As of February 1, 2021, we leased 178,098 square feet of office space in 6 states, including our principal executive offices located in Reno, Nevada. As a result of the effectiveness of our work-from-home transition, in 2020 we began to reduce our real estate footprint by closing and vacating our office locations in Wisconsin and Pennsylvania. We believe that our existing office space is adequate for our current needs. We will continue to enter into or exit lease agreements to address future space requirements, as necessary.
Our 2020 underwriting results were significantly impacted by the COVID-19 pandemic. Prior to the COVID-19 pandemic, our underwriting results were improving, which reflected our superior claims handling and the increased pricing flexibility afforded to us through the use of multiple writing companies within states and territorial pricing in California. In addition, our ongoing underwriting initiatives, which are described below, have allowed us to expand our operations while also focusing on under-performing classes of business, as needed.
The insurance industry is highly competitive, and there is significant competition in the national workers' compensation industry that is based on price and quality of services. We compete with other specialty workers' compensation carriers, state agencies, multi-line insurance companies, professional employer organizations, self-insurance funds, and state insurance pools. As a result of these competitive conditions, pricing on our renewals showed an overall price decrease of 5.7% for the year ended December 31, 2020, versus the rate level in effect on such business a year earlier.
On July 31, 2019, we acquired (the Acquisition) PartnerRe Insurance Company of New York (PRNY) from Partner Reinsurance Company of the U.S. (PRUS). We funded the Acquisition with cash on hand. The purchase price was equal to the sum of: (i) $47.6 million, the amount of statutory capital and surplus of PRNY at closing; and (ii) $5.8 million. We did not acquire any employees or ongoing business operations pursuant to the Acquisition.
Pursuant to the purchase agreement, all liabilities and obligations of PRNY existing as of the closing date, whether known or unknown, will be indemnified by PRUS. In addition, PartnerRe Ltd., the parent company of PRUS, has provided us 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 us under the purchase agreement, all or a portion of the remaining gross loss and LAE reserves acquired by us pursuant to the Acquisition would become our responsibility.
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.
We currently expect that our in-force premiums will remain suppressed, as compared to that experienced in recent years, until such time as our insureds and businesses can resume their operations at a more normalized rate, and increase staffing and
We continually review and adjust to changes in our policyholders' payrolls, economic conditions, and seasonality, as experience develops or new information becomes known. Any such adjustments are included in our current operations. Approximately 25% of our current payroll exposure, including that associated with policies generated by our largest payroll partners, is considered to be “pay as you go,” where the associated premium collected from policyholder is adjusted in real-time based on changes in the underlying payroll. For all other policyholders, payroll adjustments are made periodically through mid-term endorsements and/or premium audits. We reduced our final audit premium accruals by approximately $35.0 million, to zero, for the year ended December 31, 2020 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.
We have been fully functional since we closed our buildings to employees and the general public in March 2020, and it is expected that our business can remain fully functional while our employees work-from-home for an indefinite period of time. As a result of the effectiveness of our work-from-home transition, we have begun to reduce our real estate footprint by terminating or non-renewing certain operating leases.
During 2020, our fair value, as measured by our market capitalization, decreased significantly as a result of investor concerns about potential adverse effects of the COVID-19 pandemic on our business. A further decline in our fair value, as measured by our market capitalization or otherwise, and/or any other relevant developments, could constitute a triggering event that could lead us to impair the valuation of all or a portion of our goodwill. As of December 31, 2020, the carrying value of our goodwill was $36.2 million.
Our net income was $119.8 million, $157.1 million, and $141.3 million in 2020, 2019, and 2018, respectively. The key areas that affected our financial performance during those years included:
•Net premiums earned decreased 11.6% in 2020 and 4.8% in 2019, each compared to the previous year;
•Underwriting and general and administrative expenses decreased 3.3% in 2020 and increased 18.3% in 2019, each compared to the previous year;
•Net investment income decreased 13.4% in 2020 and increased 8.5% in 2019, each compared to the previous year; and
Gross premiums written were $580.1 million, $696.9 million, and $748.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. Period over period changes in gross premiums earned during 2020, 2019 and 2018 were primarily related to our Employers segment. See -Summary of Financial Results by Segment -Employers.
Net investment income was $76.3 million, $88.1 million, and $81.2 million for the years ended December 31, 2020, 2019, and 2018, respectively. The decrease in 2020 was primarily due to lower bond yields and a sharp increase in the amortization of bond premiums associated with our residential mortgage-backed securities, which was caused by an acceleration of near-term mortgage loan prepayment speed assumptions during the year. The increase in 2019 was primarily due to an increase in the allocation and yield of bank loans and other invested assets. The average pre-tax ending book yield on our invested assets was 3.0%, 3.3%, and 3.4% at December 31, 2020, 2019, and 2018, respectively. The average ending tax-equivalent yield on our invested assets (which adjusts the book yield of our investments in tax-advantaged securities to an equivalent pre-tax book yield) was 3.1% at December 31, 2020 and 3.5% at both December 31, 2019 and 2018.
Realized and certain unrealized gains and losses on our investments are reported separately from our net investment income. Realized gains and losses on investments include the gain or loss on a security at the time of sale compared to its original or adjusted cost (equity securities) or amortized cost (fixed maturity securities). Realized losses are also recognized for changes in our expected credit loss allowance or when securities are written down as a result of an other-than-temporary impairment. Changes in fair value of equity securities and other invested assets are also included in Net realized and unrealized gains (losses) on investments on our Consolidated Statements of Comprehensive Income.
