The following tables summarize certain selected financial data that should be read in conjunction with our audited financial statements and accompanying notes thereto for the year ended December 31, 2020 included in this report and “
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 8 of this report. This discussion includes forward-looking statements that are subject to risks, uncertainties and other factors described in Item 1A of this report. These factors could cause our actual results in 2021 and beyond to differ materially from those expressed in, or implied by, those forward-looking statements.
Two of the key financial measures that we use to evaluate our performance are return on average equity and growth in book value per share adjusted for dividends paid to shareholders. We calculate return on average equity by dividing annual net income by the average of annual shareholders’ equity. Our return on average equity was 19.9% in 2020, 22.1% in 2019 and 17.2% in 2018. We calculate book value per share by dividing ending shareholders’ equity by the number of common shares outstanding. Our book value per share was $22.70 at December 31, 2020, $22.29 at December 31, 2019 and $21.26 at December 31, 2018. We paid cash dividends of $4.58 per share in 2020, $4.50 per share in 2019 and $4.38 per share in 2018.
The extent to which the fair value is less than the amortized cost basis
Failure of the issuer to make scheduled interest or principal payments
Any changes to the rating of the security by a rating agency
We adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), in the first quarter of 2020. We elected the modified retrospective approach. Therefore, prior comparative periods are not adjusted
We adopted ASU 2016-02, Leases (Topic 842), in the first quarter of 2019. We elected the new transition method under the transition guidance within the new standard. Therefore, prior comparative periods are not adjusted.
Net Premiums Earned. Net premiums earned for 2020 were $304.4 million, compared to $332.9 million for 2019, a decrease of 8.5%. The decrease was attributable to the decrease in net premiums written during the period.
Net Realized Gains (Losses) on Investments. Net realized gains on investments in 2020 totaled $1.1 million, compared to losses of $0.1 million in 2019. In 2020, net realized gains of $1.0 million resulted from the sale of fixed maturity securities classified as available-for-sale and $0.1 million from redemptions of fixed maturity securities. In 2019, net realized losses of $0.2 million resulted from redemptions of fixed maturity securities offset by $0.1 million of realized gains on the sale of fixed maturity securities classified as available-for-sale.
Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled $157.2 million for 2020, compared to $176.3 million for 2019, a decrease of $19.1 million, or 10.8%. The current accident year losses and LAE incurred were $220.7 million, or 72.5% of net premiums earned, compared to $241.3 million, or 72.5% of net premiums earned for 2019. We recorded favorable prior accident year development of $63.5 million in 2020, compared to $65.0 million in 2019. This is discussed in more detail below in “Prior Year Development.” Our net loss ratio was 51.6% for 2020 and 53.0% for 2019.
Income tax expense. Income tax expense for 2020 was $20.3 million, compared to $22.8 million for 2019. The effective tax rate also decreased to 19.0% for 2020, compared to 19.8% for 2019. This decrease in the effective tax rate is due to a higher proportion of tax-exempt income to underwriting income in 2020 relative to 2019.
Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled $176.3 million for 2019, compared to $204.9 million for 2018, a decrease of $28.5 million, or 13.9%. The current accident year losses and LAE incurred were $241.3 million, or 72.5% of net premiums earned, compared to $250.5 million, or 71.5% of net premiums earned for 2018. We recorded favorable prior accident year development of $65.0 million in 2019, compared to $45.6 million in 2018. This is discussed in more detail below in “Prior Year Development.” Our net loss ratio was 53.0% for 2019 and 58.5% for 2018.
Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for 2019 were $74.4 million, compared to $81.1 million for 2018, a decrease of $6.8 million, or 8.4%. This decrease was primarily due to a $6.8 million decrease in insurance related assessments, a $1.2 million decrease in commission expense, and a $0.6 million decrease in premium taxes. The decrease in insurance related assessments included a benefit of $3.5 million from the elimination of a state assessment for a multiple injury fund. The decreases above were partially offset by an increase of $1.1 million in compensation expense and an increase of $0.4 million in accounts receivable write-offs. Our underwriting expense ratio decreased to 22.3% in 2019 from 23.2% in 2018.
Income tax expense. Income tax expense for 2019 was $22.8 million, compared to $15.9 million for 2018. The effective tax rate also increased to 19.8% for 2019, compared to 18.2% for 2018. This increase in the effective tax rate is due to a lower proportion of tax-exempt income to underwriting income in 2019 relative to 2018.
The Company recorded favorable prior accident year loss and loss adjustment expense development of $63.5 million in calendar year 2020, $65.0 million in calendar year 2019 and $45.6 million in calendar year 2018. The table below sets forth the favorable development for accident years 2015 through 2019 and, collectively, all accident years prior to 2015.
The assumptions we used in establishing our reserves for these accident years were based on our historical claims data. However, as of December 31, 2020, actual results for these accident years have been better than our assumptions would have predicted. We do not presently intend to modify our assumptions for establishing reserves in light of recent results. However, if actual results for current and future accident years are consistent with, or different than, our results in these recent accident years, our historical claims data will reflect this change and, over time, will impact the reserves we establish for future claims.
were $179.9 million in 2020, $190.0 million in 2019 and $200.7 million in 2018. We fund claim payments out of cash flow from operations, principally premiums, net of amounts ceded to our reinsurers, and net investment income. Our investment portfolio at December 31, 2020 was $1.2 billion.
As discussed above under “Overview,” We purchase reinsurance to reduce our net liability on individual risks and to protect against catastrophic losses. Based on our estimates of future claims, we believe we are sufficiently capitalized to satisfy the deductibles and retentions in our 2021 reinsurance program. We reevaluate our reinsurance program at least annually, taking into consideration a number of factors, including cost of reinsurance, our liquidity requirements, operating leverage and coverage terms.
Net cash provided by operating activities was $63.4 million in 2020, as compared to $78.8 million in 2019, and $98.3 million in 2018. The decline in operating cash flow has been primarily due to lower premiums collected as loss cost rates have declined in most states over the past several years. Major components of cash provided by operating activities in 2020 were net premiums collected of $294.4 million, investment income collected of $38.0 million, and a $7.9 million decrease in amounts held by others. These increases were offset in-part by claim payments of $179.1 million, $69.4 million of operating expenditures, federal taxes paid of $20.6 million, and dividends to policyholders paid of $4.9 million.
In 2018, major components of net cash used in investing activities included investment purchases of $368.3 million and net purchases of furniture, fixtures and equipment of $1.1 million, offset by proceeds from sales and maturities of investments of $340.2 million.
Net cash used in financing activities was $88.8 million in 2020, as compared to $87.0 million in 2019 and $84.4 million in 2018. Major components of cash used in financing activities in 2020 included cash used for dividends paid to shareholders of $88.8 million.
The Board of Directors initially authorized the Company’s share repurchase program in February 2010. In October 2016, the Board reauthorized this program with no expiration date. As of December 31, 2020, we had repurchased a total of 1,258,250 shares of our outstanding common stock for $22.4 million. The Company had $25.0 million available for future purchases at December 31, 2020 under this program. There were no share repurchases in 2020, 2019 or 2018. The purchases may be effected from time to time depending upon market conditions and subject to applicable regulatory considerations. It is anticipated that future purchases will be funded from available capital.
AMERISAFE is a holding company that transacts business through its operating subsidiaries, including AIIC, SOCI and AIICTX. AMERISAFE’s primary assets are the capital stock of these insurance subsidiaries. The ability of AMERISAFE to fund its operations depends upon the surplus and earnings of its subsidiaries and their ability to pay dividends to AMERISAFE. Payment of dividends by our insurance subsidiaries is restricted by state insurance laws, including laws establishing minimum solvency and liquidity thresholds. Based upon the prescribed calculation, the insurance subsidiaries could pay to AMERISAFE dividends of up to $83.4 million in 2021 without seeking regulatory approval. See “Business-Regulation-Dividend Limitations” in Item 1 of this report.
On February 23, 2021, the Company declared a regular quarterly cash dividend of $0.29 per share payable on March 26, 2021 to shareholders of record as of March 12, 2021. The Board intends to continue to consider the payment of a regular cash dividend each calendar quarter. On an annualized basis, the cash dividend is expected to be $1.16 per share in 2021.
