The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. Certain statements contained in this report are forward-looking statements based on the Company’s current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by the Company. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve significant risks and uncertainties (some of which are beyond the control of the Company) and are subject to change based upon various factors, including but not limited to the following risks and uncertainties: changes in the demand for the Company’s insurance products, inflation and general economic conditions, including general market risks associated with the Company’s investment portfolio; the accuracy and adequacy of the Company’s pricing methodologies; catastrophes in the markets served by the Company; uncertainties related to estimates, assumptions and projections generally; the possibility that actual loss experience may vary adversely from the actuarial estimates made to determine the Company’s loss reserves in general; the Company’s ability to obtain and the timing of the approval of premium rate changes for insurance policies issued in states where the Company operates; legislation adverse to the automobile insurance industry or business generally that may be enacted in the states where the Company operates; the Company’s success in managing its business in non-California states; the presence of competitors with greater financial resources and the impact of competitive pricing and marketing efforts; the ability of the Company to successfully manage its claims organization outside of California; the Company's ability to successfully allocate the resources used in the states with reduced or exited operations to its operations in other states; changes in driving patterns and loss trends; acts of war and terrorist activities; pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases; court decisions and trends in litigation and health care and auto repair costs; and legal, cyber security, regulatory and litigation risks.
or credits in 2020 was approximately $128 million. The Company's net premiums earned was reduced by approximately $128 million for the twelve months ended December 31, 2020 as a result of these premium refunds and credits.
In November and December 2020, the California Insurance Commissioner issued a mandatory moratorium on cancellations and non-renewals of policies of residential property insurance after the declaration of a state of emergency through Bulletins 2020-11, 2020-12 and 2020-13. These Bulletins list declarations of a state of emergency issued by the California Governor in August, September and November 2020, along with the ZIP Codes within and adjacent to the fire perimeters in counties subject to each state of emergency. The mandatory moratorium prohibits insurers from canceling or refusing to renew a policy of residential property insurance for a property located in any ZIP Code listed in these Bulletins for one year after the declaration of a state of emergency and in effect at the time of the declared emergency, based solely on the fact that the insured structure is located in an area in which a fire has occurred. The Company will comply with these Bulletins and does not believe that these Bulletins will have a material adverse impact on its financial condition or cash flows.
•The GLM determines an average severity for each percentile of claims that have been closed as a percentage of estimated ultimate claims. The average severities are applied to open claims to estimate the amount of losses yet to be paid. The GLM utilizes operational time, determined as a percentile of claims closed rather than a finite calendar period, which neutralizes the effect of changes in the timing of claims handling.
Expense ratio is calculated by dividing the sum of policy acquisition costs and other operating expenses by net premiums earned. The increase in the expense ratio is largely due to premium refunds and credits as described above, without a corresponding decrease in policy acquisition costs and other operating expenses. The Company did not recoup commissions from its agents on the premiums returned to its eligible policyholders under the "Mercury Giveback" program. In addition, an increase in allowance for credit losses on premiums receivable, reflecting heightened credit risk for certain of the Company's policyholders as a result of the economic downturn caused by the COVID-19 pandemic, contributed to an increase in the expense ratio.
For a further discussion, see Note 8. Notes Payable, of the Notes to Consolidated Financial Statements in "Item 8. Financial Statements and Supplementary Data."
The Company’s significant contractual obligations at December 31, 2020 are summarized as follows:
• developing a range of reserves based on actuarial methodologies and comparing to the Company’s total recorded loss reserves
• evaluating the year-over-year movements of the Company’s recorded loss reserves within the developed range of reserves.
(2)Mercury County Mutual Insurance Company is not owned but is controlled by the Company through a management contract.
•The GLM determines an average severity for each percentile of claims that have been closed as a percentage of estimated ultimate claims. The average severities are applied to open claims to estimate the amount of losses yet to
A refund liability is recorded for the expected amount of the commission income that has to be returned to the insurers based on estimated policy cancellations. The refund liability is computed for the entire portfolio of contracts as a practical expedient, using the expected value method based on all relevant information, including historical data. The refund liability at December 31, 2020 and 2019 was approximately $0.9 million and $0.7 million, respectively, which was included in other liabilities in the Company's consolidated balance sheets.
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) along with certain additional ASUs on Topic 326 using a modified retrospective transition method, and recognized the cumulative-effect adjustment of approximately $2 million to the beginning retained earnings of 2020. The cumulative-effect adjustment primarily resulted from re-estimating credit losses on the outstanding balances of the Company's premiums receivable and reinsurance recoverables at the adoption date. Topic 326 replaces the "incurred loss" methodology for recognizing credit losses with a methodology that reflects expected credit losses for financial assets that are not accounted for at fair value through net income.
The components of lease cost along with its classification on the Company's consolidated statements of operations were as follows:
The Company also provides company-wide annual cash bonuses to all eligible employees based on performance criteria for each recipient and for the Company as a whole. The Company performance goals were based on the Company's premium growth and combined ratio. The Company paid a total of $11.6 million of company-wide annual cash bonuses to all its eligible employees in 2020. The Company did not pay any company-wide annual cash bonuses to all eligible employees in 2019 and 2018.
The following table presents a summary of the stock option activity for the year ended December 31, 2020: