Our corporate headquarters, our Commercial Accounts business unit and certain employees of our Specialty Commercial Segment are currently located at Two Lincoln Centre located at 5420 LBJ Freeway, Dallas, Texas. The leased premises consist of 47,172 square feet of office space (“Suite 1100”) and approximately 3,000 square feet of storage space (“Suite 380”). The initial term of the lease commenced June 1, 2019 and expires May 31, 2032, and we have the right to renew the lease for up to ten years at market rental rates prevailing at the time of renewal. The initial base rent for Suite 1100 of $121,861 per month was waived for the first 12 months of the lease and the initial base rent for Suite 380 of $4,250 per month is waived for the first 48 months of the lease.
Our Specialty Personal Lines business unit is located at 6500 Pinecrest, Suite 100, Plano, Texas. The suite is located in a one story office building and contains 23,941 square feet of space. The rent is currently $30,525 per month pursuant to a lease that expires June 30, 2021.
The retained premium produced by these reportable segments is supported by our American Hallmark Insurance Company of Texas, Hallmark Specialty Insurance Company, Hallmark Insurance Company, Hallmark National Insurance Company and Texas Builders Insurance Company insurance subsidiaries. In addition, control and management of Hallmark County Mutual (“HCM”) is maintained through our wholly owned subsidiary, CYR Insurance Management Company (“CYR”). CYR has as its primary asset a management agreement with HCM which provides for CYR to have management and control of HCM. HCM is used to front certain lines of business in our Specialty Commercial and Personal Segments in Texas. HCM does not retain any business.
Impairment of investments. We complete a detailed analysis each quarter to assess whether any decline in the fair value of any debt investment below cost is deemed other-than-temporary. All debt securities with an unrealized loss are reviewed. We recognize an impairment loss when a debt investment’s value declines below cost, adjusted for accretion, amortization and previous other-than-temporary impairments, and it is determined that the decline is other-than-temporary.
Goodwill. Under ASC 350, “Intangibles - Goodwill and Other,” goodwill is tested for impairment annually at the reporting unit level (business unit or one level below a business unit) on an annual basis (October 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. For purposes of evaluating goodwill for impairment, we have determined that our reporting units are the same as our business units except for the E&S Casualty and Aerospace & Programs business units for which reporting units are at the component level (“one level below”). Our consolidated balance sheet as of December 31, 2019 included goodwill of acquired businesses of $44.7 million that was assigned to our business units as follows: Commercial Accounts business unit - $2.1 million; Commercial Auto business units - $21.3 million; E&S Casualty business unit - $6.3 million (comprised of $2.6 million for the primary/excess liability and public entity component and $3.7 million for the E&S package component); Aerospace & Programs business unit- $9.7 million (comprised entirely of the general aviation component); and Specialty Personal Lines business unit - $5.3 million. This amount had been recorded as a result of prior business acquisitions accounted for under the acquisition method of accounting. In connection with our normal process for evaluating impairment triggering events, during the first quarter of 2020 we determined that a significant decline in our market capitalization below our stockholders’ equity indicated the impairment of the goodwill and iindefinite-lived intangible assets included in our balance sheet. As a result, we took a $44.7 million charge to goodwill and a $1.3 million charge to indefinite-lived intangible assets during the first quarter of 2020. Consequently, as of December 31, 2020 , there was no goodwill reported on our consolidated balance sheet.
Deferred income tax assets and liabilities. We file a consolidated federal income tax return. Deferred federal income taxes reflect the future tax consequences of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end. Deferred taxes are recognized using the liability method, whereby tax rates are applied to cumulative temporary differences based on when and how they are expected to affect the tax return. Deferred tax assets and liabilities are adjusted for tax rate changes. A valuation allowance is provided against our deferred tax assets to the
Comparison of Years ended December 31, 2020 and December 31, 2019
The decrease in revenue for the year ended December 31, 2020 was primarily due to net investment losses of $22.9 million as compared to net investment gains of $20.6 million during the same period of 2019, as well as a $7.7 million decrease in net investment income for the year ended December 31, 2020 as compared to the same period of the prior year. This decrease in revenue was partially offset by increased net premiums earned of $44.9 million for the year ended December 31, 2020 compared to the same period of the prior year.
The pre-tax loss during the year ended December 31, 2020 was also impacted by a $44.7 million impairment charge to goodwill and a $1.3 million charge to indefinite-lived intangible assets. In connection with its normal process for evaluating impairment triggering events, the Company determined that a significant decline in its market capitalization below its stockholders’ equity during the first quarter of 2020 indicated the impairment of the goodwill and indefinite-lived intangible assets included in our balance sheet.
We reported a net loss of $91.7 million for the year ended December 31, 2020, as compared to a net loss of $0.6 million for the year ended December 31, 2019. On a diluted per share basis, net loss was $5.05 per share for fiscal 2020 as compared to net loss of $0.03 per share for fiscal 2019. Our effective tax rate was 20% for the year ended December 31, 2020 as compared to 39% for the same period in 2019. The decrease in the effective tax rate for the year ended December 31, 2020 was due in large part to the non-deductible impairment of goodwill and indefinite-lived intangible assets.
The following is additional business segment information for the years ended December 31, 2020 and 2019 (in thousands):
(1) The net loss ratio is calculated as incurred losses and LAE divided by net premiums earned, each determined in accordance with GAAP. The net expense ratio is calculated as total underwriting expenses offset by agency fee income divided by net premiums earned, each determined in accordance with GAAP. Net combined ratio is calculated as the sum of the net loss ratio and the net expense ratio.
The Specialty Commercial Segment reported a pre-tax loss of $6.1 million during the year ended December 31, 2020 as compared to a pre-tax loss of $1.4 million reported for the same period in 2019. The increase in the pre-tax loss was primarily the result of higher losses and LAE of $43.2 million and higher operating expenses of $2.3 million during the year ended December 31, 2020 as compared to the same period during 2019, partially offset by higher revenue as discussed above. The exit of the contract binding line of the primary commercial automobile business contributed $56.6 million to the pre-tax loss for the fiscal year ended December 31, 2020 as compared to a pre-tax loss of $28.5 million during the prior year. The $56.6 million pre-tax loss from the exited contract binding line of the primary commercial automobile business includes the $21.7 million charge for the loss portfolio transfer reinsurance contract that closed during the third quarter of 2020.
The Specialty Commercial Segment reported a net loss ratio of 86.6% for the year ended December 31, 2020 as compared to 85.0% for the same period in 2019. The gross loss ratio before reinsurance was 85.3% for the year ended December 31, 2020 as compared to 75.9% for the same period in 2019. The increase in the net loss ratio was due in large part to the $21.7 million charge for the loss portfolio transfer reinsurance contract that closed during the third quarter of 2020 that was reported as ceded incurred losses. The increase in the gross and net loss ratios was also impacted by catastrophe losses of $15.7 million for the year ended December 31, 2020 as compared to catastrophe losses of $2.3 million during the same period of 2019, partially offset by lower unfavorable prior year net loss reserve development and lower current accident year loss trends for the year ended December 31, 2020 as compared to the same period of 2019. The Specialty Commercial Segment reported $45.8 million of unfavorable prior year net loss reserve development for the year ended December 31, 2020 as compared to unfavorable prior year net loss reserve development of $60.1 million for the same period of 2019. The Specialty Commercial Segment reported a net expense ratio of 19.4% for the year ended December 31, 2020 as compared to 21.8% for the same period of 2019. The decrease in the net expense ratio was due largely to the increase in net premiums earned partially offset by the increase in operating expenses.
Gross premiums written for the Standard Commercial Segment were $98.0 million for the year ended December 31, 2020, which was $5.4 million, or 6%, more than the $92.6 million reported for the same period in 2019. Net premiums written were $68.4 million for the year ended December 31, 2020 as compared to $62.9 million for the same period in 2019. The increase in gross and net premiums written was due to higher premium production in our Commercial Accounts business unit.
Total revenue for the Standard Commercial Segment of $69.8 million for the year ended December 31, 2020, was $1.6 million, or 2%, more than the $68.2 million reported for the same period in 2019. This increase in total revenue was due to higher net premiums earned of $2.6 million, due primarily to the increased premiums written discussed above, partially offset by lower net investment income of $0.8 million and lower finance charges of $0.2 million during the year ended December 31, 2020 as compared to the same period during 2019.
Our Standard Commercial Segment reported a pre-tax loss of $3.0 million for the year ended December 31, 2020 as compared to a pre-tax loss of $0.8 million for the same period of 2019. The pre-tax loss was the result of higher losses and LAE of $2.4 million and higher operating expenses of $1.4 million, partially offset by the higher revenue discussed above. The higher operating expenses were largely the result of higher production related expenses of $0.5 million, higher salary and related expenses of $0.9 million, higher professional service fees of $0.2 million and higher other general expenses of $0.2 million, partially offset by lower occupancy and related expenses of $0.2 million and lower travel and related expenses of $0.2 million.
loss reserve development of $0.7 million during the same period of 2019. The Standard Commercial Segment reported $6.9 million of net catastrophe losses during the year ended December 31, 2020 as compared to $1.5 million of net catastrophe losses during the same period of 2019. The Standard Commercial Segment reported a net expense ratio of 31.1% for the year ended December 31, 2020 as compared to 30.0% for the same period of 2019. The increase in the expense ratio was primarily due to the impact of the higher operating expenses discussed above.
Total revenue for Corporate decreased by $46.6 million for the year ended December 31, 2020 as compared to the same period the prior year. This decrease in total revenue was due predominately to investment losses of $22.9 million during the year ended December 31, 2020 as compared to investment gains of $20.6 million reported for the same period of 2019 and lower net investment income of $3.1 million for the year ended December 31, 2020 as compared to the same period during 2019.
Corporate pre-tax loss was $94.6 million for the year ended December 31, 2020 as compared to pre-tax income of $0.8 million for the same period of 2019. The pre-tax loss was primarily due to a $44.7 million impairment charge to goodwill and a $1.3 million charge to indefinite-lived intangible assets. In connection with its normal process for evaluating impairment triggering events, the Company determined that a significant decline in its market capitalization below its stockholders’equity during the first quarter of 2020 indicated the impairment of the goodwill and indefinite-lived intangible assets included in our balance sheet. Further contributing to the pre-tax loss were higher operating expenses of $2.9 million, as well as the lower revenue discussed above. The higher operating expenses of $2.9 million were primarily a result of higher professional service expenses of $4.2 million and higher occupancy and other general expenses of $1.2 million, partially offset by decreased salary and related expenses of $2.4 million, largely due to incentive compensation accrual adjustments, and decreased travel and related expenses of $0.1 million. The pre-tax loss was partially reduced by lower interest expense of $0.1 million.
AHIC and TBIC, domiciled in Texas, are limited in the payment of dividends to their stockholders in any 12-month period, without the prior written consent of the Texas Department of Insurance, to the greater of statutory net income for the prior calendar year or 10% of statutory policyholders’ surplus as of the prior year end. HIC and HNIC, both domiciled in Arizona, are limited in the payment of dividends to the lesser of 10% of prior year policyholders’ surplus or prior year’s net income, without prior written approval from the Arizona Department of Insurance. HSIC, domiciled in Oklahoma, is limited in the payment of dividends to the greater of 10% of prior year policyholders’ surplus or prior year’s statutory net income, not including realized capital gains, without prior written approval from the Oklahoma Insurance Department. For all our insurance companies, dividends may only be paid from unassigned surplus funds. During 2021, the aggregate ordinary dividend capacity of these subsidiaries is $22.5 million, of which $15.0 million is available to Hallmark. As a county mutual, dividends from HCM are payable to policyholders. During the years ended December 31, 2020 and 2019 our insurance company subsidiaries paid $12.0 million and $15.5 million, respectively, in dividends to Hallmark.
Net cash used by our consolidated operating activities was $69.3 million for the year ended December 31, 2020 compared to net cash flow provided by operations of $27.7 million for the year ended December 31, 2019. The cash flow used by operations was driven by an increase in net paid claims (which includes $92.6 million net reinsurance premium paid in connection with the loss portfolio transfer reinsurance agreement closed during the third quarter of 2020), decreased collected net premiums, increased paid operating expenses, lower collected investment income, lower collected
commission and fee income and higher interest paid, partially offset lower taxes paid during the year ended December 31, 2020 as compared to the same period the prior year.
The Company did not report any net cash from financing activities during the year ended December 31, 2020. Net cash used in financing activities during the year ended December 31, 2019 was $19.2 million as a result of net proceeds from our senior unsecured note offering of $49.0 million and proceeds from the exercise of employee stock options of $1.5 million, partially offset by the $30.0 million repayment of the principal balance on our revolving credit facility and $1.3 million in repurchases of our common stock.
On August 19, 2019, Hallmark issued $50.0 million of senior unsecured notes (“Notes”) due August 15, 2029. Interest on the Notes accrues at the rate of 6.25% per annum and is payable semi-annually in arrears commencing February 15, 2020. The Notes are not obligations of or guaranteed by any of Hallmark’s subsidiaries and are not subject to any sinking fund requirements. At Hallmark’s option, the Notes are redeemable, in whole or in part, prior to the stated maturity subject to certain provisions intended to make the holders of the Notes whole on scheduled interest and principal payments. The indenture governing the Notes contains certain covenants which, among other things, restrict Hallmark’s ability to incur additional indebtedness, make certain payments, create liens on the stock of certain subsidiaries, dispose of certain assets, or merge or consolidate with other entities. The terms of the indenture prohibits payments or other distributions on any security of the Company that ranks junior to the Notes when the Company’s debt to capital ratio (as defined in the indenture) is greater than 35%. The Company’s debt to capital ratio was 38% as of December 31, 2020.
On June 21, 2005, we formed Hallmark Statutory Trust I (“Trust I”), an unconsolidated trust subsidiary, for the sole purpose of issuing $30.0 million in trust preferred securities. Trust I used the proceeds from the sale of these securities and our initial capital contribution to purchase $30.9 million of subordinated debt securities from Hallmark. The debt securities are the sole assets of Trust I, and the payments under the debt securities are the sole revenues of Trust I. On August 23, 2007, we formed Hallmark Statutory Trust II (“Trust II”), an unconsolidated trust subsidiary, for the sole purpose of issuing $25.0 million in trust preferred securities. Trust II used the proceeds from the sale of these securities and our initial capital contribution to purchase $25.8 million of subordinated debt securities from Hallmark. The debt securities are the sole assets of Trust II, and the payments under the debt securities are the sole revenues of Trust II.
The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities:
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019