We use an aggregate of approximately 2.5 million square feet in approximately 54 office locations and approximately 500 storefronts. We have an ownership interest in the entities that own the buildings in which we lease space at two of these locations, which represent an aggregate of approximately 0.3 million square feet.
We manage our business through two reportable segments, Property and Casualty (“P&C”) and Accident and Health (“A&H”), and we conduct business primarily through our twenty-two regulated domestic insurance subsidiaries:
Our insurance subsidiaries have an “A-” (Excellent) group rating by A.M. Best Company, Inc. (“A.M. Best”). On July 9, 2020, following the announcement of our agreement to be acquired by Allstate, A.M. Best placed us and our subsidiaries under review with positive implications. We currently conduct a limited amount of business outside the United States, primarily in Bermuda.
The operating results of insurance companies are subject to quarterly and yearly fluctuations due to the effect of competition on pricing, the frequency and severity of losses, the effect of weather and natural disasters on losses, general economic conditions, the general regulatory environment in states in which an insurer operates, state regulation of premium rates, changes in fair value of investments, and other factors such as changes in tax laws or global events such as the COVID-19 pandemic and the resulting health and safety, economic and regulatory impacts. The industry has been highly cyclical with periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess capacity. While these cycles can have a large impact on a company’s ability to grow and retain business, we have sought to focus on niche markets and regions where we are able to maintain premium rates at generally consistent levels and maintain underwriting discipline throughout these cycles. We believe that the nature of our insurance products, including their relatively low limits, the relatively short duration of time between when claims are reported and when they are settled, and the broad geographic distribution of our customers, have allowed us to grow and retain our business throughout these cycles. Also, we have limited our exposure to catastrophe losses through reinsurance. With regard to seasonality, we tend to experience higher claims and claims expense in our P&C segment during periods of severe or inclement weather. Our operating results for the year ended December 31, 2020, have been negatively impacted by losses resulting from severe weather-related events.
We evaluate our operations by monitoring key measures of growth and profitability, including net combined ratio (non-GAAP) and operating leverage. We target a net combined ratio (non-GAAP) in the low-to-mid 90s while seeking to maintain optimal operating leverage in our insurance subsidiaries commensurate with our A.M. Best rating objectives. To achieve our targeted net combined ratio (non-GAAP) we continually seek ways to reduce our operating costs and lower our expense ratio. For the year ended December 31, 2020, our operating leverage (the ratio of net earned premium to average total stockholders’ equity) was 1.5x, which was within our planned target operating leverage of between 1.5x and 2.0x.
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization. Shortly thereafter, the President of the United States declared a National Emergency throughout the United States attributable to such outbreak. The outbreak has become increasingly widespread in the United States, including in the markets in which we operate. The COVID-19 pandemic has had a notable adverse impact on general economic conditions, including adverse impacts on automobile sales and new home sales and increased unemployment, which may decrease customer demand for our insurance products, negatively impact our premium volume, reduce our ability to access capital, and otherwise adversely impact our future results of operations. Additionally, federal, state, and local government actions to address and contain the impact of COVID-19 may adversely affect us. For example, regulatory actions seek to retroactively mandate coverage for losses which various types of insurance policies were not designed or priced to cover or seek to require premium refunds. Regulatory restrictions or requirements also impact pricing, risk selection and our rights and obligations with respect to our policies and insureds, including our ability to cancel policies or our right to collect premiums or fees. Because of the unprecedented size and breadth of this pandemic, and rapidly evolving situation, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time.
For further discussion regarding the potential impact of COVID-19 and related economic conditions on the Company, see “Part I-Item 1A - Risk Factors.”
Use of estimates and assumptions. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our principal estimates include unpaid losses and LAE reserves; deferred acquisition costs; reinsurance recoverable, including the provision for uncollectible amounts; recording of credit loss and impairment of fixed maturities due to credit-related factors; determining the fair value of investments; determining the fair value of stock-based awards for stock compensation; the valuation of intangibles and the determination of goodwill and goodwill impairment; and income taxes. In developing the estimates and assumptions, management uses all available evidence. Because of uncertainties associated with estimating the amounts, timing, and likelihood of possible outcomes, actual results could differ from estimates.
