believe that our facilities are adequate for our current needs and that suitable additional or substitute space will be available as needed.
James River Group Holdings, Ltd. is a Bermuda-based holding company. We own and operate a group of specialty insurance and reinsurance companies with the objective of generating compelling returns on tangible equity while limiting underwriting and investment volatility. We seek to accomplish this by earning profits from insurance and reinsurance underwriting and generating meaningful risk-adjusted investment returns, while managing our capital.
The Casualty Reinsurance segment provides proportional and working layer casualty reinsurance to third parties and to our U.S.-based insurance subsidiaries. Typically, we structure our reinsurance contracts (also known as treaties) as quota share arrangements, with loss mitigating features, such as commissions that adjust based on underwriting results. We frequently include risk mitigating features in our working layer excess of loss treaties, such as paid reinstatements, which allow the ceding company to capture a greater percentage of the profits should the business prove more profitable than expected, or alternatively, with additional premiums should the business incur higher than expected losses. We believe these structures best align our interests with the interests of our cedents. On a net premium volume basis, treaties with loss mitigation features including sliding scale ceding commissions represented 68.3% of the net premiums written by our Casualty Reinsurance segment during 2020. We typically do not assume large individual risks in our Casualty Reinsurance segment, nor do we write property catastrophe reinsurance. Most of the underlying policies assumed by our Casualty Reinsurance segment have a $1.0 million per occurrence limit, and we typically assume only a portion of that exposure. We believe this structure reduces volatility in our underwriting results. We do not assume stand-alone third-party property business at our Casualty Reinsurance segment, but we do have a small amount of assumed business with ancillary property exposure. 72.1% of gross premiums written by our
The Casualty Reinsurance segment writes third party business through one entity, JRG Re. Through December 31, 2017, we had intercompany reinsurance agreements under which we ceded 70% of the net written premiums of our U.S. subsidiaries (after taking into account third-party reinsurance) to JRG Re. Effective January 1, 2018, we generally discontinued ceding 70% of our U.S.-written premiums to JRG Re and instead ceded 70% of our U.S.-written premiums to Carolina Re, a Bermuda-domiciled, wholly-owned subsidiary of James River Group, Inc. Carolina Re is a Class 3A reinsurer that made an irrevocable election to be taxed as a U.S. domestic corporation under Section 953(d) of the Code effective January 1, 2018. Carolina Re is also the cedent on a stop loss reinsurance treaty with JRG Re. Business in the Casualty Reinsurance segment is ceded under proportional, or quota-share, reinsurance treaties that provide for an arm’s length ceding commission. We exclude the effects of intercompany reinsurance agreements from the presentation of our segment results, consistent with the way we manage the Company. At December 31, 2020, 43.7% of our invested assets were held at JRG Re, which benefits from a favorable operating environment, including an absence of corporate income or investment taxes.
The reserve for losses and loss adjustment expenses represents our estimated ultimate cost of all reported and unreported losses and loss adjustment expenses incurred and unpaid at the balance sheet date. We do not discount this reserve. We estimate the reserve using individual case-basis valuations of reported claims and statistical analysis. We believe that the use of judgment is necessary to arrive at a best estimate for the reserve for losses and loss adjustment expenses given the long-tailed nature of the business we write and the limited operating experience of the fronting and program business in the Specialty Admitted Insurance segment and the commercial auto business in our Excess and Surplus lines segment. In applying this judgment, we frequently establish reserves that differ from our internal actuaries’ estimate. We seek to establish reserves that will ultimately prove to be adequate. If we have indications that claims frequency or severity exceeds our initial expectations, we generally increase our reserves for losses and loss adjustment expenses. Conversely, when claims frequency and severity trends are more favorable than initially anticipated, we generally reduce our reserves for losses and loss adjustment expenses once we have sufficient data to confirm the validity of the favorable trends.
We also use statistical analysis to estimate the cost of losses and loss adjustment expenses that have been incurred but not reported to us. Those estimates are based on our historical information, industry information and estimates of future trends that may affect the frequency of claims and changes in the average cost of claims (severity) that may arise in the future.
The Company’s net reserve for losses and loss adjustment expenses prior to the $335,000 allowance for credit losses on reinsurance recoverables at December 31, 2020 was $1,386.1 million. Of this amount, 55.3% relates to IBNR. The Company’s net reserve for losses and loss adjustment expenses by segment are summarized as follows:
The Paid Loss Development method is similar to the Incurred Loss Development method, but it uses historical loss payment patterns to estimate future loss payment patterns. In this method, our actuaries apply historical loss payment patterns to develop paid loss development factors that are applied to current paid losses to calculate expected ultimate losses.
The table below quantifies the impact of extreme reserve deviations from our expected value at December 31, 2020. The total carried net reserve for losses and loss adjustment expenses is displayed alongside 5th, 50th and 95th percentiles of likely ultimate net reserve outcomes. The estimates of these percentiles are a result of a reserve variability analysis using a simulation approach.
