Investment income is an important element of our net income. Because the period of time between our receipt of premiums and the ultimate settlement of claims is often several years or longer, we are able to invest cash from premiums for significant periods of time. As a result, we are able to generate more investment income from our premiums as compared to insurance companies that operate in other lines of business that pay claims more quickly. At December 31, 2020, our investment portfolio, including cash and cash equivalents, was $1.2 billion and produced net investment income of $29.4 million in 2020, $32.5 million in 2019 and $30.5 million in 2018.
The use of reinsurance is an important component of our business strategy. We purchase reinsurance to reduce our net liability on individual risks and to protect against catastrophic losses. Our reinsurance program for 2021 includes 15 reinsurers that provide coverage to us in excess of a certain specified loss amount, or retention level. Our 2021 reinsurance program provides us with reinsurance coverage for each loss occurrence up to $70.0 million, subject to applicable limitations, deductibles, retentions and aggregate limits. However, for any loss occurrence involving only one claimant, our reinsurance coverage is limited to $10.0 million, subject to applicable deductibles, retentions and aggregate limits. Losses in the layer between $2.0 million and $10.0 million are ceded to a multi-year reinsurance treaty with an aggregate annual deductible of approximately $9.1 million and an aggregate limit of coverage of approximately $27.3 million for 2021. As losses are incurred and recorded, we record amounts recoverable from reinsurers for the portion of the losses ceded to our reinsurers.
For example, for the five-year period ended December 31, 2020 we had recorded 77 severe claims, or an average of 15 severe claims per year for accident years 2016 through 2020. The number of severe claims in any one accident year in this five-year period ranged from a low of 13 in 2016 to a high of 18 in 2020. The average reported case severity for these claims ranged from $2.3 million for the 2018 accident year to $3.1 million for the 2019 accident year. For the five accident years, the case incurred for these severe claims accounted for an average of 13.0 percentage points of our overall loss and loss adjustment expense, or LAE, ratio, measured at December 31, 2020.
Our gross reserves for loss and loss adjustment expenses at December 31, 2020, 2019 and 2018 were $760.6 million, $772.9 million and $798.4 million, respectively. As a percentage of gross reserves at year end, IBNR represented 16.8% in 2020, 17.6% in 2019 and 20.1% in 2018.
In 2020, we decreased our estimates for prior year loss reserves by $63.5 million. In 2019, we decreased our estimates for prior year loss reserves by $65.0 million. In 2018, we decreased our estimates for prior year loss reserves by $45.6 million.
Premiums are earned on a daily pro rata basis over the term of the policy. At the end of each reporting period, premiums written that are not earned are classified as unearned premiums and are earned in subsequent periods over the remaining term of the policy. Our insurance policies typically have a term of one year. Thus, for a one-year policy written on July 1, 2020 for an employer with constant payroll during the term of the policy, we would earn half of the premiums in 2020 and the other half in 2021. On a monthly basis, we also recognize net premiums earned from mandatory pooling arrangements.
Net Investment Income and Net Realized Gains and Losses on Investments. We invest our statutory surplus funds and the funds supporting our insurance liabilities in fixed maturity securities, equity securities and alternative investments. In addition, a portion of these funds are held in cash and cash equivalents to pay current claims. Our net investment income includes interest and dividends earned on our invested assets and amortization of premiums and discounts on our fixed maturity securities. We assess the performance of our investment portfolio using a standard tax equivalent yield metric. Investment income that is tax-exempt is increased by our marginal federal tax rate to express yield on tax-exempt securities on the same basis as taxable securities. Net realized gains and losses on our investments are reported separately from our net investment income. Net realized gains occur when our investment securities are sold for more than their cost or amortized cost, as applicable. Net realized losses occur when our investment securities are sold for less than their cost or amortized cost, as applicable, or are written down as a result of other-than-temporary impairment. We classify the majority of our fixed maturity securities as held-to-maturity. The remainder of our fixed maturity securities are classified as available-for-sale. Net unrealized gains or losses on our securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our balance sheet. Changes in net unrealized gains or losses on our equity securities are recognized in net income.
Management believes that the most critical accounting policies relate to the reporting of reserves for loss and loss adjustment expenses, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from reinsurers, premiums receivable, assessments, deferred policy acquisition costs, deferred income taxes, credit losses on investment securities and share-based compensation.
In establishing our reserves, we review the results of analyses using 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 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.
Amounts Recoverable from Reinsurers. Amounts recoverable from reinsurers represent the portion of our paid and unpaid loss and loss adjustment expenses that are assumed by reinsurers and related commissions due from reinsurers. These amounts are separately reported on our balance sheet as assets net of an allowance for credit losses and do not reduce our reserves for loss and loss adjustment expenses because reinsurance does not relieve us of liability to our policyholders. We are required to pay claims even if a reinsurer fails to pay us under the terms of a reinsurance contract. We calculate amounts recoverable from reinsurers based on our estimates of the underlying loss and loss adjustment expenses, as well as the terms and conditions of our reinsurance contracts, which could be subject to interpretation. In addition, we bear credit risk with respect to our reinsurers, which can be significant because some of the unpaid loss and loss adjustment expenses for which we have reinsurance coverage remain outstanding for extended periods of time.
Premiums Receivable. Premiums receivable represents premium-related balances due from our policyholders based on annual premiums for policies written, including surcharges and deposits and adjustments for premium audits, endorsements, cancellations, cash transactions and charge offs. The balance is shown net of an allowance for credit losses and includes an estimate for EBUB. The EBUB estimate is subject to significant variability and can either increase or decrease premiums receivable and earned premiums based upon several factors, including changes in premium growth, industry mix and economic conditions. EBUB assumptions include historical development factors, current economic outlook and current trends in particular sectors of our business.
The net underwriting expense ratio is calculated by dividing underwriting and certain other operating costs, commissions and salaries, and benefits by the current year’s net premiums earned.
Gross Premiums Written. Gross premiums written for 2020 were $303.1 million, compared to $333.5 million for 2019, a decrease of 9.1%. The decrease was attributable to a $23.6 million decrease in annual premiums on voluntary policies written during the period, a $5.9 million decrease in premiums resulting from payroll audits and related premium adjustments for policies written in previous periods, and a $0.9 million decrease in annual premiums on assigned risk policies written during the period. Related premium adjustments in 2020 include a $2.2 million decrease in “earned but unbilled”, or EBUB, premium.
Net Premiums Written. Net premiums written for 2020 were $292.8 million, compared to $324.5 million for 2019, a decrease of 9.8%. The decrease was primarily attributable to the decrease in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 3.3% for 2020 compared to 2.6% for 2019. The increase in ceded premiums as a percentage of gross premiums earned is due to increased pricing for our 2020 reinsurance program. For additional information, see Item 1, “Business-Reinsurance”.
Net Investment Income. Net investment income in 2020 was $29.4 million, a decrease of 9.6% from the $32.5 million reported in 2019. The decrease was due to lower interest rates on fixed income securities in 2020 compared with 2019. The pre-tax investment yield on our investment portfolio was 2.5% per annum for 2020 versus 2.8% per annum for 2019. The tax-equivalent yield on our investment portfolio was 2.9% per annum for 2020, compared to 3.1% per annum for 2019. The tax-equivalent yield is calculated using the effective interest rate and the appropriate marginal tax rate. Average invested assets, including cash and cash equivalents, decreased 0.7%, from an average of $1,200.6 million for 2019 to an average of $1,191.7 million for 2020.
Net Unrealized Gains (Losses) on Equity Securities. Net unrealized gains on equity securities in 2020 were $4.2 million compared to net unrealized gains of $4.8 million in 2019.
Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for 2020 were $71.9 million, compared to $74.4 million for 2019, a decrease of $2.4 million, or 3.3%. This decrease was primarily due to a $1.9 million decrease in commission expense, a $1.1 million decrease in travel and travel related items due to the pandemic, and a $0.7 million decrease in insurance related assessments. The decrease in insurance related assessments included a benefit of $5.7 million from the elimination of a state assessment for a second injury trust fund in 2020 compared to a benefit of $3.5 million from the elimination of a state assessment for a multiple injury fund in 2019. The
The table below sets forth the number of open claims as of December 31, 2020, 2019 and 2018, and the numbers of claims reported and closed during the years then ended.
Our principal sources of operating funds are premiums, investment income, and proceeds from maturities of investments. Our primary uses of operating funds include payments for claims and operating expenses. We pay claims, operating expenses and shareholder dividends using cash flow from operations and invest our excess cash in fixed maturity and equity securities. We expect that our projected cash flow from operations will provide us sufficient liquidity to fund future operations, including payment of claims and operating expenses and other holding company expenses, for at least the next 18 months.