Net realized and unrealized gains on investments in 2020 included $15.8 million of net realized and unrealized gains on equity securities, $4.5 million of net realized gains on fixed maturity securities and short-term investments, and $1.3 million of unrealized losses on other invested assets. The net investment gains on our equity securities were largely consistent with the performance of U.S. equity markets. The net investment gains on our fixed maturity securities were primarily the result of decreases in market interest rates. The net investment gains on our fixed maturity securities were reduced by a $0.7 million allowance for expected credit losses. Net realized and unrealized gains on investments in 2019 included $46.5 million of net realized and unrealized gains on equity securities, $3.9 million of net realized gains on fixed maturity securities, and $0.7 million of unrealized gains on other invested assets. The net investments gains on our equity securities were largely consistent with the performance of U.S. equity markets. The net investment gains on our fixed maturity securities were primarily related to sales associated with a reallocation of our investment portfolio. Net realized and unrealized losses on investments in 2018
included $11.3 million of net realized and unrealized losses on equity securities and $1.8 million of net realized losses on fixed maturity securities. The net investment losses on our equity securities were primarily the result of volatility in equity markets. The net investment losses on our fixed maturity securities were primarily related to the sales associated with a reallocation of our investment portfolio, offset by $3.3 million in other-than-temporary impairments of certain fixed maturity securities due to our intent to sell the securities. Additional information regarding our Investments is set forth under "-Liquidity and Capital Resources-Investments" and Note 5 in the Notes to our Consolidated Financial Statements.
Underwriting expenses represent those costs that we incur to underwrite and maintain the insurance policies we issue, excluding commissions. Direct underwriting expenses, such as premium taxes, policyholder dividends, and those expenses that vary directly with the production of new or renewal business, are recognized as the associated premiums are earned. Indirect underwriting expenses, such as the operating expenses of each of the Company's subsidiaries, do not vary directly with the production of new or renewal business and are recognized as incurred.
Interest and financing expenses include credit facility fees, surplus notes interest, letter of credit fees, finance lease interest, and other financing fees.
Tax-advantaged investment income, LPT Reserve Adjustments, LPT Contingent Commission Adjustments, Deferred Gain amortization and certain other adjustments reduced our income tax expense computed at a statutory rate of 21% by $3.1 million, $4.0 million, and $7.4 million for the years ended December 31, 2020, 2019, and 2018, respectively.
For additional information regarding our income tax expense see Note 8 in the Notes to our Consolidated Financial Statements.
new business premiums written in California, partially offset by increases in renewal premiums written across all of our markets.
The following table shows the percentage change in Employers' in-force premiums, policy count, average policy size, and payroll exposure upon which our premiums are based as of December 31, 2020 and 2019, respectively, overall, for California, where 45% of our premiums were generated, and for all other states, excluding California:
Loss and LAE Ratio. We analyze our loss and LAE ratios on both a calendar year and accident year basis.
The accident year loss and LAE ratio is calculated by dividing cumulative losses and LAE for reported events that occurred during a particular year by the net premiums earned for that year. The accident year loss and LAE ratio for a particular year can decrease or increase when recalculated in subsequent periods as the reserves established for insured events occurring during that year develop favorably or unfavorably. The accident year loss and LAE ratio is based on our statutory financial statements and is not derived from our GAAP financial information.
The table below reflects prior accident year loss and LAE reserve adjustments and the impact to loss ratio.
The decrease in our losses and LAE from 2019 to 2020 was primarily attributable to increased favorable prior accident year loss development of $81.6 million. Favorable prior accident year loss development in 2020 was primarily the result of our 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 due, in part, to an inability to fully execute our claims initiatives to reduce loss costs as a result of the COVID-19 pandemic. The decrease in our losses and LAE from 2018 to 2019 was primarily attributable to increased favorable prior accident year loss development of $77.5 million, partially offset by an increase in our current accident year loss estimate. Favorable prior accident year loss development in 2019 was the result of our determination that adjustments were necessary to reflect observed favorable paid loss trends, primarily for the 2014 through 2017 accident years, which had been impacted by our internal initiatives to reduce loss costs, including the accelerated claims settlement activity that began in 2014 and that continued through 2019.
Underwriting Expense Ratio. The underwriting expense ratio was 24.6%, 22.0%, and 18.5%, and our underwriting expenses were $151.1 million, $153.2 million, and $135.0 million for the years ended December 31, 2020, 2019, and 2018, respectively. During the year ended December 31, 2020, professional fees decreased $3.6 million and travel expenses decreased $2.0 million, partially offset by an increase in depreciation and amortization of $3.2 million, each compared to 2019. During the year ended December 31, 2019, our information technology related expense increased $4.9 million, our professional fees increased $6.0 million, and our compensation-related expenses increased $4.3 million, each as compared to 2018. These increases were largely the result of our continued development and implementation of new digital technologies and capabilities. Additionally, our bad debt expense increased $3.5 million compared to 2018, mainly as a result of an increase in the amount of premiums receivable relating to 2018 policy year final audits that were deemed uncollectible in 2019.
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, Interest and Financing Expenses, and Other Expenses, see "-Results of Operations -Summary of Consolidated Financial Results."
Net premiums earned were $0.2 million and less than $0.1 million for the years ended December 31, 2020 and 2019, respectively.
Underwriting expenses for our Cerity segment were $16.6 million, $16.0 million, and $5.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. During the year ended December 31, 2020, professional fees increased $2.4 million, partially offset by a decrease in depreciation and amortization of $0.8 million and a decrease in compensation-related expenses of $0.7 million, each as compared to 2019. During the year ended December 31, 2019, compensation-related expenses increased $3.7 million, information technology related expenses increased $3.6 million, and advertising expenses increased $1.5 million, each as compared to 2018. These year-over-year increases were related to the launch of Cerity and the development of its direct-to-customer platform.
The components of Corporate and Other's net income (loss) before income taxes are set forth in the following table:
(1)LPT Reserve Adjustments result in a cumulative adjustment to the Deferred Gain, which is recognized in losses and LAE incurred on our Consolidated Statements of Comprehensive Income, such that the Deferred Gain reflects the balance that would have existed had the revised reserves been recognized at the inception of the LPT Agreement. (See Note 2 in the Notes to our Consolidated Financial Statements.)
(2)LPT Contingent Commission Adjustments result in a cumulative adjustment to the Deferred Gain, which is recognized in losses and LAE incurred on our Consolidated Statements of Comprehensive Income, such that the Deferred Gain reflects the balance that would have existed had the revised contingent profit commission been recognized at the inception of the LPT Agreement. (See Note 2 in the Notes to our Consolidated Financial Statements.)
For a further discussion of non-underwriting related income and expenses, including Net Investment Income, Net Realized and Unrealized Gains and Losses on Investments, and Interest and Financing Expenses, see "-Results of Operations -Summary of Consolidated Financial Results."
The impacts of the COVID-19 pandemic on the U.S. economy, our current operations and our investment portfolio have been significant. Nonetheless we believe that the liquidity available to our holding company and its operating subsidiaries remains
adequate and we do not currently foresee a need to: (i) suspend ordinary dividends, or forgo repurchases of our common stock; (ii) seek a capital infusion; or (iii) seek any material non-investment asset sales. Furthermore, the holding company has no outstanding debt obligations and its operating subsidiaries have no interest-bearing debt obligations.
Our insurance subsidiaries' ability to pay dividends to their parent is based on reported capital, surplus, and dividends paid within the prior 12 months. For 2021, EICN cannot pay any dividends through March 20, 2021 without prior regulatory approval, and $12.5 million thereafter; ECIC cannot pay any dividends through September 24, 2021 without prior regulatory approval, and $32.1 million thereafter; EPIC can pay $1.3 million through May 11, 2021, and $23.0 million thereafter, without prior regulatory approval; EAC can pay $0.3 million of dividends through June 30, 2021, and $21.1 million thereafter, without prior regulatory approval; and CIC cannot pay dividends without prior regulatory approval until July 31, 2021, and $3.0 million thereafter.
On December 15, 2020, EHI entered into a Credit Agreement (the Credit Agreement) with a syndicate of financial institutions. The Credit Agreement provides EHI with a $75.0 million three-year revolving credit facility. Borrowings under the Credit Agreement may be used for working capital and general corporate purposes. Pursuant to the Credit Agreement, EHI has the option to request an increase of the credit available under the facility, up to a maximum facility amount of $125.0 million, subject to the consent of lenders and the satisfaction of certain conditions. There were no borrowings under the Credit Agreement at December 31, 2020.
EICN, ECIC, EPIC, and EAC are members of the Federal Home Loan Bank of San Francisco (FHLB). Membership allows our subsidiaries access to collateralized advances, which may be used to support and enhance liquidity management. The amount of advances that may be taken is dependent on statutory admitted assets on a per company basis.
FHLB membership also allows our insurance subsidiaries access to Letter of Credit Agreements and on March 9, 2018, ECIC, EPIC, and EAC entered into Letter of Credit Agreements with the FHLB. On March 1, 2019, FHLB and ECIC amended its Letter of Credit Agreement to increase its credit amount and on March 2, 2020, the FHLB and EAC and EPIC each amended their Letter of Credit Agreements to increase their respective credit amounts. On May 5, 2020, the FHLB and ECIC amended its Letter of Credit Agreement to decrease its credit amount. The amended Letter of Credit Agreements are between the FHLB and each of EAC, in the amount of $80.0 million, ECIC, in the amount of $70.0 million, and EPIC, in the amount of $125.0 million. The amended Letter of Credit Agreements will expire March 31, 2021. The Letter of Credit Agreements may only be used to satisfy, in whole or in part, insurance deposit requirements with the State of California and are fully secured with eligible collateral at all times (See Note 11 in the Notes to our Consolidated Financial Statements).
Certain reinsurance contracts require company funds to be held in trust for the benefit of the ceding reinsurer to secure the outstanding liabilities we assumed. The fair value of fixed maturity securities held in trust for the benefit of our ceding reinsurers was $3.2 million and $2.9 million at December 31, 2020 and 2019, respectively.
Net cash provided by investing activities in 2019 was primarily related to sales, maturities, and redemptions of investments whose proceeds were used to fund the acquisition of CIC, claims payments, underwriting and general and administrative expenses, stockholder dividend payments, debt repayment, 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 investing activities in 2018 was primarily related to the investment of premiums received and the reinvestment of funds from maturities, redemptions, and interest income. These investing cash outflows were partially offset by investment sales whose proceeds were used to fund claims payments, underwriting and general and administrative expenses, stockholder dividend payments, and for common stock repurchases.
Net cash used in financing activities in 2019 included common stock repurchases, the redemption of notes payable, and stockholder dividend payments.
Net cash used in financing activities in 2018 included common stock repurchases and stockholder dividend payments.
As of December 31, 2020, the capital resources available to us consisted of $1,212.8 million of stockholders' equity and the $125.4 million Deferred Gain.
Stockholders' Equity. The following table summarizes our beginning and ending stockholders' equity balance and the changes thereto for each of the years ended December 31, 2020, 2019, and 2018:
Deferred Gain. The Deferred Gain, which totaled $125.4 million and $137.1 million as of December 31, 2020 and 2019, respectively, reflects the unamortized gain from the LPT Agreement. See Note 2 in the Notes to our Consolidated Financial Statements.
The following table identifies our contractual obligations and commitments as of December 31, 2020.
(2)The unpaid losses and LAE reserves are presented gross of reinsurance recoverables for unpaid losses, which were as follows for each of the periods presented above:
Board of Directors. Our asset allocation is reevaluated by management and reviewed by the Finance Committee of the Board of Directors on a quarterly basis. We also utilize our Investment Managers' investment advisory services to assist us in developing a tailored set of portfolio targets and objectives.
The following table shows the percentage of total estimated fair value of our fixed maturity securities as of December 31, 2020 by credit rating category, using the lower of the ratings assigned by Moody's Investors Service or S&P.
LAE reserves are our estimate of future expense payments to manage, investigate, administer, and settle claims that have occurred, and include legal expenses. LAE reserves are established in the aggregate, rather than on a claim-by-claim basis. LAE reserves are categorized between defense and cost containment, and adjusting and other.
