Throughout the discussion we use certain terms and abbreviations, which can be found in the Glossary of Terms and Acronyms at the beginning of this report. In addition, a glossary of insurance terms and phrases is available on the investor section of our website. Throughout the discussion, references to "ProAssurance," "PRA," "Company," "we," "us" and "our" refer to ProAssurance Corporation and its consolidated subsidiaries. The discussion contains certain forward-looking information that involves significant risks, assumptions and uncertainties. As discussed under the heading "Caution Regarding Forward-Looking Statements," our actual financial condition and results of operations could differ significantly from these forward-looking statements.
•Specialty P&C - This segment includes our professional liability business and medical technology liability business. Our professional liability insurance is primarily comprised of medical professional liability products offered to healthcare providers and institutions. We also offer, to a lesser extent, professional liability insurance 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.
•Lloyd's Syndicates - This segment includes the results from our participation in Lloyd's of London Syndicate 1729 (29% for the 2020 underwriting year) and Syndicate 6131 (100% for the 2020 underwriting year). The results of this segment are normally reported on a quarter lag, except when information is available that is material to the current period. Syndicate 1729 underwrites risks over a wide range of property and casualty insurance and reinsurance lines in both the U.S. and international markets while Syndicate 6131 focuses on contingency and specialty property business, also within the U.S. and international markets. To support and grow our core insurance operations, we decreased our participation in the results of Syndicate 1729 for the 2021 underwriting year to 5% from 29%. Syndicate 6131 is an SPA that underwrites on a quota share basis with Syndicate 1729. Effective July 1, 2020, Syndicate 6131 entered into a six-month quota share reinsurance agreement with an unaffiliated insurer. Under this agreement, Syndicate 6131 ceded essentially half of the premium assumed from Syndicate 1729 to the
unaffiliated insurer; the agreement was non-renewed on January 1, 2021 and we decreased our participation in the results of Syndicate 6131 to 50% from 100% for the 2021 underwriting year. Due to the quarter lag, the change in our participation in the results of Syndicates 1729 and 6131 will not be reflected in our results until the second quarter of 2021.
Over the long-term we expect our growth to come primarily through controlled expansion of our existing operations. In addition, from time to time, we may identify opportunities for growth through the acquisition of other insurers, service providers or books of business. In early 2020, we entered into a definitive agreement to acquire NORCAL, an underwriter of medical professional liability insurance, subject to the demutualization of NORCAL Mutual, NORCAL's ultimate controlling party. If consummated, the transaction will provide strategic and financial benefits including additional scale and geographic diversification in the physician professional liability market. Upon satisfaction of the various remaining regulatory approvals required, we are anticipating to close the transaction in the second quarter of 2021. See further discussion under the heading "Acquisitions" in the Liquidity and Capital Resources and Financial Condition section that follows. We continue to see new opportunities from each of our acquisitions and believe each will provide organic growth through expansion in their existing markets and relationships.
Our operations at Eastern, a provider of workers' compensation insurance, currently represents the second largest product line in our gross premiums written (29% in 2020, 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.
Beginning in 2014, we started participating in and providing capital to Syndicate 1729 and beginning in 2018, began participating in and providing capital to Syndicate 6131. Our participation in Syndicate 1729 for the 2014 through 2020 underwriting years has ranged from a low of 29% to a high of 62%. Our participation in Syndicate 6131 was 100% for the 2018 through 2020 underwriting years. Our Lloyd's Syndicates segment represents 10% of our gross premiums written in 2020. For the 2021 underwriting year, we have decreased our participation in Syndicate 1729 (to 5% from 29%) and Syndicate 6131 (to 50% from 100%) in order to support and grow our core insurance operations, as previously discussed.
With the changes in executive leadership beginning in 2019, we have performed a detailed strategic review which led us to make significant organizational adjustments to our operating structure which we believe will improve our ability to grow our business profitably while strengthening our industry leading products and services. This review included consideration of the external environment on our business, agency partners’ operations and valued customer base, with the ultimate goal of enhancing our service platform to meet the ever-changing needs of the marketplace.
•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.
We particularly focus on our combined ratio and investment returns, both of which directly affect our ROE and growth in our book value. We currently target a dynamic long-term ROE of 700 basis points above the 10-year U.S. Treasury rate, which at December 31, 2020 was approximately 7.9%.
As a result of the COVID-19 pandemic, we are reevaluating certain of these estimates and assumptions which could result in material changes to our results of operations including, but not limited to, higher losses and loss adjustment expenses, lower premium volume, asset impairment charges, declines in investment valuations, reductions in audit premium estimates, deferred tax valuation allowances and increases in the allowance for expected credit losses related to available-for-sale securities, premiums receivable and reinsurance receivables. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted. These factors include, but are not limited to, the duration, spread, severity, reemergence or mutation of the COVID-19 pandemic, development and wide-scale distribution of medicines or vaccines that effectively treat the virus, the effects of the COVID-19 pandemic on our insureds, the loss environment, the healthcare industry, the labor market and Lloyd's, the actions and stimulus measures taken by governments and governmental agencies, and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, we may experience an impact to our business as a result of any economic recession that has occurred or may occur in the future. Please see "Item 1A, Risk Factors" included in this report for additional information.
Our reserving process can be broadly grouped into three areas: the establishment of the reserve for the current accident year (the initial reserve), the re-estimation of the reserve for prior accident years (development of prior accident years) and the establishment of the initial reserve for risks assumed in business combinations, applicable only in periods in which acquisitions occur (the acquired reserve). A summary of the activity in our net reserve for losses during 2020 and 2019 is provided under the heading "Losses" in the Liquidity and Capital Resources and Financial Condition section that follows.
Specialty P&C Segment. Loss costs within this segment are impacted by many factors including but not limited to the nature of the claim, including whether or not the claim is an individual or a mass tort claim, the personal situation of the claimant or the claimant's family, the outcome of jury trials, the legislative and judicial climate where any potential litigation may occur, general economic and social trends and, for claims involving bodily injury, the trend of healthcare costs. Within our Specialty P&C segment, for our professional liability business (80% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2020; predominately comprised of our HCPL products), we set an initial reserve based upon our evaluation of the current loss environment including frequency, severity, economic inflation, social inflation and legal trends.
During 2020, we have observed a reduction in claims frequency as compared to 2019, some of which is likely associated with the COVID-19 pandemic; however, we have remained cautious in recognizing these favorable frequency trends in our current accident year reserve due to the long-tailed nature of our HCPL claims as well as the uncertainty surrounding the length and severity of the pandemic. During 2020, we established a $10 million reserve related to COVID-19. This reserve represents our best estimate of ultimate COVID-19 related losses based on currently available information and reported incidents; no adjustment has been made to this reserve since the second quarter of 2020. See further discussion in our Segment Results - Specialty Property & Casualty section that follows under the heading "Losses and Loss Adjustment Expenses."
The risks insured in our Medical Technology Liability business (3% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2020) are more varied, and policies are individually priced based on the risk characteristics of the policy and the account. The insured risks range from startup operations to large multinational entities, and the larger entities often have significant deductibles or self-insured retentions. Reserves are established using our most recently developed actuarial estimates of losses expected to be incurred based on factors which include results from prior analysis of similar business, industry indications, observed trends and judgment. Claims in this line of business primarily involve bodily injury to individuals and are affected by factors similar to those of our HCPL line of business. For the Medical Technology Liability business, we also establish an initial reserve using a loss ratio approach, including a provision in consideration of historical loss volatility that this line of business has exhibited.
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
Lloyd's Syndicates Segment. Initial reserves for Syndicate 1729 and Syndicate 6131 are primarily recorded using the loss assumptions by risk category incorporated into each Syndicate's business plan submitted to Lloyd's with consideration given to loss experience incurred to date (5% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2020). The assumptions used in each business plan are consistent with loss results reflected in Lloyd's historical data for similar risks. The loss ratios may also fluctuate due to the mix of earned premium from different open underwriting years which we participate in to varying degrees, as well as the timing of earned premium adjustments. Such adjustments may be the result of premiums for certain policies and assumed reinsurance contracts being reported subsequent to the coverage period and may be subject to adjustment based on loss experience. Premium and exposure for some of Syndicate 1729's insurance policies and reinsurance contracts are initially estimated and subsequently recorded over an extended period of time as reports are received under delegated underwriting authority programs. When reports are received, the premium, exposure and corresponding loss estimates are revised accordingly. Changes in loss estimates due to premium or exposure fluctuations are incurred in the accident year in which the premium is earned.