Premiums and other receivables. We recognize earned premium on a pro rata basis over the terms of the policies, generally periods of six or twelve months. Unearned premium represents the portion of premiums written applicable to the unexpired terms of the policies. Net premiums receivable represent premium written and not yet collected, net of an allowance for uncollectible premium. We regularly evaluate premium and other receivables and adjust for uncollectible amounts as appropriate. Receivables specifically identified as uncollectible are charged to expense in the period the determination is made. Premium refunds are recorded as an offset against gross premium written.
In establishing these estimates, we make various assumptions regarding a number of factors, including frequency and severity of claims, the length of time needed to achieve ultimate settlement of claims, inflation of medical costs, insurance policy coverage interpretations, jury determinations and legislative changes. Due to the inherent uncertainty associated with these estimates, and the cost of incurred but unreported claims, our actual liabilities may be different from our original estimates. On a quarterly basis, we review our reserves for loss and LAE to determine whether further adjustments are required. Any resulting adjustments are included in the period in which adjustments are determined. Additional information regarding the judgments and uncertainties surrounding our estimated reserves for loss and LAE can be found in Item 1, “Business - Loss Reserves.”
Amounts recoverable from reinsurers are estimated in a manner consistent with the associated claim liability. We report our reinsurance recoverable net of an allowance for estimated uncollectible reinsurance. The allowance is based upon our ongoing review of amounts outstanding, length of collection periods, changes in reinsurer credit standing, applicable coverage defenses, and other relevant factors. We evaluate and monitor the financial condition of our reinsurers under voluntary reinsurance arrangements to minimize our exposure to significant losses from reinsurer insolvencies.
Purchases and sales of investments are recorded on a trade date basis. Realized gains and losses are determined based on the specific identification method. Net investment income is recognized when earned and includes interest and dividend income together with amortization of market premiums and discounts using the effective yield method and is net of investment management fees and other expenses. For mortgage-backed securities and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the change in effective yields and maturities are recognized on a prospective basis through yield adjustments.
Goodwill and intangible assets. A purchase price paid that is in excess of net assets, i.e., goodwill, arising from a business combination is recorded as an asset and is not amortized. Intangible assets with an indefinite useful life are not amortized. Goodwill and intangible assets are tested for impairment on an annual basis or more frequently if changes in circumstances indicate that the carrying amount may not be recoverable. If the goodwill or intangible asset is impaired, it is written down to its realizable value with a corresponding expense reflected in general and administrative expenses in the consolidated statements of income.
Intangible assets that have finite lives, including but not limited to, agent and customer relationships and trademarks, are amortized over the estimated useful life of the asset. For intangible assets with finite lives, impairment is recognized if the carrying amount is not recoverable and exceeds the fair value of the intangible asset. Generally, intangible assets with finite lives are only tested for impairment if indicators of impairment, i.e, triggers, are identified. Triggers include but are not limited to, a significant adverse change in the extent, manner, or length of time in which the intangible asset is being used or a significant adverse change in legal factors or in the business climate that could affect the value of the intangible asset.
Business combinations. We account for business combinations under the acquisition method of accounting, which requires us to record assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their respective fair values as of the acquisition date. We account for the insurance and reinsurance contracts under the acquisition method as new contracts, which requires us to record assets and liabilities at fair value. We adjust the fair value of loss and LAE reserves starting with the acquired loss reserves based on our existing accounting policies and then discounting them based on expected reserve payout patterns using a current risk-free rate of interest. This risk-free interest rate is then adjusted based on different cash flow scenarios that use different payout and ultimate reserve assumptions deemed to be reasonably possible based upon the inherent uncertainties present in determining the amount and timing of payment of such reserves. The difference between the acquired loss and LAE reserves and our best estimate of the fair value of such reserves at the acquisition date is recorded as either an intangible asset or another liability, as applicable and is amortized proportionately to the reduction in the related loss reserves (e.g., over the estimated payout period of the acquired loss and LAE reserves). We assign fair values to intangible assets acquired based on valuation techniques including the income and market approaches. We record contingent consideration at fair value based on the terms of the purchase agreement with subsequent changes in fair value recorded through earnings. The purchase price is the fair value of the total consideration conveyed to the seller and we record the excess (deficiency) of the purchase price over the fair value of the acquired net assets, where applicable, as goodwill or bargain purchase gain. We expense costs associated with the acquisition of a business in the period incurred.
