Net premiums earned were $544.7 million for the year ended December 31, 2020, up 13.8% compared to $478.7 million in the prior year. The increase primarily stems from higher gross premiums earned associated with expansion of our business in existing states and to new states, partly offset by higher ceded premiums.
The following table quantifies the pro forma impact of hypothetical changes in our net loss reserves on our net income and stockholders’ equity as of and for the year ended December 31, 2020 (in thousands):
We earn ceding commission on its gross and net quota share reinsurance contracts. Our accounting policy is to allocate ceding commission between policy acquisition costs and general and administrative expenses for financial reporting purposes. Ceding commission is allocated between policy acquisition costs and general and administrative expenses based upon the proportion these costs bear to production of new business. For the years ended December 31, 2020, 2019 and 2018, we earned ceding commission income of $57.1 million, $62.4 million and $73.0 million of which $43.0 million, $47.0 million and $54.9 million was allocable to policy acquisition costs.
Our reinsurance agreements are prospective contracts. We record an asset, prepaid reinsurance premiums, and a liability, reinsurance payable, for the entire contract amount upon commencement of our new reinsurance agreements. We amortize our prepaid reinsurance premiums over the 12-month contract period.
The Company’s estimated liability for unpaid losses and loss adjustment expense (LAE) totaled $659.3 million at December 31, 2020. The Company’s reserve for unpaid losses and LAE represents the estimated ultimate cost of settling all claims incurred related to insured events that have occurred as of the reporting date. The Company determines the reserve for unpaid losses and LAE on an individual-case basis for those claims reported as of December 31, 2020 with bulk reserves for additional development, if any, on the reported claims, and an estimate for unpaid losses and LAE for all claims incurred related to insured events that have occurred as of December 31, 2020, but have not yet been reported by the policyholders to the Company (collectively referred to as incurred but not reported, or “IBNR”). The Company estimates IBNR reserves by projecting ultimate losses using industry accepted actuarial methods. Management engages independent actuarial firms to prepare an actuarial analysis of unpaid losses and LAE and provides statements of actuarial opinion on management’s estimate of unpaid losses and LAE. Estimating the liability for unpaid losses and LAE requires significant judgment relating to factors such as claim development patterns, severity, type and jurisdiction of loss, economic conditions, legislative development and a variety of actuarial assumptions. Estimating the liability for unpaid losses and LAE is inherently uncertain, dependent on management judgement and significantly impacted by claim and actuarial factors and conditions which may change over time. The ultimate settlement of unpaid losses and LAE may vary materially from the recorded liability, and such variance may adversely affect the Company’s financial results. For these reasons, we identified the estimate of unpaid losses and LAE as a critical audit matter as it involved especially subjective auditor judgment.
The Company records direct and assumed premiums written as revenue net of ceded amounts on a daily pro rata basis over the contract period of the related in force policies or reinsurance contract. For any portion of premiums not earned at the end of the reporting period, the Company records an unearned premium liability.
The allowance for credit losses for reinsurance recoverable is evaluated based on historical loss experience adjusted for current events and reasonable and supportable forecasts from both internal and external sources.
In 2020, the Company entered into agreements for Class A Preferred Units in the amounts of $7.5 million and $9.9 million, measured at amortized costs with interest payments paid monthly and principal payments commencing in June 1, 2021 and February 1, 2022, respectively. For the year ended December 31, 2020, the Company received $628,000 in interest payments from the preferred units. There is no active market for these investments.
The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated:
We placed 100% of an occurrence contract for our business underwritten by NBIC which covers all catastrophe losses excluding named storms, on December 31, 2020, expiring December 31, 2021. The limit on the contract is $20.0 million with a retention of $20.0 million and has one reinstatement available.