As of February 1, 2020, we leased 202,300 square feet of office space in 7 states, including our principal executive offices located in Reno, Nevada. 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.
The following selected historical consolidated financial data should be read in conjunction with ''
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements, the accompanying notes thereto, and the financial statement schedules included in Item 8 and Item 15 of this report. In addition to historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties and other factors described in Item 1A of this report. Our actual results in future periods may differ from those referred to herein due to a number of factors, including the risks described in the sections entitled "Risk Factors" and "Forward-Looking Statements" elsewhere in this report.
Pricing on our renewals showed an overall price decrease of 11.6% for the year ended December 31, 2019, versus the rate level in effect on such business a year earlier. We believe that we can continue to write attractive business due to favorable loss costs and frequency trends and the success of our accelerated claims initiatives, despite the competitive market conditions we currently face. Given the strength of our balance sheet, the execution of our underwriting, claims, and investment strategies, we believe that we are well positioned for the current market cycle.
Net premiums earned decreased 4.8% in 2019 and increased 2.0% in 2018, each compared to the previous year;
Net investment income increased 8.5% in 2019 and 8.8% in 2018, each compared to the previous year;
We continue to execute a number of ongoing business initiatives, including: achieving internal and customer-facing business process excellence; offering quotes and insurance coverage directly to customers through digital insurance solutions; accelerating the settlement of open claims; diversifying our risk exposure across geographic markets; utilizing a multi-company pricing platform and territory-specific pricing; developing and implementing new technologies to transform the way insurance agents utilize digital capabilities; and leveraging data-driven strategies to target, price, and underwrite profitable classes of business across all of our markets.
Gross premiums written were $696.9 million, $748.9 million, and $729.7 million for the years ended December 31, 2019, 2018, and 2017, respectively. Period over period changes in gross premiums earned during 2019 and 2018 were primarily related to our Employers segment. See -Summary of Financial Results by Segment -Employers.
Net premiums earned are primarily a function of the amount and timing of net premiums previously written.
Net investment income was $88.1 million, $81.2 million, and $74.6 million for the years ended December 31, 2019, 2018, and 2017, respectively. 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 3.3%, 3.4%, and 3.1% at December 31, 2019, 2018, and 2017, 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 3.5% at each of December 31, 2019, 2018, and 2017.
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 when securities are written down as a result of an other-than-temporary impairment. Changes in fair value of equity securities (for 2019 and 2018) 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 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. Net gains on equity securities were largely consistent with the performance of U.S. equity markets. Realized gains and losses on 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 losses on equity securities for 2018 were primarily the result of volatility in equity markets. Net losses on fixed maturity securities were primarily related to the sale of fixed maturity securities resulting from a rebalancing 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. Net gains on fixed maturity securities were primarily related to the sale of fixed maturity securities resulting from a rebalancing of our investment portfolio. Net realized gains on investments in 2017 included $5.8 million of net realized gains on equity securities and $3.0 million of net realized gains on fixed maturity securities. The net gains were primarily related to sales of municipal securities, whose proceeds were reinvested in taxable fixed maturity securities, and sales of equity securities as part of a routine rebalancing of our equity portfolio. Those gains were partially offset by $1.4 million in other-than temporary impairments of certain fixed maturity and equity securities due to our intent to sell those securities and/or the severity and duration of the change in fair value of those 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.
in our current accident year loss estimate. Total claims costs have also been reduced by cost savings associated with increased claims settlement activity that continued through 2019. We believe our current accident year loss estimate is adequate; however, ultimate losses will not be known with any certainty for many years. We assume that increasing medical and indemnity cost trends will continue to impact our long-term claims costs and current accident year loss estimate, which may be offset by rate increases. Additional information regarding our reserves for losses and LAE is set forth under "-Critical Accounting Policies -Reserves for Losses and LAE." See also, "-Summary of Financial Results by Segment -Employers."
We actively invest in technology and systems across our business with a view toward maximizing efficiency, facilitating customer self-service, and creating increased capacity that will allow us to lower our expense ratios while growing premiums. In 2017, we wrote-off $7.5 million of previously capitalized costs relating to the development of information technology capabilities that had not yet been placed in service. This charge was the result of our continual evaluation of ongoing technology initiatives.
For additional information regarding our income tax expense see Note 7 in the Notes to our Consolidated Financial Statements.
Net premiums written were $691.4 million, $742.8 million, and $723.7 million for the years ended December 31, 2019, 2018, and 2017, respectively, which included $5.4 million, $6.1 million, and $6.0 million of reinsurance premiums ceded, respectively.
Net premiums earned were $695.8 million, $731.1 million, and $716.5 million for the years ended December 31, 2019, 2018, and 2017, respectively.
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, 2019 and 2018, respectively, overall, for California, where nearly 50% of our premiums were generated, and for all other states, excluding California:
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. The decrease in our losses
and LAE from 2017 to 2018 was primarily attributable to increased favorable prior accident year loss development of $66.2 million, which included $65.5 million of favorable development on our voluntary risk business and $0.7 million of favorable development related to our assigned risk business. Favorable prior accident year loss development in each period 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 have 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.