The impact of recording the net reserve for losses and loss adjustment expenses at the highest value from the sensitivity analysis above would be to increase losses and loss adjustment expenses incurred by $199.3 million, reduce after-tax net income by $169.4 million, reduce shareholders’ equity by $169.4 million and reduce shareholders’ tangible equity by $169.4 million, in each case at or for the period ended December 31, 2020.
Loss reserve estimates are subject to a high degree of variability due to the inherent uncertainty of ultimate claims settlement values. In recording our best estimate of our reserve for losses and loss adjustment expenses, our Reserve Committee often selects an amount that is different from the actuarial recommendation due to the inherent variation associated with our reserve estimates and the possibility that there are unforeseen or incorrectly valued liabilities in the actuarial recommendations. We believe that the insurance that we write is subject to above-average variation in reserve estimates. The Excess and Surplus Lines market is subject to high policyholder turnover and changes in underlying mix of exposures. This turnover and change in underlying mix of exposures can cause actuarial estimates based on prior experience to be less reliable than estimates for more stable, admitted books of business. As a casualty insurer, losses on our policies often take a number of years to develop, making it difficult to estimate the ultimate losses associated with this business. Judicial and regulatory bodies have frequently interpreted insurance contracts in a manner that expands coverage beyond that which was contemplated at the time that the policy was issued. In addition, many of our policies are issued on an occurrence basis, and insureds suffering a loss frequently seek coverage beyond the policies’ original intent. The difficulty in pinpointing actual ultimate losses and loss adjustment expenses (“LAE”) is illustrated by the fact that at December 31, 2020, 53.6% of our net reserve for losses and loss adjustment expenses in the Excess and Surplus Lines segment is for claims that have not been reported.
and the Company's underwriting assumptions and the related pricing of this risk did not keep pace with the insured's escalating loss trends. As a result of changes in the risk, unsatisfactory underwriting profits from the Rasier business, and a desire to refocus on the Company's growing E&S core (non-commercial auto) lines of business where the Company has experienced many years of profitable underwriting results, on October 8, 2019, the Company delivered a notice of early cancellation to Rasier, effective December 31, 2019. The adverse development for commercial auto was partially offset by $32.0 million of favorable development in other Excess and Surplus Lines underwriting divisions that was primarily related to the 2018 and 2019 accident years. Favorable reserve development in the Specialty Admitted Insurance segment was $5.0 million as losses on our workers’ compensation business written prior to 2019 continued to develop more favorably than we had anticipated. The Casualty Reinsurance segment experienced $37.8 million of adverse development on prior accident years primarily in accident years 2014 through 2018. This adverse development was mainly in the general liability and commercial auto lines of business.
$69.0 million of adverse development was experienced in 2019 on the reserve for losses and loss adjustment expenses held at December 31, 2018. This adverse reserve development included $51.2 million of adverse development in the Excess and Surplus Lines segment, including $57.4 million of adverse development in the commercial auto line of business that was primarily related to the 2016 and 2017 accident years with Rasier. The adverse development for commercial auto was partially offset by $6.2 million of favorable development in other Excess and Surplus Lines underwriting divisions. Favorable reserve development in the Specialty Admitted Insurance segment was $5.3 million as losses on our workers’ compensation business written prior to 2018 continued to develop more favorably than we had anticipated. The Casualty Reinsurance segment experienced $23.1 million of adverse development on prior accident years primarily in accident years 2011 through 2016. This adverse development was mainly in the general liability and commercial auto lines of business.
In connection with the adoption of ASU 2016-13, the Company elected the fair value option in accounting for bank loan participations effective January 1, 2020. The targeted transition relief offered by ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief was applied to elect the fair value option to account for bank loan participations already held at the January 1, 2020 date of adoption. Under the fair value option, bank loan participations are measured at fair value, and changes in unrealized gains and losses in bank loan participations are reported in our income statement as net realized and unrealized gains (losses) on investments. At adoption on January 1, 2020, the Company applied the amendments on a modified retrospective basis, reducing the carrying value of its bank loan portfolio to fair value through an $8.4 million adjustment with a $7.8 million (net of tax) cumulative effect adjustment to reduce retained earnings.
Losses due to credit-related impairments on bank loan participations are determined based upon consultations and advice from the Company's specialized investment manager and consideration of any adverse situations that could affect the borrower's ability to repay, the estimated value of underlying collateral, and other relevant factors. Management concluded that $8.3 million of unrealized losses were due to credit-related impairments for the year ended December 31, 2020.
Prior to the election of the fair value option on January 1, 2020, bank loan participations were generally stated at their outstanding unpaid principal balances net of unamortized premiums or discounts and net of any allowance for credit losses. The allowance for credit losses was maintained at a level considered adequate to absorb estimated probable credit losses. At December 31, 2019, the aggregate allowance for credit losses was $7.2 million on seven impaired loans with a total carrying value of $6.9 million and unpaid principal of $14.3 million. Management concluded that none of the loans in the Company's bank loan portfolio were impaired as of December 31, 2018.