Level 3 assets are unobservable inputs supported by little or no market activity. The unobservable inputs represent management’s best assumptions of how market participants would price the assets or liabilities. Generally, Level 3 assets and liabilities are valued using non-binding broker quotes, pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
We recognize tax benefits only on tax positions that are more likely than not to be sustained upon examination by taxing authorities. Our policy is to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in our income tax provision. We file our consolidated tax returns as prescribed by the tax laws of the jurisdictions in which we operate.
Gross premium written. Gross premium written represents premium from each insurance policy that we write, including as a servicing carrier for assigned risk plans, during a reporting period based on the effective date of the individual policy, before ceding reinsurance to third parties. Premium refunds are recorded as an offset against gross premium written.
Net earned premium. Net earned premium is the earned portion of our net premium written. We earn insurance premium on a pro rata basis over the term of the policy. At the end of each reporting period, premium written that is not earned is classified as unearned premium, which is earned in subsequent periods over the remaining term of the policy. Our policies typically have a term of six months or one year. For a six-month policy written on January 1, 2020, we would earn half of the premium in the first quarter of 2020, and the other half in the second quarter of 2020.
Loss and loss adjustment expense. Loss and LAE represent our largest expense item and, for any given reporting period, include estimates of future claim payments, changes in those estimates from prior reporting periods and costs associated with investigating, defending, and servicing claims. These expenses fluctuate based on the amount and types of risks we insure. We record loss and LAE related to estimates of future claim payments based on case-by-case valuations and statistical analyses. We seek to establish all reserves at the most likely ultimate exposure based on our historical claims experience. It is typical for our more serious bodily injury claims to take several years to settle, and we revise our estimates as we receive additional information about the condition of claimants and the costs of their medical treatment. Our ability to estimate loss and LAE accurately at the time of pricing our insurance policies is a critical factor in our profitability.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses consist of policy acquisition and marketing expenses, salaries and benefits expenses. Policy acquisition expenses comprise commissions attributable to those agents, wholesalers, or brokers that produce premiums written on our behalf and promotional fees attributable to our affinity relationships. Acquisition costs also include costs that are related to the successful acquisition of new or renewal insurance contracts including comprehensive loss underwriting exchange reports, motor vehicle reports, credit score checks, and policy issuance costs.
Net operating expense ratio, net operating expense ratio before amortization and impairment, net combined ratio and net combined ratio before amortization and impairment are considered non-GAAP financial measures under applicable SEC rules because a component of those ratios, net operating expense, is calculated by offsetting acquisition costs and other underwriting expenses and general and administrative expenses by ceding commission income and service and fee income, and is therefore a non-GAAP measure. We use net operating expense ratio (non-GAAP), net operating expense ratio before amortization and impairment (non-GAAP), net combined ratio (non-GAAP) and net combined ratio before amortization and impairment (non-GAAP) to evaluate financial performance against historical results and establish targets on a consolidated basis. We believe this presentation enhances the understanding of our results by eliminating what we believe are volatile and unusual events and presenting the ratios with what we believe are the underlying run rates of the business. Other companies may calculate these measures differently, and, therefore, their measures may not be comparable to those used by us. For a reconciliation of net operating expense, see “Results of Operations - Consolidated Results of Operations” below.
The Company has auto and homeowners quota share agreements (collectively, the “Quota Shares”). Effective January 1, 2020, under the auto quota share agreement we cede 5.0% of net liability under new and renewal auto policies written, compared to 7.0% and 10.0% of net liability ceded effective January 1, 2019, and July 1, 2019, respectively. From July 1, 2019, to June 30, 2020, under the homeowners quota share agreement we ceded 40.0% of net liability. Effective July 1, 2020, we cede 20.0% of net liability under homeowners policies.