Commission Expense Ratio. The commission expense ratio was 12.7%, 12.9%, and 12.8%, and our commission expenses were $88.1 million, $94.2 million, and $91.4 million for the years ended December 31, 2019, 2018, and 2017, respectively. The decrease in the commission expense ratio for 2019 compared to 2018 was primarily the result of decreases in 2019 agency incentive commissions, which were directly impacted by decreases in premiums written. The increase in the commission expense ratio for 2018 compared to 2017 was primarily the result of increased levels of agency incentive commissions and an increase in the percentage of business produced by our partnerships and alliances for those years, which are subject to a higher commission rate.
Underwriting Expense Ratio. The underwriting expense ratio was 22.0%, 18.5%, and 17.3%, and our underwriting expenses were $153.2 million, $135.0 million, and $123.7 million for the years ended December 31, 2019, 2018, and 2017, respectively. During the year ended December 31, 2019, our IT 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 aggressive 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. During the year ended December 31, 2018, our compensation-related expenses increased $3.4 million, our professional fees increased $3.2 million, our bad debt expense increased $1.4 million, and our premium tax and assessments increased $1.4 million, each as compared to 2017.
For a further discussion of non-underwriting related income and expenses, including Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments, Gain on Redemption of Notes Payable, Other Income, Interest and Financing Expenses, and Other Expenses see "-Results of Operations -Summary of Consolidated Financial Results."
Gross premiums written and net premiums written were $0.1 million for the year ended December 31, 2019. Cerity had no premiums written prior to 2019.
For a further discussion of non-underwriting related income, including Net Investment Income and Net Realized and Unrealized Gains (Losses) on Investments, and Other Income see "-Results of Operations -Summary of Consolidated Financial Results Consolidated."
General and administrative expenses primarily consist of compensation related expenses, professional fees, and other corporate expenses at the holding company level. General and administrative expenses were $18.3 million, $17.6 million, and $15.1 million for the years ended December 31, 2019, 2018, and 2017, respectively. During the year ended December 31, 2019, our professional fees increased $0.5 million, and our compensation-related expenses increased $0.2 million, each as compared to 2018. During the year ended December 31, 2018, our compensation-related expenses increased $1.6 million, and our professional fees increased $1.0 million, each as compared to 2017.
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 2020, the maximum dividend that may be paid by EPIC without prior regulatory approval is $21.7 million. EICN can pay $1.4 million of dividends through March 1, 2020, and $21.1 million thereafter, without prior regulatory approval; ECIC cannot pay any dividends through September 23, 2020 without prior regulatory approval, and $32.1 million thereafter; and EAC can pay $1.2 million of dividends through June 12, 2020, and $20.9 million thereafter, without prior regulatory approval. CIC cannot pay dividends without prior regulatory approval until July 31, 2021.
The primary sources of cash for our operating subsidiaries, which include our insurance and other operating subsidiaries, are premium collections, investment income, sales and maturities of investments and reinsurance recoveries. The primary uses of cash for our operating subsidiaries are payments of losses and LAE, commission expenses, underwriting and general and administrative expenses, ceded reinsurance, investment purchases and dividends paid to their parent.
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, EPIC, and EAC each amended their Letter of Credit Agreements to increase their respective credit amounts. The Letter of Credit Agreements are between the FHLB and each of EAC, in the amount of $60.0 million, ECIC, in the amount of $90.0 million, and EPIC, in the amount of $110.0 million. The amended Letter of Credit Agreements became effective March 1, 2019 and expire March 31, 2020. The amended 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 10).
Net cash provided by operating activities in 2019 included net premiums received of $746.2 million, investment income received of $98.5 million, and cash received of $19.1 million for the LPT Contingent Commission. These operating cash inflows were partially offset by net claims payments of $403.3 million, underwriting and general and administrative expenses paid of $184.8 million, commissions paid of $95.1 million, and federal income taxes paid of $37.8 million.
Net cash provided by operating activities in 2017 included net premiums received of $702.4 million and investment income received of $90.0 million. These operating cash inflows were partially offset by net claims payments of $419.2 million, underwriting and general and administrative expenses paid of $123.6 million, and commissions paid of $84.6 million.
As of December 31, 2019, the capital resources available to us consisted of $1,165.8 million of stockholders' equity and the $137.1 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, 2019, 2018, and 2017:
Deferred Gain. The Deferred Gain, which totaled $137.1 million and $149.6 million as of December 31, 2019 and 2018, respectively, reflects the unamortized gain from the LPT Agreement. See Note 2 in the Notes to our Consolidated Financial Statements.
We also have a $6.7 million investment in FHLB stock which we record at cost. We receive periodic dividends from the FHLB for this investment, when declared, which can vary from period to period.
Our Other invested assets made up 1% of our investment portfolio at December 31, 2019 and include private equity limited partnerships and convertible preferred shares of real estate investment trusts. Our investments in private equity limited partnerships totaled $9.1 million at December 31, 2019 and are generally not redeemable by the investees and cannot be sold without prior approval of the general partner. These investments have a fund term of 12 years, subject to three one-year extensions at the general partner's discretion. We expect to receive distributions of proceeds from dividends and interest from fund investments, as well as from the disposition of a fund investment or portion thereof, from time-to-time during the full course of the fund term. As of December 31, 2019, we had unfunded commitments to these private equity limited partnerships totaling $41.6 million. Our investments in convertible preferred shares of real estate investment trusts totaled $20.0 million at December 31, 2019 and are non-redeemable until conversion and are periodically evaluated for impairment based on the ultimate recovery of the investment.
The following table shows the estimated fair value, the percentage of the fair value to total invested assets, the average ending book yield, and the average ending tax equivalent yield (each based on the book value of each category of invested assets) as of December 31, 2019.
The amount by which estimated losses in the aggregate differ from those previously estimated for a specific time period is known as reserve "development." Reserve development is unfavorable when losses ultimately settle for more than the amount estimated or subsequent estimates indicate a basis for reserve increases, causing the previously estimated loss reserves to be ''deficient.'' Reserve development is favorable when estimates of ultimate losses indicate a decrease in established reserves, causing the previously estimated loss reserves to be ''redundant.'' Development is reflected in our operating results through an adjustment to incurred losses and LAE during the period in which it is recognized.
The ranges of estimates of loss reserves produced by our Internal Actuary and the Consulting Actuary are intended to represent the range in which it is most likely that the ultimate losses will fall. These ranges are narrower than the range of indications produced by the individual methods applied because it is not likely that the high or low result will emerge for every claim segment and accident year. Each actuary's point estimate of loss reserves for each claim segment is based on a judgmental selection from within the range of results indicated by the different actuarial methods.
Management formally establishes loss reserves for financial statement purposes on a quarterly basis. In doing so, we make reference to the most current analyses of our Internal Actuary and of the Consulting Actuary, including a review of the assumptions and the results of the various actuarial methods used. Both our Internal Actuary and the Consulting Actuary conducted comprehensive studies in the second and fourth quarters. On the alternate quarters, our Internal Actuary updates the results of the preceding quarter's studies for actual claim payment and case reserve activity.
As of December 31, 2019, California and Nevada loss reserves represented approximately 74% of our total loss reserves on our Consolidated Balance Sheet.
In California, our recent loss experience from 2012 through 2019, indicates a slight downward trend in medical severity and a slight upward trend in indemnity severity. The reduction in medical severity can be attributed to a number of factors including California Senate Bill 863 (SB 863), which was enacted in 2012 and largely became effective in 2013/2014. Among the more significant changes, SB 863 introduced independent medical review (IMR) into the dispute resolution process and filing fees for medical liens. On the indemnity side, various provisions of SB 863 resulted in an overall increase in certain benefits. Our indemnity claims frequency (the number of claims expressed as a percentage of payroll) has decreased year-over-year for the past four years. Aside from the impact of recent regulatory changes, we believe our increased emphasis on claims settlements, as well as our various underwriting initiatives, have contributed to more favorable trends in our California results.
Our insurance subsidiaries have been operating in a period characterized by changing environmental conditions in our major markets, entry into new markets, and operational changes. During periods characterized by such changes, at each evaluation, the actuaries and management must make judgments as to the relative weight to accord to long-term historical company data, more recent company data, and external data. We also consider the impact of environmental and operational changes and other factors when selecting the methods used to project ultimate losses and LAE, the parameters to incorporate in those methods, and the relative weights applied to those methods.
and legislative environment. In the event of significant new legal liability theories or new regulation or legislation, we will attempt to quantify its impact on our business.
If the actual loss reserves were at the high or the low end of the actuarial range, the pretax impact on our financial results would have been as follows:
Actual losses are affected by a more complex combination of forces and dynamics than any one model or actuarial methodology can represent, and each methodology is an approximation of these complex forces and dynamics. None of the methods are designed or intended to produce an indication that is systematically higher or lower than the other methods. At any given evaluation date, some of the actuarial projection methods produce indications outside the actuary's selected range. Accordingly, we believe that the range of potential outcomes is considerably wider than the actuarially estimated range of the most likely outcomes. We have no basis for anticipating whether actual future payments of losses and LAE may be either greater than or less than the loss reserves currently on our Consolidated Balance Sheets.
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 can be significant 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 we believe that amounts currently reflected on our consolidated financial statements will similarly not require any material prospective adjustment.
Additionally, we are entitled to receive a contingent profit commission under the LPT Agreement. The contingent profit commission is an amount based on the favorable difference between actual paid losses and LAE and expected paid losses and LAE as established
in the LPT Agreement. The calculation of actual amounts paid versus expected amounts is determined every five years beginning June 30, 2004 for the first twenty-five years of the agreement. We are paid 30% of the favorable difference between the actual and expected losses and LAE paid at each calculation point. Each quarter, management records its best estimate of the estimated ultimate contingent profit commission through June 30, 2024, which is impacted by estimates for ceded losses and LAE. The related Deferred Gain is amortized using the recovery method, whereby the amortization is determined by the proportion of actual reinsurance recoveries to total estimated recoveries over the life of the contingent profit commission, or through June 30, 2024, and is recorded in losses and LAE incurred in the accompanying Consolidated Statements of Comprehensive Income. Changes in estimates of the reserves ceded under the LPT Agreement may significantly impact the Contingent commission receivable-LPT Agreement and the Deferred Gain on our Consolidated Balance Sheets and losses and LAE on our Consolidated Statements of Comprehensive Income.
