak Mutual Group includes persons who are not members of our Board of Directors, we cannot provide any assurance that they will take such action with respect to any cash dividend that we may declare.

If we are unable to obtain a commitment from the Board of Directors of Nodak Mutual Group that it will waive its right to receive any cash dividend that we intend to declare or that it will return the funds from such dividend to the Company as an equity contribution, our Board of Directors may decide not to declare a cash dividend.

We are not currently subject to regulatory restrictions on the payment of dividends to our shareholders.

However, any future dividends may be restricted to those received from our insurance subsidiaries, as our income is limited to earnings from the invested capital remaining from our initial IPO.

North Dakota law limits the amount of dividends and other distributions that Nodak Insurance, Direct Auto, and Westminster may pay to us.

For information regarding the regulatory restrictions on dividends our insurance subsidiaries can pay, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Liquidity and Capital Resources”, and Part II, Item 8, Note 21 “Statutory Net Income, Capital and Surplus, and Dividend Restrictions”.

Even if we receive dividends from Nodak Insurance, Direct Auto, or Westminster, we may not declare any dividends to our shareholders due to working capital requirements.

We are not subject to regulatory restrictions on the payment of dividends to shareholders, but we are subject to the requirements of the North Dakota Business Corporation Act.

This law generally permits dividends or distributions to be paid, to the extent we still have the ability to pay our debts in the ordinary course of business after making the dividend or distribution payments.

This law requires our total assets to exceed our total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of holders of stock with senior liquidation rights if we were to be dissolved at the time the dividend or distribution is paid.

If we pay dividends to our shareholders, we also

will be required to pay dividends to Nodak Mutual Group, unless Nodak Mutual Group elects to waive the receipt of dividends.

Because Nodak

Mutual Group has no current plans to utilize any cash dividends that it may receive from us, we anticipate that it will waive its right

to receive substantially all of the dividends that are paid to it by us or immediately return substantially all of such funds to us as

an equity contribution.

However, because the Board of Directors of Nodak Mutual Group includes persons who are not members of our Board

of Directors, we cannot provide any assurance that they will take such action with respect to any cash dividend that we may declare.

we are unable to obtain a commitment from the Board of Directors of Nodak Mutual Group that it will waive its right to receive any cash

dividend that we intend to declare or that it will return the funds from such dividend to the Company as an equity contribution, our Board

of Directors may decide not to declare a cash dividend.

We are not currently subject to regulatory restrictions

on the payment of dividends to our shareholders.

However, any future dividends may be restricted to those received from our insurance

subsidiaries, as our income is limited to earnings from the invested capital remaining from our initial IPO.

North Dakota law limits the

amount of dividends and other distributions that Nodak Insurance, Direct Auto, and Westminster may pay to us.

For information regarding

the regulatory restrictions on dividends our insurance subsidiaries can pay, refer to Part II, Item 7, “Management’s Discussion

and Analysis of Financial Condition and Results of Operations”, “Liquidity and Capital Resources”, and Part II, Item

8, Note 21 “Statutory Net Income (Loss), Capital and Surplus, and Dividend Restrictions”.

Even if we receive dividends from Nodak Insurance,

Direct Auto, or Westminster, we may not declare any dividends to our shareholders due to working capital requirements.

We are not subject

to regulatory restrictions on the payment of dividends to shareholders, but we are subject to the requirements of the North Dakota Business

Corporation Act.

This law generally permits dividends or distributions to be paid, to the extent we still have the ability to pay our

debts in the ordinary course of business after making the dividend or distribution payments.

This law requires our total assets to exceed

our total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of holders of stock with

senior liquidation rights if we were to be dissolved at the time the dividend or distribution is paid.

Unregistered Securities

The Company has not sold any unregistered securities within the past three years.

The Company has not sold any unregistered securities

within the past three years.

Use of Proceeds from Initial Public Offering

On January 17, 2017, our registration statement on Form S-1 registering our common stock was declared effective by the SEC.

On March 13, 2017, the Company completed the IPO of 10,350,000 shares of common stock at a price of $10.00 per share.

The Company received net proceeds of $93,145 from the offering, after deducting the underwriting discounts and offering expenses.

Griffin Financial Group, LLC acted as our placement agent in connection with the IPO.

Direct Auto was acquired on August 31, 2018 with $17,000 of the net proceeds from the IPO.

Westminster was acquired on January 1, 2020 for a purchase price of $40,000, subject to certain adjustments.

The Company paid $20,000 from the net proceeds from the IPO at time of closing.

The terms of the acquisition agreement included payment of the remaining $20,000, subject to certain adjustments, in three equal installments on each of the first and second anniversaries of the closing, and on the first business day of the month preceding the third anniversary of the closing.

The first two installments were paid in January 2021 and January 2022.

The Company anticipates using the net proceeds from the IPO to satisfy this obligation in December 2022.

From time to time, the Company may also repurchase its own stock.

These repurchases may be used to satisfy its obligations under the equity incentive plans or may be done for other reasons.

To date, the Company has used net proceeds from the IPO to fund these buyback programs.

For more information, see Part II, Item 5, “Issuer Stock Purchases”.

There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on January 17, 2017.

On January 17, 2017, our registration statement

on Form S-1 registering our common stock was declared effective by the SEC.

On March 13, 2017, the Company completed the IPO of 10,350,000

shares of common stock at a price of $10.00 per share.

The Company received net proceeds of $93,145 from the offering, after deducting

the underwriting discounts and offering expenses.

Direct Auto was acquired on August 31, 2018, with

$17,000 of the net proceeds from the IPO.

On January 1, 2020, we acquired Westminster for $40,000.

$20,000 at the time of closing.

The terms of the acquisition agreement included payment of the remaining $20,000, subject to certain adjustments,

in three equal installments on each of the first and second anniversaries of the closing, and on the first business day of the month preceding

the third anniversary of the closing.

The first two installments were paid in January 2021 and January 2022, and the final installment

was paid in December 2022 with no adjustments from the originally anticipated amount.

The Company used net proceeds from the IPO to satisfy

these obligations.

From time to time, the Company may also repurchase

its own stock.

To date, the Company has used net proceeds from the IPO to fund these share repurchases.

For more information, see Part

II, Item 5, “Issuer Stock Purchases”.

There has been no material change in the planned

use of proceeds from our IPO as described in our final prospectus filed with the SEC on January 17, 2017.

Issuer Stock Purchases

The Company had no common shares outstanding prior to March 13, 2017.

During 2017, our Board of Directors approved an authorization for the repurchase of up to $8,000 of the Company’s outstanding common stock.

We purchased 446,671 shares of our common stock for $8,037 during the three months ended June 30, 2017.

