payrolls accordingly. Although our new business growth, as defined by number of policies added, has been strong, it has been insufficient to offset the decline in premiums that we experienced in 2020.
We are taking precautions to protect the safety and well-being of our employees while providing uninterrupted service to our policyholders and claimants. However, no assurance can be given that these actions will be sufficient, nor can we predict the level of disruption that will occur should the COVID-19 pandemic and its related macro-economic risks continue for an extended period of time. Additional information regarding risks and uncertainties related to the COVID-19 pandemic to our business, financial condition, and results of operations are set forth in Part I, Item 1A of this report.
We formally analyze the goodwill that we carry on our Consolidated Balance Sheets for impairment in the fourth quarter of each year and, as of December 31, 2020, our formal analysis determined that no impairment was necessary in accordance with ASC 350-20-35-23.
•Losses and LAE decreased 17.4% in 2020 and 2.9% in 2019, each compared to the previous year;
•Net realized and unrealized gains (losses) on investments were $19.0 million, $51.1 million, and $(13.1) million in 2020, 2019, and 2018, respectively.
Net premiums written are gross premiums written less reinsurance premiums ceded.
Net realized and unrealized gains (losses) on investments were $19.0 million, $51.1 million, and $(13.1) million for the years ended December 31, 2020, 2019, and 2018, respectively.
Other income consists of net gains and losses on fixed assets, non-investment interest, installment fee revenue, and other miscellaneous income.
General and administrative expenses of the holding company are excluded in determining the underwriting expense ratios of our reportable segments.
As a result of the effectiveness of our work-from-home transition, in 2020 we began to reduce our real estate footprint and closed and vacated various office locations. Accordingly, during the year ended December 31, 2020, we recorded charges of $0.8 million related to the abandonment of certain operating leases.
Income tax expense was $27.9 million, $36.7 million, and $28.2 million for the years ended December 31, 2020, 2019, and 2018, respectively, representing effective tax rates of 18.9%, 18.9%, and 16.6% for the years ended December 31, 2020, 2019, and 2018, respectively.
The components of Employers' net income before income taxes are set forth in the following table:
Gross premiums written were $579.8 million, $696.8 million, and $748.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. The decrease in 2020 was primarily driven by the impacts of the COVID-19 pandemic, including higher levels of unemployment and declines in payrolls for many of our insureds, upon which our premiums are based, particularly in our restaurant and hospitality classes. We reduced our final audit accruals by approximately $35.0 million during the year, to zero, to reflect our estimate of the exposure adjustments on our in-force policies that we expect have resulted and will result from the impact of economic contraction. Prior to the COVID-19 pandemic we experienced strong new business opportunities, as evidenced by record levels of submissions, quotes, and binds. As a result of the abrupt and severe economic impacts attributable to the COVID-19 pandemic, the number of new insurance submissions, quotes, and binds we received decreased significantly in the latter half of March 2020 and that trend largely continued through May 2020. Since then, as many businesses began to reopen, we have experienced year-over-year increases in new business submissions and new policies bound in nearly all of the states in which we operate, with the notable exception of California. Despite the increases in new non-California business policies that we experienced in 2020, our new business premium has fallen, driven primarily by significant declines in policy size and declines in policies with annual premiums greater than $25,000. Additionally, year-over-year decreases in average rates in many of the states in which we do business further impacted our gross premiums written during the year. The decrease in 2019 was primarily due to decreases in final audit premiums and average rates, as well as declines in
Net premiums earned were $615.1 million, $695.8 million, and $731.1 million for the years ended December 31, 2020, 2019, and 2018, respectively.
We analyze our calendar year loss and LAE ratio to measure our profitability in a particular year and to evaluate the adequacy of our premium rates charged in a particular year to cover expected losses and LAE from all periods, including development (whether favorable or unfavorable) of reserves established in prior periods. In contrast, we analyze our accident year loss and LAE ratios to evaluate our underwriting performance and the adequacy of the premium rates we charged in a particular year in relation to ultimate losses and LAE from insured events occurring during that year. The loss and LAE ratios provided in this report are on a calendar year basis, except where they are expressly identified as accident year loss and LAE ratios.
The decrease in our current accident year loss and LAE estimate in 2020 was primarily due to a reduction in payroll exposure and a decline in indemnity claim frequency. The increase in our current accident year loss estimate in 2019 was primarily due to the impact of increased competitive pressures and resulting price decreases across most of our markets. Our current accident year loss and LAE ratio continues to reflect the impact of key business initiatives, including: an emphasis on the accelerated settlement of open claims, despite the delay in 2020; diversifying our risk exposure across geographic markets; and leveraging data-driven strategies to target, underwrite, and price profitable classes of business across all of our markets.
Commission Expense Ratio. The commission expense ratio was 12.8%, 12.7%, and 12.9%, and our commission expenses were $78.8 million, $88.1 million, and $94.2 million for the years ended December 31, 2020, 2019, and 2018, respectively. The increase in the commission expense ratio for 2020 was primarily the result of a higher concentration of alternative distribution channels, which is subject to a higher commission rate, and increased commission expense on new business writings. The decrease in the commission expense ratio for 2019 compared to 2018 was primarily the result of decreases in 2019 agency incentive commissions, which were directly impacted by decreases in premiums written.
Underwriting income for our Employers segment was $71.0 million, $75.9 million, and $110.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. Underwriting income or loss is determined by deducting losses and LAE, commission expense, and underwriting expenses from net premiums earned.
The components of Cerity's net loss before income taxes are set forth in the following table:
Gross premiums written and net premiums written were $0.3 million and $0.1 million for the years ended December 31, 2020 and 2019, respectively. Cerity had no premium writings prior to 2019.
Underwriting losses for our Cerity segment were $16.5 million, $16.0 million, and $5.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. Underwriting income or loss is determined by deducting losses and LAE, commission expense, and underwriting expenses from net premiums earned.
For a further discussion of non-underwriting related income and expenses, including Net Investment Income and Net Realized and Unrealized Gains on Investments, Other Income, and Other Expenses, see "-Results of Operations -Summary of Consolidated Financial Results Consolidated."
General and administrative expenses primarily consist of compensation related expenses, professional fees, and other corporate expenses at the holding company level. General and administrative expenses were $13.6 million, $18.3 million, and $17.6 million for the years ended December 31, 2020, 2019, and 2018, respectively. During the year ended December 31, 2020, our compensation-related expenses decreased $3.2 million, due primarily to lower incentive compensation accruals, and our professional fees decreased $0.9 million, each as compared to 2019. During the year ended December 31, 2019, our professional fees increased $0.5 million, and our compensation-related expenses increased $0.2 million, each as compared to 2018.
Total cash and investments at the holding company were $22.4 million at December 31, 2020, consisting of $11.0 million of cash and cash equivalents, $11.0 million of fixed maturity securities, and $0.4 million of equity securities.
The interest rates applicable to loans under the Credit Agreement are generally based on a base rate plus a specified margin, ranging from 0.25% to 1.25%, or the Eurodollar rate (which will convert to an alternative reference rate once LIBOR is discontinued) plus a specified margin, ranging from 1.25% to 2.25%. No interest was paid during the year ended December 31, 2020.
The Credit Agreement contains covenants that require us to maintain: (i) a minimum consolidated net worth of no less than 70% of our stockholders’ equity as of September 30, 2020, plus 50% of our aggregate net income thereafter; and (ii) a debt to total capitalization ratio of no more than 35%, in each case as determined in accordance with the Credit Agreement.
The primary sources of cash for our operating subsidiaries, which include our insurance and other operating subsidiaries, are premium collections, investment income, sales and maturities of investments, proceeds from FHLB advances, and reinsurance recoveries. The primary uses of cash for our operating subsidiaries are payments of losses and LAE, commission expenses, underwriting and general and administrative expenses, ceded reinsurance, repayments of FHLB advances, investment purchases and dividends paid to their parent.
Total cash and investments held by our operating subsidiaries was $2,895.4 million at December 31, 2020, consisting of $149.6 million of cash, cash equivalents, and restricted cash, $2,468.2 million of fixed maturity securities, $214.8 million of equity securities, $26.6 million of short-term investments, and $36.2 million of other invested assets. Sources of immediate and unencumbered liquidity at our operating subsidiaries as of December 31, 2020 consisted of $149.5 million of cash and cash equivalents, $208.1 million of publicly-traded equity securities whose proceeds are available within three business days, $975.8 million of highly liquid fixed maturity securities whose proceeds are available within three business days, and $26.6 million of short-term investments whose proceeds are available within three business days. We believe that our subsidiaries' liquidity needs over the next 24 months will be met with cash from operations, investment income, and maturing investments.
During the second quarter of 2020, the FHLB announced its Zero Interest Recovery Advance Program (the FHLB Advance Program). The FHLB Advance Program is a zero percent interest, six-month or one-year credit product that members can use to provide immediate relief to property owners, businesses, and other customers struggling with the financial impacts of the COVID-19 pandemic. Each member was allocated up to $10.0 million in advances under the FHLB Advance Program.
On May 11, 2020, our insurance subsidiaries received a total of $35.0 million of advances under the FHLB Advance Program. The advances were secured by collateral previously pledged to the FHLB by our insurance subsidiaries in support of our existing collateralized advance facility, which has been reduced by the amount of these outstanding advances. Our insurance subsidiaries repaid $15.0 million on November 4, 2020. The remaining advances are required to be repaid to the FHLB by May 11, 2021 in the amount of $20.0 million.
We purchase reinsurance to protect us against the costs of severe claims and catastrophic events, including pandemics. On July 1, 2020, we entered into a new reinsurance program that is effective through June 30, 2021. The reinsurance program consists of one treaty covering excess of loss and catastrophic loss events in four layers of coverage. Our reinsurance coverage is $190.0 million in excess of our $10.0 million retention on a per occurrence basis, subject to certain exclusions. We believe that our reinsurance program meets our needs and that we are sufficiently capitalized. We further believe that we will not trigger a recovery under our current excess of loss reinsurance program in connection with the COVID-19 pandemic.
Our insurance subsidiaries are required by law to maintain a certain minimum level of surplus on a statutory basis. Surplus is calculated by subtracting total liabilities from total admitted assets. The amount of capital in our insurance subsidiaries is maintained relative to standardized capital adequacy measures such as risk-based capital (RBC), as established by the National Association of Insurance Commissioners. The RBC standard was designed to provide a measure by which regulators can assess the adequacy of an insurance company's capital and surplus relative to its operations. An insurance company must maintain capital and surplus of at least 200% of RBC. Each of our insurance subsidiaries had total adjusted capital in excess of the minimum RBC requirements that correspond to any level of regulatory action at December 31, 2020.
Net cash provided by operating activities in 2020 included net premiums received of $624.6 million and investment income received of $87.2 million. These operating cash inflows were partially offset by net claims payments of $402.6 million, underwriting and general and administrative expenses paid of $171.3 million, commissions paid of $85.7 million, and federal income taxes paid of $18.5 million.
Net cash provided by investing activities in 2020 was primarily related to sales, maturities, and redemptions of investments whose proceeds were used to fund claims payments, underwriting and general and administrative expenses, stockholder dividend payments, and common stock repurchases, partially offset by the investment of premiums received and reinvestment of funds from investment sales, maturities, redemptions, and interest income.
Net cash used in financing activities in 2020 included common stock repurchases and stockholder dividend payments, partially offset by net cash received from the FHLB Advance Program.
Dividends. We paid $30.8 million, $28.9 million, and $26.7 million in dividends to our stockholders in 2020, 2019, and 2018, respectively. The declaration and payment of future dividends to common stockholders will be at the discretion of our Board of Directors and will depend upon many factors, including our financial position, capital requirements of our operating subsidiaries, legal and regulatory requirements, and any other factors our Board of Directors deems relevant. On February 17, 2021, the Board of Directors declared a $0.25 dividend per share, payable March 17, 2021, to stockholders of record on March 3, 2021.
(1)Estimated losses and LAE reserve payment patterns have been computed based on historical information. Our calculation of loss and LAE reserve payments by period is subject to the same uncertainties associated with determining the level of reserves and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our reserving process, see ''-Critical Accounting Policies-Reserves for Losses and LAE.'' Actual payments of losses and LAE by period will vary, perhaps materially, from the above table to the extent that current estimates of losses and LAE reserves vary from actual ultimate claims amounts due to variations between expected and actual payout patterns.
As of December 31, 2020, the total cost and amortized cost of our investments recorded at fair value was $2,472.5 million and its fair value was $2,714.3 million. These investments provide a steady source of income, which may fluctuate with changes in interest rates and our current investment strategies.
As of December 31, 2020, our investment portfolio consisted of 90% fixed maturity securities. We strive to limit the interest rate risk associated with fixed maturity investments by managing the duration of these securities. Our fixed maturity securities (excluding cash and cash equivalents) had a duration of 3.2 at December 31, 2020. To minimize interest rate risk, our portfolio is weighted toward short-term and intermediate-term bonds; however, our investment strategy balances consideration of duration, yield, and credit risk. Our investment guidelines require that the minimum weighted average quality of our fixed maturity securities portfolio be "A+," using ratings assigned by S&P or an equivalent rating assigned by another nationally recognized statistical rating agency. Our fixed maturity securities portfolio had a weighted average quality of "A+" as of December 31, 2020, with 50.2% of the portfolio rated "AA" or better, based on market value. Other securities within fixed maturity securities consist of bank loans, which are classified as AFS and are reported at fair value.
Our investment portfolio also contains equity securities. We strive to limit the exposure to equity price risk associated with publicly traded equity securities by diversifying our holdings across several industry sectors. These equity securities had a fair value of $208.5 million at December 31, 2020, which represented 8% of our investment portfolio at that time. We also have a $6.7 million investment in FHLB stock which we record at cost. We receive periodic dividends from the FHLB for this investment, when declared, which can vary from period to period.