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the timing differences are expected to reverse. The effect of the recent change in tax rates on our deferred tax assets and liabilities was recognized in income as of the date of Enactment.
Our investments in fixed maturity securities, equity securities at fair value (in 2017 only), and short-term investments are classified as AFS and are reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of deferred taxes, in accumulated other comprehensive income.
We prepare an impairment analysis for goodwill and other intangible assets, whereby we identify whether events have occurred that may impact the carrying value of these assets and make assumptions regarding future events, such as cash flows and profitability. Differences between the assumptions regarding recoverability of carrying value and actual results could materially impact the carrying amount of these assets and our operating results.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This update removes the disclosure requirements for the amounts of and the reasons for transfers between Level 1 and Level 2 and disclosure of the policy for timing of transfers between levels. This update also removes disclosure requirements for the valuation processes for Level 3 fair value measurements. Additionally, this update adds disclosure requirements for the changes in unrealized gains and losses for recurring Level 3 fair value measurements and quantitative information for certain unobservable inputs in Level 3 fair value measurements. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We do not expect that this update will have a material impact on our consolidated financial condition and results of operations.
In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections. This update aligned the guidance in various SEC sections of the codification with the requirements of certain SEC final rules along with other miscellaneous updates, which were effective upon issuance. We adopted these updates where applicable and there was no impact to our consolidated financial condition and results of operations.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements. This update provided clarification, corrected errors in and made minor improvements to the codification within various ASC topics. Many of the amendments in this update had transition guidance with effective dates for annual periods beginning after December 15, 2018 and some amendments in this update did not require transition guidance and became effective upon issuance of this update. We adopted these amendments and there was no impact to our consolidated financial condition and results of operations.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This update provided entities with an additional and optional transition method to adopt ASU 2016-02 with a cumulative-effect adjustment in the period of adoption. This update also provided guidance for a practical expedient that permitted lessors to not separate non-lease components from the associated lease components. Additionally, in July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. This update provided additional guidance on the new lease model with improvements in numerous aspects of the guidance in ASC 842 including, but not limited to, implicit rates, reassessment of lease classification, terms and purchase options, investment tax credits, and various other transition guidance. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors. This update provided amendments to various lease topics including sales taxes collected from lessees, certain lessor costs paid to third parties, and variable payments for contracts with lease and non-lease components. In March 2019, the FASB issued ASU 2019-01, Leases Topics (842) Codification Improvements. The amendments in this update increased transparency and comparability for the recognition of leases and disclosures about leasing transactions. This update provided additional clarity on determining the value of the underlying asset by lessors that are not manufacturers or dealers. This update further clarified the presentation of the statement of cash flows related to lessors that are depository and lending institutions within the scope of Topic 942. Additionally, this update provided guidance on transition disclosures related to leases. We adopted these updates concurrently with ASU 2016-02. See Note 11 regarding the impact of this adoption on our consolidated financial statements.
Consolidated Statements of Comprehensive Income for each of the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders' Equity for each of the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for each of the years ended December 31, 2019, 2018 and 2017
Management conducted an assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2019 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework).
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, 2019 and 2018, the related consolidated statements of comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15 and our report dated February 20, 2020 expressed an unqualified opinion thereon.
At December 31, 2019, the liability for incurred but not reported (IBNR) reserves represented a material portion of the $2,192.8 million of unpaid loss and loss adjustment expenses (LAE) reserves. As explained in Notes 2 and 8 to the consolidated financial statements, the liability for unpaid losses and LAE represents management's best estimate of the ultimate net cost of all reported and unreported losses incurred for the applicable periods, less payments made. The estimated reserves include the accumulation of estimates for all claims reported prior to the balance sheet date, estimates of claims incurred but not reported, and estimates of expenses for investigating and adjusting all incurred and unadjusted claims. IBNR reserves include an estimate for claims that are incurred but not yet reported, expected development on reported claims and for additional payments on closed claims. There is significant uncertainty inherent in determining management’s best estimate of the ultimate loss settlement cost which is used to determine the incurred but not reported claim reserves. In particular, the estimate is sensitive to the selection and weighting of actuarial methods and management’s selection of parameters and assumptions including, the pattern with which aggregate data will be paid or emerge over time, claim settlement activity, claims cost inflation rates, and claim frequencies.
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 9.
The Company considers all liquid investments with maturities of less than three months, as measured from the date of purchase, to be cash equivalents.
Beginning in 2018, with the adoption of ASU Number 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. The Company's investment in FHLB stock is presented within Equity securities at cost on the Company's Consolidated Balance Sheets.