On February 28, 2018, our Board of Directors approved an authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock.

We completed the repurchase of 191,265 shares of our common stock for $2,966 during 2018, and an additional 116,034 shares for $2,006 during 2019.

During the six months ended June 30, 2020, we completed the repurchase of 402,056 shares of our common stock for $4,996 to close out this authorization.

On May 4, 2020, our Board of Directors approved an additional authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock.

During the year ended December 31, 2020, we completed the repurchase of 454,443 shares of our common stock for $7,238 under this authorization.

During the nine months ended September 30, 2021, we repurchased an additional 144,110 shares of our common stock for $2,762 to close out this authorization.

On August 11, 2021, our Board of Directors approved an additional authorization for the repurchase of up to approximately $5,000 of the Company’s outstanding common stock.

During the six months ended December 31, 2021, we completed the repurchase of 81,095 shares of our common stock for $1,554 under this new authorization.

In total during the year ended December 31, 2021, we completed the repurchase of 225,205 shares of our common stock for $4,316.

The repurchases made in the three months ended December 31, 2021 are shown below:

The Company had no common shares outstanding prior

to March 13, 2017.

On February 28, 2018, our Board of Directors approved

an authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock.

We completed the repurchase

of 191,265 shares of our common stock for $2,966 during 2018, and an additional 116,034 shares for $2,006 during 2019.

During the six

months ended June 30, 2020, we completed the repurchase of 402,056 shares of our common stock for $4,996 to close out this authorization.

On May 4, 2020, our Board of Directors approved an additional authorization

for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock.

During the year ended December 31,

2020, we completed the repurchase of 454,443 shares of our common stock for $7,238 under this authorization.

During the nine months ended

September 30, 2021, we repurchased an additional 144,110 shares of our common stock for $2,762 to close out this authorization.

On August 11, 2021, our Board of Directors approved

an additional authorization for the repurchase of up to approximately $5,000 of the Company’s outstanding common stock.

year ended December 31, 2021, we completed the repurchase of 81,095 shares of our common stock for $1,554 under this new authorization.

During the year ended December 31, 2022, we completed the repurchase of 214,937 shares of our common stock for $3,446 to close out this

authorization.

On May 9, 2022, our Board of Directors approved

an additional authorization for the repurchase of up to approximately $10,000 of the Company’s outstanding common stock.

the year ended December 31, 2022, we completed the repurchase of 54,223 shares of our common stock for $734 under this authorization.

In total during the year ended December 31, 2022, we completed the

repurchase of 269,160 shares of our common stock for $4,180.

The repurchases made in the three months ended December 31, 2022, are shown

Period in 2022

Total Number of Shares Purchased

Average Price Paid Per Share

Total Number of

Average Price

Total Number of

Shares Purchased

2 unchanged sentences

or Programs (1)

Maximum Approximate

Dollar Value of Shares

1 unchanged sentence

Purchased Under the

Plans or Programs 

Plans or Programs (2)

(in thousands)

October 1 –

November 1 –

December 1 –

Shares purchased pursuant to the August 11, 2021 publicly announced share repurchase authorization of up to approximately $5,000 of the Company’s outstanding common stock.

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 Consolidated Financial Statements alone.

The discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in Part II, Item 8, “Financial Statements and Supplementary Data.”

Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K constitutes forward-looking information that involves risks and uncertainties.

Please see “Forward-Looking Statements”

and Part I, Item 1A, “Risk Factors”

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.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this document generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this document can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 10, 2021.

All dollar amounts, except per share amounts, are in thousands.

Marketplace Conditions and Trends

The private passenger auto marketplace was impacted by increased loss severity throughout the year, as driving habits and miles driven returned to pre-pandemic levels.

Loss severity trends also continued to increase due to numerous factors, including the impacts that supply chain issues, inflation, and technological advancements have had on the automobile market.

As a result, elevated loss experience was common across much of the industry during 2021.

The non-standard auto market also remains competitive with many companies seeking growth in this line as a result of the challenging private passenger auto market and the opportunity to cross-sell additional insurance products, such as homeowners or renters insurance, to the growing non-standard auto market.

As opposed to most personal lines, the commercial multi-peril market continued to benefit from significant positive rate changes throughout 2021.

Unlike property and casualty insurance, the total crop insurance premiums written each year vary mainly based on prevailing commodity prices for the type of crops planted, because the aggregate number of acres planted usually does not vary much from year to year.

Because the premiums that are charged for crop insurance are established by the RMA, and the policy forms and terms are also established by the RMA, insurers do not compete on price or policy terms and conditions.

Moreover, because participation in other federal farm programs by a farmer is conditioned upon participation in the federal crop insurance program, most commercial farmers obtain crop insurance on their plantings each year.

Changing Climate Conditions

Longer-term natural catastrophe trends may be changing, and new types of catastrophe losses may be developing due to climate change, a phenomenon that has been associated with extreme weather events linked to rising temperatures, and includes effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, hail, and snow.

The frequency, number, and severity of these losses are unpredictable.

The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event.

Our ability to effectively manage catastrophe risk is dependent, in part, on the reliance of various catastrophe models, which may produce unreliable output as a result of inaccurate or incomplete data, along with the inherent uncertainty of future frequency and severity of losses.

The impact of changing climate conditions on the overall insurance industry may also materially affect the availability and cost of reinsurance to us.

In addition, these changes could impact the creditworthiness of issuers of securities in which the Company invests, subjecting our investment portfolio to increased credit and interest rate risk, with the potential for reduced investment returns and/or material realized or unrealized losses.

Principal Revenue Items

The Company derives its revenue primarily from net premiums earned, net investment income, and net capital gain on investments.

Gross and net premiums written

Gross premiums written is equal to direct premiums written and assumed premiums before the effect of ceded reinsurance.

Gross premiums written are recognized upon sale of new insurance contracts or renewal of existing contracts.

Net premiums written is equal to gross premiums written less premiums ceded to reinsurers.

Premiums earned

Premiums earned is the earned portion of net premiums written.

Gross premiums written include all premiums recorded by an insurance company during a specified policy period.

Insurance premiums on property and casualty policies are recognized in proportion to the underlying risk insured and are earned ratably over the duration of the policies or, in the case of crop insurance, over the period of risk to the Company.

At the end of each accounting period, the portion of the premiums that is not yet earned is included in unearned premiums and is realized as revenue in subsequent periods over the remaining term of the policy or period of risk.

The Company’s property and casualty policies, other than some of our auto lines and the non-standard auto policies, typically have a term of twelve months.