The following table shows the estimated fair value, the percentage of the fair value to total invested assets, the average ending book yield, and the average ending tax equivalent yield (each based on the book value of each category of invested assets) as of December 31, 2020.
In addition to recognizing realized gains and losses upon the disposition of an investment security, we also recognize: (i) in 2020, realized gains or losses on AFS debt securities for changes in expected credit losses; or (ii) prior to 2020, realized losses when securities are written down as a result of other-than-temporary impairment. We recognized $0.7 million of expected credit losses on AFS debt securities during the year ended December 31, 2020, which was due to COVID-19 impacts. We recognized no other-than-temporary impairments on fixed maturity securities during the year ended December 31, 2019. We recognized impairments on fixed maturity securities of $3.3 million (consisting of sixty-six securities) during the year ended December 31, 2018. The other-than-temporary impairments recognized during this year was the result of our intent to sell these securities and/or the severity of the change in fair values of these securities. The remaining fixed maturity securities whose total fair value was less than amortized cost at December 31, 2020, 2019 and 2018, were those in which we had no intent, need or requirement to sell at an amount less than their amortized cost.
The amount by which estimated losses in the aggregate differ from those previously estimated for a specific time period is known as reserve "development." Reserve development is unfavorable when losses ultimately settle for more than the amount estimated or subsequent estimates indicate a basis for reserve increases, causing the previously estimated loss reserves to be ''deficient.'' Reserve development is favorable when estimates of ultimate losses indicate a decrease in established reserves,
causing the previously estimated loss reserves to be ''redundant.'' Development is reflected in our operating results through an adjustment to incurred losses and LAE during the period in which it is recognized.
Our Internal Actuary prepared reserve estimates for all accident years using our own historical claims data, industry data and many of the generally accepted actuarial methodologies for estimating loss reserves, such as paid loss development methods, incurred loss development methods, and Bornhuetter-Ferguson methods. These methods vary in their responsiveness to different information, characteristics, and dynamics in the data, and the results assist the actuary in considering these characteristics and dynamics in the historical data. The methods employed for each segment of claims data, and the relative weight accorded to each method, vary depending on the nature of the claims segment and on the age of the claims.
Each actuarial methodology requires the selection and application of various parameters and assumptions. The key parameters and assumptions include: the future payment and emergence patterns of our aggregate claims data; the magnitude and changes in claim settlement activity; claims cost inflation rates; the effects of legislative benefit changes and/or judicial decisions; and trends in the frequency and severity of claims. We believe the pattern with which our aggregate claims data will be paid or emerge over time, claim settlement activity, and claims cost inflation rates are the most important parameters and assumptions.
The ranges of estimates of loss reserves produced by our Internal Actuary are intended to represent the range in which it is most likely that the ultimate losses will fall. These ranges are narrower than the range of indications produced by the individual methods applied because it is not likely that the high or low result will emerge for every claim segment and accident year. Each actuary's point estimate of loss reserves for each claim segment is based on a judgmental selection from within the range of results indicated by the different actuarial methods.
Management formally establishes loss reserves for financial statement purposes on a quarterly basis. In doing so, we make reference to the most current analyses of our Internal Actuary, including a review of the assumptions and the results of the various actuarial methods used. Our Internal Actuary conducted comprehensive studies in the second and fourth quarters. On the alternate quarters, our Internal Actuary updates the results of the preceding quarter's studies for actual claim payment and case reserve activity.
The table below provides the actuarial range of loss reserves, net of reinsurance, that management considered when selecting its best estimate and our carried reserves.
As of December 31, 2020, California and Nevada loss reserves represented approximately 70% of our total loss reserves on our Consolidated Balance Sheet.
Approximately 57% of our claims payments during the three years ended December 31, 2020 related to medical care for injured workers. The utilization and cost of medical services in the future is a significant source of uncertainty in the establishment of loss reserves for workers' compensation. Our loss reserves are established based on reviewing the results of actuarial methods, most of which do not contain explicit medical claim cost inflation rates; however, because medical care may be provided to an injured worker over many years, and in some cases decades, the pace of medical claim cost inflation can have a significant impact on our ultimate claim payments. For example, if the rate of medical claim cost inflation increases by 1% above the inflation rate that is implicitly included in the loss reserves at December 31, 2020, we estimate that future medical costs over the lifetime of current claims would increase by approximately $78.3 million on a net-of-reinsurance basis.
If the actual loss reserves were at the high or the low end of the actuarial range, the impact on our financial results would have been as follows:
assessing future default, we evaluate the current expected credit loss allowance (CECL) under the ratings based method using the A.M. Best Average Cumulative Net Impairment Rates. Reinsurer ratings are also assessed through this process.
Under the LPT Agreement, the Fund initially ceded $1.5 billion in liabilities for the incurred but unpaid losses and LAE related to claims incurred prior to July 1, 1995 for consideration of $775.0 million in cash. The estimated remaining liabilities subject to the LPT Agreement were $353.5 million as of December 31, 2020. Losses and LAE paid with respect to the LPT Agreement totaled $818.9 million at December 31, 2020. We account for the LPT Agreement as retroactive reinsurance. Entry into the LPT Agreement resulted in a deferred reinsurance gain that was recorded on our Consolidated Balance Sheets as a liability. The Deferred Gain is being amortized using the recovery method, whereby the amortization is determined by the proportion of actual reinsurance recoveries to total estimated recoveries through the life of the LPT Agreement, and the amortization is reflected in losses and LAE. Changes in estimates of the reserves ceded under the LPT Agreement may significantly impact the Deferred Gain on our Consolidated Balance Sheets and losses and LAE on our Consolidated Statements of Comprehensive Income.
We record uncertain tax positions in accordance with Accounting Standards Codification (ASC) 740, Income Taxes, on the basis of a two-step process. Recognition (Step 1) occurs when we conclude that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination. Measurement (Step 2) is addressed only if Step 1 has been satisfied. Under Step 2, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, that is more likely than not to be realized upon ultimate settlement.
Our investments in fixed maturity securities, equity securities at fair value, and short-term investments are classified as AFS and are reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of deferred taxes, in accumulated other comprehensive income.
We use third party pricing services to assist us with our investment accounting function. The fair values of our AFS fixed maturity and equity securities are based on quoted market prices, when available. These fair values are obtained primarily from third party pricing services, which generally use Level 1 or Level 2 inputs in accordance with GAAP guidance. We obtain a quoted price for each security from third party pricing services, which is derived through recently reported trades for identical or similar securities. For securities not actively traded, the third party pricing services may use quoted market prices of similar instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates, and prepayment speeds. We also perform quarterly analysis on the prices received from third parties to determine whether the prices are reasonable estimates of fair value, including confirming the fair values of these securities through observable market prices using an alternative pricing source. If differences are noted in this review, we may obtain additional information from other pricing services to validate the quoted price (See Note 4 in the Notes to our Consolidated Financial Statements).