The Company establishes a bad debt allowance on its premiums receivable through a charge included in underwriting and general and administrative expenses in its Consolidated Statements of Comprehensive Income. This bad debt allowance is determined based on estimates and assumptions to project future experience. After all collection efforts have been exhausted, the Company reduces the bad debt allowance for write-offs of premiums receivable that have been deemed uncollectible. The Company's bad debt allowance was $4.6 million and $6.7 million at December 31, 2019 and 2018, respectively. The Company had write offs, net of recoveries of amounts previously written off, of $10.5 million, $8.2 million, and $3.2 million for the years ended December 31, 2019, 2018, and 2017, respectively.
In the ordinary course of business, the Company purchases excess of loss reinsurance in order to protect it against the impact of large and/or catastrophic losses. Additionally, the Company is a party to the LPT Agreement (see Note 9). These reinsurance arrangements reduce the Company's exposure to such losses since its reinsurers are liable to the Company to the extent of the 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.
Balances due from reinsurers on unpaid losses, including an estimate of such recoverables related to reserves for incurred but not reported losses, are reported as reinsurance recoverables on the Company's Consolidated Balance Sheets. Reinsurance recoverables on paid losses represent amounts currently due from reinsurers. Reinsurance recoverables on unpaid losses represent amounts that will be collectible from reinsurers once the losses are paid. Reinsurance recoverables on unpaid losses and LAE amounted to $532.5 million and $504.4 million at December 31, 2019 and 2018, respectively.
Pursuant to the LPT Agreement, LAE is deemed to be 7% of total losses paid and is payable to the Company as compensation for management of the claims under the LPT Agreement. The Deferred Gain is amortized using the recovery method, whereby the amortization is determined by the proportion of actual reinsurance recoveries to total estimated recoveries through the life of the LPT Agreement, and is recorded in losses and LAE incurred in the Company's Consolidated Statements of Comprehensive Income. Any adjustment to the estimated loss and LAE reserves ceded under the LPT Agreement results in a cumulative adjustment to the Deferred Gain, which is also recognized in losses and LAE incurred in the Company's 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 (LPT Reserve Adjustment).
Electronic data processing equipment, software, furniture and equipment, and automobiles are depreciated using the straight-line method over three to seven years. Leasehold improvements are also carried at cost less accumulated amortization. The Company amortizes leasehold improvements using the straight-line method over the lesser of the useful life of the asset or the remaining original lease term, excluding options or renewal periods. Leasehold improvements are generally amortized over three to eight years.
Leased property and equipment meeting finance lease criteria are capitalized at the lower of the present value of the related lease payments or the fair value of the leased asset at the inception of the lease. Financing leases for automobiles are included in property
and equipment in other liabilities on the Company's Consolidated Balance Sheets. Amortization is calculated using the straight-line method based on the term of the lease and is included in the depreciation expense of property and equipment. See Note 11 for additional disclosures related to finance leases.
The Company monitors the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company also obtains collateral from its reinsurers in order to mitigate the risks related to insolvencies. At December 31, 2019, $2.7 million was held as collateral by cash or letters of credit for the Company's reinsurance recoverables and an additional $341.0 million was in trust accounts for reinsurance recoverables specifically related to the LPT Agreement.
Investment securities. The Company's investment securities are predominantly valued on the basis of actual market transactions or observable inputs. A small portion of the Company's investment securities are valued on the basis of pricing models with significant unobservable inputs or nonbinding broker quotes. See Note 4.
The Company tests for impairment of goodwill and non-amortizable 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. 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 stock price and determined that there were no impairments of these assets as of December 31, 2019 and 2018.
During the years ended December 31, 2018 and 2017, the Company recognized $0.2 million and $0.3 million in amortization expense associated with its intangible assets, respectively. There was no amortization expense in 2019. These amortization expenses are included in the Company's Consolidated Statements of Comprehensive Income in underwriting and general and administrative expenses.
The Company provides stock-based compensation to its directors and certain of its employees, which is recognized in its Consolidated Statements of Comprehensive Income based on estimated grant date fair values over the relevant service period (see Note 13).