For significant property catastrophe exposures, Syndicate 1729 uses third-party catastrophe models to accumulate a listing of potentially affected policies. Each identified policy is given an estimate of loss severity based upon a combination of factors including the probable maximum loss of each policy, market share analytics, underwriting judgment, client/broker estimates and historical loss trends for similar events. These models are inherently uncertain, reliant upon key assumptions and management judgment and are not always a representation of actual events and ensuing potential loss exposure. Determination of actual losses may take an extended period of time until claims are reported and resolved, including coverage litigation.
Paid Development and Reported (Incurred) Development Methods. These methods use historical, cumulative losses (paid losses for the Paid Development Method, reported losses for the Reported (Incurred) Development Method) by accident year and develop those actual losses to estimated ultimate losses based upon the assumption that each accident year will develop to estimated ultimate cost in a manner that is analogous to prior years, adjusted as deemed appropriate for the expected effects of known changes in the claim payment environment (and case reserving environment for the Reported (Incurred) Development Method); and to the extent necessary, supplemented by analyses of the development of broader industry data.
The acquisition of Eastern on January 1, 2014 increased our loss reserve by $153.2 million which represented the fair value of Eastern's loss reserve at the time of the acquisition. The fair value of the reserve for losses and loss adjustment expenses and related reinsurance recoverables was based on an actuarial estimate of the expected future net cash flows, a reduction of those cash flows for the time value of money determined utilizing the U.S. Treasury Yield Curve, and a risk adjustment to reflect the net present value of profit that an investor would demand in return for the assumption of the associated risks. Expected net cash flows were derived from the expected loss payment patterns included in an actuarial analysis of Eastern's reserve performed as of December 31, 2013. The fair value of the reserve, including the risk margin discussed above, exceeded the undiscounted loss reserve previously established by Eastern by $9.3 million; this fair value adjustment was
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. However, from early 2017 to the current period, the average pricing on renewed business has steadily increased reflective of the rising loss cost environment, and we anticipate further renewal pricing increases due to increasing loss severity.
Workers' Compensation. The projection of changes in claim severity trend has not historically been an influential factor affecting our analysis of workers' compensation reserves, as claims are typically resolved more quickly than the industry norm. As previously mentioned, the determination and calculation of loss development factors, in particular, the selection of tail factors which are used to extend the projection of losses beyond historical data, requires considerable judgment.
This can also 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, 2020, 2019 and 2018 with respect to the three then most recent prior accident years:
Our Medical Technology Liability line of business has not experienced the change in claims frequency previously described for HCPL. However, the nature of the risks insured and volatility of the loss experience in this line of business has produced more variable loss development, as presented in the following table:
Approximately $5.3 million of the $8.6 million total net favorable development recognized in 2020 related to the 2017 through 2019 accident years. The development for the 2017 through 2019 accident years represents a 13.7% reduction to the ultimates established for those reserves at December 31, 2019. Approximately $6.8 million of the $12.8 million total net favorable development recognized in 2019 related to the 2014 through 2017 accident years. The development for the 2014 through 2017 accident years represents a 13.7% reduction to the ultimates established for those reserves at December 31, 2018. Approximately $5.7 million of the $13.3 million total net favorable development recognized in 2018 related to the 2013 through 2016 accident years. The development for the 2013 through 2016 accident years represents a 12.3% reduction to the ultimates established for those reserves at December 31, 2017.
In 2020, 2019 and 2018 the development was largely attributable to favorable results from claims closed during the year. As time has elapsed we have recognized that actual loss experience has on average been better than estimated. We have been cautious in recognizing the improvement, but as claims have matured and claims are closed or have become more certain for the remaining open claims, we have revised reserve estimates. We believe the need for a cautious approach is required as outcomes are uncertain and results can be significantly affected by outcomes for a small number of cases.
In 2020, we recognized $12.1 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment related to workers' compensation business and $7.0 million of net favorable development in our Workers' Compensation Insurance segment. In 2019, we recognized $10.1 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment, all related to workers' compensation business, 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, all related to workers' compensation business, and $8.0 million of net favorable development in our Workers' Compensation Insurance segment. During the years ended December 31, 2019 and 2018, 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.
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 minimums and maximums. Any adjustments to our estimates of losses recoverable under our reinsurance agreements or the premiums owed under our agreements are reflected in 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.
We record the majority of our investments at fair value as shown in the table below. At December 31, 2020, the distribution of our investments based on GAAP fair value hierarchies (levels) was as follows:
Fair values for a majority of our equity securities and portions of our 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.
Certain of our investments, in accordance with GAAP for the type of investment, are measured using methodologies other than fair value. At December 31, 2020, these investments represented approximately 4% 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.
The assessment of whether the amortized cost basis of a 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 estimate of expected cash flows is determined by projecting a recovery value and a recovery time frame and assessing whether further principal and interest will be received. We consider various factors in projecting recovery values and recovery time frames, including the following:
•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;
•failure of the issuer of the security to make scheduled interest or principal payments;
•significant deterioration in the market environment that may affect the value of collateral (e.g. decline in real estate prices);
As part of our evaluation of the recoverability of DPAC, we also evaluate our unearned premiums for premium deficiencies. A premium deficiency is recognized if the sum of anticipated losses and loss adjustment expenses, unamortized DPAC and maintenance costs, net of anticipated investment income, exceeds the related unearned premium. If a premium deficiency is identified, the associated DPAC is written off, and a PDR is recorded for the excess deficiency as a component of net losses and loss adjustment expenses in our Consolidated Statement of Income and Comprehensive Income and as a component of the reserve for losses on our Consolidated Balance Sheet. For the year ended December 31, 2020 we did not determine any DPAC to be unrecoverable. For the year ended December 31, 2019, a nominal amount of DPAC was charged to expense as it was determined to be unrecoverable, and a $9.2 million PDR was established in our Specialty P&C segment related to a large national healthcare account. The $9.2 million PDR was fully amortized during 2020. See further discussion on the PDR in the Segment Results - Specialty Property & Casualty 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 quarter, 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 2020 or 2019. At December 31, 2020, our liability for unrecognized tax benefits approximated $5.2 million.
Impairment of goodwill is tested at the reporting unit level, which is consistent with our reportable segments identified in Note 16 of the Notes to Consolidated Financial Statements.
During the third quarter of 2020, the Company recorded a goodwill impairment charge of $161.1 million, and the facts and circumstances that led to this impairment and how the fair value of each reporting unit was estimated, including the significant assumptions used and other details are outlined in the following section.
As the impacts persisted into the third quarter, management performed new quantitative assessments of goodwill on our Specialty P&C and Workers' Compensation Insurance reporting units using updated marketplace data. The updated data, which was significantly influenced by our continued depressed stock price relative to both our own book value and the comparable stock prices of our peers, impacted a number of key variables in our analysis including the determination of a higher discount rate and lower valuation multiples. In addition, new guidance given by the Federal Reserve during the period regarding the expectation of a prolonged low interest rate environment impacted our analysis. This analysis during the third quarter of 2020 indicated an impairment of the goodwill associated with our Specialty P&C reporting unit and accordingly we recorded a $161.1 million charge to goodwill during the third quarter of 2020.
For each of the interim impairment assessments performed in the second and third quarters of 2020, management estimated the fair value of the reporting units using both an income approach and a market approach using marketplace data that was current at the time of each respective analysis. The estimate of fair value derived from the income approach was based on the present value of expected future cash flows, including terminal value, utilizing a market-based weighted average cost of capital determined separately for each reporting unit. The estimate of fair value derived from the market approach was based on price to book multiple data. The determination of fair value involved the use of significant estimates and assumptions, including revenue growth rates, operating margins, capital requirements, tax rates, terminal growth rates, discount rates, comparable public companies and synergistic benefits available to market participants. In addition, management made certain judgments and assumptions in allocating shared assets and liabilities to individual reporting units to determine the carrying amount of each reporting unit.
Management also performed impairment tests of certain of our definite and indefinite lived intangible assets for which a triggering event was deemed to have occurred. Based upon these impairment tests, no impairment of our definite or indefinite lived intangible assets was identified at September 30, 2020.
Subsequent to performing the interim impairment assessments previously discussed, we performed our annual goodwill impairment assessment as of October 1, 2020.
When testing goodwill for impairment on our annual test date, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform a quantitative impairment test; otherwise,
no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.
The quantitative goodwill impairment test involves comparing the fair value of a reporting unit with its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, the reporting unit's goodwill is considered not to be impaired. However, if the carrying value of a reporting unit exceeds its fair value, an impairment loss is recorded in an amount equal to that excess. Any impairment charge recognized is limited to the amount of the respective reporting unit's allocated goodwill.