We allocate our portfolio into four categories: cash and cash equivalents, short-term investments, fixed maturity securities and equity securities. Cash and cash equivalents include cash on deposit, money market funds and municipal securities, corporate securities and certificates of deposit with an original maturity of less than 90 days. Short-term investments include municipal securities, corporate securities and certificates of deposit with an original maturity greater than 90 days but less than one year. Our fixed maturity securities include obligations of the U.S. Treasury or U.S. agencies, obligations of states and their subdivisions, U.S. Dollar-denominated obligations of the U.S. or Canadian corporations, U.S. agency-based mortgage-backed securities, commercial mortgage-backed securities and asset-backed securities.
Under Nebraska and Texas law, as applicable, each of AIIC, SOCI and AIICTX is required to invest only in securities that are either interest-bearing, interest-accruing or eligible for dividends, and must limit its investment in the securities of any single issuer, other than direct obligations of the United States, to five percent of the insurance company’s assets. As of December 31, 2020, we were in compliance with these requirements.
As of December 31, 2020, our investment portfolio, including cash and cash equivalents, totaled $1.2 billion, a decrease of 1.6% from December 31, 2019. The majority of our fixed maturity securities are classified as held-to-maturity, as defined by FASB ASC Topic 320, Investments-Debt and Equity Securities. As such, the reported book value of those securities is equal to their amortized cost net of allowance for credit losses and does not fluctuate based on changing interest rates. The remainder of our fixed maturity securities are classified as available-for-sale and reported at fair market value, less an allowance for credit losses, if any. Investments in equity securities are reported at fair market value.
We follow FASB ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As disclosed in Note 18 of the financial statements, our securities available-for-sale are classified using Level 1,
2 and 3 inputs. We did not elect the fair value option prescribed under FASB ASC Topic 825, Financial Instruments, for any financial assets in 2019 or 2020.
The composition of our investment portfolio, including cash and cash equivalents, as of December 31, 2020 is shown in the following table.
(including claims that have not yet been reported to us) will be paid. For a discussion of our loss and loss adjustment expense process, see “Business-Loss Reserves” in Item 1 of this report. Actual payments of loss and loss adjustment expenses by period will vary, perhaps materially, from the amounts shown in the table above to the extent that current estimates of loss and loss adjustment expenses vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See “Risk Factors- Risks Related to Our Business-Our loss reserves are based on estimates and may be inadequate to cover our actual losses” in Item 1A of this report for a discussion of the uncertainties associated with estimating loss and loss adjustment expenses.
We have audited the accompanying consolidated balance sheets of AMERISAFE, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in shareholders' 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.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), 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) and our report dated February 26, 2021 expressed an unqualified opinion thereon.
The Company provides workers’ compensation insurance for small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, agriculture, maritime, and oil and gas. Assets and revenues of AIIC and its subsidiaries represent at least 95% of comparable consolidated amounts of the Company for each of 2020, 2019 and 2018.
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company implemented the new standard using the modified retrospective approach. Results for reporting periods beginning after January 1, 2020 are presented under the new guidance while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to Retained Earnings of $594 thousand as of January 1, 2020, for the cumulative effect of adopting ASU 2016-13. The transition adjustment includes a $243 thousand impact to establish a credit loss allowance for held-to-maturity securities. The remaining $351 thousand of the transition adjustment was due to the creation of the reinsurance recoverable credit allowance.
The Company believes that under the standard there is no current expected credit allowance necessary for GNMA Securities in its judgment as: 1) GNMA securities typically are the most highly rated securities among rating agencies; 2) GNMA securities have a long history of no credit losses and payments are explicitly guaranteed by the United States; 3) Underlying mortgage loans for GNMA securities are insured by the Federal Housing Administration or guaranteed by the U.S. Department of Veteran Affairs; 4) the U.S. Government can print its own money to retire GNMA obligations.
The Company did not record a credit allowance for available-for-sale securities. The available-for-sale portfolio is composed of highly rated securities, which carry a low risk of default. The Company’s concentrations in municipal bonds have helped lower default risk, as the historical default rates and recovery rates for municipal bonds has been much better than corporate bonds rated at the same level. The Company creates a watch list of available-for-sale securities that are below book value at the end of each quarter. This watch list excludes US Treasury securities, GNMA Securities, and government agency securities (FNMA, etc.) as none of those securities will have an expected credit loss. The watch list will also exclude those securities that are trading at least at $95 or above
1. The extent to which the fair value is less than the amortized cost basis
b.) Discontinuation of a segment of business that may affect future earnings
5. Any changes to the rating of the security by a rating agency
The calculation of the credit loss allowance will not take into account the amount of time the security has been below book value or when the security might be expected to recover in value.