Impairment of Investment Securities. Additionally, ASU 2016-01 removed the impairment assessment for equity securities at fair value. Prior to adoption of this standard, when, in the opinion of management, a decline in the fair value of an equity security below its cost was considered to be "other-than-temporary," the equity security's cost was written down to its fair value at the time the other-than-temporary decline was identified.
We prepare an impairment analysis for our goodwill and other intangible assets, whereby we identify whether events or circumstances have occurred that may impact the carrying value of these assets and make assumptions regarding future events, such as cash flows and profitability. Differences between the assumptions regarding recoverability of carrying value and actual results could materially impact the carrying amount of these assets and our operating results.
In October 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-10, Codification Improvements. This update ensures all disclosure guidance that requires or provides an option for an entity to provide notes to the financial statements is included in the Disclosure Section (Section 50) of the Codification. This update also provided various codification improvements in which the original guidance was unclear. This update becomes effective for annual periods beginning after December 15, 2020 and early adoption is permitted for any annual or interim period for which financial statements have not been issued. We have determined that the impact of this new standard will not be material to our consolidated financial condition and results of operations.
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivable-Nonrefundable fees and other costs. The amendments in that Update shortened the amortization period for certain purchased callable debt securities held at a premium by requiring that entities amortize the premium associated with those callable debt securities within the scope of paragraph 310-20-25-33 to the earliest call date. The amendments affect the guidance in Accounting Standards Update No. 2017-08, receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments is this update become effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is not permitted. We do not expect that the adoption of this update will have a material impact on our consolidated financial condition or results of operations.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). This update simplifies the accounting for income taxes within Accounting Standards Codification (ASC) topic 740 by removing certain exceptions and clarifies existing guidance. We have determined that the impact of this new standard will not be material to our consolidated financial condition and results of operations.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this update represent changes to clarify, correct errors in, or improve the codification within various (ASC) topics. We adopted the updates related to Topic 815 when we adopted ASU 2016-13. We determined that the impact of these improvements was not material to our consolidated financial condition and results of operations.
update requires credit losses on available-for-sale fixed maturity securities to be presented as an allowance rather than as a write-down, allowing an entity to also record reversals of credit losses in current period net income. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Additionally, in December 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This update provides clarification on the effective and transition dates and the exclusion of operating lease receivables from Topic 326. In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. This update adds optional transition relief for entities to elect the fair value option for certain financial assets previously measured at amortized cost basis to increase comparability of similar financial assets. In December 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses which provides clarification on certain aspects of the guidance in ASC 326 including purchased credit-deteriorated financial assets, transition relief for troubled debt restructurings, disclosure relief for accrued interest receivables and allows a practical expedient for financial assets secured by collateral maintenance provisions. We adopted these standards on January 1, 2020 and did not make any opening balance sheet adjustments due to the immaterial amounts. See Note 6 in the Notes to our Consolidated Financial Statements regarding the impact of this adoption on our consolidated financial condition and results of operations.
Consolidated Statements of Stockholders' Equity for each of the years ended December 31, 2020, 2019 and 2018 60
Consolidated Statements of Cash Flows for each of the years ended December 31, 2020, 2019 and 2018 61
The following Financial Statement Schedules are filed in Item 15 of Part IV of this report:
Management conducted an assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
To the Stockholders and the Board of Directors of Employers Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Employers Holdings, Inc. and Subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules listed in the Index at Item 15 (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Description of the Matter At December 31, 2020, the liability for incurred but not reported (IBNR) reserves represented a material portion of the $2,069.4 million of unpaid loss and loss adjustment expenses (LAE) reserves. As explained in Notes 2 and 9 to the consolidated financial statements, the liability for unpaid losses and LAE represents management's best estimate of the ultimate net cost of all reported and unreported losses incurred for the applicable periods, less payments made. The estimated reserves include the accumulation of estimates for all claims reported prior to the balance sheet date, estimates of claims incurred but not reported, and estimates of expenses for investigating and adjusting all incurred and unadjusted claims. IBNR reserves include an estimate for claims that are incurred but not yet reported, expected development on reported claims and for additional payments on closed claims. There is significant uncertainty inherent in determining management’s best estimate of the ultimate loss settlement cost which is used to determine the incurred but not reported claim reserves. In particular, the estimate is sensitive to the selection and weighting of actuarial methods and management’s selection of parameters and assumptions including, the pattern with which aggregate data will be paid or emerge over time, claim settlement activity, claims cost inflation rates, and claim frequencies.
How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over the process for estimating IBNR reserves. This included, among other procedures, testing management review controls in place over the review and approval of methods and assumptions used in estimating IBNR reserves.
Employers Holdings, Inc. (EHI) is a Nevada holding company. Through its wholly owned insurance subsidiaries, Employers Insurance Company of Nevada (EICN), Employers Compensation Insurance Company (ECIC), Employers Preferred Insurance Company (EPIC), Employers Assurance Company (EAC), and Cerity Insurance Company (CIC), EHI is engaged in the commercial property and casualty insurance industry, specializing in workers' compensation products and services. Unless otherwise indicated, all references to the "Company" refer to EHI, together with its subsidiaries.
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP). All intercompany transactions and balances have been eliminated in consolidation.
The Company operates through two reportable segments: Employers and Cerity. Each of the segments represents a separate and distinct underwriting platform through which the Company conducts insurance business. This presentation allows the reader, as well as the Company's chief operating decision makers, to objectively analyze the business originated through each of the Company's underwriting platforms. Detailed financial information about the Company's operating segments is presented in Note 19.
with a guaranty that unconditionally, absolutely and irrevocably guarantees the full and prompt payment and performance by PRUS of all of its obligations, liabilities and indemnities under the purchase agreement and the transactions contemplated thereby. If PRUS and PartnerRe Ltd. were to fail to honor their obligations to the Company under the purchase agreement, all or a portion of the remaining gross loss and LAE reserves acquired by the Company pursuant to the Acquisition would become the Company's responsibility.
Restricted cash and cash equivalents represent cash and cash equivalents held in trust in order to secure certain of the Company's obligations and, accordingly, are restricted as to withdrawal or usage. As of December 31, 2020 and 2019 the Company held $3.2 million and $2.9 million, respectively, in cash and investments in trust for reinsurance obligations, of which $0.2 million and $0.3 million, respectively, represented restricted cash and cash equivalents.
The Company's investments in fixed maturity securities and short-term investments are classified as available-for-sale (AFS) and are reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of deferred taxes, in Accumulated other comprehensive income on the Company's Consolidated Balance Sheets.
Beginning in 2020, with the adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), the Company's investments in fixed maturity securities are presented net of an allowance for expected credit losses. The Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria is met, the security's amortized cost basis is written down to its fair value. For AFS debt securities that do not meet either criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. The changes in the Company's allowance for expected credit losses on investments are included in Net realized and unrealized gains (losses) on investments on the Company's Consolidated Statements of Comprehensive Income (see Note 6).