For the most recent goodwill impairment test performed on October 1, 2020, we elected to perform a qualitative goodwill impairment test for our Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units. These reporting units have historically had an excess of fair value over book value and based on current operations are expected to continue to do so; therefore, our annual impairment test for these reporting units was performed qualitatively. In applying the qualitative approach, management considered macroeconomic factors, industry and market conditions, cost factors that could have a negative impact on the reporting units, actual financial performance of the reporting units versus expectations and management's future business expectations. As a result of the qualitative assessments, management concluded that it was not more likely than not that the fair value of each of our two reporting units that have net goodwill was less than the carrying value of each reporting unit as of the testing date; therefore, no further impairment testing was required. No goodwill impairment was recorded during the years ended December 31, 2019 or 2018. See Note 6 of the Notes to Consolidated Financial Statements for additional information about our goodwill.
Workers’ compensation premiums are determined based upon the payroll of the insured, respective premium rates and, where applicable, an experience-based modification factor. An audit of the policyholders’ records is conducted after policy expiration to make a final determination of applicable premiums. Audit premium due from or due to a policyholder as a result of an audit is reflected in net premiums written and earned when billed. We track, by policy, the amount of additional premium billed in final audit invoices as a percentage of payroll exposure and use this information to estimate the probable additional amount of EBUB as of the balance sheet date. We include changes to the EBUB estimate in net premiums written and earned in the period recognized. We reduced our EBUB estimate by $1.3 million during the year ended December 31, 2020 which primarily reflected a reduction in earned payroll exposure. As a result of the economic impact of COVID-19, we expect future reductions in payroll exposure related to in-force policies that could result in a significant decrease in audit premium and our EBUB estimate. We will continue to monitor and adjust the estimate, if necessary, based on changes in insured payrolls and economic conditions, as experience develops or new information becomes known; however, the length and magnitude of such changes depends on future developments, which are highly uncertain and cannot be predicted.
During the second quarter of 2020, we early adopted ASU 2019-12 which is intended to simplify various aspects related to accounting for income taxes. The most impactful provision of the new guidance on the Company is the removal of the limitation on the tax benefit recognized on pre-tax losses during interim periods in which the year-to-date loss exceeds the expected loss for the fiscal year.
During 2020, our operating subsidiaries paid dividends to us of approximately $118 million, which included extraordinary dividends of approximately $64 million. In the aggregate, our insurance subsidiaries are permitted to pay dividends of approximately $87 million over the course of 2021 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 principal components of our operating cash flows are the excess of premiums collected and net investment income over losses paid and operating costs, including income taxes. Timing delays exist between the collection of premiums and the payment of losses associated with the premiums. Premiums are generally collected within the twelve-month period after the policy is written, while our claim payments are generally paid over a more extended period of time. Likewise, timing delays exist between the payment of claims and the collection of any associated reinsurance recoveries.
in premiums ceded to Syndicate 1729. The decrease in operating cash flows also reflected one-time expenses of $5.4 million primarily related to employee severance and early retirement benefits paid to certain employees in 2020. Additionally, the decrease in operating cash flows reflected a decrease in cash received from investment income of $3.5 million primarily due to a reduction in dividends received on our equity portfolio resulting from a decrease in our allocation to this asset category. The decrease in operating cash flows was somewhat offset by an increase in net premium receipts of $28.1 million and a decrease in 2020 net tax payments as compared to 2019 of $9.8 million. The increase in net premium receipts was driven by our Specialty P&C segment due to $14.3 million of tail premium received from a large national healthcare account during the second quarter of 2020 (see further discussion in our Segment Results - Specialty Property & Casualty section that follows). The decrease in net tax payments was primarily due to refunds received in 2020. Furthermore, the decrease in operating cash flows was partially offset by an increase in net cash received of $6.8 million associated with the cash settlement of a quota share reinsurance agreement between our Specialty P&C segment and one of its reinsurers. The remaining variance in operating cash flows in 2020 as compared to 2019 was comprised of individually insignificant components.
•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).
•The line entitled “Net cumulative redundancy (deficiency)” reflects the difference between the previously recorded Balance Sheet Reserve for each applicable year and the Net Re-estimated Liability relating thereto as of the end of the most recent fiscal year.
•Reserves for 2010 and thereafter include gross and net reserves acquired in 2010 business combinations of $88.1 million and $82.2 million, respectively.
•The HCPL legal environment deteriorated in the late 1990’s and severity began to increase at a greater pace than anticipated in our rates and reserve estimates. We addressed the adverse severity trends through increased rates, stricter underwriting and modifications to claims handling procedures, and reflected this adverse severity trend when we established our initial reserves for subsequent years.
•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.
•Beginning in 2017, we identified potential higher severity trends in the broader HCPL industry. These trends were also reflected in increases in estimates of ultimate losses for open HCPL claims for earlier accident years, which resulted in a lower amount of favorable development recognized in 2018 and 2017 as compared to prior years.
•During 2019 the loss experience in our Specialty line 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 Specialty 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 Results - Specialty Property and Casualty section that follows.
Activity in our net reserve for losses during 2020, 2019 and 2018 is summarized below:
(1) Current year net losses for the year ended December 31, 2019 included incurred losses of $2.1 million related to a loss portfolio transfer entered into during 2019 in the Specialty P&C segment. Current year net losses in 2018 included incurred losses of $25.4 million related to a loss portfolio transfer entered into during the second quarter of 2018 (see Note 8 of the Notes to Consolidated Financial Statements).
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.
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 for one program. For the years ended December 31, 2020 and 2019, we wrote total alternative market premium of approximately $76.6 million and $90.0 million, respectively. The majority of these policies ($72.8 million and $86.7 million of premium in 2020 and 2019, 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 results of the SPCs are due to the participants of that cell. We participate to a varying degree in the results of selected SPCs and, for the SPCs in which we participate, our participation interest ranges from a low of 20% to a high of 85%. SPC results attributable to external cell participants are reflected as an SPC dividend expense (income) in our Segregated Portfolio Cell Reinsurance segment. See further discussion on our SPC operations in the Segment Results - Segregated Portfolio Cell Reinsurance section that follows. The alternative market workers' compensation policies are ceded from our Workers' Compensation Insurance segment to the SPCs under 100% quota share reinsurance agreements. The alternative market healthcare professional liability policies are ceded from our Specialty P&C segment to the SPCs under either excess of loss or quota share reinsurance agreements, depending on the structure of the individual program. The nominal portion of the risk that is not ceded to an SPC is retained in our Specialty P&C segment and may also be reinsured under our standard healthcare professional liability reinsurance program, depending on the policy limits provided. The remaining premium written in our alternative market business of $2.8 million and $2.4 million in 2020 and 2019, respectively, was 100% ceded to an unaffiliated captive insurer.
(1) Effective October 1, 2020, one prepaid limit reinstatement of $21M and a second limit reinstatement of up to $21M for the second layer, subject to reinstatement premium, which attaches after the first reinstatement has been completely exhausted. All limit reinstatements thereafter require no additional premium.
•Reinsurance is utilized on a per risk basis for the property insurance and casualty coverages in order to mitigate risk volatility.
At December 31, 2020, 99% of our investments in available-for-sale fixed maturity securities were rated and the average rating was A+. The distribution of our investments in available-for-sale fixed maturity securities by rating were as follows:
A detailed listing of our investment holdings as of December 31, 2020 is located under the Financial Information heading on the Investor Relations page of our website which can be reached directly at www.proassurance.com/investmentholdings or through links from the Investor Relations section of our website, investor.proassurance.com.
