Net premiums earned: Net premiums earned is the earned portion of our written premiums, less that portion of premium that is ceded to third party reinsurers under reinsurance agreements. The amount ceded under these reinsurance agreements is based on a contractual formula contained in the individual reinsurance agreement. Insurance premiums are earned on a 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 have a term of one year. Accordingly, for a one-year policy written on July 1, 2020, we would earn half of the premiums in 2020 and the other half in 2021.
Net investment income and net gains (losses) on investments: We invest in cash and cash equivalents, short-term investments, fixed-maturity and equity securities, and other investments. Our net investment income includes interest and dividends earned on our invested assets, less investment expenses. 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 costs or amortized costs, as applicable. Net realized losses occur when our investment securities are sold for less than their costs or amortized costs, as applicable, or are written down as a result of other-than-temporary impairment. We classify our fixed-maturity securities as either available-for-sale or held-to-maturity. Net unrealized gains (losses) on those securities classified as available-for-sale are reported separately within accumulated other comprehensive income on our balance sheet while our equity securities and other investments report changes in fair value through earnings. See Note 2 in the accompanying consolidated financial statements for further discussion over our accounting policies following Item 16 of this Annual Report.
The years ended December 31, 2020 and 2019 include catastrophe losses, which are defined as losses from an event for which a catastrophe bulletin and related serial number has been issued by the Property Claims Services (PCS) unit of the Insurance Services Office (ISO). PCS catastrophe bulletins are issued for events that cause more than $25 million in total insured losses and affect a significant number of policyholders and insurers.
Beginning in 2017 we started writing homeowners policies in New Jersey. Through 2019 we expanded to Rhode Island, Massachusetts and Connecticut. We refer to our New York business as our “Core” business and the business outside of New York as our “Expansion” business. Direct written premiums from our Expansion business were $33,914,000 in Year Ended 2020, an increase of $8,267,000, or 32.2% compared to $25,647,000 in Year Ended 2019.
The 2018/2019 Treaty Year, covered under the 2017/2019 Treaty, expired on a run-off basis effective July 1, 2019 through June 30, 2020 (the “2019 Run-off”).
An increase in written premiums will increase the premiums ceded under our excess of loss treaties. In Year Ended 2020, our ceded excess of loss reinsurance premiums increased by $128,000 over the comparable ceded premiums for Year Ended 2019. The increase was due to an increase in premiums subject to excess of loss reinsurance.
Net premiums earned decreased $19,543,000, or 15.3%, to $108,081,000 in Year Ended 2020 from $127,624,000 in Year Ended 2019. The decrease was due to the inception of the 2019/2020 Treaty on December 15, 2019 and the decrease in commercial lines premiums, which are not subject to a quota share treaty. The expired 2017/2019 Treaty under the 2018/2019 Treaty Year was in run-off through June 30, 2020.
Ceding commission revenue was $14,202,000 in Year Ended 2020 compared to $4,651,000 in Year Ended 2019. The increase of $9,551,000, or 205.4%, was due to an increase in both provisional ceding commissions earned and contingent ceding commissions earned. The increase in provisional ceding commissions occurred due to the increase in quota share reinsurance rates effective December 15, 2019 (see below for discussion of provisional ceding commissions earned and contingent ceding commissions earned).
We receive a provisional ceding commission based on ceded written premiums. The $8,673,000 increase in provisional ceding commissions earned is primarily due to the increase in the quota share ceding rate effective December 15, 2019 to 25%, from the 10% rate in effect for part of Year Ended 2019. There was an increase in ceded premiums in Year Ended 2020 available from which to earn ceding commissions compared to Year Ended 2019 due to the changes in quota share ceding rates, the elimination of the 10% quota share treaty on effective July 1, 2019, and an increase in personal lines direct written premiums subject to the quota share.
The underlying loss ratio (loss ratio excluding impact of catastrophe and prior year development) was 50.7% for Year Ended 2020, a decrease of 5.3 points from the 56.0% underlying loss ratio for Year Ended 2019. The improvement was primarily due to reduced severity and our exit from the commercial liability lines of business. Excluding commercial lines, the underlying loss ratio improved 3.3 points to 49.8% for Year Ended 2020 compared to from 53.1% for Year Ended 2019.
Commission expense was $31,828,000 in Year Ended 2020 or 18.8% of direct earned premiums. Commission expense was $30,093,000 in Year Ended 2019 or 18.8% of direct earned premiums. The increase of $1,735,000 is primarily due to the increase in direct earned premiums in Year Ended 2020 as compared to Year Ended 2019.
Our largest single component of other underwriting expenses is salaries and employment costs, with costs of $10,830,000 in Year Ended 2020 compared to $10,358,000 in Year Ended 2019. The increase of $472,000, or 4.6%, was less than the 8.2% increase in personal lines direct written premiums. The increase in employment costs was attributable to the hiring of additional highly experienced management and separation payments to terminated employees, offset by staff reductions.
Our net underwriting expense ratio in Year Ended 2020 was 38.9% compared to 38.0% in Year Ended 2019. The following table shows the individual components of our net underwriting expense ratio for the periods indicated:
The overall 9.5 percentage point increase in the benefit from ceding commissions was driven entirely by the change in our quota share ceding rates and its impact on provisional ceding commission revenue. The components of our net underwriting expense ratio related to other underwriting expenses, other income and commissions increased in all categories due to less retention beginning with the inception of the 2019/2020 Treaty on December 15, 2019, resulting in an overall 0.9 percentage point increase in the net underwriting expense ratio.