Prior to adoption of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), the determination of an other-than-temporary decline for fixed maturity securities and other invested assets included, in addition to other relevant factors, a presumption that if the market value was below cost by a significant amount for a period of time, a bifurcation of the write-down may be necessary based on the portion of the loss that was deemed to be a "credit loss", which was considered a realized loss, and the portion that was deemed to be an "other than credit loss", which was considered to be an unrealized loss. If management had the intent to sell the security or more likely than not would be required to sell the security before its anticipated recovery, the investment was written down to its fair value and the entire impairment was recorded as a realized loss in the Company's Consolidated Statements of Comprehensive Income. If management did not have the intent to sell or would
not be required to sell the security but did not expect to recover the amortized cost or cost basis of the security, the amount of the other-than-temporary impairment was bifurcated (see Note 5).
Policy acquisition costs, those costs that relate directly to the successful acquisition of new or renewal insurance contracts, including underwriting, policy issuance and processing, medical and inspection, sales force contract selling and commissions are deferred and amortized as the related premiums are earned. Amortization of deferred policy acquisition costs for the years ended December 31, 2020, 2019, and 2018, was $97.5 million, $107.7 million, and $112.0 million, respectively.
Balances due from reinsurers on unpaid losses, including an estimate of such recoverables related to reserves for incurred but not reported losses, are reported as reinsurance recoverables on the Company's Consolidated Balance Sheets. Reinsurance recoverables on paid losses represent amounts currently due from reinsurers. Reinsurance recoverables on unpaid losses represent amounts that will be collectible from reinsurers once the losses are paid. Reinsurance recoverables on unpaid losses and LAE amounted to $496.6 million and $532.5 million at December 31, 2020 and 2019, respectively.
Beginning in 2020, with the adoption of ASU 2016-13, the Company's reinsurance recoverables are presented net of an allowance for expected credit losses. The changes in the Company's allowance for expected credit losses are included in underwriting and general and administrative expenses on the Company's Consolidated Statements of Comprehensive Income (see Note 6). This allowance for expected credit losses is determined based on historical information, financial strength of reinsurers, collateralization amounts and ratings to determine the appropriateness of the allowance.
The Company capitalizes software license fees and implementation costs associated with hosting arrangements that are service contracts. These amounts are included in Cloud computing arrangements on the Company's Consolidated Balance Sheets. Amortization of the software license fees is calculated using the straight-line method over the term of the service contract or
The Company determines if an arrangement is a lease at the inception of the transaction. Leased office property meets the definition of operating leases under ASC 842 and is presented as a right-of-use asset (ROU asset) and lease liability on the Company's Consolidated Balance Sheets. ROU assets represent the right to use an underlying asset for the lease payments arising from the lease transaction. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term. The Company uses collateralized incremental borrowing rates to determine the present value of lease payments. The ROU assets also include lease payments less any lease incentives within a lease agreement. The Company's lease terms may include options to extend or terminate a lease. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company elected the practical expedients in ASU 2018-11, Leases (Topic 842): Targeted Improvements and ASU 2016-02, Leases (Topic 842), allowing it to apply provisions of the new guidance at the date of adoption without adjusting comparative periods presented (see Note 12).
Leased property and equipment meeting finance lease criteria are capitalized at the lower of the present value of the related lease payments or the fair value of the leased asset at the inception of the lease. Financing leases for automobiles are included in property and equipment in other liabilities on the Company's Consolidated Balance Sheets. Amortization is calculated using the straight-line method based on the term of the lease and is included in the depreciation expense of property and equipment. See Note 12 for additional disclosures related to finance leases.
The Company's cash equivalents and short-term investments include investments in money market securities and securities backed by the U.S. government. The Company's investment securities are diversified throughout many industries and geographic regions and include investments in U.S. government and U.S. government-sponsored enterprises. The Company believes that it has no significant concentrations of credit risk from a single issue or issuer within its cash equivalents, short-
term investments and investment securities other than concentrations in U.S. government and U.S. government-sponsored enterprises.
The Company monitors the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company also obtains collateral from its reinsurers in order to mitigate the risks related to insolvencies. At December 31, 2020, $2.2 million was held as collateral by cash or letters of credit for the Company's reinsurance recoverables and an additional $369.1 million was in trust accounts for reinsurance recoverables specifically related to the LPT Agreement.
Intangible assets related to state licenses are not subject to amortization. Intangibles related to insurance relationships were amortized in proportion to the expected period of benefit and were fully amortized as of December 31, 2020.
The Company provides stock-based compensation to its directors and certain of its employees, which is recognized in its Consolidated Statements of Comprehensive Income based on estimated grant date fair values over the relevant service period (see Note 14).
In October 2020, the FASB issued ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivable-Nonrefundable fees and other costs. The amendments in that Update shortened the amortization period for certain purchased callable debt securities held at a premium by requiring that entities amortize the premium associated with those callable debt securities within the scope of paragraph 310-20-25-33 to the earliest call date. The amendments affect the guidance in Accounting Standards Update No. 2017-08, receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments is this update become effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2020. Early adoption is not permitted. The Company does not expect that the adoption of this update will have a material impact on its consolidated financial condition or results of operations.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This update provides optional transition guidance to ease the potential accounting burden associated with transitioning away from the London Interbank Offered Rate (LIBOR), with optional expedients and exceptions related to the application of US GAAP to contracts, hedging relationships and other transactions affected by reference rate reform. Companies can apply this ASU immediately, but early adoption is only available through December 31, 2022 when the ASU becomes effective. The Company is evaluating the impact of LIBOR on its existing contracts and investments, but does not expect that this update will have a material impact on its consolidated financial condition or results of operations.
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this update represent changes to clarify, correct errors in, or improve the codification within various ASC topics. The Company adopted the updates related to Topic 815 when it adopted ASU 2016-13. The Company determined that the impact of these improvements was not material to its consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This update removes the disclosure requirements for the amounts of and the reasons for transfers between Level 1 and Level 2 and disclosure of the policy for timing of transfers between levels. This update also removes disclosure requirements for the valuation processes for Level 3 fair value measurements. Additionally, this update adds disclosure requirements for the changes in unrealized gains and losses for recurring Level 3 fair value measurements and quantitative information for certain unobservable inputs in Level 3 fair value measurements. Additionally, in March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments. This update provided clarification and eliminated inconsistencies on a variety of topics within the codification. The Company adopted the applicable standards and there was no impact on its consolidated financial condition and results of operations.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). This update replaces the incurred loss impairment methodology for recognizing credit losses on financial instruments with a methodology that reflects an entity's current estimate of all expected credit losses. This update requires financial assets (including receivables and reinsurance recoverables) measured at amortized cost to be presented net of an allowance for credit losses. Additionally, this
update requires credit losses on available-for-sale fixed maturity securities to be presented as an allowance rather than as a write-down, allowing an entity to also record reversals of credit losses in current period net income. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Additionally, in December 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This update provides clarification on the effective and transition dates and the exclusion of operating lease receivables from Topic 326. In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. This update adds optional transition relief for entities to elect the fair value option for certain financial assets previously measured at amortized cost basis to increase comparability of similar financial assets. In December 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses which provides clarification on certain aspects of the guidance in ASC 326 including purchased credit-deteriorated financial assets, transition relief for troubled debt restructurings, disclosure relief for accrued interest receivables and allows a practical expedient for financial assets secured by collateral maintenance provisions. The Company adopted these standards on January 1, 2020 and did not make any opening balance sheet adjustments due to the immaterial amounts. See Note 6 regarding the impact of this adoption on the Company's consolidated financial condition and results of operations.
•Level 2 - Inputs other than Level 1 prices that are observable for similar assets or liabilities through corroboration with market data at the measurement date.
For securities not actively traded, third party pricing services may use quoted market prices of similar instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates, and prepayment speeds. There were no material adjustments to the valuation methodology utilized by third party pricing services as of December 31, 2020 and 2019.
The following table presents the Company's investments at fair value and the corresponding fair value measurements.
EICN, ECIC, EPIC, and EAC are members of the Federal Home Loan Bank of San Francisco (FHLB). Members are required to purchase stock in the FHLB in addition to maintaining collateral deposits that back any funds advanced. The Company's investment in FHLB stock is recorded at cost, which approximates fair value, as purchases and sales of these securities are at par value with the issuer. FHLB stock is considered a restricted security and is periodically evaluated by the Company for impairment based on the ultimate recovery of par value.
The Company also has investments in convertible preferred shares of real estate investment trusts which are carried at cost and approximate fair value.
The Company has investments in private equity limited partnership interests that are included in Other invested assets on the Company's Consolidated Balance Sheets. These investments do not have readily determinable fair values and are carried at NAV and therefore are excluded from the fair value hierarchy. The Company initially estimates the value of these investments using the transaction price. In subsequent periods, the Company measures these investments using NAV per share provided quarterly by the general partner, based on financial statements that are audited annually. The Company performs certain control procedures to validate the appropriateness of using NAV as a measurement. These investments are generally not redeemable by the investees and cannot be sold without approval of the general partner. These investments have a fund term of 10 to 12 years, subject to two or three one year extensions at the general partner's discretion. The Company will receive distributions of proceeds from dividends and interest from fund investments, as well as from the disposition of a fund investment, or a portion thereof. The Company expects these distributions from time-to-time during the full course of the fund term. As of December 31, 2020 and 2019, the Company had unfunded commitments to these private equity limited partnerships totaling $63.8 million and $41.6 million, respectively.
Additionally, certain cash equivalents, principally money market securities, are measured using NAV, which approximates fair value.
The following table presents cash and investments carried at NAV on the Company's Consolidated Balance Sheets.
The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of the Company's AFS investments were as follows:
The following is a summary of AFS investments that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or greater as of December 31, 2020 and 2019.
maturity securities are also recognized when securities are written down as a result of an other-than-temporary impairment or for changes in the expected credit loss allowance.
Net realized gains on investments and the change in unrealized gains (losses) on the Company's investments recorded at fair value are determined on a specific-identification basis and were as follows:
Proceeds from the sales of fixed maturity securities were $349.5 million, $163.0 million and $204.8 million for years ended December 31, 2020, 2019 and 2018, respectively.
In assessing an allowance for reinsurance assets, which includes reinsurance recoverables and contingent commission receivables, the Company considers historical information, financial strength of reinsurers, collateralization amounts and ratings to determine the appropriateness of the allowance. Historically, the Company has not experienced a credit loss from reinsurance transactions. In assessing future default, the Company evaluated the CECL allowance under the ratings based method using the A.M. Best Average Cumulative Net Impairment Rates. Reinsurer ratings are also assessed through this process. Changes in the allowance for credit losses are recorded through general and administrative expenses.
The table below shows the changes in the allowance for expected credit losses on reinsurance recoverables.
As of December 31, 2020, the Company established an aggregate allowance for credit losses in the amount of $0.7 million. For the Company’s investments in fixed-income debt securities, the allowance for credit losses was determined by: (i) observing the credit characteristics of those debt securities that may have demonstrated a credit loss as of that date and by comparing the present value of cash flows expected to be collected to its amortized cost basis; and (ii) observing the credit characteristics of those debt securities that are expected to demonstrate a credit loss in the future by comparing the present value of cash flows expected to be collected to its amortized cost basis. The expected present value of cash flows are calculated using scenario based credit loss models derived from the discounted cash flows under the Comprehensive Capital Analysis Review (CCAR) framework, which is adopted by the Federal Reserve.
As of December 31, 2020, the Company did not intend to sell any of its AFS debt securities in which its amortized cost exceeded its fair value.
The Tax Cuts and Jobs Act significantly revised U.S. corporate income tax law by, among other things, reducing the corporate statutory income tax rate from 35% to 21%, beginning January 1, 2018. This reduction in the corporate statutory income tax
The LPT Reserve Adjustments for the years ended December 31, 2020, 2019, and 2018 increased GAAP net income by $1.2 million, $1.8 million, and $2.2 million, respectively, but did not affect taxable income. The LPT Contingent Commission Adjustments increased net income by $0.2 million, $0.2 million, and $0.5 million during 2020, 2019, and 2018, respectively, but did not increase taxable income.
As of December 31, 2020, 2019, and 2018 the Company had no material unrecognized tax benefits.
The Company made cash payments of $18.5 million, $37.8 million and $4.2 million for income taxes during the years ended December 31, 2020, 2019, and 2018, respectively.
Tax years 2017 through 2020 remain open and are available for examination by the Internal Revenue Service. The significant components of deferred income taxes, net, were as follows as of December 31:
The Company uses actuarial methods to analyze and estimate the aggregate amount of unpaid losses and LAE. Management considers the results of various actuarial methods and their underlying assumptions, among other factors, in establishing reserves for unpaid losses and LAE.
Each actuarial methodology requires the selection and application of various parameters and assumptions. The key parameters and assumptions include the future payment and emergence patterns of our aggregate claims data; the magnitude and changes in claim settlement activity; claims cost inflation rates; the effects of legislative benefit changes and/or judicial decisions; and trends in the frequency and severity of claims. The Company believes the pattern with which our aggregate data will be paid or emerge over time, claim settlement activity, and claims cost inflation rates are the most important parameters and assumptions.
The following table represents a reconciliation of changes in the liability for unpaid losses and LAE.
Total net losses and LAE included in the above table excludes the impact of the amortization of the Deferred Gain and LPT Reserve Adjustments (See Note 10).