Due to the nature of the crop planting and harvesting cycle and the deadlines for filing and processing claims under the federal crop insurance program, insurance premiums for crop insurance are recognized and earned during the period of risk, which usually begins in spring and ends with harvest in the fall.

In the case of prevented planting claims, the period of risk is shortened to the date a valid prevented planting claim is filed, as the Company believes the period of risk has ended.

Under the federal crop insurance program, farmers must purchase crop insurance with respect to spring planted crops by March 15.

By July 15, the farmer must report the number of acres he has planted in each crop.

On September 1, the insurer bills the farmer for the insurance premium, which is due and payable by the farmer by October 1.

If the farmer does not pay the premium by such date, the insurer must essentially provide a loan to the farmer in an amount equal to the premium at an annual interest rate of 15% because the insurer is required to pay the farmer’s portion of the premium to the FCIC by November 15, regardless of whether the farmer pays the premium to the insurer.

Except for claims occurring in the spring (primarily for prevented planting and required replanting claims), claims are required to be filed with the FCIC by December 15.

A different cycle exists for crops planted in the fall, such as winter wheat, but the vast majority of crop insurance written by the Company covers crops planted in the spring.

Net investment income and net capital gain (loss) on investments

The Company invests its excess cash in fixed income and equity securities.

Investment income includes interest and dividends earned on invested assets, and is reported net of investment-related expenses.

Net capital gains and losses on investments are reported separately from net investment income.

The Company recognizes realized capital gains when investments are sold for an amount greater than their cost or amortized cost (in the case of fixed income securities) and realized capital losses when investments are written down as a result of an other-than-temporary impairment or are sold for an amount less than their cost or amortized cost, as applicable.

The Company recognizes changes in unrealized gains and losses of equity securities in net income as part of net capital gains and losses on investments.

These gains and losses may be significant given the fair market value of the equity portfolio and the inherent volatility in equity markets.

The changes in unrealized gains and losses on fixed income securities are recorded in other comprehensive income (loss), net of income taxes.

Therefore, these change have no impact on net income, but do impact shareholders’

The portfolio of investments for NI Holdings and its insurance subsidiaries is managed by Conning, Inc.

and Disciplined Growth Investors.

These investment managers have discretion to buy and sell securities in accordance with the investment policy approved by our Board of Directors.

Principal Expense Items

The Company’s expenses consist primarily of losses and LAE, amortization of deferred policy acquisition costs, other underwriting and general expenses, and income taxes.

Losses and Loss Adjustment Expenses

Losses and LAE represent the largest expense item and include (1) claim payments made, (2) estimates for future claim payments and changes in those estimates from prior periods, and (3) costs associated with investigating, defending, and adjusting claims, including legal fees.

Amortization of deferred policy acquisition costs and other underwriting and general expenses

Expenses incurred to underwrite risks are referred to as policy acquisition costs.

Policy acquisition costs consist of commission expenses, state premium taxes, and certain other underwriting expenses that vary with and are primarily related to the writing and acquisition of new and renewal business.

These policy acquisition costs are deferred and amortized over the effective period of the related insurance policies.

Other underwriting and general expenses consist of salaries, professional fees, office supplies, depreciation, and all other operating expenses not otherwise classified separately.

Current income taxes represent amounts paid to the federal government and certain states whose payment is based upon net income (subject to regulatory adjustments) generated by the Company.

As noted above, it does not include state premium taxes that are based purely on the collection of policyholder premiums.

We use the asset and liability method of accounting for deferred income taxes.

Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the income tax bases of its assets and liabilities.

A valuation allowance is provided when it is more likely than not that some portion of the deferred income tax asset will not be realized.

The effect of a change in tax rates is recognized in the period of the enactment date.

Total income taxes reflect both current income taxes and the change in the net deferred income tax asset or liability, excluding amounts attributed to accumulated other comprehensive income.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires both the use of estimates and judgment relative to the application of appropriate accounting policies.

The Company is required to make estimates and assumptions in certain circumstances that affect amounts reported in its 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 and that reported results of operations would not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time.

We believe the following policies are the most sensitive to estimates and judgments.

Unpaid Losses and Loss Adjustment Expenses

How reserves are established

With respect to its traditional property and casualty insurance products, the Company maintains reserves for the payment of claims (indemnity losses) and expenses related to adjusting those claims (LAE).

The Company’s liability for unpaid losses and LAE consists of (1) case reserves, which are reserves for claims that have been reported to it, and (2) IBNR, which are reserves for claims that have been incurred but have not yet been reported and for the future development of case reserves.

LAE consist of two components –

allocated loss adjustment expenses (“ALAE”) and unallocated loss adjustment expenses (“ULAE”).

ALAE are defense and cost containment expenses, including legal fees, court costs, and investigation fees, which are linked to the settlement of specific individual claims or losses.

ULAE are expenses that generally cannot be associated with a specific claim, including internal costs such as salaries and other overhead costs, and also represent estimates of future costs to administer claims.

When a claim is reported to one of the insurance companies, its claims personnel establish a case reserve for the estimated amount of the ultimate payment to the extent it can be determined or estimated.

The amount of the loss reserve for the reported claim is based primarily upon an evaluation of coverage, liability, damages suffered, and any other information considered pertinent to estimating the exposure presented by the claim.

Each claim is contested or settled individually based upon its merits, and some property and casualty claims may take years to resolve, especially in the unusual situation that legal action is involved.

Case reserves are reviewed on a regular basis and are updated as new information becomes available.

When a catastrophe occurs, which in the Company’s case usually involves the weather perils of wind and hail, we utilize mapping technology through geographic coding of its property risks to overlay the path of the storm.

This enables the Company to establish estimated damage amounts based on the wind speed and size of the hail for case or per claim loss amounts.

This process allows us to determine within a reasonable time (5 –

7 days) an estimated number of claims and estimated losses from the storm.

If we estimate the damages to be in excess of the retained catastrophe amount, reinsurers are notified immediately of a potential loss so that the Company can quickly recover reinsurance payments once the retention is exceeded.

In addition to case reserves, the Company maintains estimates of reserves for losses and LAE incurred but not reported.

These reserves include estimates for the future development of case reserves.

Some claims may not be reported for several years.

As a result, the liability for unpaid losses and LAE includes significant estimates for IBNR.

The Company estimates multi-peril crop insurance losses on a quarterly basis based upon historical loss patterns, current crop conditions, current weather patterns, and input from crop loss adjusters.

These estimates have proven to be reasonably accurate indicators of the Company’s anticipated losses for this line of business.

We utilize an independent actuary to assist with the estimation of the liability for unpaid losses and LAE.

This actuary prepares estimates by first deriving an actuarially based estimate of the ultimate cost of total losses and LAE incurred as of the financial statement date based on established actuarial methods as described below.