Other operating expenses, related to the expenses of our holding company and Cosi, were $4,283,000 for Year Ended 2020 compared to $3,835,000 for Year Ended 2019. The increase in Year Ended 2020 of $448,000, or 11.7%, as compared to Year Ended 2019 was primarily due to increases in equity compensation. The increase in equity compensation was due to an annual restricted stock award pursuant to the employment agreement with Barry B. Goldstein, our Chief Executive Officer. Executive bonus compensation is accrued pursuant to the employment agreement in effect through December 31, 2022, however, no bonus expense was accrued for Year Ended 2020.The bonus, when applicable, is a one-time payment computed at the end of the three-year period ended December 31, 2019, and as of December 31, 2019 the three-year computation did not meet the required terms of profitability, resulting in no payment and a reversal of the $698,000 previously accrued.
Income tax benefit in Year Ended 2020 was $2,260,000, which resulted in an effective tax benefit rate of 175.5%. Income tax benefit in Year Ended 2019 was $1,816,000, which resulted in an effective tax benefit rate of 23.3%. Loss before taxes was $1,288,000 in Year Ended 2020 compared to loss before taxes of $7,783,000 in Year Ended 2019. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, allowing for a five year carryback of 2019 NOL’s. We elected on our 2019 federal income tax return to carry back the 2019 NOL of $9,737,000 to tax years 2014 and 2015. The corporate tax rate in 2014 and 2015 was 34%, compared to the corporate tax rate of 21% in 2019. We will also elect on our 2020 federal income tax return to carry back the 2020 NOL of $5,715,000 to tax year 2015. The corporate tax rate in 2015 was 34%, compared to the corporate tax rate of 21% in 2020.
Net income was $972,000 in Year Ended 2020 compared to a net loss of $5,967,000 in Year Ended 2019. The increase in net income of $6,939,000, or 116.3%, was due to the circumstances described above, which caused the decrease in our net loss ratio and increase in ceding commission, partially offset by the decrease in our net premiums earned, other underwriting and operating expenses, depreciation and amortization.
For the years ended December 31, 2020 and 2019, includes the sum of net catastrophe losses and loss adjustment expenses of $11,601,760 and $7,694,817, respectively.
The following table presents a breakdown of the amortized cost, aggregate estimated fair value and unrealized gains and losses by investment type as of December 31, 2020 and 2019:
(1) KICO placed certain residential mortgage backed securities as eligible collateral in a designated custodian account related to its membership in FHLBNY (see note 9, in the accompanying consolidated financial statements following Item 16 of this Annual Report). The eligible collateral would be pledged to FHLBNY if KICO draws an advance from the FHLBNY credit line. As of December 31, 2019, the estimated fair value of the eligible investments was approximately $7,284,000. KICO will retain all rights regarding all securities if pledged as collateral. As of December 31, 2019, there was no outstanding balance on the FHLBNY credit line.
The following table presents a breakdown of the cost, estimated fair value, and gross gains and losses of investments in equity securities as of December 31, 2020 and 2019:
Pursuant to the definition of “Fair Value Measurement,” set forth in the Accounting Standards Codification 820 “Fair Value Measurement” (“ASC 820”), an entity is permitted, as a practical expedient, to estimate the fair value of an investment within the scope of ASC 820 using the net asset value (“NAV”) per share (or its equivalent) of the investment. The following table presents a breakdown of the cost, estimated fair value, and gross gain of our other investments as of December 31, 2020 and 2019:
A summary of the amortized cost and estimated fair value of our investments in held-to-maturity securities by contractual maturity as of December 31, 2020 and 2019 is shown below:
The table below details the average yield by type of fixed-maturity security as of December 31, 2020 and 2019:
For the year ended December 31, 2020, the primary source of cash flow for our holding company was the dividends received from KICO, subject to statutory restrictions. For the year ended December 31, 2020, KICO paid dividends of $6,000,000 to us.
As of December 31, 2020, invested assets and cash in our holding company was approximately $2,783,000. If the aforementioned sources of cash flow currently available are insufficient to cover our holding company cash requirements, we will seek to obtain additional financing.
Net cash used in operating activities was $10,235,000 in Year Ended 2020 as compared to net cash provided by $29,859,000 in Year Ended 2019. The $40,094,000 decrease in cash flows provided by operating activities in Year Ended 2020 was primarily a result of a decrease in cash arising from net fluctuations in assets and liabilities, partially offset by an increase in net income (adjusted for non-cash items) of $16,065,000. The net fluctuations in assets and liabilities are related to operating activities of KICO as affected by growth or declines in its operations, payments on claims and changes in quota share ceding rates which are described above.
Net cash provided by investing activities was $581,000 in Year Ended 2020 compared to net cash used of $14,974,000 in Year Ended 2019. The $15,555,000 increase in net cash flows for investing activities was the result of a $25,016,000 increase in the sale of invested assets and a $10,073,000 decrease in sales or maturities of invested assets.
Our quota share reinsurance treaties in effect during Year Ended 2020 and 2019 for our personal lines business, which primarily consists of homeowners’ policies, were covered under the 2019/2020 Treaty and under a treaty covering a two-year period from July 1, 2017 through June 30, 2019 (“2017/2019 Treaty”). The 2017/2019 Treaty was in run-off effective from July 1, 2019 through June 30, 2020 (run-off period). The treaty in effect during Year Ended 2019 through June 30, 2019 (together with the run-off period) was covered under the July 1, 2018 through June 30, 2019 treaty year (“2018/2019 Treaty Year”).
For personal lines, includes the addition of an automatic facultative facility allowing KICO to obtain homeowners single risk coverage up to $10,000,000 in total insured value, which covers direct losses from $3,500,000 to $10,000,000.
For the period July 1, 2018 through June 30, 2019, reinstatement premium protection for $210,000,000 of catastrophe coverage in excess of $5,000,000.
For the period July 1, 2019 through June 30, 2020, reinstatement premium protection for $292,500,000 of catastrophe coverage in excess of $7,500,000.