We forecast claim payments based on our historical trends. We seek to manage the funding of claim payments by actively managing available cash and forecasting cash flows on a short- and long-term basis. Cash payments, net of reinsurance, for claims
Major components of cash provided by operating activities in 2019 were net premiums collected of $329.0 million and investment income collected of $41.6 million. These increases were offset in-part by claim payments of $189.8 million, $75.9 million of operating expenditures, federal taxes paid of $20.9 million, and dividends to policyholders paid of $3.5 million.
Major components of cash provided by operating activities in 2018 were net premiums collected of $354.0 million and investment income collected of $41.7 million. These increases were offset in-part by claim payments of $200.5 million, $74.2 million of operating expenditures, federal taxes paid of $11.2 million, a $7.9 million increase in amounts held by others, and dividends to policyholders paid of $2.9 million.
Net cash provided by investing activities was $43.4 million in 2020, as compared to net cash provided by investing activities of $11.7 million in 2019 net cash used in investing activities of $29.1 million in 2018. In 2020, major components of net cash provided by investing activities included proceeds from sales and maturities of investments of $365.2 million, offset by investment purchases of $320.9 million.
In 2019, major components of net cash provided by investing activities included proceeds from sales and maturities of investments of $358.6 million, offset by investment purchases of $345.9 million.
Major components of cash used in financing activities in 2019 and 2018 included cash used for dividends paid to shareholders of $87.0 million and $84.5 million, respectively.
The Company has a line of credit agreement with Frost Bank for borrowings up to a maximum of $20.0 million. Under the agreement, advances may be made either in the form of loans or letters of credit. Borrowings under the agreement accrue at interest rates based upon prime rate or LIBOR (or equivalent) and are unsecured. Under the agreement, the Company pays a fee of 0.25% on
the unused portion of the loan in arrears quarterly, for a fee of $50,000 annually. At December 31, 2020, there were no outstanding borrowings. Unless renewed, the agreement will expire in December 2022.
The Company paid regular quarterly cash dividends of $0.27, $0.25, $0.22 per share in 2020, 2019 and 2018, respectively. In addition, the Company paid extraordinary cash dividends of $3.50 per share in 2020, 2019, and 2018.
The pre-tax investment yield on our investment portfolio was 2.5% and 2.8% per annum during the twelve months ended December 31, 2020 and 2019, respectively.
We manage risk on certain long-duration claims by settling these claims through the purchase of annuities from unaffiliated life insurance companies. In the event these companies are unable to meet their obligations under these annuity contracts, we could be liable to the claimants, but our reinsurers remain obligated to indemnify us for all or part of these obligations in accordance with the terms of our reinsurance contracts. As of December 31, 2020, the present value of these annuities was $99.3 million, as estimated by our annuity providers. Substantially all of the annuities are issued or guaranteed by life insurance companies that have an A.M. Best rating of “A” (Excellent) or better. For additional information, see Note 16 to our consolidated financial statements in Item 8 of this report.
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 Company, in determining the present value of lease payments, utilizes either the rate implicit in the lease if that rate is readily determinable or the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.
Future minimum lease payments at December 31, 2020, were as follows:
The table below provides information with respect to our contractual obligations as of December 31, 2020.
The loss and loss adjustment expense payments due by period in the table above are based upon the loss and loss adjustment expense estimates as of December 31, 2020 and actuarial estimates of expected payout patterns and are not contractual liabilities as to a time certain. Our contractual liability is to provide benefits under the policy. As a result, our calculation of loss and loss adjustment expense payments due by period is subject to the same uncertainties associated with determining the level of loss and loss adjustment expenses generally and to the additional uncertainties arising from the difficulty of predicting when claims
Audited Financial Statements as of December 31, 2020 and 2019 and for the three years in the period ended December 31, 2020:
At December 31, 2020, the Company’s reserves for loss and loss adjustment expenses (LAE) was $761 million, which includes Incurred But Not Reported (IBNR) reserves of $128 million. As discussed in Notes 1 and 9 to the consolidated financial statements, the reserve for loss and LAE represents the estimated ultimate costs of all reported and unreported losses incurred and unpaid as of the reporting date. There is significant uncertainty inherent in determining the ultimate loss and LAE costs which are estimated using individual case-base valuations and statistical and actuarial analysis based upon experience for previously unreported claims and their ultimate loss and LAE costs. In particular, the estimates are sensitive to loss severity and frequency trends, changes in customers, products mix, claims management, regulatory factors, medical trends, employment and wage patterns, insurance policy coverage interpretations, and judicial determinations, among other factors.