We cede a portion of our obligations for losses and LAE to unaffiliated reinsurers. The amount of reinsurance that will be recoverable on our losses and LAE includes both the reinsurance recoverable from our excess of loss reinsurance contracts, as well as reinsurance recoverable under the terms of the LPT Agreement.
Judgment is required in the actuarial estimation of loss reserves, including the selection of various actuarial methodologies to project the ultimate cost of claims. Specifically, judgment is required in the following areas: the selection of parameters utilized in the various methodologies; the use of industry data and other benchmarks; and the weighting of differing reserve indications resulting from alternative methods and assumptions. The adequacy of our ultimate loss reserves is inherently uncertain and represents a significant risk to our business. We attempt to mitigate this risk through our claims management processes and by monitoring and reacting to statistics relating to the cost and duration of claims.
Management, along with our Internal Actuary, separately analyzed LAE and estimate unpaid LAE. These analyses rely primarily on examining the relationship between historical aggregate paid LAE and the volume of claims activity for the corresponding periods. The portion of unpaid LAE that will be recoverable from reinsurers is estimated based on the contractual reinsurance terms.
The aggregate carried reserve calculated by management represents our best estimate of our outstanding unpaid losses and LAE. In establishing management's best estimate of unpaid losses and LAE at December 31 for the last three years, management and our Internal Actuary reviewed and considered the following: (a) our Internal Actuary's assumptions, point estimates, and ranges; and (b) the inherent uncertainty of workers' compensation loss reserves. Management did not quantify a specific loss reserve increment for each uncertainty, but rather established an overall provision that represented management's best estimate of loss reserves in light of the historical data, actuarial assumptions, point estimate and range, and current facts and circumstances.
An internal initiative that began in 2014 and continued through 2020 emphasizes the settlement of open claims. This initiative has actively driven a significant increase in claims settlement activity and has primarily affected accident years 2009 and
forward. This settlement activity has been recognized in the actuarial analysis using a methodology that adjusts the data and loss development patterns to account for an increase in settlements arising from this initiative.
Additionally, any adjustment to the estimated ceded reserves under the LPT Agreement results in a cumulative adjustment to the Deferred Gain, which is also included in losses and LAE incurred in the Consolidated Statements of Comprehensive Income, so that the Deferred Gain reflects the balance that would have existed had the revised reserves been recognized at the inception of the LPT Agreement. The table below provides the actuarial range of estimated liabilities for gross loss reserves under the LPT Agreement and our carried reserves.
Reinsurance recoverables represent: (a) amounts currently due from reinsurers on paid losses and LAE; (b) amounts recoverable from reinsurers on estimates of reported losses; and (c) amounts recoverable from reinsurers on actuarial estimates of IBNR for losses and LAE. These recoverables are based on our current estimates of the underlying loss reserves, and are reported on our Consolidated Balance Sheets separately as assets, as reinsurance does not relieve us of our legal liability to policyholders. We bear credit risk with respect to the reinsurers, which could be significant in the future, considering that some of the loss reserves remain outstanding for an extended period of time. Reinsurers may refuse or fail to pay losses that we cede to them, or they might delay payment. We are required to pay losses even if a reinsurer refuses or fails to meet its obligations under the applicable reinsurance agreement. We continually monitor the financial condition and financial strength ratings of our reinsurers. No material amounts due from reinsurers have been written-off as uncollectible since our inception in 2000, and in
Premium revenue is recognized as earned over the period of the contract in proportion to the amount of insurance protection provided. At the end of the policy term, payroll-based premium audits are performed on substantially all policyholder accounts to determine net premiums earned for the policy year. Earned but unbilled premiums include estimated future audit premiums based on our historical experience, adjusted for current market conditions. These estimates are subject to changes in policyholders' payrolls, economic conditions, and seasonality, and are continually reviewed and adjusted as experience develops or new information becomes known. Any such adjustments are included in current operations; however, they are partially offset by the resulting changes in losses and LAE, commission expenses, and premium taxes. Although considerable variability is inherent in such estimates, we believe that the net effect of any estimates currently reflected on our consolidated financial statements will similarly not require any material prospective adjustment.
Beginning in 2020, with the adoption of ASU 2016-13, our investments in fixed maturity securities are presented net of an allowance for expected credit losses. The changes in our allowance for expected credit losses on investments are included in Net realized and unrealized gains (losses) on investments on our Consolidated Statements of Comprehensive Income (see Note 6 in the Notes to our Consolidated Financial Statements). Prior to 2020, if management had the intent to sell the debt security or more likely than not would be required to sell the debt security before its anticipated recovery, the investment was written down to its fair value and the entire impairment was recorded as a realized loss due to credit in the accompanying Consolidated Statements of Comprehensive Income. If management did not have the intent to sell or would not be required to sell the debt security but did not expect to recover the amortized cost basis of the debt security, the amount of the other-than-temporary impairment was bifurcated between credit loss and other loss and recorded as a component of realized gains and losses and in other comprehensive income, respectively, in the Consolidated Statements of Comprehensive Income. The amount of any write-down was determined by the difference between the cost or amortized cost of the debt security and its fair value at the time the other-than-temporary decline was identified.
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. We are evaluating the impact of LIBOR on its existing contracts and investments, but do not expect that this update will have a material impact on our consolidated financial condition or results of operations.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). This update simplifies the measurement of goodwill by eliminating the performance of Step 2 in the goodwill impairment testing. This update allows the testing to be performed by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge when the carrying amount exceeds fair value. Additionally, this update eliminates the requirements of any reporting unit with a zero or negative carrying value to perform Step 2, but requires disclosure of the amount of goodwill allocated to a reporting unit with zero or negative carrying amount of net assets. We adopted this standard and there was no impact on our consolidated financial condition and results of operations.
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting 54
Consolidated Balance Sheets as of December 31, 2020 and 2019 57
Consolidated Statements of Comprehensive Income for each of the years ended December 31, 2020, 2019 and 2018 59
We have audited Employers Holdings, Inc. and Subsidiaries' 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) (the COSO criteria). In our opinion, Employers Holdings, Inc. and Subsidiaries' (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of 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 and our report dated February 22, 2021 expressed an unqualified opinion thereon.