We manage our investments to ensure that we will have sufficient liquidity to meet our obligations, taking into consideration the timing of cash flows from our investments, including interest payments, dividends and principal payments, as well as the expected cash flows to be generated by our operations. During the year ended December 31, 2020, we received and granted requests for premium relief for certain insureds that have been adversely impacted by the recent COVID-19 pandemic in the form of either premium credits or premium deferrals. While premium credits and deferrals granted during the year ended December 31, 2020 did not have a significant impact on our liquidity, additional premium relief efforts could have an impact on our cash flows to be generated from our operations in future quarters and could result in an increase to our allowance for expected credit losses related to our premiums receivable. In addition to the interest and dividends we will receive from our investments, we anticipate that between $50 million and $110 million of our portfolio will mature (or be paid down) each quarter over the next twelve months and become available, if needed, to meet our cash flow requirements. The primary outflow of cash at our insurance subsidiaries is related to paid losses and operating costs, including income taxes. The payment of individual claims cannot be predicted with certainty; therefore, we rely upon the history of paid claims in estimating the timing of future claims payments with consideration to current and anticipated industry trends and macroeconomic conditions, including the impacts of COVID-19. To the extent that we may have an unanticipated shortfall in cash, we may either liquidate securities or borrow funds under existing borrowing arrangements through our Revolving Credit Agreement and the FHLB system. Permitted borrowings under our Revolving Credit Agreement are $250 million with the possibility of an additional $50 million accordion feature, if successfully subscribed. Given the duration of our investments, we do not foresee a shortfall that would require us to meet operating cash needs through additional borrowings. Additional information regarding our Revolving Credit Agreement is detailed in Note 11 of the Notes to Consolidated Financial Statements.
Our investment portfolio continues to be primarily composed of high quality fixed income securities with approximately 94% of our fixed maturities being investment grade securities as determined by national rating agencies. The weighted average effective duration of our fixed maturity securities at December 31, 2020 was 3.16 years; the weighted average effective duration of our fixed maturity securities combined with our short-term securities was 2.78 years.
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, 2020, we had investments in 31 separate investment funds with a total carrying value of $282.8 million which represented approximately 8% of our total investments. Our investment fund LPs/LLCs generate earnings from trading portfolios, secured debt, debt securities, multi-strategy funds and private equity investments, and the performance of these 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 results of the LPs/LLCs become available, typically following the end of a reporting period.
We have entered into a definitive agreement to acquire NORCAL, an underwriter of medical professional liability insurance, subject to the demutualization of NORCAL Mutual, NORCAL's ultimate controlling party. Upon satisfaction of the various remaining regulatory approvals required, we are anticipating to close the transaction in the second quarter of 2021. Subject to NORCAL’s conversion from a mutual company to a stock company, we have agreed to acquire 100% of the converted company stock in exchange for base consideration of $450 million and contingent consideration of up to an additional $150 million depending on the development of NORCAL’s ultimate losses over a three-year period following the acquisition date. The actual final cost of the transaction could vary due to the ability of NORCAL’s policyholders to elect forms of consideration other than stock in the demutualization transaction as provided by California law. Those alternative consideration options are tied to an appraised value of NORCAL as determined by the California insurance regulator rather than the price per share we have agreed to pay for 100% of NORCAL assuming that all policyholders elect to receive stock. Further, the transaction is subject to a number of closing conditions, including a maximum threshold for one of the alternative forms of consideration in the demutualization, a minimum threshold for the number of NORCAL shares tendered to us, and various required regulatory approvals, as previously mentioned. The Agreement and Plan of Acquisition is included as Exhibit 10.19 of this report. We plan to utilize our Revolving Credit Agreement to partially finance the acquisition (see further discussion on our Revolving Credit Agreement in this section under the heading "Debt"). The COVID-19 pandemic’s potential disruption to our business operations may require us to access our Revolving Credit Agreement for other purposes including working capital, capital expenditures or other general corporate requirements. If needed, we may be required to obtain additional financing and our ability to arrange such financing or refinancing will depend on, among other factors, our financial position and performance, as well as prevailing market conditions and other factors beyond our control. As a result, we may be compelled to take additional measures to preserve our cash flow, including the reduction of operating expenses or reduction or suspension of dividend payments, at least until the impacts of the COVID-19 pandemic improve. We believe that funds available under the Revolving Credit Agreement, along with cash generated from our operations and investment portfolio, will be sufficient to meet our liquidity needs.
There were no business combinations during the years ended December 31, 2020 or 2019.
Treasury share activity for 2020, 2019 and 2018 was as follows:
Each dividend was paid in the month following the quarter in which it was declared. Cash dividends totaling $39 million, $93 million and $316 million were paid during the years ended December 31, 2020, 2019 and 2018, respectively. Given our current earnings profile, the effects that underlying conditions in the broader insurance marketplace continue to have on our results and the uncertainties introduced by the COVID-19 pandemic, our Board made the decision to reduce our quarterly cash dividend from $0.31 per share to $0.05 per share, beginning with the dividend that was declared during the second quarter of 2020. Any decision to pay future cash dividends is subject to the Board’s final determination after a comprehensive review of financial performance, future expectations and other factors deemed relevant by the Board.
Additional information regarding our debt is provided in Note 11 of the Notes to Consolidated Financial Statements.
Selected consolidated financial data for each period is summarized in the table below:
the volatility in the global financial markets related to COVID-19, partially offset by lower tax credit partnership operating losses.
For the year ended December 31, 2020, we recognized $1.5 million of credit-related impairment losses in earnings and a nominal amount of non-credit impairment losses in OCI. The credit-related impairment losses recognized in 2020 primarily related to corporate bonds in the energy and consumer sectors. Additionally, 2020 included credit-related impairment losses related to four corporate bonds in various sectors, which were sold in 2020. The non-credit impairment losses recognized during 2020 related to three corporate bonds in the energy and consumer sectors. We recognized credit-related impairment losses in earnings of $0.8 million and nominal amount of non-credit impairment losses in OCI during 2019, both of which related to three corporate bonds in the energy and consumer sectors.
The primary drivers of the change in our consolidated current accident year net loss ratio for the year ended December 31, 2020 as compared to 2019 were as follows:
Our consolidated current accident year net loss ratio in 2020 and 2019 was impacted by a large national healthcare account. In 2019, we increased our reserve estimates in our Specialty P&C segment for this account's claims-made policy based on our in-depth review of our current accident year reserve which we believed best reflected emerging data at that time. In addition, we recognized a PDR of $9.2 million during the fourth quarter of 2019 related to this account which increased current accident year net losses. The PDR represented an estimated premium deficiency associated with the unearned premium of this account's claims-made policy as of the end of 2019. During 2020, this PDR was amortized back into current accident year net losses which offset the impact of the losses incurred in 2020 associated with the earned premium related to this account's claims-made policy. During the second quarter of 2020, the policy term associated with this account's claims-made policy expired. This account did not renew on terms offered by us and the insured exercised its contractual option to purchase the extended reporting endorsement or "tail" coverage resulting in a net underwriting loss of $45.7 million in our Specialty P&C segment during the second quarter of 2020. The net impact of this large national healthcare account resulted in a 2.0 percentage point increase in our consolidated current accident year net loss ratio in 2020 as compared to 2019. See further discussion on the large national healthcare account in our Segment Results - Specialty Property & Casualty section that follows. Also during the second quarter of 2020, we established a $10 million reserve in our Specialty P&C segment for COVID-19 which increased our current accident year net loss ratio by 1.3 percentage points in 2020 (see further discussion in our Segment Results - Specialty Property & Casualty section that follows). In addition, our consolidated current accident year net loss ratio in 2019 included the impact of an increase to our reserve in our Specialty P&C segment related to DDR coverage endorsements which accounted for 0.8 percentage points of the decrease in the 2020 ratio as compared to 2019. Furthermore, our consolidated current accident year net loss ratio in 2019 was affected by a $10 million reserve established by an SPC at Eastern Re associated with an assumed E&O liability policy which accounted for 1.2 percentage points of the decrease in our consolidated current accident year net loss ratio in 2020 as compared to 2019 (see further discussion in our Segment Results - Segregated Portfolio Cell Reinsurance section that follows). Excluding the impacts of the previously discussed items, our consolidated current accident year net loss ratio decreased 1.8 percentage points in 2020 as compared to 2019. This remaining decrease was driven by a lower current accident year net loss ratio in our Specialty P&C segment primarily due to decreases in certain loss ratios in 2020 in our Standard Physician, Specialty and Small Business Unit lines as a result of our re-underwriting efforts and focus on rate adequacy (see further discussion in our Segment Results - Specialty P&C section that follows).
The change in our consolidated underwriting expense ratio for the year ended December 31, 2020 as compared to 2019 was primarily attributable to the following:
Our consolidated underwriting expense ratio in 2020 was impacted by a decline in consolidated net premiums earned which outpaced the decline in consolidated DPAC amortization, accounting for 2.0 percentage points of the increase in the ratio, driven by lower earned premium in our Specialty P&C and Workers' Compensation Insurance segments. Our consolidated underwriting expense ratio also reflected one-time expenses of $5.4 million in 2020 mainly comprised of early retirement benefits granted to certain employees and expenses associated with the restructuring of our HCPL field office organization. In addition, our consolidated underwriting expense ratio was impacted by an increase in professional fees in our Corporate segment associated with our planned acquisition of NORCAL as well as corporate legal expenses. The remaining decrease in our consolidated underwriting expense ratio in 2020 of 2.2 percentage points primarily reflected the impact of a decrease in various operational expenses resulting from incremental improvements over the past year in our Specialty P&C segment including organizational structure enhancements and improved operating efficiencies. In addition, the remaining decrease in our consolidated underwriting expense ratio reflected lower operating expenses in our Lloyd's Syndicates segment due to our reduced participation in Syndicate 1729, lower consolidated travel-related costs due to COVID-19 and, to a lesser extent, a reduction of $1.7 million in employer contributions to the ProAssurance Savings Plan (see further discussion in Note 17 of the Notes to Consolidated Financial Statements).
Our effective tax rates for the years ended December 31, 2020 and 2019 were as follows:
We recognized an income tax benefit in both 2020 and 2019. Our effective tax rates for the years ended December 31, 2020 and 2019 were different from the statutory federal income tax rate of 21% primarily due to the benefit recognized from the tax credits transferred to us from our tax credit partnership investments. In addition, our effective tax rate in 2020 was also impacted by the non-deductible portion of the goodwill impairment related to the Specialty P&C reporting unit recognized during the third quarter of 2020. See further discussion of the goodwill impairment under the heading "Goodwill / Intangibles" in the Critical Accounting Estimates section and Notes 1 and 6 of the Notes to Consolidated Financial Statements and further information on other notable items impacting our effective tax rate in the Segment Results - Corporate section that follows under the heading "Taxes."
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, 2020 as compared to December 31, 2019 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 effects of the items listed in the following table that do not reflect normal 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 (loss) computed in accordance with GAAP.
(1) Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell Reinsurance segment. SPC results, including any realized gain or loss, that are attributable to external cell participants are reflected in the SPC dividend expense (income). To be consistent with our exclusion of net realized investment gains (losses) recognized in earnings, we are excluding the portion of net realized investment gains (losses) that is included in the SPC dividend expense (income) which is attributable to the external cell participants.
As a result of COVID-19, we continue to experience downward pressure on our premium volume resulting from new business disruptions. We have also experienced reductions in exposure due to insureds moving to part-time as a result of a general reduction in non-COVID-19 healthcare consumption and suspension of elective medical procedures. However, the length and magnitude of such changes depends on future developments, which are highly uncertain and cannot be predicted. In an effort to provide premium relief for insureds adversely impacted by the COVID-19 pandemic and to adjust for changes in exposures we granted premium credits totaling $4.1 million during the year ended December 31, 2020.
(3)Hospitals and Facilities premium (which includes hospitals, surgery centers and miscellaneous medical facilities) increased in 2020 as compared to 2019 primarily due to an increase in renewal pricing and, to a lesser extent, new business written, including the addition of two policies totaling $3.2 million, partially offset by retention losses. Renewal pricing increases in 2020 reflect rate increases and contract modifications that we believe are appropriate given the current loss environment and new business written reflects lower submissions as a result of COVID-19 as well as general market conditions. Retention losses in 2020 were driven by our decision not to renew certain products and the loss of two large policies totaling $4.3 million. As we have substantially completed our re-underwriting efforts on certain books of business as of the end of the third quarter of 2020, we anticipate retention rates to begin to normalize going forward.
(4)Senior Care premium includes facilities specializing in long term residential care primarily for the elderly ranging from independent living through skilled nursing. Our Senior Care premium decreased in 2020 as compared to 2019 primarily due to retention losses, partially offset by new business written. Retention losses in 2020 were driven by our decision not to renew certain classes of Senior Care business based on our expectations of poor loss performance, including our non-renewal of two large policies totaling $7.2 million. As of the end of the third quarter of 2020, we have completed our re-underwriting efforts on certain books of business and anticipate retention rates to begin to normalize going forward.
(6)Our Small Business Unit is primarily comprised of premium associated with podiatrists, legal professionals, dentists and chiropractors. Our Small Business Unit premium decreased in 2020 as compared to 2019 driven by retention losses and, to a lesser extent, reductions in exposure of $2.0 million primarily due to our insureds moving to part-time as a result of a general reduction in non-COVID-19 healthcare consumption, partially offset by new business written and, to a lesser extent, an increase in renewal pricing. The increase in renewal pricing in 2020 was primarily the result of an increase in the rate charged for certain renewed policies in select states.
(1)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. The decrease in ceded premiums written under our excess of loss reinsurance arrangements in 2020 as compared to 2019 primarily reflected a decrease in the overall volume of gross premiums written subject to cession and, to a lesser extent, certain of our reinsurance arrangements reaching maximum limits eligible for cession on treaty years effective October 1, 2017 and 2018. The decrease in ceded premiums written in 2020 also reflected the reduced rate on the treaty year effective October 1, 2020, partially offset by the effect of changes to both minimum and maximum limits for the treaty year effective October 1, 2019.
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. Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums written. Generally, our policies carry a term of one year; however, prior to the third quarter of 2020, we wrote certain Standard Physician policies with a twenty-four month term, and a few of our Medical Technology Liability policies have a multi-year term. 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. Retroactive coverage premiums are 100% earned at the inception of the contract, as all of the associated underlying loss events occurred in the past. Additionally, any ceded premium changes due to changes to estimates of premiums owed under reinsurance agreements for prior accident years are fully earned in the period of change.
The decrease in ceded premiums earned during 2020 as compared to 2019 reflected the effect of adjustments made during 2020 and 2019 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 $5.2 million in 2020 as compared to 2019. The remaining decrease was driven by the pro rata effect of a decrease in premium ceded under our shared risk and excess of loss arrangements during the preceding twelve months.
The determination of calendar year losses involves the actuarial evaluation of incurred losses for the current accident year and the actuarial re-evaluation of incurred losses for prior accident years, including an evaluation of the reserve amounts required for ECO/XPL losses.
(2)During 2020 and 2019, we increased the premiums owed under reinsurance agreements for prior accident years which decreased net premiums earned (the denominator of the current accident year ratio). See the discussion in the Premiums section for our Specialty P&C segment under the heading "Ceded Premiums Written" for additional information.
Our current accident year net loss ratio in 2020 and 2019 was impacted by a large national healthcare account. In 2019, we increased our reserve estimates for this account's claims-made policy during the fourth quarter of 2019 based on our in-depth review of our current accident year reserve which we believed best reflected emerging data at that time. In addition, we recognized a PDR of $9.2 million during the fourth quarter of 2019 related to this account which increased current accident year net losses. The PDR represented an estimated premium deficiency associated with the unearned premium of this account's claims-made policy as of the end of 2019. During 2020, this PDR was amortized back into current accident year net losses which offset the impact of the losses incurred in 2020 associated with the earned premium related to this account's claims-made policy. During the second quarter of 2020, the policy
We recognized net favorable prior year reserve development of $27.5 million for the year ended December 31, 2020 as compared to net unfavorable prior year reserve development of $5.7 million for the year ended December 31, 2019. Favorable development recognized during 2020 principally related to accident years 2014 through 2017. Net unfavorable prior year reserve development in 2019 included $51.5 million of unfavorable reserve development related to our reserves for the previously mentioned large national healthcare account that has experienced losses far exceeding the assumptions we made when underwriting the account, beginning in 2016; unfavorable development recognized during 2019 related to accident years 2016 through 2018. Excluding the unfavorable development related to this account, the Specialty P&C segment recognized favorable prior year reserve development totaling $45.8 million in 2019. Prior accident year development recognized for years ended December 31, 2020 and 2019 included a reduction in our reserve for potential ECO/XPL claims of $4.0 million and $0.3 million, respectively. Development recognized in both 2020 and 2019 also included favorable prior year reserve development attributable to our medical technology liability line of business of $8.6 million and $13.3 million, respectively.
A detailed discussion of factors influencing our recognition of loss development is included in our Critical Accounting Estimates section under the heading "Reserve for Losses and Loss Adjustment Expenses." Assumptions used in establishing our reserve are regularly reviewed and updated by management as new data becomes available. Any adjustments necessary are reflected in the then current operations. Due to the size of our reserve, even a small percentage adjustment to the assumptions can have a material effect on our results of operations for the period in which the change is made, as was the case in both 2020 and 2019.
Our Specialty P&C segment underwriting, policy acquisition and operating expenses for the years ended December 31, 2020 and 2019 were comprised as follows:
Management fees are charged pursuant to a management agreement by the Corporate segment to the operating subsidiaries within our Specialty P&C segment for services provided based on the extent to which services are provided to the subsidiary and the amount of premium written by the subsidiary. While the terms of the management agreement were consistent between 2020 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.
Gross premiums written in our alternative market business decreased during the year ended December 31, 2020 as compared to 2019, which primarily reflected renewal rate decreases, retention losses and a decrease in audit premium. In addition, the decline in alternative market business in 2020 also reflected the reduction in premium funding for one of our large alternative market programs (see further discussion in our Segment Results - Segregated Portfolio Cell Reinsurance section that follows). Renewal rate decreases were 4% in 2020 as compared to 5% in 2019. Retention in our alternative market business was 84% in 2020 which reflected the impact of the aforementioned reduction in premium funding for a large alternative market program. A decrease in renewal rate and retention losses were partially offset by new business of $3.7 million in 2020. We retained 100% of the 23 workers' compensation alternative market programs up for renewal during the year ended December 31, 2020. During the second quarter of 2020, we added one new workers' compensation alternative market program at Inova Re with $1.1 million in premiums written during the year ended December 31, 2020.
Our traditional and alternative market premiums written were impacted by reductions in payroll exposure and policy cancellations related to the economic impact of COVID-19. Reductions in payroll exposure and policy cancellations related to the economic impact of COVID-19 reduced premiums written by approximately $3.6 million for the year ended December 31, 2020. We expect continued downward pressure in future quarters on our workers' compensation premium resulting from further reductions in insured payroll exposure; however, the length and magnitude of such changes depends on future developments, which are highly uncertain and cannot be predicted.
Our Workers' Compensation Insurance segment cedes alternative market business under a 100% quota share reinsurance agreement, net of a ceding commission, to SPCs in our Segregated Portfolio Cell Reinsurance segment and, to a limited extent, to an unaffiliated captive insurer. The decrease in premiums ceded to SPCs during the year ended December 31, 2020 reflects the reduction in alternative market gross premiums written as discussed above under the heading "Gross Premiums Written".
Under our external reinsurance agreement for traditional business, we retain the first $0.5 million in risk insured by us and cede losses in excess of this amount on each loss occurrence under our primary external reinsurance treaty, subject to an AAD. The AAD for the contract year effective May 1, 2019 was $3.9 million of incurred losses in excess of the $0.5 million per occurrence retention, or approximately 2.1% of subject earned premium. Effective May 1, 2020, our primary reinsurance layer was renewed at a slightly higher rate than the expiring year, with an increase in the AAD to 3.16% of subject earned premium for incurred losses in excess of the per occurrence retention. Per our reinsurance agreements, we cede premiums related to our traditional business on an earned premium basis. The decrease in premiums ceded to external reinsurers during the year ended December 31, 2020 primarily reflected the decrease in traditional earned premium.
The above table reflects ceded premiums earned as a percent of gross premiums earned. As discussed above, we cede premiums related to our traditional business to external reinsurers on an earned premium basis. The ceded premiums ratio in 2020 primarily reflects the reinsurance rates in effect for the contract period beginning May 1, 2020.
Our Workers' Compensation Insurance segment underwriting, policy acquisition and operating expenses were comprised as follows:
The decrease in DPAC amortization for the year ended December 31, 2020 as compared to 2019 primarily reflects the decrease in net premiums earned. The decrease in other underwriting and operating expenses for the year ended December 31, 2020 as compared to 2019 primarily reflected a decrease in travel-related costs and a reduction in employer contributions to the
ProAssurance Savings Plan (see Note 17 of the Notes to Consolidated Financial Statements). The decrease in travel-related costs in 2020 are directly attributable to COVID-19, as company business travel has been substantially reduced. The decrease in other underwriting and operating expenses in 2020 was largely offset by costs related to the implementation of a new policy administration and claims system and one-time costs of $0.9 million primarily comprised of employee severance costs associated with the restructuring of our workers' compensation business in 2020.
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 decrease in SPC ceding commissions earned for the year ended December 31, 2020 as compared to 2019, primarily reflects the decrease in alternative market ceded earned premium.
The Segregated Portfolio Cell Reinsurance segment includes the results (underwriting profit or loss, plus investment results, net of U.S. federal income taxes) of SPCs at Inova Re and Eastern Re, our Cayman Islands SPC operations, as discussed in Note 16 of the Notes to Consolidated Financial Statements. SPCs are segregated pools of assets and liabilities that provide an insurance facility for a defined set of risks. Assets of each SPC are solely for the benefit of that individual cell and each SPC is solely responsible for the liabilities of that individual cell. Assets of one SPC are statutorily protected from the creditors of the others. Each SPC is owned, fully or in part, by an agency, group or association and the results of the SPCs are attributable to the participants of that cell. We participate to a varying degree in the results of selected SPCs and, for the SPCs in which we participate, our participation interest ranges from a low of 20% to a high of 85%. SPC results attributable to external cell participants are reflected as an SPC dividend (expense) income in our Segregated Portfolio Cell Reinsurance segment. In addition, our Segregated Portfolio Cell Reinsurance segment includes the investment results of the SPCs as the investments are solely for the benefit of the cell participants and investment results attributable to external cell participants are reflected in the SPC dividend (expense) income. As of December 31, 2020, there were 27 (24 active) SPCs. The SPCs assume workers' compensation insurance, healthcare professional liability insurance or a combination of the two from our Workers' Compensation Insurance and Specialty P&C segments. As of December 31, 2020, there were two SPCs that assumed both workers' compensation insurance and healthcare professional liability insurance and one SPC that assumed only healthcare professional liability insurance.
Segment results reflects our share of the underwriting and investment results of the SPCs in which we participate, and included the following:
Premiums in our Segregated Portfolio Cell Reinsurance segment are assumed from either our Workers' Compensation Insurance or Specialty P&C segments. Premium volume is driven by five primary factors: (1) the amount of new business written, (2) retention of the existing book of business, (3) premium rates charged on the renewal book of business and, for workers' compensation business, (4) changes in payroll exposure and (5) audit premium.
Gross premiums written for the years ended December 31, 2020 and 2019 were primarily comprised of workers' compensation coverages assumed from our Workers' Compensation Insurance segment. The decrease in gross premiums written in 2020 as compared to 2019 primarily reflected the competitive workers’ compensation market conditions and the resulting renewal rate decreases of 4%, retention losses and a decrease in audit premium. The decrease in the retention rate during 2020 includes the impact of a reduction in premium funding for a large workers' compensation alternative market program. We do not participate in this program; therefore, the reduction in premium funding had no effect on the segment results for the year ended December 31, 2020. Healthcare professional liability gross premiums written decreased during 2020 as compared to 2019 due to retention losses driven by the loss of a large Senior Care policy that chose to utilize self-insurance, partially offset by new business (see previous discussion under the heading "Gross Premiums Written" in our Segment Results - Specialty Property & Casualty section). We retained 100% of the 22 workers' compensation programs and 3 healthcare professional liability programs up for renewal during 2020. During the second quarter of 2020, we added one new alternative market program at Inova Re with $1.1 million in premiums written during the year ended December 31, 2020.
The decrease in net premiums earned during the year ended December 31, 2020 primarily reflected the pro rata effect of a reduction in net premiums written during the preceding twelve months, including the reduction in premium funding for the large workers' compensation alternative market program (see previous discussion under the heading "Gross Premiums Written").
Net investment income for the years ended December 31, 2020 and 2019 was primarily attributable to interest earned on available-for-sale fixed maturity investments, which primarily includes investment-grade corporate debt securities. We recognized $3.1 million of net realized investment gains for the year ended December 31, 2020, which primarily reflected an increase in the fair value on our equity portfolio due to an improvement in the global financial markets since the first quarter of 2020, which was depressed due to the onset of COVID-19. We recognized $4.0 million of net realized investment gains for the year ended December 31, 2019 driven by changes in the fair value of our equity portfolio.
For the year ended December 31, 2019, our Segregated Portfolio Cell Reinsurance segment net loss ratios were affected by a $10 million reserve that an SPC at Eastern Re established during the second quarter of 2019. This SPC had previously assumed an errors and omissions liability policy that provides coverage for losses up to a lifetime maximum of $10 million from a captive insurer unaffiliated with ProAssurance. During the second quarter of 2019, a claim was filed under this policy that met the lifetime maximum limit and, accordingly, a $10 million reserve was recorded. We do not participate in the SPC that assumed this policy; therefore, these losses were attributable to the external cell participants as reflected in the SPC dividend expense (income) and had no effect on our Segregated Portfolio Cell Reinsurance segment results for the year ended December 31, 2019. Given the significance of this event, we have removed the impact of the policy from each of the ratios below (as shown in the columns labeled "Adjusted") in order to assist in the comparability between periods. Calendar year and current accident year net loss ratios for the years ended December 31, 2020 and 2019 was as follows:
Excluding the impact of the errors and omissions liability policy, as previously discussed and as shown in the table above, the current accident year net loss ratio increased 2.3 percentage points in 2020 as compared to 2019, primarily reflecting the continuation of intense price competition and the resulting renewal rate decreases, partially offset by overall favorable claim trends in the 2020 accident year. As a result of the COVID-19 pandemic, legislative and regulatory bodies in certain states have changed or are considering changes to compensability requirements and presumptions for certain types of workers related to COVID-19 claims. These endeavors could have an adverse impact on the frequency and severity related to COVID-19 claims. Furthermore, the current economic conditions resulting from the COVID-19 pandemic have introduced significant risk of a prolonged recession, which could have an adverse impact on our return to wellness efforts and the ability of injured workers to return to work, resulting in a potential reduction in favorable claim trends in future periods.
Calendar year ceded incurred losses (excluding IBNR) decreased $10.2 million for the year ended December 31, 2020 as compared to 2019. Current accident year ceded incurred losses (excluding IBNR) decreased $8.9 million for the year ended December 31, 2020 as compared to 2019. The decrease in ceded incurred losses reflects lower severity-related claim activity during 2020 and, on a calendar year basis, favorable development on prior year reinsured claims.
Our Segregated Portfolio Cell Reinsurance segment underwriting, policy acquisition and operating expenses were comprised as follows:
The SPCs at Inova Re have made a 953(d) election under the U.S. Internal Revenue Code and are subject to U.S. federal income tax. U.S. federal income taxes incurred totaled $1.7 million and $1.1 million for the years ended December 31, 2020 and 2019, respectively. The increase in the federal income tax provision for the year ended December 31, 2020 as compared to 2019 reflects an increase in taxable income for the Inova Re SPCs.
Our Lloyd's Syndicates segment includes the results from our participation in certain Syndicates at Lloyd's of London. In addition to our participation in Syndicate results, we have investments in and other obligations to our Lloyd's Syndicates consisting of a Syndicate Credit Agreement and FAL requirements. For the 2020 underwriting year, our FAL was comprised of investment securities and cash and cash equivalents deposited with Lloyd's which at December 31, 2020 had a fair value of approximately $106.2 million, as discussed in Note 3 of the Notes to Consolidated Financial Statements. During the third quarter of 2020, we received a return of approximately $32.3 million of cash and cash equivalents from our FAL balances given the reduction in our participation in the results of Syndicate 1729 for the 2020 underwriting year to 29% from 61%.
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. 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. As previously discussed, we decreased our participation in the results of Syndicate 1729 for the 2020 underwriting year to reduce our exposure and the associated earnings volatility. Due to the quarter lag, this reduced participation was not reflected in our results until the second quarter of 2020. Syndicate 1729 had a maximum underwriting capacity of £135 million (approximately $185 million based on December 31, 2020 exchange rates) for the 2020 underwriting year, of which £39 million (approximately $53 million based on December 31, 2020 exchange rates) was our allocated underwriting capacity. To support and grow our core insurance operations, we decreased our participation in the results of Syndicate 1729 for the 2021 underwriting year to 5% from 29% which, due to the quarter lag, will not be reflected in our results until the second quarter of 2021. Syndicate 1729's maximum underwriting capacity for the 2021 underwriting year is £185 million (approximately $253 million based on December 31, 2020 exchange rates), of which £9 million (approximately $13 million based on December 31, 2020 exchange rates) is our allocated underwriting capacity.
Lloyd's Syndicate 6131. We provide capital to an SPA, Syndicate 6131, which focuses on contingency and specialty property business, primarily for risks within the U.S. as well as international markets. For the 2020 underwriting year, we were the sole (100%) capital provider to Syndicate 6131 which had a maximum underwriting capacity of £12 million (approximately $16 million based on December 31, 2020 exchange rates). As an SPA, Syndicate 6131 underwrites on a quota share basis with Syndicate 1729. Effective July 1, 2020, Syndicate 6131 entered into a six-month quota share reinsurance agreement with an unaffiliated insurer. Under this agreement, Syndicate 6131 ceded essentially half of the premium assumed from Syndicate 1729 to the unaffiliated insurer; the agreement was non-renewed on January 1, 2021 and we decreased our participation in the results of Syndicate 6131 to 50% from 100% for the 2021 underwriting year. Due to the quarter lag, this reduced participation will not be reflected in our results until the second quarter of 2021. Syndicate 6131's maximum underwriting capacity for the 2021 underwriting year is £20 million (approximately $27 million based on December 31, 2020 exchange rates), of which £10 million (approximately $14 million based on December 31, 2020 exchange rates) is our allocated underwriting capacity.
Changes in our premium volume within our Lloyd's Syndicates segment are driven by five primary factors: (1) changes in our participation in the Syndicates, (2) the amount of new business and the channels in which the business is written, (3) our retention of existing business, (4) 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 (5) the timing of premium written through multi-period policies.
Syndicate 1729 utilizes reinsurance to provide the capacity to write larger limits of liability on individual risks, to provide protection against catastrophic loss and to provide protection against losses in excess of policy limits. As previously discussed, for the second half of 2020 Syndicate 6131 utilized external quota share reinsurance to manage the net loss exposure on the specialty property and contingency coverages it assumed from Syndicate 1729 by ceding essentially half of the premium assumed to an unaffiliated insurer; this agreement was non-renewed on January 1, 2021. Due to the quarter lag, the effect of this reinsurance arrangement was not reflected in our results until the fourth quarter of 2020. Ceded premiums written decreased for the year ended December 31, 2020 as compared to 2019 primarily driven by our decreased participation in the results of Syndicate 1729 and, to a lesser extent, the effect of a revision to the Syndicates' estimates of premiums due to reinsurers during the first quarter of 2019. The decrease in ceded premiums written in 2020 as compared to 2019 was partially offset by the impact of premiums ceded under Syndicate 6131's six-month quota share agreement and, to a lesser extent, an increase in estimated reinsurance reinstatement premiums of $1.2 million during the fourth quarter of 2020 triggered by certain property and catastrophe related losses exceeding specified levels in the reinsurance agreement.
The decrease in gross premiums earned for the year ended December 31, 2020 as compared to 2019 was driven by our decreased participation in Syndicate 1729, which was not reflected in our results until the second quarter of 2020 and, to a lesser extent, a binder adjustment which reduced both written and earned premium in the current period (see previous discussion under the heading "Gross Premiums Written"). The decrease in gross premiums earned in 2020 was partially offset by the pro rata effect of higher premiums written at the Syndicates during the preceding twelve months, primarily property insurance and casualty coverages.
The increase in ceded premiums earned during 2020 as compared to 2019 was driven by the aforementioned reinstatement premiums earned of $1.2 million during the fourth quarter of 2020 and, to a lesser extent, the pro rata effect of an increase in written premiums ceded under reinsurance arrangements during the preceding twelve months, partially offset by our decreased participation in Syndicate 1729.
Losses for the year were primarily recorded using the loss assumptions by risk category incorporated into the business plans submitted to Lloyd's for Syndicate 1729 and Syndicate 6131 with consideration given to loss experience incurred to date. The assumptions used in each business plan were consistent with loss results reflected in Lloyd's historical data for similar risks. The loss ratios may fluctuate due to the mix of earned premium and the timing of earned premium adjustments (see discussion in this section under the heading "Net Premiums Earned"). Premium and exposure for some of Syndicate 1729's insurance policies and reinsurance contracts are initially estimated and subsequently adjusted over an extended period of time as underlying premium reports are received from cedants and insureds. When reports are received, the premium, exposure and corresponding loss estimates are revised accordingly. Changes in loss estimates due to premium or exposure fluctuations are incurred in the accident year in which the premium is earned.
We recognized $0.6 million and $0.4 million of unfavorable prior year development for the years ended December 31, 2020 and 2019, respectively. The unfavorable prior year development for the year ended December 31, 2020 was driven by higher than expected losses and development on certain large claims, primarily catastrophe related losses, which resulted in unfavorable development with respect to a previous year of account.
We have exposures to potential COVID-19 claims through our participation in Syndicates 1729 and 6131. During 2020, we recognized losses related to COVID-19 of approximately $3.6 million, net of reinsurance, primarily in Syndicate 6131's contingency and Syndicate 1729's casualty books of business. We are closely monitoring potential amendments in legislation and court decisions that could impact the claims position; however, to date, legislative attempts have been unsuccessful in most territories in which the Syndicates write the majority of their business. See previous discussion in Part I under the heading "Insurance Regulatory Matters- COVID-19."
Underwriting, policy acquisition and operating expenses decreased by $4.6 million for the year ended December 31, 2020 as compared to 2019 and reflected our decreased participation in Syndicate 1729 and, to a lesser extent, the effect of higher operational expenses incurred associated with establishing Syndicate 6131 during 2019.
The change in net investment income in 2020 as compared to 2019 was primarily attributable to interest earned on our FAL investments, which primarily includes investment-grade corporate debt securities. During the second quarter of 2020, certain corporate debt securities included in our FAL investments were liquidated. During the third quarter of 2020, approximately $32.3 million of cash and cash equivalents was returned to ProAssurance, as previously discussed, which will continue to impact the segment's net investment income in future periods. Syndicate 1729's fixed maturities portfolio includes certain debt securities classified as trading securities. Investment results associated with these fixed maturity trading securities are reported on the same quarter lag.
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 16 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 results for our Corporate segment were net earnings of $71.4 million and $129.7 million for the years ended December 31, 2020 and 2019, respectively, and included the following:
Net investment income is primarily derived from the income earned by our fixed maturity securities and also includes dividend income from equity securities, income from our short-term and cash equivalent investments, earnings from other investments and increases in the cash surrender value of BOLI contracts, net of investment fees and expenses.
Income from our fixed maturities decreased during 2020 as compared to 2019 primarily due to lower yields from our corporate debt securities, partially offset by higher average investment balances. Average investment balances were approximately 5% higher for the year ended December 31, 2020 as compared to 2019.
Equity in earnings (loss) of unconsolidated subsidiaries was comprised as follows:
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 results of the LPs/LLCs become available, typically following the end of a reporting period. The decrease in our investment results from our portfolio of investments in LPs/LLCs during 2020 as compared to 2019 was due to lower reported earnings from several LPs/LLCs driven by the volatility in the global financial markets related to COVID-19.
Our tax credit partnership investments are designed to generate returns in the form of tax credits and tax-deductible project operating losses and are comprised of qualified affordable housing project tax credit partnerships and a historic tax credit partnership. We account for our tax credit partnership investments under the equity method and record our allocable portion of the operating losses of the underlying properties based on estimates provided by the partnerships. For our qualified affordable housing project tax credit partnerships, we adjust our estimates of our allocable portion of operating losses periodically as actual operating results of the underlying properties become available. Our historic tax credit partnership is short-term in nature and the remaining operating losses, up to our total current funded commitment, were recognized during the second quarter of 2020. The results from our tax credit partnership investments for the year ended December 31, 2020 reflected lower partnership operating losses as compared to 2019. In addition, based on operating results received, we increased our estimate of operating losses by $4.3 million and $3.0 million for the years ended December 31, 2020 and 2019, respectively.
The tax benefits received from our tax credit partnerships, which are not reflected in our investment results above, reduced our tax expense in 2020 and 2019 as follows:
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 2019 and 2020, 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.
Consolidated interest expense for the years ended December 31, 2020 and 2019 was comprised as follows:
Listed below are the primary factors affecting our consolidated effective tax rate in 2020 and 2019.
(2) Represents the tax impact of the impairment of non-deductible goodwill in relation to the Specialty P&C reporting unit during the third quarter of 2020. See further discussion on the impairment charge under the heading "Goodwill / Intangibles" in the Critical Accounting Estimates section.
Our effective tax rates for 2020 and 2019, 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 benefit recognized from the tax credits transferred to us from our tax credit partnership investments. Tax credits recognized in 2020 were $17.9 million as compared to $21.9 million for 2019. While projected tax credits for 2020 are less than 2019, they continue to have a significant impact on the effective tax rate for 2020. Additionally, our effective tax rates in both 2020 and 2019 were impacted by provision-to-return differences. For 2020, these differences primarily reflected the additional tax rate differential of 14% on the carryback of the 2019 NOL to the 2014 tax year which was lower than the previously estimated tax benefit. For 2019, these differences primarily reflected a lower amount of tax credits recognized for the 2018 tax year than the previously estimated tax benefit. Furthermore, our pre-tax loss in 2020 included a $161.1 million goodwill impairment recognized in relation to the Specialty P&C reporting unit during the third quarter of 2020. Of the $161.1 million goodwill impairment, $149.6 million was non-deductible for which no tax benefit was recognized, while the remaining $11.5 million was deductible for which a 21% tax benefit was recognized on the related tax amortization. Consequently, the total impact of the goodwill impairment on the effective tax rate in 2020 was approximately 14.5%. See further discussion on this goodwill impairment in Notes 1 and 6 of the Notes to Consolidated Financial Statements. Our effective tax rate for the year ended December 31, 2020 also includes the
Other than as described below, there have been no other significant retrospective revisions in the presentation of the changes in the financial condition, results of operations and cash flows for the year ended December 31, 2019 as compared to the year ended December 31, 2018 as disclosed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of ProAssurance's December 31, 2019 report on Form 10-K.
As previously discussed, we reorganized our presentation of gross premiums written by component and related metrics during the second quarter of 2020 to better align with the current internal management reporting structure within the Specialty P&C segment. All below information has been recast to conform to the current period presentation.
(1)Standard Physician premium was our greatest source of premium revenues in both 2019 and 2018 and is predominately comprised of twelve month term policies. The decrease in twelve month term policies in 2019 was driven by retention losses, partially offset by an increase in renewal pricing and, to a lesser extent, new business written. The lower retention in 2019 is largely attributable to our focus on underwriting discipline as we continue to emphasize careful risk selection, rate adequacy and a willingness to walk away from business that does not fit our goal of achieving a long-term underwriting profit. We anticipate a lower than average level of retention to persist as we continue to reevaluate certain books of business and set our rates to reflect our observations of higher severity trends. Renewal pricing increases in 2019 are reflective of our concern about increases in loss severity. We also offer twenty-four month term policies to our physician insureds in one selected jurisdiction. The increase in twenty-four month term policies in 2019 as compared to 2018 primarily reflected the normal cycle of renewals (policies subject to renewal in 2019 were previously written in 2017 rather than 2018.
(2)Custom Physician premium includes large complex physician groups, multi-state physician groups and non-standard physicians and is written primarily on an excess and surplus lines basis. The increase in premium in 2019 as compared to 2018 included timing differences of $5.6 million primarily related to the prior year renewal of certain policies. Excluding the effect of these timing differences, Custom Physician premium increased $18.7 million as compared to 2018. The remaining increase was primarily due new business written, including the addition of a $7.2 million policy, an increase in
exposure related to three policies totaling $5.2 million and, to a lesser extent, renewal price increases. Renewal pricing increases during 2019 reflect the rising loss cost environment. The increase in premium in 2019 was partially offset by retention losses which reflects our focus on underwriting discipline as we continue to emphasize careful risk selection, rate adequacy and a willingness to walk away from business that does not fit our goal of achieving a long-term underwriting profit. We anticipate a lower than average level of retention to persist as we continue to reevaluate certain books of business and set our rates to reflect our observations of higher severity trends.
(4)Senior Care premium includes facilities specializing in long term residential care primarily for the elderly ranging from independent living through skilled nursing. Our Senior Care premium decreased in 2019 as compared to 2018 primarily due to retention losses, partially offset by new business written and, to a lesser extent, renewal pricing increases. Retention losses in 2019 were driven by our decision not to renew certain classes of Senior Care business based on our expectations of poor loss performance and, to a lesser extent, the loss of a $0.3 million policy as a result of rate increases. Renewal price increases in 2019 reflect rate increases where we believe appropriate given the loss environment in this space.
(5)We offer custom alternative risk solutions including loss portfolio transfers for healthcare entities that, most commonly, are exiting a line of business, changing an insurance approach or simply preferring to transfer risk. In the third quarter of 2019, we entered into a loss portfolio transfer with a regional hospital group which resulted in $0.9 million of retroactive premium written and fully earned in 2019. In the second quarter of 2018, we entered into a loss portfolio transfer with a large healthcare organization which resulted in $18.7 million of retroactive premium written and fully earned in 2018. See further discussion in footnote 7 that follows.
(9)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.
(1) See Gross Premiums Written section for further explanation of retention decline in 2019.