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Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-08 · 447 added, 468 removed, 319 unchanged (74% of the section changed)

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

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.

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that could cause actual results to differ materially from the results described, or implied by, the forward-looking statements contained

Our Management’s Discussion and Analysis

of Financial Condition and Results of Operations included in this document generally discusses 2022 and 2021 items and year-to-year comparisons

Our Management’s Discussion and Analysis of

Financial Condition and Results of Operations included in this document generally discusses 2023 and 2022 items and year-to-year comparisons

between 2023 and 2022.

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Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 8, 2023.

All dollar amounts, except per share amounts,

are in thousands.

All dollar amounts, except per share amounts, are

in thousands.

Results of Operations

Our consolidated financial statements are prepared on the basis

of accounting principles generally accepted in the United States of America (“GAAP”).

Management evaluates our operations

by monitoring key measures of growth and profitability, which may include the disclosure of certain non-GAAP financial measures.

Our consolidated financial statements are prepared on the basis of

accounting principles generally accepted in the United States of America (“GAAP”).

Management evaluates our operations by

monitoring key measures of growth and profitability, which may include the disclosure of certain non-GAAP financial measures.

of operations are influenced by numerous factors affecting the U.S.

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fluctuations in interest rates, and other changes in the financial markets.

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

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

The markets that we serve are diversified, which requires us

to regularly monitor our performance and competitive position by line of business and geographic market to determine appropriate rate

Premiums in the multi-peril crop insurance business are primarily

influenced by the types of crops planted, number of acres insured, and commodity prices because the rates are established by the RMA rather

than individual insurance carriers.

Our premium levels and underwriting results have been, and will continue

to be, influenced by market conditions.

The property and casualty insurance industry has historically been characterized by soft markets

(periods of relatively high levels of price competition, less restrictive underwriting practices, and generally low premium rates) followed

by hard markets (periods of capital shortages resulting in a lack of insurance availability, relatively low levels of price competition,

more selective underwriting of risks, and relatively high premium rates).

During soft markets, we may lose business to other carriers

offering competitive insurance at lower rates.

We may also choose to reduce our premiums or limit premium increases leading to a reduction

in profit margins and revenues.

Our industry is also influenced by general economic conditions, which could reduce overall premium volume

for us and our competitors.

Additionally, the industry is impacted by changes in customer preferences, including customer demand for direct,

point-of-sale, or other non-traditional distribution channels.

We regularly monitor our performance and competitive position by line of

business and geographic market to determine appropriate rate actions.

Premiums in the multi-peril crop insurance business are primarily influenced

by the types of crops planted, number of acres insured, and commodity prices 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

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The consolidated net loss for the Company was $5,226 for the year

ended December 31, 2022, compared to net income of $8,332 for the year ended December 31, 2021, and $41,344 for the year ended December

ended December 31, 2023, compared to a net loss of $53,775 for the year ended December 31, 2022, and net income of $8,332 for the year

ended December 31, 2021.

The major components of our revenues and net income (loss) for the

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

Underwriting gain (loss)

Underwriting loss

Fee and other income

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Net investment gains (losses)

Goodwill impairment charge

Income (loss) before income taxes

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Total net premiums earned

Below are comments regarding significant changes in net premiums

earned, by business segment:

Below are comments regarding significant changes in net premiums earned

by business segment:

Private passenger auto – Net premiums earned for

2023 increased $5,755, or 7.4%, from 2022.

Results were driven by rate increases in North Dakota, South Dakota, and Nebraska.

Non-standard auto – Net premiums earned for 2022 increased

$8,326, or 14.2%, from 2021.

Results were driven by new business growth, increased retention, and rate increases in the Chicago market

where our non-standard auto business is concentrated.

This increase was driven by significant rate increases in North Dakota, South Dakota, and Nebraska,

partially offset by lower new business production as a result of underwriting actions taken to improve profitability.

Non-standard auto – Net premiums earned for 2023

increased $20,849, or 31.2%, from 2022.

This increase was driven by new business growth, improved retention, and significant rate increases

in the Chicago market where our non-standard auto business is concentrated.

Home and farm – Net premiums earned for 2023 increased

$5,008, or 6.4%, from 2022.

Results were driven by increased insured property values, which were primarily the result of using higher

inflationary factors, along with rate increases.

Crop – Net premiums earned for 2022 increased $7,873,

This increase was driven by rate increases along with increased insured property values, which were primarily

the result of higher inflationary factors.

These premium increases were partially offset by lower levels of new business production as

a result of underwriting actions taken to improve profitability.

Crop – Net premiums earned for 2023 decreased $8,904,

or 25.6%, from 2022.

Results were driven by the impact of higher commodity prices on our multi-peril crop insurance direct written premiums.

In addition, earned premiums increased as a result of ceding significantly less multi-peril crop insurance business into the Assigned

Risk fund of the SRA in 2022 compared to the prior year.

This decrease was driven by lower commodity prices and lower muti-peril crop insurance rates, combined with fewer

acres insured in the current year.

In addition, the strong multi-peril crop results for the current year resulted in higher ceded premiums

as required by the SRA.

Commercial – Net premiums earned for 2023 increased

$3,045, or 5.0%, from 2022.

Results were driven by increased insured values which were primarily the result of higher inflationary factors

as well as continued growth in rate and new business premiums.

This increase was driven by prior period new business growth, increased insured values which were primarily

the result of higher inflationary factors, and continued increases in rate, partially offset by higher ceded premiums and the impact of

underwriting actions taken to improve profitability.

All other – Net premiums earned for 2023 decreased

$2,906, or 31.4%, from 2022.

Results were driven by the Company’s decision to non-renew its participation in an assumed domestic

and international reinsurance pool of business as of January 1, 2022.

This decrease was driven by the decision to non-renew our participation in an assumed domestic and international

reinsurance pool of business as of January 1, 2022.

Losses and Loss Adjustment Expenses

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Total net losses and loss adjustment expenses

The Company’s net losses and loss adjustment expenses for

the year ended December 31, 2022 increased $78,053, or 36.1%, to $294,432, compared to $216,379 for the year ended December 31, 2021.

The Company’s net losses and loss adjustment expenses 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.

The Company’s net losses and loss adjustment expenses for the

year ended December 31, 2023 decreased $50,020, or 17.0%, to $244,412, compared to $294,432 for the year ended December 31, 2022.

The Company’s net losses and loss adjustment expenses for the

year ended December 31, 2022 increased $78,053, or 36.1%, to $294,432, compared to $216,379 for the year ended December 31, 2021.

Year Ended December 31,

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loss adjustment expenses, and the net loss and loss adjustment expenses ratios by business segment:

Private passenger auto – The net loss and loss adjustment

expenses ratio increased 2.0 percentage points in 2022 compared to 2021.

This increase was driven by elevated loss costs due to continued

high levels of inflation and increased weather-related comprehensive losses in Nebraska and South Dakota.

We have addressed this increased

frequency and severity through recent aggressive underwriting actions and rate increases.

Private passenger auto – The net loss and loss

adjustment expenses ratio decreased 12.1 percentage points in 2023 compared to 2022.

This decrease was the result of recent significant

rate increases, lower loss frequency in the current year, and favorable prior year reserve development, partially offset by elevated loss

costs due to continued high levels of inflation.

Non-standard auto – The net loss and loss adjustment

expenses ratio increased 12.9 percentage points in 2023 compared to 2022.

Loss and loss adjustment expenses were once again impacted by

elevated loss costs due to continued high levels of inflation partially offset by successful implementation of various strategic initiatives

in 2022 as well as rate increases taken throughout the year.

Home and farm – The net loss and loss adjustment expenses

ratio increased 66.9 percentage points in 2022 compared to 2021.

This increase was driven by catastrophe losses in Nebraska, South Dakota,

and North Dakota that occurred during second and third quarters of 2022.

Catastrophe losses, net of reinsurance, for the segment accounted

for 72.1 percentage points of the net loss and loss adjustment expense ratio for the year ended December 31, 2022, compared to 9.9 percentage

points for the same period for 2021.

We have addressed the increased loss and loss adjustment expenses ratio through recent aggressive

underwriting actions and rate increases.

Crop – The net loss and loss adjustment expenses ratio

decreased 47.8 percentage points in 2022 compared to 2021.

This improvement was due to more favorable crop growing conditions in 2022

in comparison to the extreme drought conditions faced in 2021.

This increase was driven by elevated loss severity as a result

of inflationary factors as well as unfavorable prior year loss reserve development, partially offset by recent significant rate increases.

We continue to take significant rate and underwriting actions as a result of these elevated losses and challenging market conditions.

Home and farm – The net loss and loss adjustment

expenses ratio decreased 76.5 percentage points in 2023 compared to 2022.

This decrease was driven by the much-improved loss experience

as a result of having no catastrophe losses during 2023 compared to 2022, combined with improved non-catastrophe weather losses and the

significant rate increases and underwriting actions we have implemented to address the profitability on these lines of business.

losses, net of reinsurance, for the Home and Farm segment accounted for 72.1 percentage points of the net loss and loss adjustment expense

ratio for the year ended December 31, 2022.

Crop – The net loss and loss adjustment expenses

ratio decreased 14.1 percentage points in 2023 compared to 2022.

This decrease was due to improved crop growing conditions in 2023 in

comparison to 2022.

Commercial – The net loss and loss adjustment expenses

ratio increased 32.4 percentage points in 2022 compared to 2021.

This increase was driven by increased frequency and severity of fire

losses as well as increased liability claims in our commercial multi-peril line of business.

In addition, our results were impacted by

freezing claims from winter storm Elliott.

Our North Dakota commercial business also experienced elevated weather-related losses which

contributed to this increase.

ratio decreased 2.0 percentage points in 2023 compared to 2022.

This decrease was driven by higher ceded losses in the current year, partially

offset by higher levels of unfavorable prior year reserve development and elevated loss severity in the current year.

We continue to take

significant rate and underwriting actions to improve the segment’s profitability.

All other – The net loss and loss adjustment expenses

ratio decreased 44.8 percentage points in 2023 compared to 2022.

The decrease was driven by the Company’s decision to non-renew

its participation in an assumed domestic and international reinsurance pool of business as of January 1, 2022.

The loss and loss adjustment

expense ratio was also impacted by favorable prior year development in our assumed domestic and international reinsurance pool of business.

This decrease was driven by improved loss experience related to the excess

liability lines of business.

Underwriting and General Expenses and Expense Ratio

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operational efficiency in producing, underwriting, and administering its insurance business.

The overall expense ratio decreased 1.9 percentage

points in the year ended December 31, 2022, compared to the same period in 2021.

This decrease was driven by the impact of the significantly

higher multi-peril crop insurance net premiums earned during 2022 in our crop segment, which operates at a significantly lower expense

ratio relative to our other segments.

The overall expense ratio increased 2.1 percentage points in the year ended December 31, 2021, compared

to the same period in 2020.

The overall expense ratio increased 3.6

percentage points in the year ended December 31, 2023, compared to the same period in 2022.

The increase in amortization of deferred

policy acquisition costs was driven by higher deferrable costs resulting from overall premium growth compared to the prior year, including

significant growth in the non-standard auto segment which generally pays higher agent commissions than our other segments.

in other underwriting and general expenses was due to the impact of continued high levels of inflation and 2022 expenses being favorably

impacted by multi-peril crop insurance final settlements.

Underwriting Gain (Loss) and Combined Ratio

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Home and farm

Total underwriting gain (loss)

Total underwriting loss

Year Ended December 31,

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as a percentage of net premiums earned and measures our overall underwriting profit.

The total underwriting loss increased $52,097, or 398.3%, for the

year ended December 31, 2022, compared to the same period in 2021.

These results were driven by the factors discussed in the Losses and

Loss Adjustment Expenses section above.

The overall combined ratio increased 15.6 percentage points in the

The total underwriting loss decreased $53,111, or 81.5%, for the year

ended December 31, 2023, compared to the same period in 2022.

These results were driven by the factors discussed in the Losses and Loss

Adjustment Expenses section above.

The overall combined ratio decreased 16.5 percentage points in the

year ended December 31, 2023, compared to the same period in 2022.

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Fee and Other Income

The Company had fee and other income of $1,453 for the year ended

December 31, 2022, compared to $1,775 for the year ended December 31, 2021, and $1,801 for the year ended December 31, 2020.

attributable to the non-standard auto segment decreased to $831 for the year ended December 31, 2022, from $1,280 for the year ended

December 31, 2021, due to a reduction in policies that generate fee income.

We had fee and other income of $1,978 for the year ended December 31,

2023, compared to $1,453 for the year ended December 31, 2022, and $1,775 for the year ended December 31, 2021.

Fee income is largely

attributable to the non-standard auto segment and is a key component in measuring its profitability.

Fee and other income for non-standard

auto increased to $1,293 for the year ended December 31, 2023, from $831 for the year ended December 31, 2022, due to an increase in policies

that generate fee income.

Goodwill Impairment Charge

We had a goodwill impairment charge of $6,756 for the year ended December

31, 2023, compared to $0 for the years ended December 31, 2022 and 2021.

See Part II, Item 8, Note 10 “Goodwill and Other Intangibles”

for additional information.

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:

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,

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31, 2023, compared to the year ended December 31, 2022.

This increase was primarily driven by an increase in the fixed income portfolio

average book value (measured at cost or amortized cost), the rising interest rate environment, as well as a higher allocation of invested

assets to private placement securities and high dividend yield equities.

Net investment income decreased $140 for the year ended December

This increase was primarily driven by higher reinvestment rates as well as a strategic

increased allocation to fixed income securities in our investment portfolio.

Net investment income increased $689 for the year ended December

31, 2022, compared to the year ended December 31, 2021.

The Company’s gross and net return on average cash and invested

assets increased year-over-year, driven by a decrease in average cash and invested assets (measured at fair value) as a result of unfavorable

market conditions for both fixed income and equity securities as well as higher net investment income.

Gross and net return on average cash and invested assets increased

year-over-year, driven by the higher net investment income and a higher proportion of the equity portfolio being invested in high dividend

yield equities in 2023, along with a decrease in average cash and invested assets (measured at fair value).

This decrease in average cash

and invested assets was driven by challenging equity market conditions, particularly during the middle and later stages of 2022, combined

with investment sales as a result of an unusually high number of weather-related losses in 2022.

Net Investment Gains (Losses)

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Net investment gains (losses)

The Company had net realized gains of $1,924 for the year ended

December 31, 2022, compared to $17,768 for the year ended December 31, 2021, and $7,771 for the year ended December 31, 2020.

reported no credit impairment losses during any of the periods presented.

The Company experienced a decrease in net unrealized gains on equity

securities of $15,050 during the year ended December 31, 2022, driven by changes in fair value attributable to unfavorable equity markets.

In addition, the Company’s sales activity (and resulting gains and losses) impacts the level and direction of the change in the

net unrealized gain or loss of its equity securities portfolio.

The Company had net realized gains on the sale of equity securities of

$2,075, $17,118, and $6,868 during the years ended December 31, 2022, 2021, and 2020, respectively.

The Company’s fixed income securities are classified as available

for sale because it will, from time to time, execute sales of securities that are not impaired to meet liquidity needs or for other strategic

purposes, in accordance with our investment policy.

The fixed income portfolio experienced an unfavorable change in net unrealized gains/losses

of $46,362 during the year ended December 31, 2022, compared to a decrease in net unrealized gains of $9,796 during the year ended December

The changes were primarily the result of rising interest rates in the U.S.

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.

fixed income portfolio experienced an increase in net unrealized gains of $9,264 during the year ended December 31, 2020.

We had net realized gains of $12,051 for the year ended December 31,

2023, compared to $1,924 for the year ended December 31, 2022, and $17,768 for the year ended December 31, 2021.

The year-to-date increase

in net realized gains was primarily the result of a strategic liquidation of a portfolio of equity securities in the first quarter of

The gross realized gains from the sale of these securities were largely offset by the elimination of the unrealized gain position

of these securities.

No credit impairment losses were reported during any of the periods presented.

We experienced a decrease in net unrealized gains on equity securities

of $9,927 during the year ended December 31, 2023.

The current period change in net unrealized gains on equity securities was driven by

the equity portfolio liquidation noted above and the impact of changes in fair value attributable to equity market volatility.

year decreases were driven by the impact of changes in fair value attributable to unfavorable equity markets.

We had net realized gains

on the sale of equity securities of $12,633, $2,075, and $17,118 during the years ended December 31, 2023, 2022, and 2021, respectively.

Our fixed income securities are classified as available for sale because

we will, from time to time, execute sales of securities that are not impaired, consistent with our investment goals and policies.

fixed income portion of the portfolio experienced net unrealized gains of $10,654 during the year ended December 31, 2023, compared to

net unrealized losses of $46,362 during the year ended December 31, 2022.

The changes were primarily the result of changes in U.S.

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.

The fixed income portfolio experienced a decrease in net unrealized gains of $9,796

during the year ended December 31, 2021.

Income (Loss) before Income Taxes

For the year ended December 31, 2022, the Company had pre-tax loss

of $69,029, compared to pre-tax income of $11,306 and $52,816 for the years ended December 31, 2021 and 2020, respectively.

in pre-tax income was largely attributable to the significant catastrophe losses in Nebraska, South Dakota, and North Dakota, along with

the change in net investment gains/losses that was driven by the impact of unfavorable equity markets during 2022.

We had a pre-tax loss of $4,263 for the year ended December 31, 2023,

a pre-tax loss of $69,029 for the year ended December 31, 2022, and pre-tax income of $11,306 for the year ended December 31, 2021.

year-over-year improvement in 2023 compared to 2022 was largely attributable to the significant catastrophe losses and significantly higher

investment losses during 2022, partially offset by higher unfavorable prior year reserve development during 2023.

Income Tax Expense (Benefit)

The Company recorded income tax benefit of $15,254 for the year

ended December 31, 2022, compared to income tax expense of $2,974 and $11,472 for the years ended December 31, 2021 and 2020, respectively.

We recorded income tax expense of $963 for the year ended December

31, 2023, an income tax benefit of $15,254 for the year ended December 31, 2022, and income tax expense of $2,974 for the year ended December

Our effective tax rate for 2023 was (22.6)% compared to an effective tax rate of 22.1% and 26.3% for 2022 and 2021, respectively.

of the effective tax rate is due to state income taxes, which drove the higher effective tax rate in 2021.

The valuation allowance against

certain deferred income tax assets was $694 as of December 31, 2022 compared to $1,008 as of December 31, 2021.

Our 2023 effective tax rate was impacted by several factors, but the current year non-taxable goodwill impairment charge was the most

significant driver of the variance from the statutory rate.

The valuation allowance against certain deferred income tax assets was $505

as of December 31, 2023 compared to $694 as of December 31, 2022.

Net Income (Loss)

For the year ended December 31, 2022, the Company had a net loss

before non-controlling interest of $53,775, compared to income of $8,332 and $41,344 for the years ended December 31, 2021 and 2020, respectively.

The decrease was largely attributable to the significant catastrophe losses in Nebraska, South Dakota, and North Dakota, along with the

change in net investment gains/losses that was driven by the impact of unfavorable equity markets during 2022.

We had a net loss before non-controlling interest of $5,226 for the

year ended December 31, 2023, a net loss of $53,775 for the year ended December 31, 2022, and net income of $8,332 for the year ended

December 31, 2021.

The year-over-year improvement in 2023 compared to 2022 was largely attributable to the significant catastrophe losses

and significantly higher investment losses during 2022, partially offset by higher unfavorable prior year reserve development during 2023.

Return on Average Equity

For the year ended December 31, 2022, the Company had annualized

return on average equity, after non-controlling interest, of (17.9)%, compared to annualized return on average equity, after non-controlling

interest, of 2.4% and 12.4% for the years ended December 31, 2021 and 2020, respectively.

For the year ended December 31, 2023, we had annualized return on

average equity, after non-controlling interest, of (2.2)%, compared to annualized return on average equity, after non-controlling interest,

of (17.9)% and 2.4% for the years ended December 31, 2022 and 2021, respectively.

Average equity is calculated as the average between beginning and

ending shareholders’ equity, excluding non-controlling interest, for the period.

ending equity, excluding non-controlling interest, for the period.

Principal Revenue Items

The Company derives its revenue primarily from net premiums earned,

net investment income, and net investment gains (losses).

Revenue is primarily derived from net premiums earned, net investment

income, and net investment gains (losses).

Gross and Net Premiums Written

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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 multi-peril crop insurance

Our 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 multi-peril crop insurance

are recognized and earned during the period of risk, which usually begins in spring and ends with harvest in the fall.

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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.

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.

such as winter wheat, but the vast majority of crop insurance we write covers crops planted in the spring.

Net Investment Income and Net Investment

Gains (Losses)

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 investment

gains (losses) are reported separately from net investment income.

The Company recognizes realized gains when investments are sold for

an amount greater than their cost or

amortized cost (in the case of fixed income securities) and realized losses when investments are

sold for an amount less than their cost or amortized cost or when credit impairments are recorded, as applicable.

The Company recognizes

changes in unrealized gains and losses of equity securities in net income as part of net investment gains (losses).

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 changes

have no impact on net income but do impact shareholders’ equity.

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.

We invest our excess cash in fixed income and equity securities.

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

Net investment gains

(losses) are reported separately from net investment income.

We recognize realized gains when investments are sold for an amount greater

than their cost or amortized cost (in the case of fixed income securities) and realized losses when investments are sold for an amount

less than their cost or amortized cost or when credit impairments are recorded, as applicable.

We recognize changes in unrealized gains

and losses of equity securities in net income as part of net investment gains (losses).

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 changes have no impact

on net income but do impact shareholders’ equity.

The portfolio of investments for NI Holdings and its insurance subsidiaries

is managed by Conning, Inc., which has 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 loss

adjustment expenses, amortization of deferred policy acquisition costs, other underwriting and general expenses, and income taxes.

Our expenses consist primarily of losses and loss adjustment expenses,

amortization of deferred policy acquisition costs, other underwriting and general expenses, and income taxes.

Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses 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

Losses and loss adjustment expenses 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.

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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

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

Expenses incurred to underwrite risks are referred to as policy acquisition

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 or owed

to the federal government and certain states whose payment is based upon net income (subject to regulatory adjustments) generated by the

The generation of net losses may result in income tax benefits.

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

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with GAAP requires both the use of estimates and judgment relative to the application of appropriate accounting policies.

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 are required

to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related

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

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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 (loss

adjustment expenses).

The Company’s liability for unpaid losses and loss adjustment expenses consists of (1) case reserves, which

are reserves for claims that have been reported to the Company, and (2) IBNR, which are reserves for claims that have been incurred but

have not yet been reported and for the future development of reported claims.

As some claims may not be reported for several years, the

liability for unpaid losses and loss adjustment expenses includes significant estimates for IBNR.

With respect to our traditional property and casualty insurance products,

we maintain reserves for the payment of claims (indemnity losses) and expenses related to adjusting those claims (loss adjustment expenses).

Our liability for unpaid losses and loss adjustment expenses consists of (1) case reserves, which are reserves for claims that have been

reported to us, and (2) IBNR, which represents reserves for claims that have been incurred but have not yet been reported and for the

future development of reported claims.

As some claims may not be reported for several years, the liability for unpaid losses and loss

adjustment expenses includes significant estimates for IBNR.

Loss adjustment expenses consist of two components – allocated

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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.

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.

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

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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.

When a catastrophe occurs, which in our case usually involves the weather

perils of wind and hail, we utilize mapping technology through geographic coding of our property risks to overlay the path of the storm.

This enables us 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

We have also begun reviewing the results of the predicted cost of the claim generated by the catastrophe models as a reasonability

check on the anticipated cost of 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.

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.

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

The Company’s actuaries assist with the estimation of the

liability for unpaid losses and loss adjustment expenses.

The actuaries prepare estimates by first deriving an actuarially based estimate

of the ultimate cost of total losses and loss adjustment expenses incurred as of the financial statement date based on established actuarial

methods as described below.

We then reduce the estimated ultimate loss and loss adjustment expenses by loss and loss adjustment expenses

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, weighted averages of the methods, and judgment.

The specific method used to estimate the

ultimate losses varies depending on the judgment of the actuaries as to what is the most appropriate 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.

Management 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 loss adjustment expenses by using the following actuarial methodologies:

are notified immediately of a potential loss so that we can quickly recover reinsurance payments once the retention is exceeded.

We estimate 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 our anticipated losses for this line of business.

Our actuaries assist with the estimation of the liability for unpaid

losses and loss adjustment expenses.

The actuaries prepare estimates by first deriving an actuarially based estimate of the ultimate cost

of total losses and loss adjustment expenses incurred as of the financial statement date based on established actuarial methods as described

We then reduce the estimated ultimate loss and loss adjustment expenses by loss and loss adjustment expenses payments and case

reserves carried as of the financial statement date.

The actuarially determined estimate is based upon indications from various actuarial

methodologies including paid chain-ladder, incurred chain-ladder, Bornhuetter-Ferguson, weighted averages of the methods, and judgment.

The specific method used to estimate the ultimate losses varies depending on the judgment of the actuaries as to what is the most appropriate

for the line of 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.

Management may

adjust the actuarial estimates based on this supplemental information in order to arrive at the amount recorded in the consolidated financial

A further discussion of the actuarial methodologies used follows:

Bornhuetter-Ferguson Method — The Bornhuetter-Ferguson

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The resulting dollars are then multiplied by

the expected percentage of unpaid (or unreported) losses described above.

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 loss adjustment expenses

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 loss adjustment expenses.

Ultimate losses or loss adjustment expenses are then selected for each accident year from the various methods

Paid and Case Incurred Loss Development (Chain-Ladder) Method

— The Paid and Case Incurred Loss Development Method utilizes ratios of cumulative paid or case incurred losses or loss adjustment

expenses 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 loss adjustment expenses.

Ultimate losses or loss adjustment expenses are then selected for each accident year from the various

methods employed.

Ratio of Paid Allocated Loss Adjustment Expenses to Paid Loss

Method — The Ratio of Paid Allocated Loss Adjustment Expenses to Paid Loss Method utilizes the ratio of paid allocated loss

adjustment expenses 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 allocated loss adjustment expenses to paid losses.

The projected ultimate ratio is then multiplied

by the selected ultimate losses, by accident year, to yield the ultimate allocated loss adjustment expenses.

Allocated loss adjustment

expenses reserves are calculated by subtracting paid losses from ultimate allocated loss adjustment expenses.

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, weather, 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 loss adjustment expenses 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

loss adjustment expenses are established.

There is an inherent amount of uncertainty in the establishment

of liabilities for unpaid losses and loss adjustment expenses.

adjustment expenses to paid losses and is similar to the Paid and Case Incurred Loss Development (Chain-Ladder) Method described above,

except that the data projected are the ratios of paid allocated loss adjustment expenses to paid losses.

The projected ultimate ratio

is then multiplied by the selected ultimate losses, by accident year, to yield the ultimate allocated loss adjustment expenses.

loss adjustment expenses reserves are calculated by subtracting paid losses from ultimate allocated loss adjustment expenses.

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/staffing, inflation, weather, legal trends, and regulatory and legislative changes.

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 loss adjustment expenses 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 loss adjustment expenses are established.

There is an inherent amount of uncertainty in the establishment of

liabilities for unpaid losses and loss adjustment expenses.

This uncertainty is greatest in the current and most recent accident years

due to the more recent nature of the claims being reported and 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 may 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

and adjusted by our claims staff.

Therefore, the reserves carried in these more recent accident years are generally more conservative

than those carried for older accident years.

As we have 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 may have an impact on our 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

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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.

by the Company, causing us 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.

reported, adjusted, and reserved may affect the reserves we establish.

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

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

Should the economic inflation rate increase significantly, 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.

have a significant impact on our 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 we usually settle 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.

the economic inflation rate increase significantly, we may not anticipate the need to adjust the IBNR reserves accordingly, which could

lead to deficient IBNR reserves.

Increases or decreases in claim severity for reasons other than

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only the availability and cost of building materials such as roofing and other materials, but also the availability and cost of labor.

Numerous other factors could also cause claim severity to increase beyond what the Company’s historic reserves would reflect.

addition, unexpected increases in labor, healthcare, or building material costs and other factors may cause fluctuations in the ultimate

development of the case reserves.

Numerous other factors could also cause claim severity to increase beyond what our historic reserves would reflect.

In addition, unexpected

increases in labor, healthcare, or building material costs and other factors 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 actuaries consider

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 actuaries consider 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

When establishing IBNR reserves, our actuaries consider 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

Our actuaries consider factors such as the number of files entering litigation, payment patterns, length of time it takes

our claims personnel to settle the claims, and average payment amounts when estimating reserve amounts.

Should future settlement patterns

change due to the legal environment, our 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, the Company and its actuaries 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), 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, the

types or lines of business the Company writes, the Company’s distribution system, and the geographic area where the Company chooses

to insure risk.

As discussed above, we 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), 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, the types or lines of business we write,

our distribution system, and the geographic area where we choose to insure risk.

Due to the inherent uncertainty underlying loss reserve estimates,

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in amount than current loss reserves.

The Company reflects adjustments to the liability for unpaid losses and loss adjustment expenses

in the results of operations during the period in which the estimates are changed.

The Company’s 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 independent 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 from fixed income securities is recognized when earned,

and realized investment gains (losses) are recognized when investments are sold, the fair value of equity securities change, or credit

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

We reflect adjustments to the liability for unpaid losses and loss adjustment expenses in the results

of operations during the period in which the estimates are changed.

Our 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 independent

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 investment gains or losses on equity securities

are reported in net income (loss).

Investment income from fixed income securities is recognized when earned, and realized investment gains

(losses) are recognized when investments are sold, the fair value of equity securities change, or credit impairments are recognized.

For additional information on our investments, see

Part II, Item 8, Note 4 “Investments” and Note 5 “Fair Value Measurements”.

Deferred Policy Acquisition Costs

Certain direct policy acquisition costs consisting of commissions,

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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

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, 2022 and 2021, deferred policy

acquisition costs and the related liability for unearned premiums were as follows:

At December 31, 2023 and 2022, deferred policy acquisition

costs (“DAC”) 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, 2022 or 2021.

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 loss adjustment expenses, 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 loss adjustment expenses, 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

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 established 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 $17,900 at December 31, 2022, and $10,070 at December 31, 2021, arising primarily from unearned premiums, loss reserve discounting,

net unrealized investment losses, 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 $694 and $1,008 was maintained at December 31, 2022, and December 31, 2021, respectively.

The Company had gross deferred income tax liabilities of $8,201

at December 31, 2022, and $14,568 at December 31, 2021, arising primarily from deferred policy acquisition costs, net unrealized investment

gains, 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, 2022, the Company had no material

unrecognized income tax benefits or accrued interest and penalties.

Federal income tax returns for the years 2019 through 2021 are open

for examination.

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 loss adjustment expenses, 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 loss adjustment expenses, 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 or owed

to the federal government and certain states whose payment is based upon net income (subject to regulatory adjustments) generated by the

The generation of net losses may result in income tax benefits, a portion of which may be in the form of refunds of prior income

taxes paid to taxing authorities.

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 our assets

and liabilities.

A valuation allowance is established 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.

We had gross deferred income tax assets of $18,172

at December 31, 2023, and $17,900 at December 31, 2022, arising primarily from unearned premiums, loss reserve discounting, net unrealized

investment losses, and net operating loss carryforwards.

A valuation allowance is required to be established for any portion of the deferred

income tax asset for which we believe it is more likely than not that it will not be realized.

A valuation allowance of $505 and $694

was maintained at December 31, 2023, and December 31, 2022, respectively.

We had gross deferred income tax liabilities of $9,254 at December

31, 2023, and $8,201 at December 31, 2022, arising primarily from deferred policy acquisition costs and other intangible assets.

We exercise 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 our 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

us to record a valuation allowance against our deferred income tax assets.

As of December 31, 2023, we had no material unrecognized

income tax benefits or accrued interest and penalties.

Federal income tax returns for the years 2020 through 2022 are open for examination.

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.

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.

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output as a result of inaccurate or incomplete data, along with the inherent uncertainty of future frequency and severity of losses.

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

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.

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

In addition, these changes could impact the creditworthiness of issuers of securities in which we invest, subjecting our investment

portfolio to increased credit and interest rate risk, with the potential for reduced investment returns and/or material realized or unrealized

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 fixed income maturities.

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, which

was paid at closing.

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

We paid $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.

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.

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

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

We also have a $3,000 line of credit with Wells Fargo

The terms of the line of credit include a floating interest rate of 2.50% above the daily simple secured overnight financing

There were no outstanding amounts during the years ended December 31, 2023, 2022, or 2021.

This line of credit is scheduled to expire

on December 13, 2024.

The changes in cash and cash equivalents for the

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Net increase (decrease) in cash and cash equivalents

For the year ended December 31, 2022, net cash used by operating

activities totaled $30,388 compared to $29,168 net cash provided by operating activities a year ago.

This decrease was primarily driven

by higher claim payments related to catastrophe losses during the current year and higher levels of premiums and agents’ balances

receivable and federal income tax recoverable.

For the year ended December 31, 2023, net cash provided by operating

activities totaled $25,970 compared to $30,388 net cash used by operating activities a year ago.

This change was primarily driven by lower

claim payments and the receipt of a significant income tax refund during the current period.

For the year ended December 31, 2023, net cash used by investing activities

totaled $8,813 compared to $25,048 net cash provided by investing activities a year ago.

This change was primarily attributable to a decrease

in maturities and sales of fixed income securities and an increase in purchases of fixed income securities in the current year compared

to the prior year, partially offset by an increase in sales of equity securities and a decrease in purchases of equity securities.

For the year ended December 31, 2023, net cash used by financing activities

totaled $7,466 compared to $18,281 a year ago.

This decrease in cash used was attributable to installment payments on the Westminster

consideration payable during 2022, partially offset by an increase in share repurchases during 2023 compared to 2022.

For the year ended December 31, 2022, net cash used by operating activities

totaled $30,388 compared to $29,168 net cash provided by operating activities a year ago.

This decrease was primarily driven by higher

claim payments related to catastrophe losses during the current year and higher levels of premiums and agents’ balances receivable

and federal income tax recoverable.

For the year ended December 31, 2022, net cash provided by investing

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the first quarter of 2021.

For the year ended December 31, 2022, net cash used by financing

activities totaled $18,281 compared to $11,471 a year ago.

This increase in cash used was primarily attributable to the Company making

two installment payments for the Westminster purchase during 2022 for $13,333 compared to one installment payment in 2021 for $6,667.

For the year ended December 31, 2021, net cash provided by operating

activities totaled $29,168 compared to $51,010 in the year prior.

The decrease in net cash provided by operating activities was primarily

driven by higher claim payments related to a return to average loss frequency in the private passenger auto segment while pandemic-related

restrictions were removed as well as above average weather-related losses and a catastrophe event in the home and farm segment.

claim payments were partially offset by increased premium receipts due to premium growth.

For the year ended December 31, 2021, net cash used by investing

activities totaled $48,151 compared to net cash provided by investing activities of $200 in the year prior.

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 in the year prior.

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.

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.

For the year ended December 31, 2022, net cash used by financing activities

totaled $18,281 compared to $11,471 a year ago.

This increase in cash used was primarily attributable to the Company making two installment

payments for the Westminster purchase during 2022 for $13,333 compared to one installment payment in 2021 for $6,667.

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 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

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

This amount cannot exceed the lesser of (i) 10% of the Company’s surplus as regards policyholders as of the preceding

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of the North Dakota Insurance Department.

There is no amount available for payment of dividends from Nodak

Insurance to NI Holdings during 2023 without the prior approval of the North Dakota Insurance Department based upon the net loss of Nodak

Insurance as of December 31, 2022.

Prior to its payment of any dividend, Nodak Insurance will be required to provide notice of the dividend

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

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 dividends of $3,000 and

$6,000 to NI Holdings during the years ended December 31, 2022 and 2020, respectively.

No dividends were declared or paid by Nodak Insurance

during the year ended December 31, 2021.

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 dividends of $3,000 to NI Holdings during the year ended December 31, 2022.

dividends were declared or paid by Nodak Insurance during the years ended December 31, 2023 and 2021.

Direct Auto re-domesticated from Illinois to North Dakota during 2021

and is now subject to the same dividend restrictions as Nodak Insurance.

There is no amount available for payment of dividends from

Direct Auto to NI Holdings during 2023 without the prior approval of the North Dakota Insurance Department based upon the net loss of

Direct Auto as of December 31, 2022.

No dividends were declared or paid by Direct Auto during the years ended December 31, 2022, 2021,

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,

No dividends were declared or paid by Direct Auto during the years ended December 31, 2023, 2022, or 2021.

Westminster re-domesticated from Maryland to North Dakota during 2021

and is now subject to the same dividend restrictions as Nodak Insurance.

There is no amount available for payment of dividends

from Westminster to NI Holdings during 2023 without the prior approval of the North Dakota Insurance Department based upon the net loss

of Westminster as of December 31, 2022.

No dividends were declared or paid by Westminster during the years ended December 31, 2022, 2021

The amount available for payment of dividends from Westminster

to NI Holdings during 2024 without the prior approval of the North Dakota Insurance Department is approximately $1,200 as of December

No dividends were declared or paid by Westminster during the years ended December 31, 2023, 2022 or 2021.

Contractual Obligations

The primary contractual obligations of the Company

include gross loss and loss adjustment expenses payments, consideration due relating to the acquisition of Westminster, and operating

lease obligations.

include gross loss and loss adjustment expenses payments as well as operating and finance lease obligations.

The Company’s unpaid losses and loss adjustment

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The actual timing and amounts of these payments in the future

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, and paid the final installment in December 2022.

Recent Accounting Pronouncements

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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 7. Management’s Discussion and Analysis