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process for estimating loss and LAE reserves, including, among others controls over the review and approval processes that the Company has in place for the methods and assumptions used in estimating IBNR reserves.
To test the recorded IBNR reserves, with the assistance of our actuarial specialists, we evaluated the Company’s selection of methods and assumptions, including loss severity, against those used in prior periods and used in the industry for similar types of insurance. We also considered changes to employment and wage patterns and the Company’s customers, product mix, and claims management. We involved our actuarial specialist to independently calculated a range of reasonable loss and LAE reserve estimates and compared this range to the Company’s recorded loss and LAE reserve. We also performed a review of the development of prior years’ reserve estimates.
In January 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance requires fair value measurement for equity investments (not including those that result in consolidation of the investee or use the equity method of accounting) and the recognition of changes in fair value to be presented as a component of net income. The guidance also revises the disclosure requirements related to fair value changes of liabilities presented in comprehensive income, eliminates disclosure related to the methods and assumptions underlying fair value for financial instruments measured at amortized cost, and simplifies impairment assessments for equity investments without readily determinable fair values. The adoption of this new guidance in the first quarter of 2018 resulted in an immaterial decrease in net income of $390 thousand or a $0.02 decrease to our diluted earnings per common share.
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses (“CECL”). The prior guidance delays the recognition of credit losses until a probable loss has occurred. The new guidance requires credit losses for securities measured at amortized cost to be determined using current expected credit loss estimates. These estimates are derived from historical, current and reasonable supporting forecasts, including prepayments and estimates, and are recorded through a valuation account. The same method is used for available-for-sale securities, but the valuation account is limited to the amount by which the fair value is below amortized cost.
The Company believes that under the standard there is no current expected credit allowance necessary for U.S. Government Securities in its judgment as: 1) Treasury securities typically are the most highly rated securities among rating agencies; 2) Treasury securities have a long history of no credit losses; 3) Treasury securities are guaranteed by a sovereign entity (the U.S. Government) that can print its own money and whose currency (the U.S. dollar) is the reserve currency.
The Company believes that under the standard there is no current expected credit allowance necessary for FNMA or Freddie Mac (FHLMC) Securities in its judgment as: 1) These securities typically are among the most highly rated securities among rating agencies; 2) There is a long history of no credit losses; 3) Principal and interest payments are guaranteed by the issuing agency; 4) There is an explicit guarantee by the U.S. Government that can print its own money and whose currency (the U.S. dollar) is the reserve currency.
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. This methodology provides additional conservatism in determining the credit loss allowance needed.
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. This study also contains the average recovery rates based on the historical defaults in the Moody’s study. We have chosen to use the 1983-2019 data as more reflective of the current historical pattern of defaults (the study goes back to 1920). 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. This study also contains the average recovery rates based on the historical defaults in the Moody’s study. This study covers 1970-2019 data, which we believe is reflective of the current historical pattern of defaults. The maximum maturity using the default rate is 20 years (any maturity greater than 20 years will use the 20-year rate).
(par value $100) as the Company believes any slight difference between $95 and par likely reflect interest rate changes and liquidity only and are not a sign of credit impairment or market expectations for any current expected credit loss.
The list is reviewed by the Management Investment Committee to evaluate any security where the discounted cash flows expected no longer exceed the book value of the security. If the Company intends to sell the security (or more likely than not be required to sell the security before recovery of the loss) the Company will write down the security to fair value through earnings. If the Company intends to hold the security, the Company will establish a credit loss allowance for the security through earnings, and adjust the allowance each quarter through earnings, as the security changes in value.
In determining the amount of the credit loss allowance, the Company will consider all of the following factors:
c.) Changes in the quality of the credit enhancement, if any
4. Failure of the issuer to make scheduled interest or principal payments
The credit rating used for reinsurance recoverables uses the average rating for each reinsurer as published by Moody’s, S&P, Fitch and A.M. Best to determine the probability of default. The median rating is used if there are three ratings. The probability of default (given a rating) comes from Moody’s annual study of Corporate Bond defaults published each February. This study also contains the average recovery rates based on the historical defaults in the Moody’s study. We have chosen to use the 1983-2019 data as more reflective of the current historical pattern of defaults (the study goes back to 1920).
The Company’s internal working group evaluated the existing allowance for doubtful accounts reserving methodology for premiums receivable and determined the calculation was consistent with the new credit loss guidance. There was no impact to the premiums receivable balance as a result of the adoption of the new standard.