In 2020, the Company had $81.6 million of favorable prior accident year loss development, which included $80.2 million of favorable development on its voluntary risk business and $1.4 million on its assigned risk business. In 2019, the Company had $77.5 million of favorable prior accident year loss development on its voluntary risk business. In 2018, the Company had $66.2 million of favorable prior accident year loss development, which included $65.5 million of favorable development on its voluntary risk business and $0.7 million of favorable development related to its assigned risk business. The favorable prior accident year development on voluntary business during 2020 was primarily the result of the Company's determination that adjustments were necessary to reflect observed favorable paid loss trends for accident years 2018 and prior due to decreasing medical costs, partially offset by $13.3 million of adverse development on accident year 2019 partially due to an inability to fully execute its claims initiatives to reduce loss costs as a result of the COVID-19 pandemic. The favorable prior accident year loss development on voluntary business during 2019 and 2018 was the result of the Company's determination that adjustments were necessary to reflect observed favorable paid loss trends. Paid loss trends have been impacted by generally declining loss costs and by cost savings associated with accelerated claims settlement activity that began in 2014 and continued through 2020. Loss reserves shown in the Company's Consolidated Balance Sheets are net of $28.1 million and $28.6 million for anticipated subrogation recoveries as of December 31, 2020 and 2019, respectively.
The Company compiles and aggregates its claims data by grouping the claims according to the year in which the claim occurred ("accident year") when analyzing claim payment and emergence patterns and trends over time. Reported claims include any claim that has case reserves and/or loss and LAE payments associated with them.
The following table represents a reconciliation of claims development to the aggregate carrying amount of the liability for unpaid losses and LAE:
The Company has consistently maintained excess of loss reinsurance coverage to protect it against the impact of large and/or catastrophic losses in its workers' compensation business. The Company currently maintains reinsurance for losses from a single occurrence or catastrophic event in excess of $10.0 million and up to $200.0 million, subject to certain exclusions. This current reinsurance program is effective July 1, 2020 through June 30, 2021. The coverage under the Company's annual reinsurance program that ended each of July 1, 2020 and 2019 was $190.0 million, in excess of its $10.0 million retention on a per occurrence basis. The reinsurance coverage includes coverage for pandemics, acts of terrorism, excluding nuclear, biological, chemical, and radiological events. Any liability outside the coverage limits of the reinsurance program is retained by the Company.
Recoverables from reinsurers on unpaid losses and LAE amounted to $496.6 million and $532.5 million at December 31, 2020 and 2019, respectively. At each of December 31, 2020 and 2019, $353.5 million and $380.4 million, respectively, of those recoverables was related to the LPT Agreement that was entered into in 1999 by the Fund and assumed by EICN. Under the LPT Agreement, substantially all of the Fund's losses and LAE on claims incurred prior to July 1, 1995 have been ceded to three unaffiliated reinsurers on a 100% quota share basis. Investments totaling $369.1 million and $341.0 million at December 31, 2020 and 2019, respectively, have been placed in trust by the three reinsurers as security for payment of the reinsured claims. Under the LPT Agreement, initially $1.5 billion in liabilities for the incurred but unpaid losses and LAE related to claims incurred prior to July 1, 1995, were reinsured for consideration of $775.0 million. The LPT Agreement provides coverage up to $2.0 billion. Through December 31, 2020, the Company has paid losses and LAE claims totaling $818.9 million related to the LPT Agreement.
The Company amortized $10.5 million, $10.7 million, and $11.9 million of the Deferred Gain for the years ended December 31, 2020, 2019, and 2018, respectively. Additionally, the Company recognized favorable development in the estimated reserves ceded under the LPT Agreement of $4.2 million, $5.3 million, and $6.3 million that reduced the Deferred Gain by $1.2 million, $1.8 million, and $2.2 million for the years ended December 31, 2020, 2019, and 2018, respectively, due to favorable LPT Reserve Adjustments and by $0.2 million, $0.2 million, and $0.5 million for the years ended December 31, 2020, 2019, and 2018, respectively, due to favorable LPT Contingent Commission Adjustments (Note 2 -Reinsurance).
During the second quarter of 2020, the FHLB announced its Zero Interest Recovery Advance Program (the FHLB Advance Program). The FHLB Advance Program is a zero percent interest, six-month or one-year credit product that members can use to provide immediate relief to property owners, businesses, and other customers from the COVID-19 pandemic. Each member was allocated up to $10.0 million in advances under the FHLB Advance Program.
On May 11, 2020, the Company's insurance subsidiaries received a total of $35.0 million of advances under the Advance Program. The advances were secured by collateral previously pledged to the FHLB by the Company's insurance subsidiaries in support of their existing collateralized advance facility, which has been reduced by the amount of these outstanding advances. The Company repaid $15.0 million on November 4, 2020. The remaining advances are required to be repaid to the FHLB by May 11, 2021 in the amount of $20.0 million.
As of December 31, 2020 and 2019, investment securities having a fair value of $385.6 million and $326.8 million, respectively, were pledged to the FHLB by the Company's insurance subsidiaries in support of the collateralized advance facility and the Letter of Credit Agreements.
As of December 31, 2020, the weighted average remaining lease term for operating leases was 6.0 years and for finance leases was 2.8 years. The weighted average discount rate was 2.8% and 3.7% for operating and finance leases, respectively.
All of the states where the Company's insurance subsidiaries are licensed to transact business require property and casualty insurers doing business within the respective state to pay various insurance assessments. The Company accrues a liability for estimated insurance assessments as direct premiums are written, losses are recorded, or as other events occur in accordance with various states' laws and regulations, and defers these costs and recognizes them as an expense as the related premiums are earned. The Company had an accrued liability for guaranty fund assessments, second injury funds assessments, and other insurance assessments totaling $18.4 million and $16.8 million as of December 31, 2020 and 2019, respectively. These liabilities are generally expected to be paid over one to eighty year periods based on individual state's regulations. The Company also recorded an asset of $18.7 million and $17.0 million, as of December 31, 2020 and 2019, respectively, for prepaid policy charges still to be collected in the future from policyholders, or assessments that may be recovered through a reduction in future premium taxes in certain states. These assets are expected to be realized over one to ten year periods in accordance with their type and each individual state's regulations.
As of December 31, 2020 and 2019, the Company had unfunded commitments to invest $63.8 million and $41.6 million, respectively, into private equity limited partnerships. See Note 4.
On February 21, 2018, the Board of Directors authorized a share repurchase program for up to $50.0 million of the Company's common stock from February 26, 2018 through February 26, 2020 (the 2018 Program). On April 24, 2019, the Board of Directors authorized a $50.0 million expansion of the 2018 Program, to $100.0 million, and extended the repurchase authority pursuant to the 2018 Program through June 30, 2020. On March 11, 2020, the Board of Directors authorized a second $50.0 million expansion of the 2018 Program, to $150.0 million, and extended the repurchase authority pursuant to the 2018 Program through June 30, 2021. On July 22, 2020, the Board of Directors authorized a third $50.0 million expansion of the 2018 Program, to $200.0 million, and extended the repurchase authority pursuant to the 2018 Program through September 30, 2021. The 2018 Program provides that shares may be purchased at prevailing market prices through a variety of methods, including open market or private transactions, in accordance with applicable laws and regulations and as determined by management. The timing and actual number of shares repurchased will depend on a variety of factors, including the share price, corporate and regulatory requirements, and other market and economic conditions. Repurchases under the 2018 Program may be commenced, modified, or suspended from time-to-time without prior notice, and the 2018 Program may be suspended or discontinued at any time. Through December 31, 2020, the Company has repurchased a total of 4,751,653 shares of common stock at an average price of $36.09 per share, including commissions, for a total of $171.5 million under the 2018 Program.
Since the Company's initial public offering in January 2007 through December 31, 2020, the Company has repurchased a total of 28,849,008 shares of common stock at an average cost per share of $19.24 through various stock repurchase programs, which is reported as treasury stock, at cost, on its Consolidated Balance Sheets.
On May 28, 2020, the Company’s stockholders approved the Employers Holdings, Inc. Amended and Restated Equity and Incentive Plan (as amended and restated, the "Plan"). The Plan will expire on the tenth anniversary of April 1, 2020, which is also the effective date of the Plan. The Plan is administered by the Compensation Committee of the Board of Directors, which is authorized to grant, at its discretion, awards to officers, employees, non-employee directors, consultants, and independent contractors. The maximum number of common shares reserved for grants of awards under the Plan was 6,555,000 shares, prior to reductions for grants made. The Plan provides for the grant of stock options (both incentive stock options and nonqualified stock options), stock appreciation rights, shares of restricted stock, restricted stock units (RSUs), performance stock units (PSUs), and other stock-based awards.
As of December 31, 2020, the only incentive awards outstanding under the Plan were nonqualified stock options, RSUs, and PSUs.
Changes in outstanding stock options for the year ended December 31, 2020 were as follows:
The fair value of stock options vested and the intrinsic value of outstanding and exercisable stock options as of December 31, were as follows:
Changes in outstanding RSUs for the year ended December 31, 2020 were as follows:
Net income provided from the Company's insurance subsidiaries prepared in accordance with SAP was $140.4 million, $129.3 million, and $159.3 million, for the years ended December 31, 2020, 2019 and 2018, respectively.
Nevada law limits the payment of cash dividends by EICN to its parent by providing that payments cannot be made except from available and accumulated surplus, otherwise unrestricted (unassigned), and derived from realized net operating profits and realized and unrealized capital gains. A stock dividend may be paid out of any available surplus. A cash or stock dividend prohibited by these restrictions may only be declared and distributed as an extraordinary dividend upon the prior approval of the Nevada Commissioner of Insurance (Nevada Commissioner). EICN may not pay such an extraordinary dividend or make an extraordinary distribution until the Nevada Commissioner either approves or does not disapprove the payment within 30 days after receiving notice of its declaration. An extraordinary dividend or distribution is defined by statute to include any dividend or distribution of cash or property whose fair market value, together with that of other dividends or distributions made within the preceding 12 months, exceeds the lesser of: (a) 10% of EICN's statutory surplus as regards to policyholders at the next preceding December 31; or (b) EICN's statutory net income, not including realized capital gains, for the 12-month period ending at the next preceding December 31. As of December 31, 2020, EICN had positive unassigned surplus of $229.3 million. During 2020, EICN paid an ordinary dividend in the amount of $20.0 million to its parent company, EGI. As a result of that payment, EICN cannot pay any dividends through March 20, 2021, and can pay $12.5 million of dividends thereafter, without regulatory approval.
EPIC and EAC are subject to regulation by the Florida Department of Financial Services (FDFS). Florida statute Section 624.408 requires EPIC and EAC to maintain minimum capital and surplus of the greater of $4.0 million or 10% of total liabilities. Florida statutes require EPIC and EAC to maintain a ratio of written premiums, defined as 1.25 times written premiums, to surplus of no greater than 10-to-1 for gross written premiums and 4-to-1 for net written premiums. During the years ended December 31, 2020, 2019, and 2018, EPIC and EAC were in compliance with these statutes.
ECIC is subject to regulation by the California Department of Insurance (California DOI). Additionally, the California Insurance Holding Company System Regulatory Act limits the ability of ECIC to pay dividends to its parent. California law provides that, absent prior approval of the California Insurance Commissioner, dividends may only be declared from earned surplus. For purpose of this statute, earned surplus excludes amounts derived from net appreciation in the value of assets not yet realized, or derived from an exchange of assets, unless the assets received are currently realizable in cash. In addition, California law provides that the appropriate insurance regulatory authorities in the state of California must approve (or, within a 30-day notice period, not disapprove) any dividend that, together with all other such dividends paid during the preceding 12 months, exceeds the greater of: (a) 10% of the paying company's statutory surplus as regards to policyholders at the preceding December 31; or (b) 100% of net income for the preceding year. During the years ended December 31, 2020, 2019, and 2018, ECIC was in compliance with these requirements.
During 2020, ECIC paid an ordinary dividend in the amount of $32.1 million to its parent company, EGI. As a result of that payment, ECIC cannot pay any dividends through September 24, 2021 and can pay $32.1 million of dividends thereafter, without prior regulatory approval.
Additionally, EICN, ECIC, EPIC, EAC, and CIC are required to comply with RBC requirements. RBC is a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. NAIC RBC standards are used by regulators to determine appropriate regulatory actions relating to insurers that show signs of weak or deteriorating conditions. As of December 31, 2020, 2019, and 2018, EICN, ECIC, EPIC, EAC, and CIC each had total adjusted capital above all regulatory action levels.
Accumulated other comprehensive income is comprised of unrealized gains on investments classified as available-for-sale, net of deferred tax expense. The following table summarizes the components of Accumulated other comprehensive income:
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilutive impact of all common stock equivalents on earnings per share. Diluted earnings per share includes common shares assumed issued under the "treasury stock method," which reflects the potential dilution that would occur if outstanding RSUs and PSUs vested, and stock options were to be exercised.
In 2019 the Company made changes to its corporate structure, mainly involving the launch and further development of a new digital insurance platform offered under the Cerity brand name (Cerity), resulting in changes to its reportable segments. The Company has determined that it has two reportable segments: Employers and Cerity. Each of these segments represents a separate and distinct underwriting platform through which the Company conducts insurance business. The nature and composition of each reportable segment and its Corporate and Other activities are as follows:
The Cerity segment represents the business offered under the Cerity brand name, which includes the Company's direct-to-customer business.
The following table summarizes the Company's written premiums and components of net income before income taxes by reportable segment.
policies in-force for each state with approximately five percent or more of our in-force premiums and all other states combined as of December 31:
Quarterly results for the years ended December 31, 2020 and 2019 were as follows:
The first quarter of 2020 was impacted by: (1) favorable prior accident year loss development of $3.5 million, which decreased losses and LAE by the same amount; (2) the inclusion of $69.2 million in net unrealized losses on equity securities; and (3) unfavorable change in CECL allowance on investments of $10.7 million.
The fourth quarter of 2020 was impacted by: (1) favorable prior accident year loss development of $39.7 million, which decreased losses and LAE by the same amount; and (2) the inclusion of $18.2 million in net unrealized gains on equity securities.