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 22, 2021 expressed an unqualified opinion thereon.
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Auditing management’s best estimate of IBNR reserves was complex due to the highly judgmental nature of the assumptions used in the valuation process. The significant judgement was primarily due to the sensitivity of management’s estimate to the selection of assumptions including the pattern with which aggregate data will be paid or emerge over time and claims cost inflation rates, which had a significant effect on the valuation of IBNR reserves.
To test IBNR reserves, our audit procedures included, among others, testing the completeness and accuracy of the data used in the calculation by testing reconciliations of the underlying claims and policyholder data recorded in the source systems to the actuarial reserving calculations, and comparing a sample of incurred and paid claims to source documentation. With the assistance of EY actuarial specialists, we evaluated the Company’s selection and weighting of actuarial methods by comparing the weightings used in the current estimate to those used in prior periods and those used in the industry for the specific types of insurance. To evaluate the significant assumptions used by management, we compared the assumptions to current and historical claims trends and to current industry benchmarks. We also compared management’s recorded reserves to a range of reasonable reserves estimates calculated independently by our EY actuarial specialists. Additionally, we performed a hindsight analysis of the prior period estimates using subsequent claims development.
In 1999, the Nevada State Industrial Insurance System (the Fund) entered into a 100% quota share reinsurance agreement (the LPT Agreement) through a loss portfolio transfer transaction with third party reinsurers. The LPT Agreement commenced on June 30, 1999 and will remain in effect until: (i) all claims under the covered policies have closed; (ii) the LPT Agreement is commuted or terminated upon the mutual agreement of the parties; or (iii) the reinsurers' aggregate maximum limit of liability is exhausted, whichever occurs first. The LPT Agreement does not provide for any additional termination terms. On January 1, 2000, EICN assumed all of the assets, liabilities and operations of the Fund, including the Fund's rights and obligations associated with the LPT Agreement. See Notes 2 and 10.
On July 31, 2019, the Company acquired (the Acquisition) PartnerRe Insurance Company of New York (PRNY) from Partner Reinsurance Company of the U.S. (PRUS). The purchase price was equal to the sum of: (i) $47.6 million, the amount of statutory capital and surplus of PRNY at closing; and (ii) $5.8 million. The Company funded the Acquisition with cash on hand. As a result of the purchase, the Company acquired $37.3 million of cash and cash equivalents, $10.3 million of fixed maturity securities, $5.8 million of intangible assets (comprised of state licenses), $6.8 million of other assets, $6.8 million of other liabilities, and $48.3 million of gross loss and LAE reserves, which were offset by $48.3 million of reinsurance recoverables, resulting in no net loss and LAE reserves. The Company did not acquire any employees or ongoing business operations pursuant to the Acquisition.
Beginning in 2018, with the adoption of ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10), the Company's investments in equity securities at fair value are no longer classified as AFS and changes in fair value are included in Net realized and unrealized gains (losses) on investments on the Company's Consolidated Statements of Comprehensive Income. Additionally, ASU 2016-01 also 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. The Company's investment in FHLB stock is presented within Equity securities at cost on the Company's Consolidated Balance Sheets.
The Company's investments in other invested assets are reported at either net asset value or fair value and changes in the value of these investments are included in Net realized and unrealized gains (losses) on investments on the Company's Consolidated Statements of Comprehensive Income.
Premiums written are recognized as revenues, net of any applicable underlying reinsurance coverage, and are earned over the term of the related policy. At the end of the policy term, payroll-based premium audits are performed on substantially all policyholder accounts to determine the actual amount of net premiums earned for that policy year. Earned but unbilled premiums include estimated future audit premiums based on the Company's historical experience. These estimates are subject to changes in policyholders' payrolls, economic conditions, and seasonality, and are continually reviewed and adjusted as experience develops or new information becomes known. Any such adjustments are included in current operations; however, they are partially offset by the resulting changes in losses and LAE, commission expenses, and premium taxes. The Company's premiums receivable on its Consolidated Balance Sheets included $2.3 million and $37.3 million of additional premiums expected to be received from policyholders for premium audits at December 31, 2020 and 2019, respectively.
The Company establishes an allowance for expected credit losses (see Note 6) on its premiums receivable through a charge included in underwriting and general and administrative expenses in its Consolidated Statements of Comprehensive Income. This allowance for expected credit losses is determined based on estimates (collectability and historical payment patterns) and assumptions to project future experience. After all collection efforts have been exhausted, the Company reduces the allowance for expected credit losses for write-offs of premiums receivable that have been deemed uncollectible. The Company's allowance for expected credit losses was $10.8 million and $4.6 million at December 31, 2020 and 2019, respectively. The Company had write offs, net of recoveries of amounts previously written off, of $6.8 million, $10.5 million, and $8.2 million for the years ended December 31, 2020, 2019, and 2018, respectively.
If the sum of a policy's expected losses and LAE and deferred policy acquisition costs exceeds the related unearned premiums and projected investment income, a premium deficiency is determined to exist. In this event, deferred policy acquisition costs are immediately expensed to the extent necessary to eliminate the premium deficiency. If the premium deficiency exceeds deferred acquisition costs, a liability is accrued for the excess deficiency. There were no premium deficiency adjustments recognized during the years ended December 31, 2020, 2019, and 2018.
reinsurance protection provided. However, the Company remains liable for all losses it incurs to the extent that any reinsurer is unable or unwilling to make timely payments under its reinsurance agreements.
based on the expected utilization of the asset. Amortization of the implementation costs are calculated using the straight-line method based on the term of the service contract and commence once the module or component is ready for its intended use, regardless of whether the hosted software has been placed into service, and will be recognized over the remaining life of the service contract.
The Company records uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process. Recognition (Step 1) occurs when the Company concludes 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.
The Company formally tests for impairment of goodwill and intangible assets in the fourth quarter of each year. At the end of each quarter, management considers the results of the previous analysis as well as any recent developments that may constitute triggering events requiring the impairment analysis of goodwill and other intangible assets to be updated. During 2020 the Company’s fair value, as measured by its market capitalization, decreased significantly as a result of investor concerns of the potential adverse effects of the COVID-19 pandemic on our business. Nonetheless, the Company has assessed the effects of current economic conditions on the Company's financial condition and results of operations and changes in the Company's fair value and determined that there were no impairments of these assets as of December 31, 2020 and 2019.
During the year ended December 31, 2018, the Company recognized $0.2 million in amortization expense associated with its intangible assets. There was no amortization expense in 2020 or 2019. These amortization expenses are included in the Company's Consolidated Statements of Comprehensive Income in underwriting and general and administrative expenses.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). This update simplifies the measurement of goodwill by eliminating the performance of Step 2 in the goodwill impairment testing. This update allows the testing to be performed by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge when the carrying amount exceeds fair value. Additionally, this update eliminates the requirements of any reporting unit with a zero or negative carrying value to perform Step 2, but requires disclosure of the amount of goodwill allocated to a reporting unit with zero or negative carrying amount of net assets. The Company adopted this standard and there was no impact on its consolidated financial condition and results of operations.
(1)Other securities within fixed maturity securities consist of bank loans, which are classified as AFS and reported at fair value.
The cost and estimated fair value of the Company's equity securities recorded at fair value at December 31, 2020 and 2019 were as follows:
The Company had Other invested assets totaling $36.2 million and $29.1 million at December 31, 2020 and 2019, respectively. These investments consisted of: (i) private equity limited partnerships that totaled $16.2 million and $9.1 million (initial cost of $16.8 million and $8.4 million) at December 31, 2020 and 2019, respectively, which are carried at NAV based on information provided by the general partner; and (ii) convertible preferred shares of real estate investment trusts that totaled $20.0 million at each December 31, 2020 and 2019, which are carried at cost and approximate fair value. These investments are non-redeemable until conversion and are periodically evaluated by the Company for impairment based on the ultimate recovery of the investment. Changes in the value of these investments are recorded through Net realized and unrealized gains and losses on the Company's Consolidated Statements of Comprehensive Income.
The amortized cost and estimated fair value of the Company's fixed maturity securities at December 31, 2020, by contractual maturity, are shown below. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The Company recorded an allowance for expected credit losses on available-for-sale debt securities of $0.7 million during the year ended December 31, 2020 (see Note 6). Those fixed maturity securities whose total fair value was less than amortized cost at December 31, 2020, were those in which the Company had no intent, need or requirement to sell at an amount less than their amortized cost. There were no other-than-temporary impairments recognized on fixed maturity securities during the year ended December 31, 2019. The Company recognized impairments on fixed maturity securities of $3.3 million (consisting of sixty-six securities) during the year ended December 31, 2018, as a result of the Company's intent to sell these securities and/or the severity of the change in fair values of these securities. The Company determined that the remaining unrealized losses on fixed maturity securities at December 31, 2019 and 2018 were primarily the result of changes in prevailing interest rates and not the credit quality of the issuers.
Realized gains and losses on investments include the gain or loss on a security at the time of sale compared to its original or adjusted cost (equity securities and other invested assets) or amortized cost (fixed maturity securities). Realized losses on fixed
The Company is required by various state laws and regulations to support, through securities on deposit or otherwise, its outstanding loss reserves in certain states in which it does business. These laws and regulations govern not only the amount but also the types of securities that are eligible for deposit. As of December 31, 2020 and 2019, securities having a fair value of $768.7 million and $844.9 million, respectively, were on deposit. Additionally, standby letters of credit from the FHLB were in place in lieu of $275.0 million and $260.0 million of securities on deposit as of December 31, 2020 and 2019, respectively (see Note 11).
Certain reinsurance contracts require the Company's funds to be held in trust for the benefit of the ceding reinsurer to secure the outstanding liabilities assumed by the Company. The fair value of fixed maturity securities and restricted cash and cash equivalents held in trust for the benefit of ceding reinsurers at December 31, 2020 and 2019 was $3.2 million and $2.9 million, respectively.
The Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) in the first quarter of 2020, which replaced the incurred loss methodology with an expected loss methodology known as the current expected loss methodology (CECL). The measurement of CECL is applicable to financial assets measured at amortized cost, which includes held-to-maturity securities, trade receivables, lease receivables, reinsurance recoverables, financial guarantee contracts, loan commitments, and financial assets with evidence of credit deterioration. Additionally, Topic 326 made changes to the accounting for AFS debt securities. This change requires credit losses to be presented as an allowance rather than as a write-down on AFS debt securities that the Company does not intend to sell or believes that it is more likely than not that it will be required to sell.
Premiums receivable balances are all due within one year or less. The Company currently determines the allowance for premiums receivable based on an internal aging schedule using collectability and historical payment patterns, as well as current and expected future market conditions to determine the appropriateness of the allowance. Historical payment patterns provide the basis for the estimation along with similar risk characteristics and the Company's business strategy, which have not changed significantly over time. However, current and future market conditions have deteriorated as compared with the economic conditions included in the historical information. Specifically, as a result of the COVID-19 pandemic, unemployment and the temporary and/or permanent closures of small businesses have increased as of December 31, 2020, and the Company expects this trend to continue until such time that business operations can resume at a more normalized rate. Based on our past experience with generally similar conditions, the Company will continually assess the historical payment patterns and aging schedule to reflect the differences in our current conditions and future forecasted changes. Changes in the allowance for credit losses are recorded through general and administrative expenses.
The Company assesses all AFS debt securities in an unrealized loss position 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. Any impairment that has not been recorded through an allowance for credit losses is recognized in Accumulated other comprehensive income on the Company's Consolidated Balance Sheets. Changes in the allowance for credit losses are recorded through realized capital losses.