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments in this update represent changes to clarify, correct errors in, or improve the codification within various ASC topics. The Company will adopt the updates related to Topic 815 when it adopts ASU 2016-13. The Company will adopt any remaining codification improvements as they become applicable and has determined that the impact of these improvements will not be material to its consolidated financial condition and results of operations.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This update removes the disclosure requirements for the amounts of and the reasons for transfers between Level 1 and Level 2 and disclosure of the policy for timing of transfers between levels. This update also removes disclosure requirements for the valuation processes for Level 3 fair value measurements. Additionally, this update adds disclosure requirements for the changes in unrealized gains and losses for recurring Level 3 fair value measurements and quantitative information for certain unobservable inputs in Level 3 fair value measurements. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company does not expect that this update will have a material impact on its consolidated financial condition and results of operations.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements. This update provided clarification, corrected errors in and made minor improvements to the codification within various ASC topics. Many of the amendments in this update had transition guidance with effective dates for annual periods beginning after December 15, 2018 and some amendments in this update did not require transition guidance and became effective upon issuance of this update. The Company adopted these amendments and there was no impact to its consolidated financial condition and results of operations.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This update provided entities with an additional and optional transition method to adopt ASU 2016-02 with a cumulative-effect adjustment in the period of adoption. This update also provided guidance for a practical expedient that permitted lessors to not separate non-lease components from the associated lease components. Additionally, in July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. This update provided additional guidance on the new lease model with improvements in numerous aspects of the guidance in ASC 842 including, but not limited to, implicit rates, reassessment of lease classification, terms and purchase options, investment tax credits, and various other transition guidance. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors. This update provided amendments to various lease topics including sales taxes collected from lessees, certain lessor costs paid to third parties, and variable payments for contracts with lease and non-lease components. In March 2019, the FASB issued ASU 2019-01, Leases Topics (842) Codification Improvements. The amendments in this update increased transparency and comparability for the recognition of leases and disclosures about leasing transactions. This update provided additional clarity on determining the value of the underlying asset by lessors that are not manufacturers or dealers. This update further clarified the presentation of the statement of cash flows related to lessors that are depository and lending institutions within the scope of Topic 942. Additionally, this update provided guidance on transition disclosures related to leases. The Company adopted these updates concurrently with ASU 2016-02. See Note 11 regarding the impact of this adoption on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update provided guidance on a new lease model that included the recognition of assets and liabilities arising from lease transactions on the balance sheet. Additionally, the update provided clarity on the definition of a lease and the distinction between finance and operating leases. Furthermore, the update
The Company bases all of its estimates of fair value for assets on the bid price, when available, as it represents what a third-party market participant would be willing to pay in an arm's length transaction.
The Company's estimates of fair value for its financial liabilities are based on a combination of the variable interest rates for notes with similar durations to discount the projection of future payments on notes payable. The fair value measurements for notes payable have been determined to be Level 2 at each of the periods presented. As of December 31, 2019, all outstanding notes payable had been redeemed. See Note 10 for further details.
The following table provides a reconciliation of the beginning and ending balances that are measured using Level 3 inputs for the years ended December 31, 2019 and 2018.
The cost and estimated fair value of the Company's equity securities recorded at fair value at December 31, 2019 and 2018 were as follows:
The Company has investments in private equity limited partnerships that totaled $9.1 million (initial cost of $8.4 million) at December 31, 2019, which are carried at NAV based on information provided by the general partner. The Company also has investments in convertible preferred shares of real estate investment trusts that totaled $20.0 million at December 31, 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. Both of these investments are included in Other invested assets on the Company's Consolidated Balance Sheets, and 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 Company had no Other invested assets at December 31, 2018.
The amortized cost and estimated fair value of the Company's fixed maturity securities at December 31, 2019, 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.
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 maturity securities are also recognized when securities are written down as a result of an other-than-temporary impairment.
Depreciation expenses related to property and equipment for the years ended December 31, 2019, 2018, and 2017 were $9.0 million, $6.1 million, and $7.9 million, respectively. Internally developed software costs of $3.2 million and $2.9 million were capitalized during each of the years ended December 31, 2019 and 2018, respectively.
The Company's capitalized costs associated with cloud computing arrangements totaled $33.6 million and $26.0 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, 2019 and 2018, respectively. Total amortization for hosting arrangements for the years ended December 31, 2019 and 2018 was $5.3 million and $0.8 million, respectively.
The Company files a consolidated federal income tax return. The insurance subsidiaries pay premium taxes on premiums in lieu of some states' income or franchise taxes.
As of December 31, 2019, 2018, and 2017 the Company had no material unrecognized tax benefits.
The Company made cash payments of $37.8 million, $4.2 million and $21.3 million for income taxes during the years ended December 31, 2019, 2018, and 2017, respectively.
Tax years 2016 through 2019 remained open and are subject to full examination by the federal taxing authority. The significant components of deferred income taxes, net, were as follows as of December 31:
The three main components of reserves for unpaid losses and LAE are case reserves, incurred but not reported (IBNR) loss reserves, and LAE reserves.
LAE reserves are the Company's estimate of the future expense 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.
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.
Each actuarial methodology requires the selection and application of various parameters and assumptions. The key parameters and assumptions include: the future payment and emergence patterns of our aggregate claims data; the magnitude and changes in claim settlement activity; claims cost inflation rates; the effects of legislative benefit changes and/or judicial decisions; and trends in the frequency and severity of claims. The Company believes the pattern with which our aggregate data will be paid or emerge over time, claim settlement activity, and claims cost inflation rates are the most important parameters and assumptions.
Total net losses and LAE included in the above table excludes the impact of the amortization of the Deferred Gain and LPT Reserve Adjustments (See Note 9).