The Company has the ability and positive intent to hold certain investments until maturity. Therefore, fixed maturity securities classified as held-to-maturity are recorded at amortized cost net of the allowance for credit losses. Fixed maturity securities classified as available-for-sale are recorded at fair value. Temporary changes in the fair value of these securities are reported in shareholders’ equity as a component of other comprehensive income, net of deferred income taxes. Changes in the fair value of equity securities are recorded in net income.
All advertising expenditures incurred by the Company are charged to expense in the period to which they relate and are included in underwriting and certain other operating costs in the consolidated statements of income. Total advertising expenses incurred were $0.2 million in 2020, $0.4 million in 2019, and $0.5 million in 2018.
Basic EPS is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. The diluted EPS calculation includes potential common shares assumed issued under the treasury stock method, which reflects the potential dilution that would occur if any outstanding options or warrants were exercised or restricted stock becomes vested.
Short-term investments held at December 31, 2020 include $30.7 million of U.S. Treasury securities and obligations of U.S. government agencies, $9.1 million of obligations of states and political subdivisions and $6.1 million of corporate bonds. Short-term investments held at December 31, 2019 include $54.6 million of U.S. Treasury securities and obligations of U.S. government agencies and $1.9 million of obligations of states and political subdivisions.
The gross unrecognized gains and losses on, and the amortized cost, allowance for credit losses, carrying amount, and fair value of, those investments classified as held-to-maturity at December 31, 2020 are summarized as follows:
The gross unrealized gains and losses on, and the cost of equity securities at December 31, 2019 are summarized as follows:
At December 31, 2020, there were $19.9 million of held-to-maturity investments on deposit with regulatory agencies of states in which the Company does business.
The following table summarizes the fair value and gross unrealized losses on fixed maturity securities, aggregated by major investment category and length of time that the individual securities have been in a continuous unrealized loss position:
At December 31, 2020, the Company held 2 individual fixed maturity securities that were in an unrealized loss position, of which none were in a continuous unrealized loss position for longer than 12 months.
The following table illustrates the changes in the allowance for credit losses by major security type of the investments classified as held-to-maturity for the year ended December 31, 2020.
The Company has established an allowance for credit losses on 424 held-to-maturity securities totaling $0.3 million as of December 31, 2020. The majority of those securities were states and political subdivisions and corporate bonds at 393 and 28, respectively.
The Company has no allowance for credit losses on investments classified as available-for-sale as of December 31, 2020. During 2019, the Company had no impairment losses recognized for other-than-temporary declines in the fair value of our investments.
The calculation of the credit loss allowance takes the amortized cost of the fixed income security and assumes default and recovery based on the average recovery rates from the Moody’s default studies. The amortized cost of the security, minus the amount recovered, is the estimated full amount the Company could lose in a default scenario. Then this amount is multiplied by the probability of default to determine the allowance for credit loss. The lower the security is rated, the higher likelihood of default, and therefore a higher allowance for credit loss. The longer to the maturity date of a security, the higher the default risk.
Premiums receivable consist primarily of premium-related balances due from policyholders. The balance is shown net of the allowance for credit losses. The components of premiums receivable are shown below:
The following summarizes the activity in the allowance for credit losses:
Included in premiums receivable at December 31, 2020, 2019 and 2018 is the Company’s estimate for EBUB premium of $6.3 million, $8.5 million and $7.5 million, respectively.
The Company cedes certain premiums and losses to various reinsurers under excess-of-loss treaties. These reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. Ceded reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. To minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers on a continual basis. The effect of reinsurance on premiums written and earned in 2020, 2019 and 2018 was as follows:
As of December 31, 2020 and 2019, the Company had a valuation allowance against its deferred income tax benefits of $2.2 and $2.0 million, respectively. During 2018, there was no valuation allowance on the Company’s deferred income tax assets and liabilities.
The Company has an agreement providing for a line of credit in the maximum amount of $20.0 million with Frost Bank. The agreement expires in December 2022. Under the agreement, advances may be made either in the form of loans or letters of credit. Borrowings under the agreement accrue at interest rates based upon prime rate, LIBOR or equivalent. Under the agreement, the Company pays a fee of 0.25% on the unused portion of the loan in arrears quarterly, or a fee of $50,000 annually, assuming the line of credit is not used during the calendar year. The line of credit is unsecured. No borrowings or letters of credit were outstanding under the line of credit arrangement at December 31, 2020 or 2019.