The Company has researched various options and methodologies and has chosen to use Moody’s default rates and recovery rates for our unsecured reinsurance recoverables based on the current credit rating of the reinsurer and a time period of ten years. This is a probability of default (PD) and loss given default (LGD) methodology. The ten-year period is consistent with our current working layer reinsurance treaty where we have a three-year treaty, which must be commuted by the end of the tenth year. We believe this is an appropriate approach to our reinsurance recoverables.
The Company does not hold any debt securities for which an other-than-temporary impairment has been recognized. Additionally, the Company does not hold any financial assets purchased with credit deterioration.
The Company has elected not to establish a credit allowance for investment interest receivable. The Company plans to continue use of the current policy for writing off investment related interest receivable balances over ninety days old.
All other issued but not yet effective accounting and reporting standards as of December 31, 2020 are either not applicable to the Company or are not expected to have a material impact on the Company.
Premiums receivable consist primarily of premium-related balances due from policyholders. The Company considers premiums receivable as past due based on the payment terms of the underlying policy. The balance is shown net of the allowance for credit losses. Receivables due from insureds are charged off when a determination has been made by management that a specific balance will not be collected. An estimate of amounts that are likely to be charged off is established as an allowance for credit losses as of the balance sheet date. The estimate is primarily comprised of specific balances that are considered probable to be charged off after all collection efforts have ceased, as well as historical trends and an analysis of the aging of the receivables.
The direct costs of successfully acquiring and renewing business are capitalized to the extent recoverable and are amortized over the effective period of the related insurance policies in proportion to premium revenue earned. These capitalized costs consist mainly of sales commissions, premium taxes and other underwriting costs. The Company evaluates deferred policy acquisition costs for recoverability by comparing the unearned premiums to the estimated total expected claim costs and related expenses, offset by anticipated investment income. The Company would reduce the deferred costs if the unearned premiums were less than expected claims and expenses after considering investment income, and report any adjustments in amortization of deferred policy acquisition costs. There were no adjustments necessary in 2020, 2019 or 2018.
Premium revenue is earned on a pro rata basis over periods covered by the policies. The reserve for unearned premiums on these policies is computed on a daily pro rata basis.
Experience-rated commissions are earned from certain reinsurance companies based on the financial results of the applicable risks ceded to the reinsurers. These commission revenues on reinsurance contracts are recognized during the related reinsurance treaty period and are based on the same assumptions used for recording loss and allocated loss adjustment expenses. These commissions are reflected as a reduction in underwriting and certain other operating costs and are adjusted as necessary as experience develops or new information becomes known. Any such adjustments are included in income from current operations. Experience-rated commissions had no impact on underwriting and certain other operating costs in 2020 and 2019 and increased underwriting and certain other operating costs by $0.2 million in 2018.
The gross unrealized gains and losses on, and the cost of equity securities at December 31, 2020 are summarized as follows:
A summary of the carrying amounts and fair value of investments in fixed maturity securities classified as held-to-maturity by contractual maturity is as follows:
A summary of the Company’s realized gains and losses on sales, calls or redemptions of investments for 2020, 2019 and 2018 is as follows:
The credit rating used for held-to-maturity fixed income securities is the rating for each security as published by Moody’s, S&P, and Fitch to determine the probability of default. If there are two ratings, the lower rating is used. If there are three ratings, the median rating is used. If there is one rating, that rating is used. For corporate fixed income securities the probability of default (given a rating) comes from Moody’s annual study of corporate bond defaults published each February. The maximum maturity using the default rate is 20 years (any maturity greater than 20 years will use the 20-year rate). For municipal fixed income securities the probability of default (given a rating) comes from Moody’s annual study of municipal bond defaults published each July/August.
The table below presents the amortized cost of held-to-maturity securities aggregated by credit quality indicator as of December 31, 2020.
Deferred policy acquisition costs represent those costs that are incremental and directly related to the successful acquisition of new or the renewal of existing insurance policies. We defer incremental costs that result directly from, and are essential to, the acquisition or renewal of an insurance policy.
Accumulated depreciation and amortization includes $0.2 million that is related to equipment held under finance leases at December 31, 2020 and 2019 and is included in the underwriting and certain other operating costs line item on the income statement. The lease liabilities related to these properties are included in accounts payable and other liabilities.
Amounts recoverable from reinsurers consists of ceded case reserves, ceded incurred but not reported (“IBNR”) reserves, and paid losses recoverable. Ceded case and ceded IBNR reserves represent the portion of gross loss and loss adjustment expense liabilities that are recoverable under reinsurance agreements, but are not yet due from reinsurers. Paid losses recoverable are receivables currently due from reinsurers for ceded paid losses. The Company considers paid losses recoverable outstanding for more than 90 days to be past due. At December 31, 2020, paid losses recoverable past due were immaterial.
The Company received reinsurance recoveries of $4.4 million in 2020, $2.0 million in 2019 and $1.3 million in 2018.
The Company generally secures large reinsurance recoverable balances with various forms of collateral, including funds withheld accounts, irrevocable letters of credit and secured trusts. At December 31, 2020, reinsurance recoverables from reinsurers that exceeded 1.5% of statutory surplus of the Company’s insurance subsidiaries are shown below.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions as of December 31, 2020, 2019 and 2018.
The following development tables provide the incurred and paid losses and allocated loss adjustment expenses, net of reinsurance, for workers’ compensation and general liability for accident years 2011 through 2020. The incurred but not reported (“IBNR”) losses and claims frequency is included for each accident year presented.
The average annual percentage payout of incurred losses by age, net of reinsurance, for workers’ compensation and general liability as of December 31, 2020 is summarized below. Since workers’ compensation has long payout periods, the table below shows less than 100% in the years disclosed. This is required supplementary information, which is unaudited.
The difference between currently estimated losses and losses estimated for a prior period at a prior valuation date is known as development. Development is unfavorable when the losses ultimately settle for more than they were reserved for or future estimates suggest that reserves should be increased on unresolved claims. Development is favorable when the losses ultimately settle for less than they were reserved for or future estimates suggest that reserves should be decreased on unresolved claims. Favorable or unfavorable development of loss reserves are reflected in our results of operations in the period the estimates are changed.
The foregoing reconciliation reflects favorable development of the net reserves at December 31, 2020, 2019 and 2018. The favorable development reduced loss and loss adjustment expenses incurred by $63.5 million in 2020, driven primarily by accident years 2018 and 2017 of $14.8 million and $14.5 million, respectively. In 2019 and 2018, the Company recorded favorable development of $65.0 million and $45.6 million, respectively. The revisions to the Company’s reserves reflect new information gained by claims adjusters in the normal course of adjusting claims and is reflected in the financial statements when the information becomes available. It is typical for more serious claims to take several years or longer to settle and the Company continually revises estimates as more information about claimants’ medical conditions and potential disability becomes known and the claims get closer to being settled. Multiple factors can cause loss development both unfavorable and favorable. The favorable loss development we experienced across accident years was largely due to favorable case reserve development and continued favorable severity trends compared to those originally estimated.
The Company has historically written general liability coverages that are reported in other liability lines of business. These coverages may be associated with the property and casualty industry’s exposure to environmental claims. However, the Company has not been notified by any insured for which exposure exists due to these types of claims. Company management believes potential exposure to environmental claims to be remote. Therefore, the Company has no loss or loss adjustment expense reserves for such liabilities.
The anticipated effect of inflation is implicitly considered when estimating liabilities for loss and loss adjustment expenses. In establishing our reserves for loss and loss adjustment expenses, we review the results of analyses using individual case-base valuations and statistical and actuarial methods that utilize historical loss data from our more than 35 years of underwriting workers’ compensation insurance. The actuarial analysis of our historical data provides some of the factors we use in estimating our loss reserves. These factors are primarily measures over time of the number of claims paid and reported, average paid and incurred claim amounts, claim closure rates and claim payment patterns. In evaluating the results of our analyses, management also uses substantial judgment in considering other factors that are not considered in these actuarial analyses, including changes in business mix, claims management, regulatory issues, medical trends, employment and wage patterns, insurance policy coverage interpretations, judicial determinations and other subjective factors. Due to the inherent uncertainty associated with these estimates, and the cost of incurred but unreported claims, our actual liabilities may vary significantly from our original estimates. These anticipated trends are monitored based on actual development and are modified if necessary.