We then reduce the estimated ultimate loss and LAE by loss and LAE payments and case reserves carried as of the financial statement date.

The actuarially determined estimate is based upon indications from one of the following actuarial methodologies or uses a weighted average of these results.

The specific method used to estimate the ultimate losses varies depending on the judgment of the actuary as to what is the most appropriate method for the property and casualty business.

Management reviews these estimates and supplements the actuarial analysis with information not fully incorporated into the actuarially based estimate, such as changes in the external business environment and internal company processes.

We may adjust the actuarial estimates based on this supplemental information in order to arrive at the amount recorded in the Consolidated Financial Statements.

The Company determines its ultimate liability for unpaid losses and LAE by using the following actuarial methodologies:

Bornhuetter-Ferguson Method —

The Bornhuetter-Ferguson Method is a blended method that explicitly considers both actual loss development to date and expected future loss emergence.

This method is applied on both a paid loss basis and an incurred loss basis.

This method uses selected loss development patterns to calculate the expected percentage of losses unpaid (or unreported).

The expected future loss component of the method is calculated by multiplying earned premium for the given exposure period by a selected a priori (i.e.

deductive) loss ratio.

The resulting dollars are then multiplied by the expected percentage of unpaid (or unreported) losses described above.

This provides an estimate of future paid (or reported) losses that is then added to actual paid (or incurred) loss data to produce the estimated ultimate loss.

Paid and Case Incurred Loss Development Method —

The Paid and Case Incurred Loss Development Method utilizes ratios of cumulative paid or case incurred losses or LAE at each age of development as a percent of the preceding development age.

Selected ratios are then multiplied together to produce a set of loss development factors which when applied to the most current data value, by accident year, develop the estimated ultimate losses or LAE.

Ultimate losses or LAE are then selected for each accident year from the various methods employed.

Ratio of Paid ALAE to Paid Loss Method —

The Ratio of Paid ALAE to Paid Loss Method utilizes the ratio of paid ALAE to paid losses and is similar to the Paid and Case Incurred Loss Development Method described above, except that the data projected are the ratios of paid ALAE to paid losses.

The projected ultimate ratio is then multiplied by the selected ultimate losses, by accident year, to yield the ultimate ALAE.

ALAE reserves are calculated by subtracting paid losses from ultimate ALAE.

The process of estimating loss reserves involves a high degree of judgment and is subject to a number of variables.

These variables can be affected by both internal and external events, such as changes in claims handling procedures, inflation, legal trends, increases in the state-dictated minimum liability limits in the recent cases of nonstandard auto insurance, and legislative changes, among others.

The impact of many of these items on ultimate costs for losses and loss adjustment expenses is difficult to estimate.

Loss reserve estimation is also affected by the volume of claims, the potential severity of individual claims, the determination of occurrence date for a claim, and reporting lags (the time between the occurrence of the policyholder event and when it is actually reported to the insurer).

Informed judgment is applied throughout the process, including the application of various individual experiences and expertise to multiple sets of data and analyses.

We continually refine our estimates of unpaid losses and LAE in a regular ongoing process as historical loss experience develops, and additional claims are reported and settled.

We consider all significant facts and circumstances known at the time the liabilities for unpaid losses and LAE are established.

There is an inherent amount of uncertainty in the establishment of liabilities for unpaid losses and LAE.

This uncertainty is greatest in the current and most recent accident years due to the relative newness of the claims being reported and the relatively small percentage of these claims that have been reported, investigated, and adjusted by the Company’s claims staff.

Therefore, the reserves carried in these more recent accident years are generally more conservative than those carried for older accident years.

As the Company has the opportunity to investigate and adjust the reported claims, both the case and IBNR reserves are adjusted to more closely reflect the ultimate expected loss.

Other factors that have or can have an impact on the Company’s case and IBNR reserves include but are not limited to those described below.

Changes in liability law and public attitudes regarding damage awards

Laws governing liability claims and judicial interpretations thereof can change over time, which can expand the scope of coverage anticipated by insurers when initially establishing reserves for claims.

In addition, public attitudes regarding damage awards can result in judges and juries granting higher recoveries for damages than expected by claims personnel when claims are presented.

In addition, these changes can result in both increased claim frequency and severity as both plaintiffs and their legal counsel perceive the opportunity for higher damage awards.

Reserves established for claims that occurred in prior years would not have anticipated these legal changes and, therefore, could prove to be inadequate for the ultimate losses paid by the Company, causing the Company to experience adverse development and higher loss payments in future years.

Change in claims handling and/or setting case reserves

Changes in Company personnel and/or the approach to how claims are reported, adjusted, and reserved may affect the reserves established by the Company.

As discussed above, the setting of IBNR reserves is not an exact science and involves the expert judgment of an actuary.

One actuary’s reserve opinion may differ slightly from another actuary’s opinion.

This is the primary reason why the IBNR reserve estimate is customarily reported as a range by a company’s actuary, which provides a company with an acceptable “range”

to use in establishing its best estimate for IBNR reserves.

Economic inflation

A sudden and extreme increase in the economic inflation rate could have a significant impact on the Company’s case and IBNR reserves.

When establishing case reserves, claims personnel generally establish an amount that in their opinion will provide a conservative amount to settle the loss.

If the time to settle the claim extends over a period of years, which is possible but unlikely as the Company usually settles claims in less than 50 days on average, the initial reserve may not anticipate an economic inflation rate that is significantly higher than the current inflation rate.

This can also apply to IBNR reserves.

Should the economic inflation rate increase significantly, it is likely that the Company may not anticipate the need to adjust the IBNR reserves accordingly, which could lead to the Company being deficient in its IBNR reserves.

Increases or decreases in claim severity for reasons other than inflation

Factors exist that can drive the cost to settle claims for reasons other than standard inflation.

For example, demand surge caused by a very large catastrophe, as in the case of a hurricane, has an impact on not only the availability and cost of building materials such as roofing and other materials, but also on the availability and cost of labor.

Other factors such as increased vehicle traffic in an area not designed to handle the increased congestion and increased speed limits on busy roads are examples of changes that could cause claim severity to increase beyond what the Company’s historic reserves would reflect.

In addition, unexpected increases in the labor costs and healthcare costs that underlie insured risks, changes in costs of building materials, or changes in commodity prices for insured crops may cause fluctuations in the ultimate development of the case reserves.

Actual settlement experience different from historical data trends

When establishing IBNR reserves, the Company’s actuary takes into account many of the factors discussed above.

One of the more important factors that is considered when setting reserves is the past or historical claim settlement experience.