The following table provides a reconciliation of the beginning and ending reserve balances, net of related amounts recoverable from reinsurers, for 2020, 2019 and 2018:
The final resolution of the estimated loss reserve liability may be different from that anticipated at the reporting date because of the inherent uncertainty in loss reserve estimates, including, but not limited to, the future settlement environment. Consequently, actual paid losses in the future may result in a significantly different amount than currently reserved, favorable or unfavorable.
Pursuant to regulatory requirements, AIIC cannot pay dividends to the Company in excess of the greater of 10% of statutory surplus, or statutory net income, excluding realized investment gains, for the preceding 12-month period, without the prior approval of the Nebraska Director of Insurance. However, for purposes of this dividend calculation, net income from the previous two calendar years may be carried forward to the extent that it has not already been paid out as dividends. AIIC paid $88.6 million in dividends to the Company in 2020, $115.9 million in 2019 and $65.4 million in 2018. Based upon the dividend limitation described above, AIIC could pay to the Company dividends of up to $83.4 million in 2021 without seeking regulatory approval.
The Company used the Black-Scholes-Merton option pricing model to estimate the fair value of each option on the date of grant. The expected terms of options were developed by considering the Company’s historical attrition rate for those employees at the officer level, who were eligible to receive options. Further, the Company aggregated individual awards into homogenous groups based upon grant date. Expected volatility was estimated using daily historical volatility for six companies within the property and casualty insurance sector. The Company believes that historical volatility of this peer group was the best estimate of expected volatility of the market price of the Company’s common shares. The dividend yield was assumed to be zero as the Company did not pay cash dividends until 2013. The risk-free interest rate is the yield on the grant date of U.S. Treasury zero coupon securities with a maturity comparable to the expected term of the options.
The Company recognized no compensation expense in 2020 and 2019 and $12,000 in 2018, related to awards made under the 2005 Incentive Plan.
In 2020, 23,207 shares of common stock were granted under the 2012 Incentive Plan. In 2019, 9,391 shares of common stock and 13,322 shares of restricted stock were granted under the 2012 Incentive Plan, which will vest through 2024. At December 31, 2020, there were 297,227 shares of common stock available for future awards under the 2012 Incentive Plan.
Under the Restricted Stock Plan, each non-employee director is automatically granted a restricted stock award for a number of shares equal to $50,000 divided by the closing price of the Company’s common stock on the date of the annual meeting of shareholders at which the non-employee director is elected or is continuing as a member of the Board. Each restricted stock award vests on the date of the next annual meeting of shareholders following the date of grant, subject to the continued service of the non-employee director. Under the terms of the Restricted Stock Plan, the Company’s Board of Directors may increase the dollar amount of the annual award to an amount up to $75,000 without further shareholder approval.
The Company recognized compensation expense of $349,000 in 2020, $317,000 in 2019 and $351,000 in 2018 related to the Non-Employee Director Restricted Stock Plan.
The diluted EPS calculation includes potential common shares assumed issued under the treasury stock method, which reflects the potential dilution that would occur if any outstanding options were exercised or restricted stock becomes vested.
The table below sets forth the reconciliation of the weighted average shares used for the basic and diluted EPS calculation.
Net premiums earned during 2020, 2019 and 2018 for the top ten states in 2020 and all others are shown below:
The Company carries available-for-sale securities and equity securities at fair value in our consolidated financial statements and determines fair value measurements and disclosure in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures.
Assets measured at fair value on a recurring basis as of December 31, 2020 and 2019 are as follows:
The following table represents unaudited quarterly financial data for the years ended December 31, 2020 and 2019.
The Company’s Board of Directors initiated a share repurchase program in February 2010. In October 2016, the Board reauthorized this program with a limit of $25.0 million with no expiration date. There were no shares repurchased under this program in 2020. Since the beginning of this plan, the Company has repurchased a total of 1,258,250 shares for $22.4 million, or an average price of $17.78, including commissions.
In 2013, the Company’s Board of Directors initiated a regular quarterly dividend. During 2020, the Company’s Board of Directors declared a quarterly dividend of $0.27 per share compared to $0.25 per share in 2019, and $0.22 per share in 2018. The Company declared extraordinary dividends totaling $3.50 per share in each of 2020, 2019 and 2018.
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 considers the payment of a regular cash dividend each calendar quarter.