Accrued interest receivable on AFS debt securities totaled $15.3 million at December 31, 2020 and is excluded from the estimate of credit losses based on historically timely payments.
The table below shows the changes in the allowance for expected credit losses on available-for-sale securities.
Depreciation expenses related to property and equipment for the years ended December 31, 2020, 2019, and 2018 were $8.2 million, $9.0 million, and $6.1 million, respectively. Internally developed software costs of $3.2 million were capitalized during each of the years ended December 31, 2020 and 2019, respectively.
The Company's capitalized costs associated with cloud computing arrangements totaled $50.2 million and $33.6 million, which were comprised of service contract fees and implementation costs associated with hosting arrangements on the Company's Consolidated Balance Sheets as of December 31, 2020 and 2019, respectively. Total amortization for hosting arrangements for the years ended December 31, 2020 and 2019 was $9.0 million and $5.3 million, respectively.
The differences between the statutory federal tax rate of 21% and the Company's effective tax rate on net income before income taxes as reflected in the Consolidated Statements of Comprehensive Income were as follows:
A portion of the Company's obligations for losses and LAE are ceded to unaffiliated reinsurers. The amount of reinsurance that will be recoverable on losses and LAE reserves includes both the reinsurance recoverable from excess of loss reinsurance contracts, as well as reinsurance recoverable under the terms of the LPT Agreement.
The Company analyzed the usefulness of disaggregation of its results and determined the characteristics associated with the policies and the related unpaid loss reserves, incurred losses, and payment patterns are similar in nature. As such, the following tables show the Company's historical incurred and cumulative paid losses and LAE development, net of reinsurance, as well as IBNR loss reserves and the number of reported claims on an aggregated basis as of December 31, 2020 for each of the previous 10 accident years.
(1)Data presented for these calendar years is required supplementary information, which is unaudited.
The following table presents the average annual percentage payout of incurred claims by age, net of reinsurance, as of December 31, 2020 and is presented as required supplementary information, which is unaudited:
On December 15, 2020, the Company entered into a Credit Agreement (the Credit Agreement) with a syndicate of financial institutions. The Credit Agreement provides for a $75.0 million three-year revolving credit facility and is guaranteed by certain of the Company’s wholly owned subsidiaries (Employers Group, Inc. and Cerity Group, Inc.). Borrowings under the Credit Agreement may be used for working capital and general corporate purposes of the Company and its subsidiaries. Pursuant to the Credit Agreement, the Company also has an option to request an increase of the credit available under the facility up to a maximum facility amount of $125.0 million, subject to the consent of lenders and the satisfaction of certain conditions.
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%. In addition, the Company will pay a fee on each lender’s commitment, ranging from 0.20% to 0.50%, irrespective of usage. The applicable margin and the amount of such commitment fee vary based upon the financial strength rating of the Company’s insurance subsidiaries as most recently announced by A.M. Best or the Company’s debt to total capitalization ratio if such financial strength rating is not available. No interest was paid during the year ended December 31, 2020.
The Credit Agreement contains covenants that require the Company and its consolidated subsidiaries to maintain: (i) a minimum consolidated net worth of no less than 70% of the Company’s stockholders’ equity as of September 30, 2020, plus 50% of the Company’s 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 Company incurred $0.7 million in debt issuance costs, which are being amortized over the three-year life of the facility in Interest and Financing expenses. The annual commitment and administrative fee on the unused portion of the facility is 0.30%, for a maximum of $225,000, and an annual agency fee of $25,000. Advances can be repaid at any time without prepayment penalties or additional fees. As of December 31, 2020, the Company has not made any advances under the credit facility.
EPIC had a $10.0 million surplus note to Alesco Preferred Funding V, LTD issued as part of a pooled transaction. On April 12, 2019, the Florida Office of Insurance regulation approved EPIC's request to pay off the Alesco surplus note. Subsequently, on May 6, 2019, EPIC formally called this note. The outstanding principal, plus accrued and unpaid interest, in the amount of $10.2 million, was paid on June 13, 2019. Interest paid during each of the years ended December 31, 2019 and 2018 was $0.2 million and $0.6 million, respectively.
EICN, ECIC, EPIC, and EAC are members of the FHLB. Membership allows the insurance subsidiaries access to collateralized advances, which may be used to support and enhance liquidity management. The amount of advances that may be taken is dependent on statutory admitted assets on a per company basis.
FHLB membership also allows the Company's insurance subsidiaries access to standby letters of credit. On March 9, 2018, ECIC, EPIC, and EAC entered into standby Letter of Credit Reimbursement Agreements (Letter of Credit Agreements) with the FHLB. On March 1, 2019, FHLB and ECIC, EPIC and EAC each amended their Letter of Credit Agreement to increase their respective credit amounts. On March 2, 2020, the FHLB and EAC and EPIC each amended their Letter of Credit Agreements to increase their respective credit amounts. On May 5, 2020, the FHLB and ECIC amended its Letter of Credit Agreement to decrease its credit amount. The amended Letter of Credit Agreements are between the FHLB and each of EAC, in the amount of $80.0 million, ECIC, in the amount of $70.0 million, and EPIC, in the amount of $125.0 million. The amended Letter of Credit Agreements will expire March 31, 2021, and will remain evergreen with automatic one-year extensions unless the FHLB notifies the beneficiary at least 60 days prior to the then applicable expiration date of its election not to renew. The Letter of Credit Agreements may only be used to satisfy, in whole or in part, insurance deposit requirements with the State of California and are fully secured with eligible collateral at all times. The Letter of Credit Agreements are subject to annual maintenance charges and a fee of 15 basis points on issued amounts. As of December 31, 2020 and 2019 letters of credit totaling $275.0 million and $260.0 million were issued in lieu of securities on deposit with the State of California under these Letter of Credit Agreements, respectively.
At December 31, 2020, the Company's operating leases have remaining terms of 1 year to 7 years, with options to extend up to 10 years with no termination provision. The Company's finance leases have an option to terminate after 1 year.
Due to the evolving nature of the Company's business impacted by the COVID-19 pandemic and the continuation of work-from-home status, the Company made the decision to reduce its real estate footprint in order to achieve operating efficiencies. As a result, during the year ended December 31, 2020, the Company recorded charges of $0.8 million related to the abandonment of certain operating leases, which is recognized in Other expenses in the Company's Consolidated Statements of Comprehensive Income.
The intrinsic value of stock options exercised was $0.8 million, $0.6 million, and $1.4 million for the years ended December 31, 2020, 2019, and 2018.
At December 31, 2020, the Company had yet to recognize $5.3 million of expense related to outstanding RSUs and expects to recognize the remaining expense on a straight-line basis over the next 39 months. The grant date fair value of RSUs vested and the intrinsic value of vested RSUs for the years ended December 31, were as follows:
The intrinsic value of outstanding RSUs was $7.9 million, $10.1 million, and $10.5 million at December 31, 2020, 2019, and 2018.
(1)The PSUs awarded in March 2018, 2019, and 2020 and August 2019 were awarded to certain employees of the Company and have a performance period of two years followed by an additional one year vesting period. The PSU awards are subject to certain performance goals with payouts that range from 0% to 200% of the target awards. The values shown in the table represent the aggregate number of PSUs awarded at the target level.
At December 31, 2020, the Company had yet to recognize $6.4 million of expense related to PSU grants and expects to recognize the remaining expense on a straight-line basis over the next 24 months. This is based on the expectation of the Company achieving a 200% of target rate for the 2018 PSUs, a 200% of target rate for the 2019 PSUs, and a 130% of target rate for the 2020 PSUs.
Treatment of the LPT Agreement, deferred policy acquisition costs, fair value of financial instruments, and the surplus notes (see Notes 4, 10, and 11) are the primary differences in the SAP-basis capital stock and total surplus of the insurance subsidiaries of $1,046.3 million and $1,021.0 million, and the GAAP-basis equity of the Company of $1,212.8 million and $1,165.8 million as of December 31, 2020 and 2019, respectively. Under SAP accounting, the retroactive reinsurance gain resulting from the LPT Agreement is recorded as a special component of surplus (special surplus funds) in the initial year of the contract, and not reported as unassigned surplus until the Company has recovered amounts in excess of the original consideration paid. The special surplus funds are also reduced by the amount of extraordinary dividends as approved by the Nevada Division of Insurance. Under SAP, the surplus notes are recorded as a separate component of surplus. Under SAP, changes to the estimated contingent profit commission under the LPT Agreement are reflected in commission expense in the period that the estimate is revised.
Under Florida law, without regulatory approval, EPIC and EAC may pay dividends if they do not exceed the greater of: the lesser of 10% of surplus or net income, not including realized capital gains, plus a 2-year carry forward; 10% of surplus, with dividends payable limited to unassigned funds minus 25% of unrealized capital gains; or, the lesser of 10% of surplus or net investment income plus a 3-year carry forward with dividends payable limited to unassigned funds minus 25% of unrealized capital gains. During 2020, EAC paid an ordinary dividend in the amount of $20.8 million to its parent company, EGI. As a result of that payment, EAC can pay $0.3 million of dividends through June 30, 2021 and $21.1 million thereafter without regulatory approval from the Florida Office of Insurance Regulation (FOIR), provided that no dividends are paid prior to June 30, 2021. During 2020, EPIC paid an ordinary dividend in the amount of $21.7 million to its parent company, EGI. As a result of that payment, EPIC can pay $1.3 million of dividends through May 11, 2021 and can pay $23.0 million of dividends thereafter, without regulatory approval from the FOIR.
Under New York law, without regulatory approval, CIC may pay dividends if they do not exceed the lesser of 10% of surplus or 100% of net investment income for the previous year increased by the excess, if any, of net investment income over dividends declared or distributed during the period commencing 36 months prior to the declaration or distribution of the current dividend and ending 12 months prior thereto. The New York state law also provides that any distribution may only be paid out
of earned surplus. Additionally, New York has prohibited CIC from paying any dividends for two years from the date of Acquisition without prior regulatory approval. CIC can pay $3.0 million of dividends after July 31, 2021.
The Company maintains a 401(k) defined contribution plan covering all eligible Company employees (the Employers 401(k) Plan). Under the Employers 401(k) Plan, the Company's safe harbor matching consists of a 100% matching contribution on salary deferrals up to 3% of compensation and then a 50% matching contribution on salary deferrals from 3% to 5% of compensation. The Company's matching contribution to the Employers 401(k) Plan was $2.3 million, $2.2 million, and $2.0 million for the years ended December 31, 2020, 2019, and 2018, respectively.
RSUs and PSUs are entitled to receive dividend equivalents on awards that fully vest or become payable. The dividend equivalents are reflected in the Company’s net income; therefore, these awards are not considered participating securities for the purposes of determining earnings per share.
The following table presents the net income and the weighted average shares outstanding used in the earnings per share common share calculations.
Diluted earnings per share excludes outstanding options and other common stock equivalents in periods where the inclusion of such options and common stock equivalents would be anti-dilutive. The following table presents options, PSUs, and RSUs that were excluded from diluted earnings per share.
The Employers segment represents the traditional business offered through the EMPLOYERS brand name (Employers) through its agents, including business originated from the Company's strategic partnerships and alliances.
Corporate and Other activities consist of those holding company expenses that are not considered to be underwriting in nature, the financial impact of the LPT agreement, and legacy business assumed and ceded by CIC. These expenses are not considered to be part of a reportable segment and are not otherwise allocated to a reportable segment.
The Company operates solely within the United States and does not have revenue from transactions with a single policyholder accounting for 10% or more of its revenues. The following table shows the Company's in-force premiums and number of
The third quarter of 2020 was impacted by: (1) favorable prior accident year loss development of $14.8 million, which decreased losses and LAE by the same amount; and (2) the inclusion of $3.7 million in net unrealized gains on equity securities.