Our actuary considers factors such as the number of files entering litigation, payment patterns, length of time it takes Company claims personnel to settle the claims, and average payment amounts when estimating reserve amounts.

Should future settlement patterns change due to the legal environment, Company claims handling philosophy, or personnel, it may have an impact on the future claims payments, which could cause existing reserves to either be redundant (excessive) or deficient (below) compared to the actual loss amount.

Change in Reporting Lag

As discussed above, NI Holdings and its actuary utilize historical patterns to provide an accurate estimate of what will take place in the future.

Should we experience an unexpected delay in reporting time (claims are slower to be reported than in the past), our actuary or we may underestimate the anticipated number of future claims, which could cause the ultimate loss we may experience to be underestimated.

A lag in reporting may be caused by changes in how claims are reported (online vs.

through company personnel), the type of business or lines of business the Company is writing, the Company’s distribution system (direct writer, independent agent, or captive agent), and the geographic area where the Company chooses to insure risk.

Due to the inherent uncertainty underlying loss reserve estimates, final resolution of the estimated liability for unpaid losses and LAE may be higher or lower than the related loss reserves at the reporting date.

Therefore, actual paid losses, as claims are settled in the future, may be materially higher or lower in amount than current loss reserves.

The Company reflects adjustments to the liability for unpaid losses and LAE in the results of operations during the period in which the estimates are changed.

NI Holdings’

fixed income securities and equity securities are classified as available-for-sale and carried at estimated fair value as determined by management based upon quoted market prices or a recognized pricing service at the reporting date for those or similar investments.

Changes in unrealized investment gains or losses on the fixed income securities, net of applicable income taxes, are reflected directly in shareholders’

equity as a component of other comprehensive income (loss) and, accordingly, have no effect on net income (loss).

Changes in unrealized investments gains or losses on equity securities are reported in net income (loss).

Investment income is recognized when earned, and realized capital gains and losses on investments are recognized when investments are sold, or other-than-temporary impairments are recognized.

For additional information on the Company’s investments, see Part II, Item 8, Note 5 “Investments”

and Note 6 “Fair Value Measurements”.

Deferred Policy Acquisition Costs and Value of Business Acquired

Certain direct policy acquisition costs consisting of commissions, state premium taxes, and other direct underwriting expenses that vary with and are primarily related to the production of business are deferred and amortized over the effective period of the related insurance policies as the underlying policy premiums are earned.

As in the case of previous acquisitions, no deferred policy acquisition costs (“DAC”) were recorded in the acquisition of Westminster in accordance with purchase accounting guidance.

Rather, a separate intangible asset representing the value of business acquired (“VOBA”) was valued at $4,750 and established at the closing date.

This VOBA intangible asset was amortized into expense as the acquired unearned premiums were reported into income, in the same way as DAC, and was fully amortized at December 31, 2020.

Policy acquisition costs relating to new business written by Westminster were deferred following the closing date.

The release of the VOBA asset and the establishment of new DAC generally offset each other over the twelve months following the acquisition of Westminster.

At December 31, 2021 and 2020, deferred policy acquisition costs and the related liability for unearned premiums were as follows:

Deferred policy acquisition costs

Liability for unearned premiums

There were no VOBA intangible assets remaining at December 31, 2021 or 2020.

The method followed in computing DAC limits the amount of deferred costs to their estimated realizable value, which gives effect to the premium to be earned, related investment income, losses and LAE, and certain other costs expected to be incurred as the premium is earned.

Future changes in estimates, the most significant of which is expected losses and LAE, may require adjustments to DAC.

If the estimation of net realizable value indicates that DAC are not recoverable, they would be written off or a premium deficiency reserve would be established.

Current income taxes represent amounts paid to the federal government and certain states whose payment is based upon net income (subject to regulatory adjustments) generated by the Company.

The Company uses the asset and liability method of accounting for deferred income taxes.

Deferred income taxes arise from the recognition of temporary differences between financial statement carrying amounts and the income tax bases of our assets and liabilities.

A valuation allowance is provided when it is more likely than not that some portion of the deferred income tax asset will not be realized.

Total income taxes reflect both current income taxes and the change in the net deferred income tax asset or liability, excluding amounts attributed to accumulated other comprehensive income.

The Company had gross deferred income tax assets of $10,070 at December 31, 2021 and $8,603 at December 31, 2020, arising primarily from unearned premiums, loss reserve discounting, and net operating loss carryforwards.

A valuation allowance is required to be established for any portion of the deferred income tax asset for which the Company believes it is more likely than not that it will not be realized.

A valuation allowance of $1,008 and $931 was maintained at December 31, 2021 and December 31, 2020, respectively.

The Company had gross deferred income tax liabilities of $14,568 at December 31, 2021 and $16,429 at December 31, 2020, arising primarily from deferred policy acquisition costs, net unrealized capital gains on investments, and other intangible assets.

The Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets.

These judgments require us to make projections of future taxable income.

The judgments and estimates we make in determining its deferred income tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change.

Any reduction in estimated future taxable income may require the Company to record a valuation allowance against its deferred income tax assets.

As of December 31, 2021, the Company had no material unrecognized income tax benefits or accrued interest and penalties.

Federal income tax returns for the years 2018 through 2020 are open for examination.

Results of Operations

Our results of operations are influenced by factors affecting the property and casualty insurance and crop insurance industries in general.

The operating results of the United States property and casualty industry and crop insurance industry are subject to significant variations due to competition, weather, catastrophic events, changes in regulations, general economic conditions, rising medical expenses, judicial trends, fluctuations in interest rates, and other changes in the investment environment.

Our premium levels and underwriting results have been, and will continue to be, influenced by market conditions.

Pricing in the property and casualty insurance industry historically has been cyclical.

During a soft market cycle, price competition is more significant than during a hard market cycle and makes it difficult to attract and retain properly priced business.

During a hard market cycle, it is more likely that insurers will be able to increase their rates or profit margins.

A hard market typically has a positive effect on premium growth.

The markets that we serve are diversified, which requires management to regularly monitor our performance and competitive position by line of business and geographic market to schedule appropriate rate actions.

Premiums in the multi-peril crop insurance business are primarily influenced by the number of acres, commodity prices, and types of crops insured because the rates are established by the RMA rather than individual insurance carriers.

The expected experience of this business for the calendar year may also significantly affect the reported net earned premiums and losses due to the risk-sharing arrangement with the federal government.

Multi-peril crop insurance premiums are generally written in the second quarter, and earned ratably over the period of risk, which generally extends into the fourth quarter.

However, as was the case in 2020, if we experience a higher-than-average number of prevented planting claims early in the season, recognition of earned premiums may be accelerated due to a shortened risk period.

Premiums in the crop hail insurance business are also generally written in the second quarter, but earned over a shorter period of risk than multi-peril crop insurance.

Premiums in our other lines of business are written and earned throughout the year based on their coverage periods.

Losses on this business are also incurred throughout the year, but usually are more frequent and/or severe during periods of elevated weather-related activity.

For more information on the Company’s results of operations by segment, see Part II, Item 8, Note 20 “Segment Information”.

Years ended December 31, 2021, 2020, and 2019

The consolidated net income for the Company was $8,332 for the year ended December 31, 2021, compared to $41,344 for the year ended December 31, 2020 and $26,500 for the year ended December 31, 2019.

The major components of our operating revenues and net income for the three periods are shown below:

Year Ended December 31,

Net premiums earned

Fee and other income

Net investment income

Net capital gain on investments

Total revenues

Components of net income:

Net premiums earned

Losses and loss adjustment expenses

Amortization of deferred policy acquisition costs and other underwriting and general expenses

Underwriting gain (loss)

Fee and other income

Net investment income

Net capital gain on investments

Income before income taxes

Net Premiums Earned

Year Ended December 31,

Net premiums earned:

Direct premium

Assumed premium

Ceded premium

Total net premiums earned

Net premiums earned for the year ended December 31, 2021 increased $15,928, or 5.6%, to $299,589, compared to $283,661 for the year ended December 31, 2020.

Net premiums earned for the year ended December 31, 2020 increased $37,223, or 15.1%, to $283,661, compared to $246,438 for the year ended December 31, 2019.

Year Ended December 31,

Net premiums earned:

Private passenger auto

Non-standard auto

Home and farm

Total net premiums earned

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

Private passenger auto –

Net premiums earned for 2021 increased $524, or 0.7%, from 2020.

Premiums were impacted by continued soft market conditions in this segment throughout the year.

Non-standard auto –

Net premiums earned for 2021 increased $4,848, or 9.0%, from 2020.

The segment has benefited from the improved economic environment in the Chicago market where our non-standard auto business is concentrated.

Home and farm –

Net premiums earned for 2021 decreased $1,087, or 1.5%, from 2020.

The modest decrease was due to competitive market conditions and the related rate reduction taken in early 2021 in the Nodak Insurance farmowners line of business, and a year-over-year increase in ceded written premiums for this business.

Crop –

Net premiums earned for 2021 decreased $8,870, or 24.8%, from 2020.

Direct earned premiums increased by $3,648 primarily due to higher commodity prices on multi-peril crop business.

However, this increase was offset by a large increase in ceded earned premiums as a result of significant multi-peril crop losses from this year’s extreme drought conditions across North and South Dakota.

We also placed a higher number of multi-peril crop policies in the assigned risk fund of the SRA for 2021, resulting in higher levels of premiums and losses being ceded to the federal government.

Commercial –

Net premiums earned for 2021 increased $18,997, or 49.6%, from 2020.

The increase was primarily driven by growth in our Westminster commercial business as a result of a continuation of favorable market conditions, the positive impact of Westminster’s financial size category, and the 2020 AM Best rating upgrade.

All other –

Net premiums earned for 2021 increased $1,516, or 16.8%, from 2020.

Net premiums earned increased related to our participation in an assumed domestic and international reinsurance pool of business.

As of January 1, 2022, the Company made the decision to non-renew its participation in these pools.

Losses and Loss Adjustment Expenses

Year Ended December 31,

Net losses and LAE:

Direct losses and LAE

Assumed losses and LAE

Ceded losses and LAE

Total net losses and LAE

Net losses and LAE for the year ended December 31, 2021 increased $47,906, or 28.4%, to $216,379, compared to $168,473 for the year ended December 31, 2020.

Net losses and LAE for the year ended December 31, 2020 decreased $1,237, or 0.7%, to $168,473, compared to $169,710 for the year ended December 31, 2019.

Year Ended December 31,

Net losses and LAE:

Private passenger auto

Non-standard auto

Home and farm

Total net losses and LAE

Year Ended December 31,

Loss and LAE ratio:

Private passenger auto

Non-standard auto

Home and farm

Total loss and LAE ratio

Below are comments regarding significant changes in net losses and LAE, and the net loss and LAE ratios, by business segment:

Private passenger auto –

The net loss and LAE ratio deteriorated 19.1 percentage points in 2021 compared to 2020.

The increase was a result of a return to average loss frequency due to increased miles driven by our insureds compared to 2020 when pandemic-related restrictions were still in place.

Loss experience in 2021 has also been adversely impacted by an increase in uninsured/underinsured motorist liability claims frequency, as well as increased severity due to inflationary factors.

We are assessing necessary future rate actions as a result of the increased loss activity.

Non-standard auto –

The net loss and LAE ratio deteriorated 2.3 percentage points in 2021 compared to 2020.

Direct Auto has experienced modest elevations in loss frequency and severity compared to 2020 despite increased miles being driven compared to 2020.

Overall net losses and LAE increased due to strong year-to-date direct written premium growth at Direct Auto.

These profitable results have been offset by Primero’s higher loss frequency and severity due largely to the continued economic challenges in the Las Vegas market.

Home and farm –

The net loss and LAE ratio deteriorated 21.6 percentage points in 2021 compared to 2020.

This increase was driven by above average weather-related losses in 2021.

These losses included a severe weather-related catastrophe event in North Dakota during June, along with additional significant weather-related losses in Nebraska and South Dakota during the second half of the year.

Crop –

The net loss and LAE ratio deteriorated 15.8 percentage points in 2021 compared to 2020.

The extreme drought conditions across North Dakota, South Dakota, and Minnesota resulted in significantly elevated multi-peril crop losses.

However, in anticipation of the dry weather, we placed a higher number of multi-peril crop policies in the assigned risk fund of the SRA for 2021, resulting in increased premiums and losses ceded to the federal government.

Commercial –

The net loss and LAE ratio deteriorated 7.3 percentage points in 2021 compared to 2020.

This increase was primarily due to increased fire loss frequency in the Westminster book of business during the first and second quarters.

Westminster had a strong second half of the year as the Company continued to benefit from favorable market conditions, along with improved loss frequency and severity.

All other –

The net loss and LAE ratio deteriorated 25.6 percentage points in 2021 compared to 2020.

The increase was primarily due to elevated loss severity in our assumed domestic and international reinsurance pool of business, in particular anticipated losses associated with Hurricane Ida.

Amortization of Deferred Policy Acquisition Costs and Other Underwriting and General Expenses

Year Ended December 31,

Underlying expenses

Deferral of policy acquisition costs

Other underwriting and general expenses

Amortization of deferred policy acquisition costs

Total reported expenses

Underlying expenses for the year ended December 31, 2021 decreased $3,632, or 3.9%, compared to the year ended December 31, 2020.

Underlying expenses for the year ended December 31, 2020 increased $23,846, or 34.2%, compared to the year ended December 31, 2019, primarily due to the acquisition of Westminster.

Expense deferrals were $5,513 higher in the year ended December 31, 2021 compared to 2020, while amortization of those costs was $13,102 higher in 2021.

This increase in net expense was primarily due to strong year-over-year growth in our commercial and non-standard auto segments which generally pay higher agent commissions than our other lines, as well as growth in our other segments.

In addition, under acquisition accounting, there were no deferred policy acquisition costs reported on the acquisition balance sheet of Westminster, which had the impact of decreasing 2020 amortization of deferred policy acquisition costs relative to future years.

Offsetting this impact, the Company recorded an intangible asset, referred to as the VOBA, on its acquisition balance sheet which was amortized during 2020 as a component of other underwriting and general expenses.

As our mix of business has shifted and these premiums continue to be earned, the related deferral and amortization of expenses have also changed.

Underwriting Gain (Loss)

Year Ended December 31,

Underwriting gain (loss):

Private passenger auto

Non-standard auto

Home and farm

Total underwriting gain (loss)

Year Ended December 31,

Combined ratio:

Private passenger auto

Non-standard auto

Home and farm

Total combined ratio

Underwriting gain (loss) measures the pre-tax profitability of our insurance operations.

It is derived by subtracting losses and LAE, 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.

A combined ratio below 100% generally indicates a profitable line of business.

The results from underwriting operations decreased $43,199 for the year ended December 30, 2021 compared to the year ended December 31, 2020.

The overall combined ratio deteriorated 15.0 percentage points.

The primary drivers behind the elevated combined ratio for the year ended December 31, 2021 were the extreme drought conditions across North Dakota, South Dakota, and Minnesota on our multi-peril crop business;

above average weather-related losses in North Dakota, South Dakota, and Nebraska;

the return to average frequency, and increased severity due to inflationary factors, of private passenger and non-standard auto physical damage claims;

and higher levels of uninsured/underinsured motorist liability claims in private passenger auto.

These elevated losses were partially offset by profitable and strong growth from Direct Auto in the non-standard segment, along with continued profitability and growth from Westminster’s commercial business, particularly during the second half of the year.

Fee and Other Income

The Company had fee and other income of $1,775 for the year ended December 31, 2021, compared to $1,801 for the year ended December 31, 2020, and $2,125 for the year ended December 31, 2019.

Fee income attributable to Primero’s non-standard auto business is a key component in measuring its profitability.

Fee income on this business decreased slightly during 2021 compared to 2020 due to a decreased policy count.

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:

Year Ended December 31,

Average cash and invested assets

Gross investment income

Investment expenses

Net investment income

Gross return on average cash and invested assets

Net return on average cash and invested assets

Investment income, net of investment expense, decreased $140 for the year ended December 31, 2021 compared to the year ended December 31, 2020.

This decrease was primarily driven by the continued impact of lower reinvestment rates in the fixed income securities portfolio.

The Company’s net return on average cash and invested assets declined year-over-year, driven by a combination of factors.

Interest income decreased primarily due to a persistent low reinvestment rate environment, ongoing maturities of existing holdings with higher embedded yields, and significant cash inflows to the investment portfolio from the Company's business operations.

These decreases were partially offset by an increased allocation to high dividend equities within our equity portfolio, which increased the portfolio’s dividend yield compared to the prior year.

Net Capital Gain on Investments

Net capital gain on investments consisted of the following:

Year Ended December 31,

Gross realized gains

Gross realized losses, excluding other-than-temporary impairment losses

Net realized gain on investments

Change in net unrealized gain on equity securities

Net capital gain on investments

The Company had realized capital gains on investment of $17,768 for the year ended December 31, 2021, compared to $7,771 for the year ended December 31, 2020 and $3,246 for the year ended December 31, 2019.

The Company reported no other-than-temporary losses during any of the periods presented.

The Company’s equity portfolio experienced a decrease in net unrealized gains of $2,289 during the year ended December 31, 2021.

The net decrease is included in net capital gain on investments in the Company’s Consolidated Statements of Operations.

It was primarily driven by $17,118 in net realized gains taken throughout the year, as a result of ongoing portfolio rebalancing as well as a strategic reallocation of equity investment strategies designed to increase exposure to income-oriented equities in order to maintain yield in the portfolio.

The resulting net appreciation in the equity securities portfolio of $14,289 in 2021 is indicative of a strong rally in U.S.

equity markets during the year.

The Company’s fixed income securities are classified as available for sale because it will, from time to time, make sales of securities that are not impaired, consistent with our investment goals and policies.

The fixed income portion of the portfolio experienced a decrease in net unrealized gains of $9,796 during the year ended December 31, 2021.

The decrease was primarily the result of an increase in U.S.

interest rates, with 5-year and 10-year U.S.

Treasury yields increasing during the year by 90 basis points and 60 basis points, respectively.

The rise in rates was partially mitigated by a tightening of credit spreads across fixed-income sectors, given an improvement in capital markets following the volatility affecting invested assets in 2020 due to the impact of the COVID-19 pandemic.

Income before Income Taxes

For the year ended December 31, 2021, the Company had pre-tax income of $11,306, compared to $52,816 and $33,811 for the years ended December 31, 2020 and 2019, respectively.

The decrease in pre-tax results was largely attributable to the significant increase in loss experience during 2021.

The Company recorded income tax expense of $2,974 for the year ended December 31, 2021, compared to $11,472 and $7,311 for the years ended December 31, 2020 and 2019, respectively.

Our effective tax rate for 2021 was 26.3% compared to an effective tax rate of 21.7% and 21.6% for 2020 and 2019, respectively.

A portion of the effective tax rate is due to Illinois state income taxes, which led to the increased effective tax rate in 2021 given the higher proportion of these taxes relative to the Company’s overall income tax expense in comparison with 2020 and 2019.

The valuation against certain deferred income tax assets was $1,008 as of December 31, 2021 compared to $931 as of December 31, 2020.

For the year ended December 31, 2021, net income before non-controlling interest was $8,332, compared to $41,344 and $26,500 for the years ended December 31, 2020 and 2019, respectively.

This decrease in net income was largely attributable to the significant increase in loss experience during 2021.

Return on Average Equity

For the year ended December 31, 2021, the Company had annualized return on average equity, after non-controlling interest, of 2.4%, compared to annualized return on average equity, after non-controlling interest, of 12.4% and 9.1% for the years ended December 31, 2020 and 2019, respectively.