In 2019, the Company had $77.5 million of favorable prior accident year loss development on its voluntary risk business. In 2018, the Company had $66.2 million of favorable prior accident year loss development, which included $65.5 million of favorable development on its voluntary risk business and $0.7 million of favorable development related to its assigned risk business. In 2017, the Company had $18.5 million of favorable prior accident year loss development, which included $17.4 million of favorable development on its voluntary risk business and $1.1 million of favorable development related to its assigned risk business. The favorable prior accident year loss development on voluntary business in these years was the result of the Company's determination that adjustments were necessary to reflect observed favorable paid loss trends. Paid loss trends have been impacted by generally declining loss costs and by cost savings associated with accelerated claims settlement activity that began in 2014 and continued through 2019. Loss reserves shown in the Company's Consolidated Balance Sheets are net of $28.6 million and $34.4 million for anticipated subrogation recoveries as of December 31, 2019 and 2018, respectively.
The Company purchases reinsurance from third parties in the normal course of its business in order to manage its exposures. The Company's reinsurance coverage is provided on both a quota share and excess of loss basis.
Management currently believes that a British exit of the European Union (BREXIT) is unlikely to affect the Company's excess of loss reinsurance program because it is the Credit for Reinsurance Law and the Credit for Reinsurance Regulation in the ceding insurers' state of domicile (the Reinsurance Regulations) that governs the statutory treatment of both U.S. and Non-U.S. reinsurers. Therefore, provided that the Company's reinsurers domiciled in the United Kingdom and the European Union continue to maintain the collateral required by the Reinsurance Regulations at all times, the Company's excess of loss reinsurance program will be unaffected by BREXIT.
Recoverables from reinsurers on unpaid losses and LAE amounted to $532.5 million and $504.4 million at December 31, 2019 and 2018, respectively. At each of December 31, 2019 and 2018, $380.4 million and $408.2 million, respectively, of those recoverables was related to the LPT Agreement that was entered into in 1999 by the Fund and assumed by EICN. Under the LPT Agreement, substantially all of the Fund's losses and LAE on claims incurred prior to July 1, 1995 have been ceded to three unaffiliated reinsurers on a 100% quota share basis. Investments totaling $341.0 million and $311.6 million at December 31, 2019 and 2018, respectively, have been placed in trust by the three reinsurers as security for payment of the reinsured claims. Under the LPT Agreement, initially $1.5 billion in liabilities for the incurred but unpaid losses and LAE related to claims incurred prior to July 1, 1995, were reinsured for consideration of $775.0 million. The LPT Agreement provides coverage up to $2.0 billion. Through December 31, 2019, the Company has paid losses and LAE claims totaling $796.2 million related to the LPT Agreement.
The Company amortized $10.7 million, $11.9 million, and $11.3 million of the Deferred Gain for the years ended December 31, 2019, 2018, and 2017, respectively. Additionally, the Company recognized favorable development in the estimated reserves ceded under the LPT Agreement of $5.3 million and $6.3 million that reduced the Deferred Gain by $1.8 million and $2.2 million for
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, 2018, and 2017 was $0.2 million, $0.6 million, and $0.5 million, respectively. Interest accrued as of December 31, 2018 was less than $0.1 million.
EPIC had a $12.0 million surplus note to ICONS, Inc. issued as part of a pooled transaction. This note was purchased by EHI in 2017 for $9.9 million, resulting in a $2.1 million gain. As a result of EHI's purchase of the note, it was no longer considered outstanding on a consolidated basis at December 31, 2018. The note was formally redeemed and retired by EPIC in May 2018. Interest paid to third parties during the year ended December 31, 2017 was $0.3 million.
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 Agreements to increase their respective credit amounts. The Letter of Credit Agreements are between the FHLB and each of EAC, in the amount of $60.0 million, ECIC, in the amount of $90.0 million, and EPIC, in the amount of $110.0 million. The amended Letter of Credit Agreements will expire April 1, 2020; however, the Letter of Credit Agreements 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, 2019 and 2018 letters of credit totaling $260.0 million and $140.0 million were issued in lieu of securities on deposit with the State of California under these Letter of Credit Agreements, respectively.
As of December 31, 2019, investment securities having a fair value of $326.8 million were pledged to the FHLB by the Company's insurance subsidiaries in support of the collateralized advance facility and the Letter of Credit Agreements.
As of December 31, 2019, the weighted average remaining lease term for operating leases was 5.8 years and for finance leases was 2.9 years. The weighted average discount rate was 3.2% and 3.7% for operating and finance leases, respectively.
All of the states where the Company's insurance subsidiaries are licensed to transact business require property and casualty insurers doing business within the respective state to pay various insurance assessments. The Company accrues a liability for estimated insurance assessments as direct premiums are written, losses are recorded, or as other events occur in accordance with various states' laws and regulations, and defers these costs and recognizes them as an expense as the related premiums are earned. The Company had an accrued liability for guaranty fund assessments, second injury funds assessments, and other insurance assessments totaling $16.8 million and $18.6 million as of December 31, 2019 and 2018, respectively. These liabilities are generally expected
to be paid over one to eighty year periods based on individual state's regulations. The Company also recorded an asset of $17.0 million and $14.9 million, as of December 31, 2019 and 2018, respectively, for prepaid policy charges still to be collected in the future from policyholders, or assessments that may be recovered through a reduction in future premium taxes in certain states. These assets are expected to be realized over one to ten year periods in accordance with their type and each individual state's regulations.
As of December 31, 2019, the Company had an unfunded commitment to invest $41.6 million into a private investment fund. See Note 4.
As of December 31, 2019, the only incentive awards outstanding under the Plan were nonqualified stock options, RSUs, and PSUs.
The intrinsic value of stock options exercised was $0.6 million, $1.4 million, and $7.6 million for the years ended December 31, 2019, 2018, and 2017.
Changes in outstanding RSUs for the year ended December 31, 2019 were as follows:
At December 31, 2019, the Company had yet to recognize $5.0 million of unamortized expense related to outstanding RSUs and expects to recognize these costs 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 $10.1 million, $10.5 million, and $13.1 million at December 31, 2019, 2018, and 2017.
The PSUs awarded in March 2017, 2018, and 2019 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, 2019, the Company had yet to recognize $8.0 million of unamortized expense related to PSU grants and expects to recognize these costs 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 2017 PSUs, a 200% of target rate for the 2018 PSUs, and a 200% of target rate for the 2019 PSUs.
The combined capital stock, surplus, and net income of the Company's insurance subsidiaries (EICN, ECIC, EPIC, EAC, and CIC), prepared in accordance with the statutory accounting practices (SAP) of the National Association of Insurance Commissioners (NAIC) as well as SAP permitted by the states of California, Florida, Nevada, and New York were as follows:
Treatment of the LPT Agreement, deferred policy acquisition costs, fair value of financial instruments, and the surplus notes (see Notes 4, 9, and 10) are the primary differences in the SAP-basis capital stock and total surplus of the insurance subsidiaries of $1,021.0 million and $927.9 million, and the GAAP-basis equity of the Company of $1,165.8 million and $1,018.2 million as of December 31, 2019 and 2018, 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.
The ability of EHI to pay dividends on the Company's common stock and to pay other expenses will be dependent to a significant extent upon the ability of the Nevada domiciled insurance company, EICN, the California domiciled insurance company, ECIC, the Florida domiciled insurance companies, EPIC and EAC, to pay dividends to their immediate holding company, Employers Group, Inc. (EGI) and the New York domiciled insurance company, CIC, to pay dividends to its immediate holding company Cerity Group, Inc. (CGI), and in turn, the ability of EGI and CGI to pay dividends to EHI. The amount of dividends each of the Company's insurance subsidiaries may pay to their immediate parent is limited by the laws of its respective state of domicile.
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.
Additionally, EICN, ECIC, EPIC, EAC, and CIC are required to comply with RBC requirements. RBC is a method of measuring the amount of capital appropriate for an insurance company to support its overall business operations in light of its size and risk profile. NAIC RBC standards are used by regulators to determine appropriate regulatory actions relating to insurers that show signs of weak or deteriorating conditions. As of December 31, 2019, 2018, and 2017, EICN, ECIC, EPIC, EAC, and CIC each had total adjusted capital above all regulatory action levels.
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 $2.2 million, $2.0 million, and $1.9 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Commencing in 2017, certain stock-based compensation awards are eligible to receive dividend equivalents on awards that fully vest or become payable.
The Company has recently made changes to its corporate structure, mainly involving the launch and further development of a new digital insurance platform offered under the Cerity brand name (Cerity), resulting in changes to its reportable segments. As of December 31, 2019, the Company has determined that it has two reportable segments: Employers and Cerity. Each of these segments represents a separate and distinct underwriting platform through which the Company conducts insurance business. The nature and composition of each reportable segment and its Corporate and Other activities are as follows:
The Company has determined that it is not practicable to report identifiable assets by segment since certain assets are used interchangeably among the segments.
Prior to December 31, 2019, the Company operated under a single reportable segment. All periods prior to December 31, 2019 have been conformed to the current presentation.
The Company operates solely within the United States and does not have revenue from transactions with a single customer accounting for 10% or more of its revenues. The following table shows the Company's in-force premiums and number of policies in-force for each state with approximately five percent or more of our in-force premiums and all other states combined as of December 31:
Quarterly results for the years ended December 31, 2019 and 2018 were as follows:
The first quarter of 2019 was impacted by: (1) favorable prior accident year loss development of $22.2 million, which decreased losses and LAE by the same amount; and (2) the inclusion of $21.2 million in net unrealized gains on equity securities.
The third quarter of 2019 was impacted by: (1) favorable prior accident year loss development of $20.2 million, which decreased losses and LAE by the same amount; and (2) the inclusion of $10.3 million in net unrealized losses on equity securities.
The first quarter of 2018 was impacted by: (1) favorable prior accident year loss development of $12.4 million, which decreased losses and LAE by the same amount; and (2) the inclusion of $12.9 million in net unrealized losses on equity securities.
The fourth quarter of 2018 was impacted by: (1) favorable prior accident year loss development of $25.4 million, which decreased losses and LAE by the same amount; and (2) the inclusion of $27.4 million in net unrealized losses on equity securities.