In August 2019, we completed the acquisition of National Farmers Union Property and Casualty Company (“Farmers Union Insurance”). In December 2019, we sold our Euro Accident Health and Care Insurance Sweden operation (“Euroaccident”).
As a result of these transactions, comparisons between the results for the years ended December 31, 2020, and 2019, will be less meaningful.
Consolidated Results of Operations for the Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019
Net premium written. Net premium written increased by $396.2 million, or 9.4%, from $4,224.6 million for the year ended December 31, 2019, to $4,620.8 million for the year ended December 31, 2020. Net premium written for the P&C segment increased by $370.4 million for the year ended December 31, 2020 compared to the same period in 2019, due to an increase in gross premium written and a decrease in ceded written premium to the Quota Shares ($461.2 million), partially offset by a decrease in the Reciprocal Exchanges ($33.3 million). Net premium written for the A&H segment increased by $25.8 million for the year ended December 31, 2020, compared to the same period in 2019, due to an increase in our small group self-funded and individual products ($115.1 million), offset by the sale of Euroaccident in 2019 ($89.2 million).
Loss and loss adjustment expense; net loss ratio. Loss and LAE decreased by $30.4 million, from $2,854.5 million for the year ended December 31, 2019, to $2,824.1 million for the year ended December 31, 2020, primarily reflecting lower claims frequency, as a result of less miles driven during the pandemic ($239.8 million), offset by a decrease in losses ceded to the Quota Shares ($180.3 million), the acquisition of Farmers Union Insurance ($43.6 million), and the sale of Euroaccident in 2019 ($48.3 million). The changes by segment were: P&C decreased by $38.6 million and A&H increased by $8.2 million. Losses related to P&C weather-related events, excluding the Reciprocal Exchanges, were $150.2 million in 2020, compared to $51.2 million in 2019, an increase of $99.0 million year over year.
Loss and LAE for the year ended December 31, 2020, included $4.2 million of unfavorable loss development on prior accident year loss and LAE reserves. The loss development was composed of $28.0 million of unfavorable loss development in the P&C segment, driven by the small business auto product line, and $23.8 million of favorable loss development in the A&H segment, driven by lower than expected loss ratios in the group segment. Loss and LAE for the year ended December 31, 2019, included $5.2 million of unfavorable loss development on prior accident year loss and LAE reserves. The loss development was composed of $50.5 million of unfavorable loss development in the P&C segment primarily driven by the small business auto product line, and $45.4 million of favorable loss development in the A&H segment primarily driven by overall improvement in loss ratio estimates.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $163.2 million, or 19.7%, from $827.4 million for the year ended December 31, 2019, to $990.6 million for the year ended December 31, 2020, due to an increase of $76.3 million in the P&C segment, as a result of the acquisition of Farmers Union Insurance and higher costs and expenses retained due to a decrease in ceded earned premium to the Quota Shares; and an increase of $86.9 million in the A&H segment, primarily due to the costs of selling policies issued by third-party insurance companies.
General and administrative expenses. General and administrative expenses increased by $1.4 million, from $1,041.8 million for the year ended December 31, 2019, to $1,043.2 million for the year ended December 31, 2020, due to an increase of $19.6 million in the P&C segment, offset by a decrease of $12.0 million in the A&H segment. The increase in the P&C segment was primarily due to organic growth, while the decrease in the A&H segment was primarily a result of the sale of Euroaccident in 2019.
The consolidated net operating expense ratio increased from 23.7% for the year ended December 31, 2019, to 24.8% for the year ended December 31, 2020. Excluding the Reciprocal Exchanges, the net operating expense ratio was 24.6% and 23.4% for the years ended December 31, 2020, and 2019, respectively. The Reciprocal Exchanges’ net operating expense ratio was 28.7% and 29.4% for the years ended December 31, 2020, and 2019, respectively.