Average equity is calculated as the average between beginning and ending shareholders’

equity excluding non-controlling interest for the period.

Liquidity and Capital Resources

The Company generates sufficient funds from its operations and maintains a high degree of liquidity in its investment portfolio to meet the demands of claim settlements and operating expenses.

The primary sources of funds are premium collections, investment earnings, and maturing investments.

In 2017, we raised $93,145 in net proceeds from our IPO, which we planned to use for strategic acquisitions.

In 2018, we used $17,000 for the acquisition of Direct Auto.

On January 1, 2020, we acquired Westminster for $40,000.

We paid $20,000 at the time of closing.

The first two installments were paid in January 2021 and January 2022.

The Company anticipates using the net proceeds from the IPO to satisfy this obligation in December 2022.

We currently anticipate that cash generated from our operations and available from our investment portfolio, along with the remaining IPO net proceeds, will be sufficient to fund our operations.

The Company’s philosophy is to provide sufficient cash flows from operations to meet its obligations in order to minimize the forced sales of investments.

The Company maintains a portion of its investment portfolio in relatively short-term and highly liquid assets to ensure the availability of funds.

The changes in cash and cash equivalents for the years ended December 31, 2021, 2020, and 2019 were as follows:

Year Ended December 31,

Net cash flows from operating activities

Net cash flows from investing activities

Net cash flows from financing activities

Net increase (decrease) in cash and cash equivalents

For the year ended December 31, 2021, net cash provided by operating activities totaled $29,168 compared to $51,010 a year ago.

Consolidated net income of $8,332 for the year ended December 31, 2021 compared to consolidated net income of $41,344 for the same period a year ago.

The decrease in consolidated net income, along with changes in reinsurance recoverables on losses, other assets, and unearned premiums, were offset by changes to the FCIC receivable/payable and unpaid losses and LAE.

For the year ended December 31, 2021, net cash used by investing activities totaled $48,151 compared to $200 net cash provided by investing activities a year ago.

In 2021, the Company invested excess cash generated from operations and the implementation of the intercompany reinsurance pooling agreement into longer term investments.

For the year ended December 31, 2021, net cash used by financing activities totaled $11,471 compared to $12,265 a year ago.

The Company paid the first installment of $6,667 of the additional consideration for Westminster during the first quarter of 2021.

The Company repurchased shares of its own common stock for $4,316 during 2021, compared to $12,234 during 2020.

For the year ended December 31, 2020, net cash provided by operating activities totaled $51,010 compared to $25,665 for the year ended December 31, 2019.

The consolidated net income of $41,344 for the year ended December 31, 2020 compared to consolidated net income of $26,500 for the year ended December 31, 2019.

The increase in cash flows from operating activities also reflected differences in the activity between the Company and the FCIC during 2020 and 2019, growth in unearned premiums due to increasing sales of the Westminster commercial business, and lower levels of loss and loss adjustment expenses.

During 2019, unrealized gains on investments were offset by increases in unpaid losses and LAE and unearned premiums to serve as the primary reconciling items between net income and net cash flows from operating activities.

For the year ended December 31, 2020, net cash provided by investing activities totaled $200 compared to $30,458 used by investing activities for the year ended December 31, 2019.

In 2020, the initial cash payment made at the time of the Westminster acquisition was $703 more than the cash and cash equivalents received in the acquisition.

During 2020, the sales and maturities of securities approximated the purchase of new securities.

Normally, the excess cash generated from operations would be invested in longer term investments.

However, the implementation of the intercompany pooling reinsurance agreement necessitated substantial cash transfers between the insurance company subsidiaries during December 2020, which were not fully reinvested in longer-term investments by year-end.

The prior year reflects the impact of investing excess cash generated from operations into longer term investments, partially offset by sales and maturities of fixed income securities.

For the year ended December 31, 2020, net cash used by financing activities totaled $12,265 compared to $2,025 for the year ended December 31, 2019.

The Company repurchased shares of its own common stock for $12,234 and $2,006 during 2020 and 2019, respectively.

As a standalone entity, and outside of the net proceeds from the IPO, the Company’s principal source of long-term liquidity will be dividend payments from its directly-owned subsidiaries.

Nodak Insurance is restricted by the insurance laws of North Dakota as to the amount of liquid 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 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 capital 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.

The amount available for payment of dividends from Nodak Insurance to us during 2022 without the prior approval of the North Dakota Insurance Department is approximately $21,493 based upon the surplus of Nodak Insurance at December 31, 2021.

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.

The Nodak Insurance Board of Directors declared and paid a $6,000 dividend to NI Holdings during the year ended December 31, 2020.

No dividends were declared or paid by Nodak Insurance during the years ended December 31, 2021 or 2019.

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 us during 2022 without the prior approval of the North Dakota Insurance Department is approximately $3,796 based upon the surplus of Direct Auto at December 31, 2021.

No dividends were declared or paid by Direct Auto during the years ended December 31, 2021, 2020, or 2019.

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 us during 2022 without the prior approval of the North Dakota Insurance Department is approximately $2,471 based upon the surplus of Westminster at December 31, 2021.

No dividends were declared or paid by Westminster during the years ended December 31, 2021 or 2020.

Contractual Obligations

The primary contractual obligations of the Company include gross loss and LAE payments, consideration due relating to the acquisition of Westminster, and operating lease obligations.

The Company’s unpaid losses and LAE were $139,662 as of December 31, 2021.

Historical payment experience indicates that approximately 57% of this amount will be paid during 2022 and another 30% will be paid over the subsequent two years.

The actual timing and amounts of these payments in the future may vary.

Westminster was acquired on January 1, 2020 for a purchase price of $40,000, subject to certain adjustments.

The Company paid $20,000 from the net proceeds from the IPO at time of closing, with another $20,000 payable in three equal installments.

We paid the first two installments on the first two anniversaries of the closing, in January 2021 and January 2022.

We will pay the final installment, plus or minus any adjustments, in December 2022.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Part II, Item 8, Note 4 “Recent Accounting Pronouncements”.

October 1 – 31, 2022

November 1 – 30, 2022

December 1 – 31, 2022

(1) Shares purchased pursuant to the August 11, 2021, and May 9, 2022, publicly announced share repurchase authorizations of up to approximately

$5,000 and $10,000, respectively, of the Company’s outstanding common stock.

The August 11, 2021, repurchase authorization was completed

in November 2022.

(2) Maximum dollar value of shares that may yet be purchased consist of up to approximately $9,265 under the May 9, 2022, publicly announced

share repurchase authorization.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity