Beginning in 2019, in accordance with a change in accounting principle, changes in unrealized gains and losses on the Company’s investments in equity securities are included in net income as a part of net capital gains and losses on investments. These gains and losses may be significant given the size of the equity securities holdings and the inherent volatility in equity securities prices. Prior to 2019, the changes in unrealized gains and losses pertaining to such investments were recorded in other comprehensive income. The changes in unrealized gains and losses on fixed income securities continue to be recorded in other comprehensive income, net of income taxes. The new accounting treatment has no effect on Equity.
NI Holdings evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis. For periods subsequent to December 31, 2018, this evaluation includes only fixed income securities. Prior to January 1, 2019, this evaluation included both fixed income and equity securities. NI Holdings assesses whether OTTI is present when the fair value of a security is less than its amortized cost. OTTI is considered to have occurred with respect to fixed income securities if (1) an entity intends to sell the security, (2) it is more likely than not an entity will be required to sell the security before recovery of its amortized cost basis, or (3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. When assessing whether the cost or amortized cost basis of the security will be recovered, the Company compares the present value of the expected cash flows likely to be collected, based on an evaluation of all available information relevant to the collectability of the security, to the cost or amortized cost basis of the security. The shortfall of the present value of the cash flows expected to be collected in relation to the cost of amortized cost basis is referred to as the “credit loss”. If there is a credit loss, the impairment is considered to be other-than-temporary. If NI Holdings identifies that an other-than-temporary impairment loss has occurred, it then determines whether it intends to sell the security, or if it is more likely than not that the Company will be required to sell the security prior to recovering the cost or amortized cost basis less any current-period credit losses. If NI Holdings determines that it does not intend to sell, and it is not more likely than not that it will be required to sell the security, the amount of the impairment loss related to the credit loss will be recorded in earnings, and the remaining portion of the other-than-temporary impairment loss will be recognized in other comprehensive income (loss), net of income taxes. If NI Holdings determines that it intends to sell the security, or that it is more likely than not that it will be required to sell the security prior to recovering its cost or amortized cost basis less any current-period credit losses, the full amount of the other-than-temporary impairment will be recognized in earnings.
NI Holdings had gross deferred income tax assets of $6,294 at December 31, 2019 and $5,741 at December 31, 2018, 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 $594 and $587 was maintained at December 31, 2019 and December 31, 2018, respectively.
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.
Total underwriting and general expenses, including amortization of deferred policy acquisition costs, increased 24.3% to $67,258 in the year ended December 31, 2019 compared to $54,117 in 2018.
The Company’s overall loss and LAE experience significantly improved year-over-year. Private passenger auto experienced higher loss and LAE ratios due to reduced favorable claim reserve development in 2018 compared to 2017. Experience on the non-standard auto business improved, and also reflects a lower loss and LAE ratio on the acquired Direct Auto business. The assumed reinsurance portion of the all other segment experience was favorable due to a relatively quiet catastrophe period in 2018, compared to a high level of hurricanes and wildfires in 2017.
The expense ratio of 27.7% for the year ended December 31, 2018 was 2.9 percentage points higher than 2017, due to the higher policy acquisition costs, higher consulting services and share-based compensation, and the increased ceding of crop insurance premiums. The Direct Auto business model, which includes a higher level of expenses offset by lower losses and LAE than the Primero business model, also contributes to a higher expense ratio.
Reported tax expense in 2017 included $568 of additional income tax expense related to the handling of expenses associated with the Company’s mutual to stock conversion and initial public offering and a $1,274 reduction of income tax expense due to a new corporate income tax rate of 21% for tax years 2018 and beyond, enacted on December 22, 2017. The previous tax rate was 35% for 2017 and prior.
Depreciation expense was $538, $492, and $500 during the years ended December 31, 2019, 2018 and 2017, respectively.
The Company recognizes stock-based compensation costs based on the grant date fair value over the performance period of the awards. Estimated forfeitures are included in the determination of compensation costs. No forfeitures are currently estimated. The current cost estimate assumes that the cumulative growth target will be achieved.
Amounts available for distribution in 2020 to Nodak Insurance as dividends from its insurance subsidiaries without prior approval of insurance regulatory authorities are $1,617 from American West and none from Primero. No dividends were paid to Nodak Insurance from either entity during the years ended December 31, 2019, 2018, or 2017.