Net investment income. Net investment income decreased by $23.0 million, or 16.3%, from $141.2 million for the year ended December 31, 2019, to $118.3 million for the year ended December 31, 2020.
Net gain (loss) on investments. Net gain (loss) on investments increased by $13.1 million, from a $13.5 million gain for the year ended December 31, 2019, to a $26.6 million gain for the year ended December 31, 2020.
P&C Segment Results of Operations for the Year Ended December 31, 2020, Compared to the Year Ended December 31, 2019
Our P&C segment net loss ratio, which includes the Reciprocal Exchanges, decreased from 73.6% for the year ended December 31, 2019, to 65.8% for the year ended December 31, 2020. Excluding the Reciprocal Exchanges, the net loss ratio was 65.5% and 72.9% for the years ended December 31, 2020, and 2019, respectively. The Reciprocal Exchanges’ net loss ratio was 69.8% and 84.2% for the years ended December 31, 2020, and 2019, respectively.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $76.3 million, or 12.6%, from $605.0 million for the year ended December 31, 2019, to $681.3 million for the year ended December 31, 2020. The increase was primarily due to the acquisition of Farmers Union Insurance and higher costs and expenses retained due to a decrease in ceded earned premium to the Quota Shares.
Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense increased by $171.5 million, or 22.6%, from $758.3 million for the year ended December 31, 2019, to $929.8 million for the year ended December 31, 2020. Our P&C segment net operating expense ratio was 21.9% for the year ended December 31, 2019, compared to 24.4% for the year ended December 31, 2020. The increases in net operating expense and net operating expense ratio were primarily due to organic growth, the acquisition of Farmers Union Insurance, and a decrease in ceding commission income from the Quota Shares.
Underwriting income; net combined ratio (non-GAAP). Underwriting income increased by $221.2 million, or 144.7%, from $152.9 million for the year ended December 31, 2019, to $374.1 million for the year ended December 31, 2020. The P&C segment net combined ratio decreased from 95.5% for the year ended December 31, 2019, to 90.2% for the year ended December 31, 2020. The increase in underwriting income and the decrease in the net combined ratio were primarily due to increased net earned premium and lower claims, including as a result of the recent decline in miles driven due to the COVID-19 pandemic, offset by higher expenses due to organic growth and the acquisition of Farmers Union Insurance, and a decrease in ceding commission income from the Quota Shares.
Net earned premium. Net earned premium increased by $22.4 million, from $663.0 million for the year ended December 31, 2019, to $685.5 million for the year ended December 31, 2020, primarily due to an increase in our small group self-funded and individual products ($113.9 million), offset by the sale of Euroaccident in 2019 ($91.4 million).
Loss and loss adjustment expense; net loss ratio. Loss and LAE increased by $8.2 million, from $310.7 million for the year ended December 31, 2019, to $318.9 million for the year ended December 31, 2020. Our A&H net loss ratio decreased from 46.9% for the year ended December 31, 2019, to 46.5% for the year ended December 31, 2020. The loss ratio decrease was primarily due to lower claims frequency.
Acquisition costs and other underwriting expenses. Acquisition costs and other underwriting expenses increased by $86.9 million, or 39.1%, from $222.3 million for the year ended December 31, 2019, to $309.3 million for the year ended December 31, 2020, primarily due to the costs of selling policies issued by third-party insurance companies.
Net operating expense (non-GAAP); net operating expense ratio (non-GAAP). Net operating expense decreased by $33.1 million, or 15.3%, from $216.1 million for the year ended December 31, 2019, to $183.1 million for the year ended December 31, 2020. Our A&H net operating expense ratio decreased from 32.6% for the year ended December 31, 2019, to 26.7% for the year ended December 31, 2020. The decreases in net operating expense and net operating ratio were primarily due to increased net earned premium in 2020 and the sale of Euroaccident in 2019.
We previously had a $340.0 million credit agreement, under which there was $140.0 million outstanding as of December 31, 2020. On January 4, 2021, the 2019 Credit Agreement was repaid and terminated in connection with the closing of the Merger.
On April 29, 2020, our Board of Directors authorized and approved a share repurchase program with a 12-month term for up to $50.0 million aggregate purchase price of our outstanding common shares. During the year ended December 31, 2020, we purchased 459,083 common shares with a cost of $8.5 million. The purchases were made in the open market in accordance with applicable federal securities laws, including Rule 10b-18 and Rule 10b5-1 of the Securities Exchange Act of 1934. Pursuant to the terms of the Merger Agreement with Allstate signed July 7, 2020, we ceased making any further common share repurchases.
Our insurance subsidiaries are subject to statutory and regulatory restrictions imposed on insurance companies by their place of domicile which limit the amount of cash dividends or distributions that they may pay to us unless special permission is received from the insurance regulator of the relevant domicile. The aggregate limit imposed by the various domiciliary regulatory authorities of our insurance subsidiaries was approximately $156.4 million and $403.0 million as of December 31, 2020, and 2019, respectively, taking into account dividends paid in the prior twelve month periods. During the years ended December 31, 2020, 2019, and 2018, there were $300.0 million, $7.0 million and $156.7 million, respectively, of dividends or return of capital paid by our insurance subsidiaries.
We forecast claim payments based on our historical experience. We seek to manage the funding of claim payments by actively managing available cash and forecasting cash flows on both a short-term and long-term basis. Cash payments for claims were $2.7 billion, $2.8 billion and $2.5 billion in the years ended December 31, 2020, 2019, and 2018, respectively. Historically, we have funded claim payments from cash flow from operations (principally premiums), net of amounts ceded to our third-party reinsurers. We presently expect to maintain sufficient cash flow from operations to meet our anticipated claim obligations and operating and capital expenditure needs. Our cash, and cash equivalents (including restricted cash), and total investments increased from $4.5 billion at December 31, 2018 to $5.0 billion at December 31, 2019, and increased to $5.7 billion at December 31, 2020. We do not anticipate selling securities in our investment portfolio to pay claims or to fund operating expenses. Should circumstances arise that would require us to do so, we may incur losses on such sales, which would adversely affect our results of operations and financial condition and could reduce investment income in future periods.
We file a consolidated Federal income tax return and participate in a Federal income tax allocation agreement with our subsidiaries. Under the tax allocation agreement, each subsidiary computes and pays to the Company its respective share of the federal income tax liability primarily based on separate return calculations. The Reciprocal Exchanges are not a party to the tax allocation agreement and file separate tax returns.
Net cash provided by operating activities increased by $78.5 million, primarily due to lower prepaid reinsurance premiums in 2020 compared to 2019.
Net cash used in financing activities decreased by $10.4 million, primarily due to lower repayments of debt in 2020 compared to 2019.
We utilize various excess of loss, quota share, state-based industry pools or facilities, and catastrophe reinsurance programs to limit our exposure. Reinsurance agreements transfer portions of our underlying risk on the business we write. Reinsurance does not discharge or diminish our obligation to pay claims covered by the insurance policies we issue; however, it does permit us to recover certain incurred losses from our reinsurers and our reinsurance recoveries reduce the maximum loss that we may incur as a result of a covered loss event. We believe it is important to ensure that our reinsurance partners are financially strong and they generally carry at least an A.M. Best rating of “A-” (Excellent) or the reinsurance recoverable balances are collateralized. The total amount, cost and limits relating to the reinsurance coverage we purchase may vary from year to year based upon a variety of factors, including the availability of quality reinsurance at an acceptable price and the level of risk that we choose to retain for our own account.
We had $100.0 million aggregate principal amount outstanding of our 7.625% subordinated notes due 2055 (the “7.625% Notes”). The 7.625% Notes bore interest at a rate equal to 7.625% per year, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. The 7.625% Notes were our subordinated unsecured obligations and were structurally subordinated to all existing and future indebtedness, liabilities and other obligations of our subsidiaries. The 7.625% Notes had a maturity date of September 15, 2055, unless earlier redeemed or purchased by us. Interest expense on the 7.625% Notes was $7.6 million for each of the years ended December 31, 2020, 2019, and 2018. On February 3, 2021, the 7.625% Notes were redeemed in full and ceased to be outstanding.
We have junior subordinated debentures (the “Subordinated Debentures”) relating to the issuance of trust preferred securities. The Subordinated Debentures require interest-only payments to be made on a quarterly basis, with principal due at maturity. The Subordinated Debentures’ principal amounts of $41.2 million and $30.9 million mature in 2035 and 2037, respectively, and bear interest at an annual rate equal to LIBOR plus 3.40% and LIBOR plus 4.25%, respectively. The Subordinated Debentures are redeemable by us at a redemption price equal to 100% of their principal amount. Interest expense on the Subordinated Debentures for the years ended December 31, 2020, 2019, and 2018, was $3.3 million, $4.5 million and $4.3 million, respectively. The Subordinated Debentures have been called for redemption and are expected to be redeemed in full on March 15, 2021.
In 2019, we refinanced our existing credit agreement and entered into a new credit agreement (the “2019 Credit Agreement”), with JPMorgan Chase Bank, N.A., as Administrative Agent, KeyBank National Association and Fifth Third Bank, as Co-Syndication Agents, and the various lending institutions party thereto. The 2019 Credit Agreement was a $340.0 million base revolving credit facility with a letter of credit sub-limit of $150.0 million and an expansion feature of up to $50.0 million. Borrowings under the 2019 Credit Agreement bore interest at either the Alternate Base Rate (“ABR”) or the LIBOR rate. ABR borrowings under the 2019 Credit Agreement bore interest at the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate on such day plus 0.5 percent or (c) the adjusted LIBOR rate for a one-month interest period on such day plus 1 percent. Eurodollar borrowings under the 2019 Credit Agreement bore interest at the adjusted LIBOR rate plus the Eurodollar spread for the interest period in effect. Fees payable by us under the 2019 Credit Agreement included a letter of credit participation fee, a letter of credit fronting fee with respect to each letter of credit (0.125%) and a commitment fee on the available commitments of the lenders (a range of 0.175% to 0.25% based on our consolidated leverage ratio; and as of December 31, 2020, the rate was 0.225%). The 2019 Credit Agreement had a maturity date of February 25, 2023. On January 4, 2021, the 2019 Credit Agreement was repaid and terminated in connection with the closing of the Merger.
The following table sets forth certain of our contractual obligations as of December 31, 2020:
(1)The loss and LAE payments due by period in the table above are based upon the loss and LAE estimates as of December 31, 2020, and actuarial estimates of expected payout patterns and are not contractual liabilities with finite maturities. Our contractual liability is to provide benefits under the policy. As a result, our calculation of loss and LAE payments due by period is subject to the same uncertainties associated with determining the level of loss and LAE generally and to the additional uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our loss and LAE estimate process, see Item 1, “Business - Loss Reserves.” Actual payments of loss and LAE by period will vary, perhaps materially, from the table above to the extent that current estimates of loss and LAE vary from actual ultimate claims amounts and as a result of variations between expected and actual payout patterns. See Item 1A, “Risk Factors - Risks Relating to Our Business - If we are unable to establish and maintain accurate loss reserves, our business, financial condition and results of operations may be materially adversely affected” for a discussion of the uncertainties associated with estimating loss and LAE.
(2) On January 4, 2021, the 2019 Credit Agreement was repaid, and on February 3, 2021, the 7.625% Notes were repaid. Repayments of principal amounts and interest are included in the less than 1 year column.
We establish the pricing for insurance premiums before we know the amount of losses and LAE or the extent to which inflation may affect such amounts. We also attempt to anticipate the potential impact of inflation in establishing our reserves, especially as it relates to medical and hospital rates where historical inflation rates have exceeded the general level of inflation. Inflation above of the levels we have assumed could cause loss and LAE to be higher than we anticipated, which would require us to increase reserves and reduce earnings. Fluctuations in rates of inflation also influence interest rates, which in turn impact the market value of our investment portfolio and yields on new investments. Operating expenses, including salaries and benefits, are also usually affected by inflation.