The Company’s insurance subsidiaries file financial statements prepared in accordance with statutory accounting principles prescribed or permitted by the insurance regulatory authorities of the states in which the subsidiaries are domiciled. Statutory-basis shareholders’ capital and surplus at December 31, 2020, 2019 and 2018 of the directly owned insurance subsidiary, AIIC, and the combined statutory-basis net income and realized investment gains for all AMERISAFE’s insurance subsidiaries for the three years in the period ended December 31, 2020, were as follows:
Property and casualty insurance companies are subject to certain risk-based capital requirements, or RBC requirements, specified by the National Association of Insurance Commissioners. Under these requirements, a target minimum amount of capital and surplus maintained by a property/casualty insurance company is determined based on the various risk factors related to it. At December 31, 2020, the capital and surplus of AIIC and its subsidiaries exceeded the minimum RBC requirements.
The Company is authorized to issue 50,000,000 shares of common stock, par value $0.01 per share. At December 31, 2020, there were 20,589,309 shares of common stock issued and 19,331,059 shares outstanding.
The Company is authorized to issue 10,000,000 shares of preferred stock, par value $0.01 per share. At December 31, 2020, there were no shares of preferred stock outstanding.
The AMERISAFE 2005 Equity Incentive Plan (the “2005 Incentive Plan”) is administered by the Compensation Committee of the Board and was designed to provide incentive compensation to executive officers and other key management personnel. The 2005 Incentive Plan permitted awards in the form of incentive stock options, as defined in Section 422(b) of the Internal Revenue Code of 1986, non-qualified stock options, restricted shares of common stock and restricted stock units. In connection with the approval of the 2012 Equity and Incentive Compensation Plan by the Company’s shareholders, no further grants were made under the 2005 Incentive Plan. As of December 31, 2020, there are no outstanding options or restricted stock awards under the 2005 Incentive Plan.
Stock options granted under the 2005 Incentive Plan were exercisable, subject to vesting requirements determined by the Compensation Committee, for periods of up to ten years from the date of grant. Stock options generally expire 90 days after the cessation of an optionee’s service as an employee. However, in the case of an optionee’s death or disability, the unexercised portion of a stock option remains exercisable for up to one year after the optionee’s death or disability. Stock options that were granted under the 2005 Incentive Plan are not transferable, except by will or the laws of descent and distribution.
The Company recognized compensation expense of $605,000, $676,000 and $726,000 in 2020, 2019 and 2018, respectively, related to share-based grants. The Company recognized compensation expense of $2,341,000, $1,359,000 and $976,000 in 2020, 2019 and 2018, respectively, related to long-term incentive awards under the 2012 Incentive Plan. The long-term incentive award is a liability award.
As of December 31, 2020, there were 5,068 shares of restricted stock outstanding under the Non-Employee Director Restricted Stock Plan, all of which will vest on the date of the annual meeting of shareholders in 2021.
Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding during the period.
The calculation of basic and diluted EPS for the years ended December 31, 2020, 2019 and 2018 are presented below.
The Company’s 401(k) benefit plan is available to all employees. The Company matches 50% of employee contributions up to 6% of compensation for participating employees, subject to certain limitations. Employees are fully vested in employer contributions to this plan after five years. Company contributions to this plan were $0.7 million in each of 2020, 2019 and 2018.
The Company manages risk on certain long-duration claims by settling these claims through the purchase of annuities from unaffiliated carriers. In the event these carriers are unable to meet their obligations under these contracts, the Company could be liable to the claimants. The following table summarizes the fair value of the annuities at December 31, 2020, that the Company has purchased to satisfy its obligations.
The Company has operating and finance leases for office space and equipment. Our leases have remaining lease terms of one month to 60 months, some of which include options to extend the leases for up to five years.
The following is a maturity analysis of the annual undiscounted cash flows of the operating and finance lease liabilities as of December 31, 2020:
Rental expense was $0.2 million in each of 2020, 2019 and 2018.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data.
The fair values of the Company’s investments are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Securities reported at fair value utilizing Level 1 inputs represent assets whose fair value is determined based upon observable unadjusted quoted market prices for identical assets in active markets. Level 2 securities represent assets whose fair value is determined using observable
market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2 during the year ended December 31, 2020.
Assets measured at amortized cost as of December 31, 2020 and 2019 are as follows: