We own three office properties, one of which is unencumbered. Our properties in Birmingham, AL and Franklin, TN are each encumbered by a ten-year mortgage loan entered into during 2017 for the purpose of recapitalization of these properties:
(1) For all periods presented, debt is shown net of unamortized debt issuance costs which prior to 2016 were reported as a part of other assets.
The following discussion generally focuses on the change in financial condition, results of operation and cash flows for the year ended December 31, 2019 as compared to the year ended December 31, 2018 and be should be read in conjunction with the Consolidated Financial Statements and Notes to those statements which accompany this report. For a full discussion of the changes in the financial condition, results of operations and cash flows for the year ended December 31, 2018 as compared to the year ended December 31, 2017, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of ProAssurance's December 31, 2018 report on Form 10-K.
ProAssurance Corporation is a holding company for property and casualty insurance companies. Our wholly owned insurance subsidiaries provide professional liability insurance for healthcare professionals and facilities, professional liability insurance for attorneys and their firms, liability insurance for medical technology and life sciences risks and workers' compensation insurance. We also provide capital to Syndicate 1729 and are the sole (100%) capital provider for Syndicate 6131 at Lloyd's of London.
We operate in five segments which are based on our internal management reporting structure for which financial results are regularly evaluated by our CODM to determine resource allocation and assess operating performance. Descriptions of ProAssurance's five operating and reportable segments are as follows:
Specialty P&C - This segment includes our professional liability business and medical technology liability business. Professional liability insurance is primarily offered to healthcare providers and institutions and, to a lesser extent, to attorneys and their firms. Medical technology liability insurance is offered to medical technology and life sciences companies that manufacture or distribute products including entities conducting human clinical trials. We also offer custom alternative risk solutions including loss portfolio transfers, assumed reinsurance and captive cell programs for healthcare professional liability insureds. For our alternative market captive cell programs, we cede either all or a portion of the premium to certain SPCs in our Segregated Portfolio Cell Reinsurance segment.
Workers' Compensation Insurance - This segment includes our workers' compensation insurance business which is provided primarily to employers with 1,000 or fewer employees. Our workers' compensation products include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies, deductible policies and alternative market solutions. Alternative market program premiums are 100% ceded to either SPCs in our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, an unaffiliated captive insurer.
Corporate - This segment includes our investment operations, other than those reported in our Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates segments, interest expense and U.S. income taxes. This segment also includes non-premium revenues generated outside of our insurance entities and corporate expenses.
We operate in very competitive markets and face strong competition from other insurance companies for all of our insurance products. HCPL insurance represents the largest product line in our gross premiums written (53% in 2019) and the healthcare market has been trending toward the formation of larger medical practice groups and the employment of physicians by hospitals. Large medical groups and facilities frequently manage their healthcare professional liability exposure outside of the traditional first dollar insurance marketplace using self-insured mechanisms and other risk sharing arrangements. In response to these trends, we offer products designed to provide greater risk sharing options to hospitals and large physician groups. Since the middle of 2019, new senior leadership in our Specialty P&C segment has executed a comprehensive underwriting strategy in response to emerging loss trends and changing conditions in the HCPL industry. This includes organizational structure enhancements, recruitment of additional talent in specialty underwriting, price strengthening and tightening of underwriting criteria, terms and conditions. Furthermore, the new senior leadership team for our Specialty P&C segment executed several strategic business decisions intended to improve operating performance by bringing together all of the Specialty P&C segment lines of business and operations under a unified organizational and management structure.
We believe our position in the healthcare liability space is strengthened by our ability to offer synergistic solutions through our operations at Eastern, a provider of workers' compensation insurance which currently represents the second largest product line in our gross premiums written (28% in 2019, including alternative market premiums). The workers’ compensation industry is highly competitive in the geographic markets in which we operate and multi-line insurers continue to increase their leverage of workers’ compensation business in their product offerings. We believe our workers' compensation product offerings allow us to provide flexibility in offering solutions to our customers at a competitive price. In addition, we believe that our claims handling and risk management services are attractive to our customers and provide us with a competitive advantage even when our pricing is higher than our competitors.
We are committed to disciplined underwriting, pricing and loss reserving practices as well as conservative investment practices, even during difficult market conditions. We are also committed to maintaining prudent operating and financial leverage. We recognize the importance that our customers and producers place on the financial strength of our insurance subsidiaries, and we manage our business to protect our financial security.
The net loss ratio which is calculated as net losses and loss adjustment expenses incurred divided by net premiums earned and is a component of underwriting profitability.
The operating ratio which is the combined ratio, less the investment income ratio. This ratio provides the combined effect of underwriting profitability and investment income.
Our emphasis on rate adequacy, selective underwriting, effective claims management and prudent investments is a key factor in our ability to achieve our long-term ROE target. We closely monitor premium revenues, losses and loss adjustment expenses, and underwriting and policy acquisition expenses. Our overall investment strategy is to focus on maximizing current income from our investment portfolio while maintaining safety, liquidity, duration and portfolio diversification. While we engage in activities that generate other income, these activities, such as insurance agency services, do not constitute a significant use of our resources or a significant source of revenues or profits.
Management considers the following accounting estimates to be critical because they involve significant judgment by management and those judgments could result in a material effect on our financial statements.
Our reserve is established by management after taking into consideration a variety of factors including premium rates, claims frequency and severity, historical paid and incurred loss development trends, the expected effect of inflation, general economic and social trends, the legal and political environment and the conclusions reached by our internal and consulting actuaries. We update and review the data underlying the estimation of our reserve for losses each reporting period and make adjustments to loss estimation assumptions that we believe best reflect emerging data. Both our internal and consulting actuaries perform an in-depth review of our reserve for losses on at least a semi-annual basis using the loss and exposure data of our insurance subsidiaries.
Considerable judgment is required in establishing our initial reserve for any current accident year period, as there is limited data available upon which to base our estimate (see further discussion that follows under the heading "Uses of Judgment"). Our process for setting an initial reserve considers the unique characteristics of each product, but in general we rely heavily on the loss assumptions that were used to price business, as our pricing reflects our analysis of loss costs that we expect to incur relative to the insurance product being priced.
Workers' Compensation Insurance Segment. Many factors affect the ultimate losses incurred for our workers' compensation coverages (10% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2019) including but not limited to the type and severity of the injury, the age, health and occupation of the injured worker, the estimated length of disability, medical treatment and related costs, and the jurisdiction and workers' compensation laws of the state of the injury occurrence. We use various actuarial methodologies in developing our workers’ compensation reserve, combined with a review of the payroll exposure base. For the current accident year, given the lack of seasoned information, the different actuarial methodologies produce results with significant variability; therefore, more emphasis is placed on supplementing results from the actuarial methodologies with trends in exposure base, medical expense inflation, general inflation, severity, and claim counts, among other things, to select an expected loss ratio.
Bornhuetter-Ferguson Method. We use both the Paid and the Reported Bornhuetter-Ferguson Methods. The Paid Method assigns partial weight to initial expected losses for each accident year (initial expected losses being the first established case and IBNR reserves for a specific accident year) and partial weight to paid to date losses. The Reported Method assigns partial weight to the initial expected losses and partial weight to current expected losses. The weights assigned to the initial expected losses decrease as the accident year matures.
For our Workers’ Compensation Insurance segment and for the workers' compensation exposures in our Segregated Portfolio Cell Reinsurance segment, we utilize the Reported (Incurred) Development Method, Paid Development Method and Bornhuetter-Ferguson Method, to develop our reserve for each accident year. The actuarial review includes the stratification of claims data (lost time claims, medical only claims) using different variations that allow us to identify trends that may not be readily identifiable if the data was evaluated only in the aggregate. Reported and paid loss development factors are key assumptions in the reserve estimation process and are based on our historical reported and paid loss development patterns. As accident years mature, the various actuarial methodologies produce more consistent loss estimates.
We use various actuarial methods in the process of setting reserves. Each actuarial method generally returns a different value, and for the more recent accident years the variations among the various methodologies can be significant. For each partition of our reserves, we evaluate the results of the various methods, along with the supplementary statistical data regarding such factors as closed with and without indemnity ratios, claim severity trends, the expected duration of such trends, changes in the legal and legislative environment and the current economic environment to develop a point estimate based upon management's judgment and past experience. The series of selected point estimates is then combined to produce an overall point estimate for ultimate losses.
HCPL. Over the past several years the most influential factor affecting the analysis of our HCPL reserves and the related development recognized has been an observed increase in claim severity for the broader HCPL industry as well as higher initial loss expectations on incurred claims. The severity trend is an explicit component of our pricing models, whereas in our reserving process the severity trend's impact is implicit. Our estimate of this trend and our expectations about changes in this trend impact a variety of factors, from the selection of expected loss ratios to the ultimate point estimates established by management.
Although the future degree and impact of the ultimate severity trend remains uncertain due to the long-tailed nature of our business, we have given consideration to observed loss costs in setting our rates. For our HCPL business, this practice had generally resulted in rate reductions as claim frequency declined and remained at historically low levels. For example, on average, excluding our podiatry business acquired in 2009, we had gradually reduced the premium rates we charged on our standard physician renewal business (our largest HCPL line) by approximately 17% from the beginning of 2006 to December 31, 2016.
We recognized net favorable reserve development of $11.8 million for the year ended December 31, 2019, of which $10.1 million related to our Segregated Portfolio Cell Reinsurance segment and $7.8 million related to our Workers' Compensation Insurance segment, partially offset by net unfavorable reserve development of $5.7 million and $0.4 million related to our Specialty P&C and Lloyd's Syndicates segments, respectively.
This can be seen in looking at both the absolute amount of reserve development recognized for the less developed accident years as well as the size of such development when compared to established ultimates for those same accident years at the end of the preceding calendar year. The following table provides this information for years ended December 31, 2019, 2018 and 2017 with respect to the three then most recent prior accident years:
In 2019, we recognized $10.1 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment and $7.8 million of net favorable development in our Workers' Compensation Insurance segment. In 2018, we recognized $9.0 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment and $8.0 million of net favorable development in our Workers' Compensation Insurance segment. In 2017, we recognized $8.5 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment and $5.7 million of net favorable development in our Workers' Compensation Insurance segment. In each of the years ended December 31, 2019, 2018 and 2017, net favorable development in our Workers' Compensation Insurance segment included $1.6 million related to the amortization of the purchase accounting fair value adjustment. As previously discussed, this fair value adjustment has been fully amortized as of December 31, 2019.
Due to the size of our consolidated reserve for losses and the large number of claims outstanding at any point in time, even a small percentage adjustment to our total reserve estimate could have a material effect on our results of operations for the period in which the adjustment is made, as was the case in 2019, 2018 and 2017.
We make a determination of the amount of insurance risk we choose to retain based upon numerous factors, including our risk tolerance and the capital we have to support it, the price and availability of reinsurance, the volume of business, our level of experience with a particular set of claims and our analysis of the potential underwriting results. We purchase excess of loss reinsurance to limit the amount of risk we retain and we do so from a number of companies to mitigate concentrations of credit risk. We utilize reinsurance brokers to assist us in the placement of these reinsurance programs and in the analysis of the credit quality of our reinsurers. The determination of which reinsurers we choose to do business with is based upon an evaluation of their then current financial strength, rating, stability and claims payment practices.
Under the terms of certain of our reinsurance agreements, the amount of premium that we cede to our reinsurers is based in part on the losses we recover under the agreements. Therefore, we make an estimate of premiums ceded under these reinsurance agreements subject to certain maximums and minimums. Any adjustments to our estimates of losses recoverable under our reinsurance agreements or the premiums owed under our agreements are reflected in then current operations. Due to the size of our reinsurance balances, an adjustment to these estimates could have a material effect on our results of operations for the period in which the adjustment is made.
The financial strength of our reinsurers and their ability to pay us may change in the future due to forces or events we cannot control or anticipate. We have not experienced significant collection difficulties due to the financial condition of any reinsurer as of December 31, 2019; however, reinsurers may periodically dispute our demand for reimbursement from them based upon their interpretation of the terms of our agreements. As of December 31, 2019, reinsurance recoverables totaling approximately $92.6 million were collateralized by letters of credit or funds withheld. We had no allowance for credit losses related to our reinsurance receivables at December 31, 2019 or 2018 as all reinsurance balances were considered collectible. No reinsurance balances were written off for credit reasons during the years ended December 31, 2019 and 2018, and reinsurance balances written off for credit reasons during the year ended December 31, 2017 were nominal in amount. Should future events lead us to believe that any reinsurer will not meet its obligations to us, adjustments to the amounts recoverable would be reflected in the results of current operations. Such an adjustment has the potential to be material to the results of operations in the period in which it is recorded; however, we would not expect such an adjustment to have a material effect on our capital position or our liquidity.
Fair values for a majority of our equity securities and portions of our corporate debt, short-term and convertible securities are determined using exchange-traded prices. There is little judgment involved when fair value is determined using an exchange-traded price. In accordance with GAAP, we classify securities valued using an exchange-traded price as Level 1 securities.
Most fixed income securities do not trade daily; thus, exchange-traded prices are generally not available for these securities. However, market information (often referred to as observable inputs or market data, including but not limited to, last reported trade, non-binding broker quotes, bids, benchmark yield curves, issuer spreads, two-sided markets, benchmark securities, offers and recent data regarding assumed prepayment speeds, cash flow and loan performance data) is available for most of our fixed income securities. We determine fair value for a large portion of our fixed income securities using available market information. In accordance with GAAP, we classify securities valued based on multiple market observable inputs as Level 2 securities.
When a pricing service does not provide a value for one of our fixed maturity securities, management estimates fair value using either a single non-binding broker quote or pricing models that utilize market based assumptions which have limited observable inputs. The process involves significant judgment in selecting the appropriate data and modeling techniques to use in the valuation process. In accordance with GAAP, we classify securities valued using limited observable inputs as Level 3 securities.
Certain of our investments, in accordance with GAAP for the type of investment, are measured using methodologies other than fair value. At December 31, 2019, these investments represented approximately 5% of total investments, and are detailed in the following table. Additional information about these investments is provided in Notes 2 and 3 of the Notes to Consolidated Financial Statements.
We evaluate our available-for-sale investment securities on at least a quarterly basis for the purpose of determining whether declines in fair value below recorded cost basis represent OTTI. We consider an OTTI to have occurred:
if it is more likely than not that the security will be required to be sold before full recovery of its amortized cost basis; or
The assessment of whether the amortized cost basis of a security, particularly an asset-backed debt security, is expected to be recovered requires management to make assumptions regarding various matters affecting future cash flows. The choice of assumptions is subjective and requires the use of judgment. Actual credit losses experienced in future periods may differ from management’s estimates of those credit losses. Methodologies used to estimate the present value of expected cash flows are:
the extent to which the decline in fair value is attributable to credit risk specifically associated with the security or its issuer;
internal assessments and the assessments of external portfolio managers regarding specific circumstances surrounding an investment, which indicate the investment is more or less likely to recover its amortized cost than other investments with a similar structure;
For structured securities (primarily asset-backed securities), management estimates the present value of the security’s cash flows using the effective yield of the security at the date of acquisition (or the most recent implied rate used to accrete the security if the implied rate has changed as a result of a previous impairment or changes in expected cash flows). We consider the most recently available six month averages of the levels of delinquencies, defaults, severities and prepayments for the collateral (loans) underlying the securitization or, if historical data is not available, sector based assumptions to estimate expected future cash flows of these securities.
Deferred federal income taxes arise from the recognition of temporary differences between the basis of assets and liabilities determined for financial reporting purposes and the basis determined for income tax purposes. Our temporary differences principally relate to our loss reserves, unearned and advanced premiums, DPAC, compensation related items, unrealized investment gains (losses) and basis differences on fixed assets, intangible assets and operating leases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect when such benefits are realized. We review our deferred tax assets quarterly for impairment. If we determine that it is more likely than not that some or all of a deferred tax asset will not be realized, a valuation allowance is recorded to reduce the carrying value of the asset. In assessing the need for a valuation allowance, management is required to make certain judgments and assumptions about our future operations based on historical experience and information as of the measurement period regarding reversal of existing temporary differences, carryback capacity, future taxable income (including its capital and operating characteristics) and tax planning strategies.
A valuation allowance was established in a prior year against the deferred tax asset related to the NOL carryforwards for the U.K. operations as management concluded that it was more likely than not that the deferred tax asset will not be realized. We also established a valuation allowance in a prior year against the deferred tax assets of certain SPCs at our recently formed wholly owned Cayman Islands reinsurance subsidiary, Inova Re. Due to the limited operations of these recently formed SPCs, management concluded that a valuation allowance was required. As of December 31, 2019, management concluded that a valuation allowance was still required against the deferred tax assets related to the NOL carryforwards for the U.K. operations and against the deferred tax assets of certain SPCs at Inova Re. See further discussion in Note 6 of the Notes to Consolidated Financial Statements.
The TCJA introduced a minimum tax on payments made to related foreign entities referred to as the BEAT. The BEAT is imposed by adding back into the U.S. tax base any base erosion payment made by the U.S. taxpayer to a related foreign entity and applying a minimum tax rate to this newly calculated modified taxable income. Base erosion payments represent any amount paid or accrued by the U.S. taxpayer to a related foreign entity for which a deduction is allowed. Premiums we cede to the SPCs at Inova Re, one of our wholly owned Cayman Islands reinsurance subsidiaries, do not fall within the scope of base erosion payments as the SPCs at Inova Re intend to elect to be taxed as U.S. taxpayers. However, premiums that we cede to any active SPC at our other wholly owned Cayman Islands reinsurance subsidiary, Eastern Re, fall within the scope of base erosion payments and therefore could be significantly impacted by the BEAT. We have evaluated our exposure to the BEAT and have concluded that our expected outbound deductible payments to related foreign entities are below the threshold for application of the BEAT; therefore, we have not recognized any incremental tax expense for the BEAT provision of the TCJA for the year ended December 31, 2019. See further discussion on our Cayman Islands SPC operations in the Segment Operating Results - Segregated Portfolio Cell Reinsurance section that follows.
We evaluate tax positions taken on tax returns and recognize positions in our financial statements when it is more likely than not that we will sustain the position upon resolution with a taxing authority. If recognized, the benefit is measured as the largest amount of benefit that has a greater than 50% probability of being realized. We review uncertain tax positions each period, considering changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law, and make adjustments as we consider necessary. Adjustments to our unrecognized tax benefits may
affect our income tax expense, and settlement of uncertain tax positions may require the use of cash. Other than differences related to timing, no significant adjustments were considered necessary during 2019 or 2018. At December 31, 2019, our liability for unrecognized tax benefits approximated $5.1 million.
Impairment of goodwill is tested at the reporting unit level, which is consistent with our reportable segments identified in Note 17 of the Notes to Consolidated Financial Statements. Of the five reporting units, three have goodwill - Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance. We evaluate goodwill for impairment annually on October 1, upon the occurrence of certain triggering events or substantive changes in circumstances that indicate the fair value of goodwill may be impaired and immediately before and after a reorganization that affects the composition of one or more of our reporting units, if applicable.
Intangible assets with definite lives are amortized over the estimated useful life of the asset. Amortizable intangible assets primarily consist of agency and policyholder relationships, renewal rights and trade names. Intangible assets with an indefinite life, primarily state licenses, are not amortized. Intangible assets are evaluated for impairment on an annual basis or upon the occurrence of certain triggering events or substantive changes in circumstances that indicate the fair value of the asset may be impaired. Additional information regarding our intangible assets is included in Note 1 of the Notes to Consolidated Financial Statements.
During the first quarter of 2019, we adopted ASU 2016-02, which requires us to make certain estimates and assumptions in applying the requirements of this new guidance. We are involved in a number of leases, primarily for office facilities. We determine if an arrangement is a lease at the inception date of the contract and classify all leases as either financing or operating. As of December 31, 2019, all of our leases were classified as operating. Operating lease ROU assets and operating lease liabilities are recognized as of the lease commencement date based on the present value of the remaining lease payments, discounted over the term of the lease using a discount rate determined based on information available as of the commencement date. The ROU asset represents the right to use the underlying asset (office space) for the lease term. As the majority of our lessors do not provide an implicit discount rate, we use our collateralized incremental borrowing rate in determining the present value of remaining lease payments. For leases entered into or reassessed after the adoption of ASU 2016-02, we account for lease and non-lease components of a contract as a single lease component.
We evaluate our operating lease ROU assets for impairment at the asset group level whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. The carrying amount of an asset group, which includes the operating lease ROU asset and the related operating lease liability, is not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows expected to result from the use of the asset group over the life of the primary asset in the asset group. That assessment is based on the carrying amount of the asset group, including the operating lease ROU asset and the related operating lease liability, at the date it is tested for recoverability and an impairment loss is measured and recognized as the amount by which the carrying amount of the asset group exceeds its fair value. Any impairment loss is allocated to each asset in the asset group, including the operating ROU asset.
Additional information regarding our leases is included in Note 1 and Note 10 of the Notes to Consolidated Financial Statements.
We did not have any change in accounting estimate or policy that had a material effect on our results of operations or financial position during 2019. We are not aware of any accounting changes not yet adopted as of December 31, 2019 that would have a material effect on our results of operations, financial position or cash flows. Note 1 of the Notes to Consolidated Financial Statements provides additional detail regarding accounting changes not yet adopted.
ProAssurance Corporation is a holding company and is a legal entity separate and distinct from its subsidiaries. As a holding company, our principal source of external revenue is our investment revenues. In addition, dividends from our operating subsidiaries represent a significant source of funds for our obligations, including debt service and shareholder dividends. We also charge our operating subsidiaries within our Specialty P&C and Workers' Compensation Insurance segments a management fee based on the extent to which services are provided to the subsidiary and the amount of gross premium written by the subsidiary. At December 31, 2019, we held cash and liquid investments of approximately $280 million outside our insurance subsidiaries that were available for use without regulatory approval or other restriction, of which $17 million was used to pay shareholder dividends in January 2020. We also have $250 million in permitted borrowings under our Revolving Credit Agreement and an accordion feature available which, if subscribed successfully, would allow another $50 million in available funds as discussed in this section under the heading "Debt." As of February 14, 2020, no borrowings were outstanding under our Revolving Credit Agreement.
During 2019, our operating subsidiaries paid dividends to us of approximately $123 million, including extraordinary dividends from our insurance subsidiaries of approximately $20 million. Our insurance subsidiaries, in the aggregate, are permitted to pay dividends of approximately $88 million over the course of 2020 without prior approval of state insurance regulators. However, the payment of any dividend requires prior notice to the insurance regulator in the state of domicile, and the regulator may reduce or prevent the dividend if, in its judgment, payment of the dividend would have an adverse effect on the surplus of the insurance subsidiary. We make the decision to pay dividends from an insurance subsidiary based on the capital needs of that subsidiary and may pay less than the permitted dividend or may also request permission to pay an additional amount (an extraordinary dividend).
The decrease in operating cash flows in 2019 as compared to 2018 of $29.1 million was primarily due to an increase in paid losses of $30.2 million, a decrease in cash received from investment income of $9.8 million and an increase in cash paid for operating expenses of $8.1 million. The increase in paid losses was driven by our Specialty P&C and Workers' Compensation Insurance segments. The increase in paid losses in our Specialty P&C segment primarily reflected higher average claims payments in 2019 as compared to 2018 and the increase in paid losses in our Workers' Compensation Insurance segment primarily reflected the timing of loss payments between periods. The decrease in cash received from investment income was primarily due to a decline in distributed earnings from our unconsolidated subsidiaries. The increase in cash paid for operating expenses was driven by an increase in brokerage expenses in our Lloyd's Syndicates segment from the continuing
growth of Syndicate 6131 as well as an increase in fees associated with a data analytics services agreement entered into during the fourth quarter of 2018 in our Specialty P&C segment. In addition, the decrease in operating cash flows reflected a decrease in net cash received of $3.0 million associated with the cash settlement from the commutation of the 2017 and 2016 calendar year quota share reinsurance arrangements between our Specialty P&C segment and Syndicate 1729 due to the reduction in premiums ceded to Syndicate 1729. The decrease in operating cash flows was partially offset by an increase in net premium receipts of $19.0 million and a decrease in estimated tax payments of $3.0 million. The increase in net premium receipts was primarily due to the growth in written premium in our Lloyd's Syndicates and Specialty P&C segments.
The increase in operating cash flows in 2018 as compared to 2017 of $3.9 million was primarily due to an increase in premium receipts of $60.8 million, a decrease in 2018 estimated tax payments as compared to 2017 of $11.5 million and a decrease in cash paid for operating expenses of $1.6 million, partially offset by an increase in paid losses of $64.3 million and a decrease in cash received from investment income of $5.1 million. The increase in premium receipts was driven by our Specialty P&C segment, primarily due to premiums received from a loss portfolio transfer entered into during the second quarter of 2018 and, to a lesser extent, our Workers' Compensation Insurance segment, primarily due to premiums received related to the third quarter 2017 acquisition of the Great Falls book of business. The decrease in 2018 estimated tax payments was primarily due to the lower statutory federal income tax rate in 2018 as compared to 2017. The increase in paid losses was driven by all of our operating segments, particularly in our Specialty P&C segment, primarily due to the timing of loss payments between periods, and our Lloyd's Syndicates segment, primarily due to 2017 storm-related losses which were paid in 2018. The decrease in cash paid for operating expenses was primarily due to a decrease in compensation related costs, largely offset by an increase in cash paid for operating expenses in our Lloyd's Syndicates segment primarily due to the start-up of Syndicate 6131. The decrease in cash received from investment income was primarily due to a reduction in interest received on our fixed maturities portfolio resulting from lower average balances.
The line entitled “Reserve for losses, undiscounted and net of reinsurance recoverables” reflects our reserve for losses and loss adjustment expense, less the receivables from reinsurers, each as reported in our Consolidated Balance Sheets at the end of each year (the Balance Sheet Reserves).
Reserves for 2009 and thereafter include gross and net reserves acquired in 2009 business combinations of $169.4 million and $163.9 million, respectively.
Reserves for 2010 and thereafter include gross and net reserves acquired in 2010 business combinations of $88.1 million and $82.2 million, respectively.
In each year reflected in the table, we have estimated our reserve for losses utilizing the management and actuarial processes discussed under the heading "Reserve for Losses and Loss Adjustment Expenses" in the Critical Accounting Estimates section. Factors that have contributed to the variation in loss development are primarily related to the extended period of time required to resolve professional liability claims and include the following:
These adverse severity trends later moderated, with that moderation becoming more pronounced beginning in 2009. We were cautious in giving full recognition to indications that the pace of severity increase had slowed, however we gave measured recognition of the improved trend in our reserve estimates. The favorable development was most pronounced for years 2004 to 2008, as the initial reserves for these accident years were established prior to substantial indication that severity trends were moderating. We gave stronger recognition to the lower severity trend as time elapsed and a greater percentage of claims were closed.
During 2019 the loss experience in our HCPL excess and surplus lines of business deteriorated further, particularly in regard to the reserves we established for a large national healthcare account that has experienced losses far exceeding the assumptions we made when underwriting the account, beginning in 2016. As a result, we strengthened our HCPL reserves through the recognition of net unfavorable development on prior accident years and a higher current accident year net loss ratio in our Specialty P&C segment in 2019 as discussed more fully in our Segment Operating Results - Specialty Property and Casualty section that follows.
Activity in our net reserve for losses during 2019, 2018 and 2017 is summarized below:
At December 31, 2019 our gross reserve for losses included case reserves of approximately $1.5 billion and IBNR reserves of approximately $0.9 billion. Our consolidated gross reserve for losses on a GAAP basis exceeds the combined gross reserves of our insurance subsidiaries on a statutory basis by approximately $0.2 billion, which is principally due to the portion of the GAAP reserve for losses that is reflected for statutory accounting purposes as unearned premiums. These unearned premiums are applicable to extended reporting endorsements (“tail” coverage) issued without a premium charge upon death, disability or retirement of an insured who meets certain qualifications.
Within our Specialty P&C segment, we use insurance and reinsurance (collectively, “reinsurance”) to provide capacity to write larger limits of liability, to provide reimbursement for losses incurred under the higher limit coverages we offer and to provide protection against losses in excess of policy limits. Within our Workers' Compensation Insurance segment, we use reinsurance to reduce our net liability on individual risks, to mitigate the effect of significant loss occurrences (including catastrophic events), to stabilize underwriting results and to increase underwriting capacity by decreasing leverage. In both our Specialty P&C and Workers' Compensation Insurance segments, we use reinsurance in risk sharing arrangements to align our objectives with those of our strategic business partners and to provide custom insurance solutions for large customer groups. The purchase of reinsurance does not relieve us from the ultimate risk on our policies; however, it does provide reimbursement for certain losses we pay. We pay our reinsurers a premium in exchange for reinsurance of the risk. In certain of our excess of loss arrangements, the premium due to the reinsurer is determined by the loss experience of the business reinsured, subject to certain minimum and maximum amounts. Until all loss amounts are known, we estimate the premium due to the reinsurer. Changes to the estimate of premium owed under reinsurance agreements related to prior periods are recorded in the period in which the change in estimate occurs and can have a significant effect on net premiums earned.
We offer alternative market solutions whereby we cede certain premiums from our Workers' Compensation Insurance and Specialty P&C segments to either the SPCs at Inova Re or Eastern Re, our Cayman Islands reinsurance subsidiaries which are reported in our Segregated Portfolio Cell Reinsurance segment, or, to a limited extent, an unaffiliated captive insurer. During 2019 and 2018, we wrote total alternative market premium of approximately $90.0 million and $90.2 million, respectively. The majority of these policies ($86.7 million and $85.1 million in 2019 and 2018, respectively) are reinsured to the SPCs at Inova Re or Eastern Re, net of a ceding commission. Each SPC at Inova Re and Eastern Re is owned, fully or in part, by an agency, group or association, and the operating results of the SPCs are due to the participants of that cell. We participate to a varying
(3) Includes an AAD where retention is the greater of $3.9M or 2.1% of subject premium in annual losses otherwise recoverable in excess of the $500k retention per loss occurrence.
For the workers' compensation business ceded to Inova Re and Eastern Re, each SPC has in place its own reinsurance arrangements; which are illustrated in the following table.
(1) The attachment point is based on a percentage of written premium within individual cells (average is 89%) and varies by cell.
External excess of loss reinsurance is utilized by Syndicate 1729 to manage the net loss exposure on the specialty property and contingency coverages ceded to Syndicate 6131 (see further discussion in Segment Operating Results - Lloyd’s Syndicates section that follows).
Syndicate 1729 may still be exposed to losses that exceed the level of reinsurance purchased as well as to reinstatement premiums triggered by losses exceeding specified levels. Cash demands on Syndicate 1729 can vary significantly depending on
Our investments at December 31, 2019 and December 31, 2018 are comprised as follows:
Investment fund LPs/LLCs are by nature less liquid and may involve more risk than other investments. We manage our risk through diversification of asset class and geographic location. At December 31, 2019, we had investments in 37 separate investment funds with a total carrying value of $310.3 million which represented approximately 9% of our total investments. We review and monitor the performance of these investments on a quarterly basis.
There were no business combinations during the years ended December 31, 2019 or 2018.
Treasury share activity for 2019, 2018 and 2017 was as follows:
We did not repurchase any common shares subsequent to December 31, 2019 and as of February 14, 2020 our remaining Board authorization was approximately $110 million.
Our Board declared cash dividends during 2019, 2018 and 2017 as follows:
We have Mortgage Loans with one lender in connection with the recapitalization of two office buildings, which mature in December 2027. The Mortgage Loans accrue interest at three-month LIBOR plus 1.325% with principal and interest payable on a quarterly basis. At December 31, 2019, the outstanding balance of the Mortgage Loans was approximately $38 million and we are in compliance with the financial covenant of the Mortgage Loans.
We utilize an interest rate cap agreement with a notional amount of $35 million to manage our exposure to increases in LIBOR on our Mortgage Loans. Per the interest rate cap agreement, we are entitled to receive cash payments if and when the three-month LIBOR exceeds 2.35%. Additional information on our interest rate cap agreement is provided in Note 12 of the Notes to Consolidated Financial Statements.
Our funding commitments are primarily related to non-public investment entities but also include the unused commitment under our Syndicate Credit Agreement as we presume it will be fully advanced within the next year for purposes of the disclosure in the table above. The above table excludes a short-term loan commitment where we have agreed to advance funds on a 30 day basis. For more information regarding these agreements see Note 9 of the Notes to Consolidated Financial Statements.
The following sections provide an overview of our consolidated and segment results of operations for the year ended December 31, 2019 as compared to 2018. See the Segment Operating Results sections that follow for additional information regarding each segment's operating results. For a discussion of the changes in the financial condition, results of operations and cash flows for the year ended December 31, 2018 as compared to the year ended December 31, 2017, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of ProAssurance's December 31, 2018 report on Form 10-K.
Consolidated net premiums earned for the years ended December 31, 2019 and 2018 included the effects of two different loss portfolio transfers in our Specialty P&C segment which resulted in $2.7 million and $26.6 million, respectively, of one-time premium written and fully earned in the respective periods. See further discussion of these loss portfolio transfers in our Segment Operating Results - Specialty Property & Casualty section that follows. After removing the impacts of the 2019 and 2018 loss portfolio transfers, consolidated net premiums earned increased $52.6 million during 2019 as compared to 2018. All of our operating segments contributed to the remaining increase in consolidated net premiums earned, particularly our Specialty P&C segment due to the pro rata effect of an increase in the volume of written premium during the preceding twelve months, predominantly in our physicians and healthcare facilities lines of business, driven by an increase in renewal pricing.
The following table shows our total consolidated net realized investment gains (losses):
Our consolidated underwriting expense ratio increased for the year ended December 31, 2019 as compared to 2018 due to the effect of a loss portfolio transfer (net premiums earned with minimal associated operating expenses) entered into during
The decrease in our ROE in 2019 as compared to 2018 was due to the decrease in net income, driven by a higher combined ratio in our Specialty P&C segment, as discussed above under the heading "Operating Ratio", largely offset by the increase in the fair value of our equity trading portfolio due to the improvement in the market since December 31, 2018.
Book value per share is calculated as total shareholders' equity at the balance sheet date divided by the total number of common shares outstanding. This ratio measures the net worth of the Company to shareholders' on a per share basis. Our book value per share at December 31, 2019 as compared to December 31, 2018 is shown in the following table.
Non-GAAP operating income (loss) is a financial measure that is widely used to evaluate performance within the insurance sector. In calculating Non-GAAP operating income (loss), we have excluded the after-tax effects of the items listed in the following table that do not reflect normal operating results. We believe Non-GAAP operating income (loss) presents a useful view of the performance of our insurance operations, however it should be considered in conjunction with net income computed in accordance with GAAP.
(2) The 21% rate is the statutory rate associated with the taxable or tax deductible items listed above. See previous discussion in this section under the heading "Taxes."
As a result of actuarial analyses performed by both internal and consulting actuaries during 2019, we concluded that additional reserves were needed in our Specialty P&C segment. As such, we recorded $5.7 million of net unfavorable development on our prior accident year reserves and recorded a higher current accident year net loss ratio which resulted in a net loss ratio of 106.7% in 2019. Furthermore, net losses and loss adjustment expenses for the year ended December 31, 2019 included a $9.2 million PDR which represents an estimated premium deficiency associated with the unearned premium related to a large national healthcare account. See further discussion that follows under the heading "Losses."
Changes in our premium volume within our Specialty P&C segment are driven by four primary factors: (1) the amount of new business, (2) our retention of existing business, (3) the premium charged for business that is renewed, which is affected by rates charged and by the amount and type of coverage an insured chooses to purchase and (4) the timing of premium written through multi-period policies. In addition, premium volume may periodically be affected by shifts in the timing of renewals between periods. The healthcare professional liability market, which accounts for a majority of the revenues in this segment, remains challenging as physicians continue joining hospitals or larger group practices and are thus no longer purchasing individual or group policies in the standard market. In addition, some competitors have chosen to compete primarily on price; both factors may impact our ability to write new business and retain existing business. Furthermore, the insurance and reinsurance markets have historically been cyclical, characterized by extended periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted more favorable premium levels. Changes in the frequency and severity of losses may affect the cycles of the insurance and reinsurance markets significantly. During soft markets, it could be very difficult for us to grow or maintain premium volume levels without sacrificing underwriting profits. Conversely, during hard markets, rising prices may pressure retention levels.
Our healthcare facilities premium (which includes hospitals, surgery centers, long-term care facilities and other miscellaneous healthcare facilities) decreased in 2019 as compared to 2018 due to retention losses, partially offset by new business written and, to a lesser extent, an increase in renewal pricing. Retention losses in 2019 were driven by our decision not to renew certain products written on an excess and surplus lines basis after our underwriting evaluation and, to a lesser extent, the loss of two large policies totaling $1.7 million due to price competition as a result of rate increases. As we continue to reevaluate certain books of business, we anticipate our retention to remain at a lower than historic level. Renewal pricing increases in 2019 reflect rate increases where we believe appropriate given the loss environment and loss indications we are seeing in the healthcare facilities space.
Our other healthcare providers are primarily dentists, chiropractors and allied health professionals. The increase in 2019 is primarily due to the timing of the prior year renewal of one policy as well as new business written.
We offer extended reporting endorsement or "tail" coverage to insureds who discontinue their claims-made coverage with us, and we also periodically offer tail coverage through custom policies. Tail coverage premiums are generally 100% earned in the period written because the policies insure only incidents that occurred in prior periods and are not cancellable. The amount of tail coverage premium written can vary significantly from period to period. The decrease in tail premiums in 2019 was driven by $7.9 million of tail coverage provided in connection with a loss portfolio transfer entered into during the second quarter of 2018, partially offset by $1.8 million of tail coverage provided in connection with a loss portfolio transfer entered into during the third quarter of 2019.
Certain components of our gross premiums written include alternative market premiums in our captive cell program. We cede either all or a portion of the alternative market premium, net of reinsurance, to certain SPCs of our wholly owned Cayman Islands reinsurance subsidiaries, Inova Re and Eastern Re, which are reported in our Segregated Portfolio Cell Reinsurance segment (see further discussion in the Ceded Premiums Written section that follows). The portion not ceded to the SPCs is retained within our Specialty P&C segment. Total gross premiums written by component in our alternative market captive cell program were as follows:
This component of gross premiums written includes all other product lines within our Specialty P&C segment. The increase during 2019 was due to a $1.5 million specialty contractual liability policy.
Ceded premiums represent the amounts owed to our reinsurers for their assumption of a portion of our losses. Through our current excess of loss reinsurance arrangements we generally retain the first $1 million in risk insured by us and cede coverages in excess of this amount. For our healthcare professional liability coverages, we also retain from 4% - 9% of the next $25 million of risk for coverages in excess of $1 million. For our medical technology liability coverages, we also retain 10% of the next $9 million of risk for coverages in excess of $1 million. We pay our reinsurers a ceding premium in exchange for their accepting the risk, and in certain of our excess of loss arrangements, the ultimate amount of which is determined by the loss experience of the business ceded, subject to certain minimum and maximum amounts.
We generally reinsure risks under our excess of loss reinsurance arrangements pursuant to which the reinsurers agree to assume all or a portion of all risks that we insure above our individual risk retention levels, up to the maximum individual limits offered. Premium due to reinsurers also fluctuates with the volume of written premium subject to cession under the arrangement. In certain of our excess of loss reinsurance arrangements, the premium due to the reinsurer is determined by the loss experience of that business reinsured, subject to certain minimum and maximum amounts. Due to increases in loss experience of business reinsured under those loss sensitive agreements and resulting increases in premium due to those reinsurers, we have reached the maximum level of premium due under those arrangements which is driving the decrease in ceded premiums written in 2019 as compared to 2018.
Prior to January 1, 2018, our Specialty P&C segment ceded premiums to Syndicate 1729 under a quota share reinsurance agreement. We record our participation in Syndicate 1729 in our Lloyd's Syndicates segment on a quarter lag, except when information is material to the current period. We also recorded the cession to Syndicate 1729 from our Specialty P&C segment on the same quarter lag as the amounts were not material and that permitted the cession to be reported by both our Lloyd's Syndicates segment and our Specialty P&C segment in the same reporting period. The decrease in premiums ceded to Syndicate 1729 during 2019 is due to the non-renewal of the quota share reinsurance agreement with Syndicate 1729 on January 1, 2018; the impact of which was not reflected in ceded premiums written until the second quarter of 2018 due to the previously mentioned quarter lag. See the Segment Operating Results - Lloyd's Syndicates section for further discussion on the quota share agreement.
We have entered into various shared risk arrangements, including quota share, fronting and captive arrangements, with certain large healthcare systems and other insurance entities. These arrangements include our Ascension Health and CAPAssurance programs. While we cede a large portion of the premium written under these arrangements, they provide us an opportunity to grow net premium through strategic partnerships. The increase in 2019 was primarily driven by growth in our CAPAssurance program, partially offset by a decrease in exposure related to one of our Ascension Health programs.
Given the length of time that it takes to resolve our claims, many years may elapse before all losses recoverable under a reinsurance arrangement are known. As a part of the process of estimating our loss reserve we also make estimates regarding the amounts recoverable under our reinsurance arrangements. As previously discussed, the premiums ultimately ceded under certain of our excess of loss reinsurance arrangements are subject to the losses ceded under the arrangements. As part of the review of our reserves during 2019 and 2018, we increased our estimate of expected losses and associated recoveries for prior year ceded losses, as well as our estimate of ceded premiums owed to reinsurers; however, this increase was lower in 2019 as compared to 2018 due to reaching the maximum level of premium due under certain prior year excess of loss arrangements. Changes to estimates of premiums ceded related to prior accident years are fully earned in the period the changes in estimates occur.
The slight increase in the current accident year ceded premiums ratio for the year ended December 31, 2019 was primarily due to the effect of the 2018 loss portfolio transfer (increase in gross premiums written with no premium ceded) which decreased the 2018 current accident year ceded premiums ratio by approximately 0.7 percentage points. Excluding the impact of the 2018 loss portfolio transfer, the current accident year ceded premiums ratio decreased by approximately 0.4 percentage points in 2019 as compared to 2018 driven by the effect of the non-renewal of the quota share reinsurance agreement with Syndicate 1729 and a decrease in premium ceded under our excess of loss reinsurance arrangements, partially offset by an increase in premium ceded to the SPCs in our Segregated Portfolio Cell Reinsurance segment.
The decrease in ceded premiums earned during 2019 as compared to 2018 reflected the effect of adjustments made during 2019 and 2018 to ceded premiums owed under reinsurance agreements related to prior accident year losses. After removing the effect of prior accident year ceded premium adjustments from both years, ceded premiums earned decreased $3.8 million in 2019 as compared to 2018. The remaining decrease was driven by the non-renewal of the quota share reinsurance agreement with Syndicate 1729, partially offset by the pro rata effect of an increase in premiums ceded under our shared risk arrangements during the preceding twelve months, predominantly in our CAPAssurance program.
Accident year refers to the accounting period in which the insured event becomes a liability of the insurer. For claims-made policies, which represent the majority of the premiums written in our Specialty P&C segment, the insured event generally becomes a liability when the event is first reported to us. For occurrence policies, the insured event becomes a liability when the event takes place. For retroactive coverages, the insured event becomes a liability at inception of the underlying contract. We believe that measuring losses on an accident year basis is the best measure of the underlying profitability of the premiums earned in that period, since it associates policy premiums earned with the estimate of the losses incurred related to those policy premiums.
We update and review the data underlying the estimation of our current accident year reserve each reporting period and make adjustments to current accident year net loss ratios that we believe best reflect emerging data. Both our internal and consulting actuaries perform an in-depth review of our current accident year reserve on at least a semi-annual basis. As a result of these analyses in both 2019 and 2018, we increased our current accident year net loss ratio; however, the adjustment was greater in 2019 as compared to 2018 which accounted for 6.0 percentage points of the increase in the current accident year net loss ratio. This increase in 2019 was driven by increased reserve estimates for a large national healthcare account and, to a lesser extent, in our broader HCPL excess and surplus lines of business.
Our broader HCPL excess and surplus lines of business include custom physicians, healthcare facilities, correctional healthcare and long-term care policies. Also as a result of our annual actuarial analysis, we increased our reserves related to DDR coverage endorsements in 2019 as compared to a decrease in 2018 which accounted for 2.9 percentage points of the increase in the current accident year net loss ratio. Furthermore, as part of our quarterly evaluation of the recoverability of DPAC, we recognized a PDR of $9.2 million which accounted for 1.9 percentage points of the increase in the current accident year net loss ratio. The PDR represents an estimated premium deficiency associated with the unearned premium of the aforementioned large national healthcare account which is reflected as a component of our current accident year net losses; no such reserves were established in 2018. The remaining increase in our current accident year net loss ratio of 1.3 percentage points was primarily due to changes in the mix of business. Current accident year loss ratios for our core physicians, podiatric, chiropractic, legal professional liability and medical technology liability businesses were relatively unchanged as compared to 2018.
Our Specialty P&C segment underwriting, policy acquisition and operating expenses for the years ended December 31, 2019 and 2018 were comprised as follows:
Other underwriting and operating expenses increased during the year ended December 31, 2019 as compared to 2018 primarily driven by $4.9 million of fees incurred in 2019 as compared to $1.0 million in 2018 associated with a data analytics services agreement entered into during the fourth quarter of 2018, partially offset by a decrease in compensation related costs primarily due to lower bonuses. See Note 9 of the Notes to Consolidated Financial Statements for further information on the data analytics services agreement.
Our expense ratio for the Specialty P&C segment for the year ended December 31, 2019 as compared to 2018 was as follows:
Our Workers' Compensation Insurance segment includes workers' compensation products provided to employers generally with 1,000 or fewer employees, as discussed in Note 17 of the Notes to Consolidated Financial Statements. Workers' compensation products offered include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies, deductible policies and alternative market solutions. Alternative market products include program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management services. Alternative market program premiums are 100% ceded to either the SPCs within our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, an unaffiliated captive insurer. Our Workers' Compensation Insurance segment operating results reflected pre-tax underwriting profit or loss from these workers' compensation products, exclusive of investment results, which are included in our Corporate segment. Segment operating results included the following:
Gross premiums written in our traditional business decreased during the year ended December 31, 2019 as compared to 2018, which reflected our response to underpricing that is occurring in a very competitive market. New business written, renewal pricing and the retention rate all declined during 2019. The decrease in deductible premiums written primarily reflects
the loss of three accounts. The decrease in retrospective policy premiums written primarily reflects the loss of two accounts and the impact of retrospective premium adjustments which are based on the loss experience of the underlying policies. Retrospective premium adjustments in 2019 decreased premiums written by $2.1 million as compared to adjustments in 2018 that increased premiums written by $0.8 million. Other premiums written primarily reflect our participation in residual market pools in the states in which we operate; premiums are based on information provided to us by the residual market.
reinsurers during the year ended December 31, 2019 primarily reflected an increase in earned premium, partially offset by the impact of lower reinsurance rates for the treaty year effective May 1, 2019.
The decrease in premiums ceded to unaffiliated captive insurers during the year ended December 31, 2019 reflected the impact of a novation of an unaffiliated captive program into an SPC at Inova Re during the fourth quarter of 2018. The premium ceded to this program is now reflected in premiums ceded to SPCs in the table above. For the year ended December 31, 2018, premiums related to this program that were ceded to the unaffiliated captive totaled $1.8 million. For the year ended December 31, 2019, premiums ceded to unaffiliated captive insurers in the table above reflected business ceded to one unaffiliated captive program.
We estimate our current accident year loss and loss adjustment expenses based on an expected loss ratio. Incurred losses and loss adjustment expenses for the current accident year are determined by applying the expected loss ratio to net premiums earned, which includes audit premium, for the respective period. The following table summarizes calendar year net loss ratios by separating losses between the current accident year and all prior accident years. Calendar year and current accident year net loss ratios by component were as follows:
The 2019 current accident year net loss ratio reflects the impact of the AAD (see previous discussion under the heading "Ceded Premiums Written") and renewal rate decreases, largely offset by overall favorable trends in claim closing patterns during 2019.
We recognized net favorable development related to our previously established reserves of $7.8 million for the year ended December 31, 2019 as compared to $8.0 million for 2018. The net favorable prior year development for the years ended December 31, 2019 and 2018 reflected overall favorable trends in claim closing patterns, primarily in the 2015 and 2016 accident years. For each of the years ended December 31, 2019 and 2018, the net favorable prior year development included $1.6 million related to the amortization of the purchase accounting fair value adjustment. The fair value adjustment has been fully amortized as of December 31, 2019.
Underwriting, policy acquisition and operating expenses includes the amortization of commissions, premium taxes and underwriting salaries, which are capitalized and deferred over the related workers’ compensation policy period, net of ceding commissions earned. The capitalization of underwriting salaries can vary as they are subject to the success rate of our contract acquisition efforts. These expenses also include a management fee charged by our Corporate segment, which represents intercompany charges pursuant to a management agreement, and the amortization of intangible assets, primarily related to the acquisition of Eastern by ProAssurance. The management fee is based on the extent to which services are provided to the subsidiary and the amount of premium written by the subsidiary.
As previously discussed, alternative market premiums written through our Workers' Compensation Insurance segment's alternative market business unit are 100% ceded, less a ceding commission, to either the SPCs in our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, an unaffiliated captive insurer. The ceding commission consists of an amount for fronting fees, cell rental fees, commissions, premium taxes and risk management fees. The fronting fees, commissions, premium taxes and risk management fees are recorded as an offset to underwriting, policy acquisition and operating expenses. Cell rental fees are recorded as a component of other income and claims administration fees are recorded as ceded ULAE. The increase in SPC ceding commissions earned in 2019 as compared to 2018 primarily reflected the increase in alternative market earned premium.
Gross premiums written for the years ended December 31, 2019 and 2018 were primarily comprised of workers' compensation coverages assumed from our Workers' Compensation Insurance segment. Workers' compensation gross premiums written decreased during 2019, primarily reflecting the competitive workers' compensation market. The increase in healthcare professional liability gross premiums written during 2019 was driven primarily by the addition of one large policy and the renewal of certain policies in 2019 that were written on a short-term basis in 2018. We retained 100% of the available alternative market programs up for renewal during 2019, including 22 workers' compensation programs and 3 healthcare professional liability programs. Additionally, we added one new alternative market program at Inova Re during the third quarter of 2019.
The above table reflects ceded premiums as a percent of gross premiums written for the workers' compensation business only; healthcare professional liability business is assumed net of reinsurance, as discussed above. The ceded premiums ratio reflects the weighted average reinsurance rates of all SPC programs. The ceded premiums ratio remained unchanged for the year ended December 31, 2019 as compared to 2018.
We recognized net favorable prior year development of $10.1 million and $9.0 million for the years ended December 31, 2019 and 2018, respectively. The net favorable prior year reserve development for the year ended December 31, 2019 primarily reflected overall favorable trends in claim closing patterns, primarily in the 2015 through 2018 accident years. The net favorable prior year reserve development for the year ended December 31, 2018 also primarily reflected overall favorable trends in claim closing patterns, primarily in the 2015 through 2017 accident years.
DPAC amortization primarily represented ceding commissions, which vary by program and are paid to our Workers' Compensation Insurance and Specialty P&C segments for premiums assumed. Ceding commissions include an amount for fronting fees, commissions, premium taxes and risk management fees, which are reported as an offset to underwriting, policy acquisition and operating expenses within our Workers' Compensation Insurance and Specialty P&C segments. In addition, ceding commissions paid to our Workers' Compensation Insurance segment include cell rental fees which are recorded as other income within our Workers' Compensation Insurance segment.
Other underwriting and operating expenses primarily include bank fees, professional fees, bad debt expense and a provision for federal income taxes paid by the SPCs. The increase in other underwriting and operating expense for the year
Underwriting, policy acquisition and operating expenses in both 2019 and 2018 included a provision for U.S. federal income taxes of $1.1 million and $0.4 million, respectively, for SPCs at Inova Re that have elected to be taxed as U.S. tax payers. The increase in the federal income tax provision for the year ended December 31, 2019 as compared to 2018 reflects an increase in taxable income for the Inova Re SPCs. This provision for federal income taxes is included in the total SPC net operating results and the portion of federal income taxes attributable to external cell participants is reflected in the SPC dividend (expense) income. We have removed the impact of the provision for U.S. federal income taxes from the expense ratio as these expenses do not represent underwriting expenses of the SPCs.
Excluding the effects of audit premium and the provision for U.S. federal income taxes, the underwriting expense ratio primarily reflected the weighted average ceding commission percentage of all SPC programs.
Our Lloyd's Syndicates segment includes operating results from our participation in certain Syndicates at Lloyd's of London. In addition to our participation in Syndicate operating results, we have investments in and other obligations to our Lloyd's Syndicates consisting of a Syndicate Credit Agreement and FAL requirements. For the 2019 underwriting year, our FAL was comprised of investment securities and cash and cash equivalents deposited with Lloyd's which at December 31, 2019 had a fair value of approximately $137.1 million, as discussed in Note 3 of the Notes to Consolidated Financial Statements.
We normally report results from our involvement in Lloyd's Syndicates on a quarter lag, except when information is available that is material to the current period (see discussion that follows under the heading "Property and Natural Catastrophe Losses"). Furthermore, the investment results associated with our FAL investments and certain U.S. paid administrative expenses are reported concurrently as that information is available on an earlier time frame.
Lloyd's Syndicate 1729. We provide capital to Syndicate 1729, which covers a range of property and casualty insurance and reinsurance lines in both the U.S. and international markets. The remaining capital for Syndicate 1729 is provided by unrelated third parties, including private names and other corporate members. For the 2019 underwriting year, we slightly decreased our participation in the operating results of Syndicate 1729 from 62% to 61% which, due to the quarter lag, was not reflected in our Lloyd's Syndicates segment results until the second quarter of 2019. Syndicate 1729 had a maximum underwriting capacity of £128 million (approximately $169.7 million at December 31, 2019) for the 2019 underwriting year, of which £78 million ($103 million based on December 31, 2019 exchange rates) was our allocated underwriting capacity. To reduce our exposure and the associated earnings volatility, we decreased our participation in the operating results of Syndicate 1729 for the 2020 underwriting year from 61% to 29% which, due to the quarter lag, will not be reflected in our Lloyd's Syndicates segment results until the second quarter of 2020. Syndicate 1729's maximum underwriting capacity for the 2020 underwriting year is £135 million (approximately $179 million at December 31, 2019), of which £39 million (approximately $51 million at December 31, 2019) is our allocated underwriting capacity.
Lloyd's Syndicate 6131. We are the sole (100%) capital provider to an SPA, Syndicate 6131, which focuses on contingency and specialty property business in both the U.S. and international markets. As an SPA, Syndicate 6131 is only allowed to underwrite one quota share reinsurance contract with Syndicate 1729. Due to the quarter lag, our participation in Syndicate 6131 was not reflected in our Lloyd's Syndicates segment results until the second quarter of 2018, as Syndicate 6131 began writing business effective January 1, 2018. For the 2019 underwriting year Syndicate 6131 had a maximum underwriting capacity of £12 million ($16 million based on December 31, 2019 exchange rates). For the 2020 underwriting year, Syndicate 6131 has a maximum underwriting capacity of £12 million (approximately $16 million at December 31, 2019).
Changes in our premium volume within our Lloyd's Syndicates segment are driven by four primary factors: (1) the amount of new business and the channels in which the business is written, (2) our retention of existing business, (3) the premium charged for business that is renewed, which is affected by rates charged and by the amount and type of coverage an insured chooses to purchase and (4) the timing of premium written through multi-period policies.
Gross premiums written in 2019 consisted of property insurance coverages (42% of total gross premiums written), casualty coverages (31%), catastrophe reinsurance coverages (16%), specialty property coverages (8%) and property reinsurance coverages (3%). The increase in gross premiums written during 2019 as compared to 2018 was primarily driven by volume increases on renewal business and renewal pricing increases, as well as new business written, primarily property insurance coverages.
As discussed in our Specialty P&C segment operating results, prior to January 1, 2018 Syndicate 1729 served as a reinsurer on a quota share basis for a wholly owned insurance subsidiary in our Specialty P&C segment. Premiums assumed from our Specialty P&C segment were approximately $1.2 million during the year ended December 31, 2019. The 2017 and 2016 calendar year quota share arrangements with our Specialty P&C segment were commuted in December 2018 and 2017, respectively. Due to the quarter lag, the effects of the 2017 and 2016 commutations were reported in both segments' results during the first quarters of 2019 and 2018, respectively, and are reflected in the Lloyd's Syndicates segment results for the years ended December 31, 2019 and 2018, respectively. The commutations did not differ significantly from the previously recorded amounts.
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to our reinsurers for their assumption of a portion of our losses. Premiums written through open-market channels are generally earned pro rata over the entire policy period, which is predominately twelve months, whereas premiums written through delegated underwriting authority arrangements are earned over twenty-four months. Therefore, net premiums earned is affected by shifts in the mix of policies written between the open-market and delegated underwriting authority arrangements. Additionally, fluctuations in premiums earned tend to lag those of premiums written. Premiums for certain policies and assumed reinsurance contracts are reported subsequent to the coverage period and/or may be subject to adjustment based on loss experience. These premium adjustments are earned when reported, which can result in further fluctuation in earned premium.
The increase in gross premiums earned for the year ended December 31, 2019 as compared to 2018 was driven by the pro rata effect of higher premiums written during the preceding twelve months, primarily property insurance coverages and, to a greater extent for 2019, the pro rata effect of shifts in the mix of premiums written during the preceding twelve months; a larger proportion of premiums were written through the open-market, as compared to previous years, which are predominately earned
The increase in ceded premiums earned during 2019 was driven by the pro rata effect of an increase in premiums ceded under reinsurance arrangements during the preceding twelve months due to the increase in gross premiums earned, as previously discussed.
Gross and net premiums earned included a nominal amount of premium assumed from our Specialty P&C segment during 2019 as compared to approximately $5.0 million of premium assumed during 2018.
The decrease in the current accident year net loss ratio for the year ended December 31, 2019 as compared to the year ended December 31, 2018 was driven by an increase in estimated reinsurance recoveries related to property and catastrophe related losses as well as the increase in net premiums earned, as previously discussed.
We recognized $0.4 million of unfavorable prior year development for the year ended December 31, 2019 as compared to $2.0 million of unfavorable prior year development for the year ended December 31, 2018. The unfavorable prior year development for the year ended December 31, 2018 was driven by higher than expected losses and development on certain large claims which resulted in unfavorable development with respect to a previous year of account.
Operating results of this segment are subject to U.K. income tax law.
Our Corporate segment includes our investment operations, other than those reported in our Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates segments, interest expense and U.S. income taxes, as discussed in Note 17 of the Notes to Consolidated Financial Statements. Our Corporate segment also includes non-premium revenues generated outside of our insurance entities and corporate expenses. Segment operating results for our Corporate segment were net earnings of $129.7 million and $42.3 million for the years ended December 31, 2019 and 2018, respectively, and included the following:
The increase in income from our fixed maturities during 2019 was primarily due to higher yields from certain asset classes in our fixed maturity portfolio. In addition, on an overall basis, our average investment in fixed maturity securities was approximately 2% higher for the year ended December 31, 2019 as compared to 2018.
Income from our equity portfolio decreased during 2019 as compared to 2018 which reflected a decrease in our allocation to this asset category as well as a different mix of equities owned.
Short-term investments, which have a maturity at purchase of one year or less, are carried at fair value, which approximates their cost basis, and are primarily composed of investments in U.S. treasury obligations, commercial paper and money market funds. Income from our short-term and other investments increased during 2019 primarily attributable to higher yields as compared to 2018.
We hold interests in certain LPs/LLCs that generate earnings from trading portfolios, secured debt, debt securities, multi-strategy funds and private equity investments. The performance of the LPs/LLCs is affected by the volatility of equity and credit markets. For our investments in LPs/LLCs, we record our allocable portion of the partnership operating income or loss as
The tax benefits received from our tax credit partnerships, which are not reflected in our investment results above, reduced our tax expenses in 2019 and 2018 as follows:
Tax credits provided by the underlying projects of the historic tax credit partnerships are typically available in the tax year in which the project is put into active service, whereas the tax credits provided by qualified affordable housing project tax credit partnerships are provided over approximately a ten year period. The increase in tax credits recognized in 2019 was primarily attributable to our historic tax credit partnership investments.
During 2019, we recognized credit-related OTTI in earnings of $0.8 million and non-credit OTTI in OCI of $0.2 million, both of which related to three corporate bonds in the energy and consumer sectors. We recognized OTTI in earnings of $0.5 million during 2018 related to debt instruments from two issuers in the energy sector.
Operating subsidiaries within our Specialty P&C and Workers' Compensation Insurance segments are charged a management fee by the Corporate segment for services provided to these subsidiaries. The management fee is based on the extent to which services are provided to the subsidiary and the amount of premium written by the subsidiary. Under the arrangement, the expenses associated with such services are reported as expenses of the Corporate segment, and the management fees charged are reported as an offset to Corporate operating expenses. While the terms of the arrangement were consistent between 2018 and 2019, fluctuations in the amount of premium written by each subsidiary can result in corresponding variations in the management fee charged to each subsidiary during a particular period.
Below we list the primary factors affecting our consolidated effective tax rate in 2019 and 2018. The comparability of each factor's impact on our effective tax rate is affected by the consolidated pre-tax loss recognized in 2019 as compared to the consolidated pre-tax income recognized in 2018. Factors that have the same directional impact on income tax expense in each year have an opposite impact on our effective tax rate due to the effective tax rate being calculated based upon on a pre-tax loss in 2019 versus pre-tax income in 2018. These factors include the following:
Our effective tax rates for 2019 and 2018, as shown in the table above, resulted in an income tax benefit in both years and differs from the statutory federal income tax rate of 21% primarily due to the recognition of a tax benefit from credits transferred to us from our tax credit partnership investments in both 2019 and 2018 and, to a lesser extent, portions of our income that are exempt from federal income taxes. Our effective tax rate in 2019 was also affected by the tax rate differential on the carryback of our current year tax loss to the 2017 tax year when the federal statutory tax rate was 35% as compared to the current tax rate of 21%. Additionally, our effective tax rates in both 2019 and 2018 were impacted by provision-to-return differences. For 2019, these differences primarily reflected a lower amount of tax credits utilized in 2018 than the previously estimated tax benefit. For 2018, these differences primarily reflected the impact of the change in the federal corporate tax rate on our temporary provision-to-return differences as well as higher tax credits received for the 2017 tax year than the previously estimated tax benefit.
Consolidated Balance Sheets - December 31, 2019 and December 31, 2018
Consolidated Statements of Income and Comprehensive Income - Years Ended December 31, 2019, 2018 and 2017