The fair values of fixed maturity securities and equity securities have been determined using fair value prices provided by our investment accounting services provider or investment managers, who utilize internationally recognized independent pricing services. The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g. broker quotes and prices observed for comparable securities). Values for U.S. Treasury and publicly-traded equity securities are generally based on Level 1 inputs which use the market approach valuation technique. The values for all other fixed maturity securities (including state and municipal securities and obligations of U.S. government corporations and agencies) generally incorporate significant Level 2 inputs, and in some cases, Level 3 inputs, using the market approach and income approach valuation techniques.
We review fair value prices provided by our outside investment accounting service provider or our investment managers for reasonableness by comparing the fair values provided to those provided by our investment custodian. We conduct
Reinsurance premium estimates are reviewed by management periodically. Any adjustment to these estimates is recorded in the period in which it becomes known. The impact of any premium adjustments on net income is offset by corresponding changes to related policy acquisition costs and losses and loss adjustment expenses. For the years ended December 31, 2020, 2019, and 2018, these adjustments were immaterial.
On January 1, 2020, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective approach, by which a cumulative-effect adjustment was made to retained earnings as of the date of adoption. This update requires financial assets measured at amortized cost, such as bank loan participations held for investment, to be presented at the net amount expected to be collected by means of an allowance for credit losses that is reflected in net income. Credit losses relating to available-for-sale debt securities are recorded through an allowance for credit losses, with the amount of the allowance limited to the amount by which fair value is below amortized cost.
Upon adoption of this ASU, the Company established an allowance for uncollectible reinsurance balances through a $265,000 (net of tax) cumulative effect adjustment to retained earnings. Because we purchase reinsurance from financially strong reinsurers or we have collateral securing the recoverables, the effect of adoption was not material to our financial position.
The Company is continually monitoring the impact that the outbreak of the coronavirus (COVID-19) pandemic may be having on the Company’s financial condition and results of operations. The Company closed its offices except for certain essential functions, and directed its employees to work from their homes or other locations where they could ‘shelter in place’. The Company’s investment portfolio was impacted by the volatility in the global financial markets during the first quarter of 2020 as discussed in “-Results of Operations-Investing Results” in the Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2020, filed with the SEC on April 30, 2020, however, investment markets recovered substantially in the second, third, and fourth quarters, leading to net unrealized gains in our investment portfolio for those quarters. While COVID-19 has adversely affected premium volume and/or been the source of claims in some lines of business (such as auto and workers' compensation), to date it has not caused a decline in gross written premiums or a material increase in total claims for the Company as a whole. However, the decreased economic and other activity caused by the coronavirus pandemic made it more difficult to set and maintain case and IBNR reserves in 2020, as medical procedures were delayed and case loss information on many lines of business went unreported until late in the year, which contributed to the adverse development we experienced for the year ended December 31, 2020. In addition, we are closely monitoring a number of risks that COVID-19 poses to the Company’s financial condition and results of operations. For a description of these risks, see “Part I-Item 1A. Risk Factors” in this Annual Report on Form 10-K.
The following table summarizes our results for the years ended December 31, 2020 and 2019:
• Net realized and unrealized investment losses of $16.0 million and $2.9 million for the years ended December 31, 2020 and 2019, respectively, which included net unrealized gains of $1.1 million and $6.3 million related to changes in unrealized gains and losses in the respective years for equity securities and bank loan participations (pursuant to fair value option election effective January 1, 2020). See “- Investing Results" for more information on these realized and unrealized investment losses.
• Employee severance expenses of $2.0 million and $1.1 million in the respective years. The 2020 expense primarily reflects reductions in claims personnel following the cancellation of Rasier.
We define adjusted net operating income as net income excluding certain non-operating expenses such as net realized and unrealized investment gains and losses, expenses related to due diligence costs for various merger and acquisition activities, professional service fees related to the filing of registration statements for the offering of securities, and severance costs associated with terminated employees. We use adjusted net operating income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful insight into our results of operations and our underlying business performance. Adjusted net operating income should not be viewed as a substitute for net income calculated in accordance with GAAP, and our definition of adjusted net operating income may not be comparable to that of other companies.
Our income before taxes and net income for the years ended December 31, 2020 and 2019 reconcile to our adjusted net operating income as follows:
Our expense ratio was 26.7% and 19.6% for the years ended December 31, 2020 and 2019, respectively. The increase reflects the termination of the Rasier business effective December 31, 2019 (the Rasier business carried higher loss ratios, but lower expense ratios). This was partially offset by a 28.1% increase in the Core E&S net earned premiums of the Excess and Surplus Lines segment including in lines that have meaningful ceding commissions. Our Excess and Surplus Lines segment has significant scale and produces a lower expense ratio than our other operating segments. The Excess and Surplus Lines segment is our largest segment and makes up 68.4% of consolidated net earned premiums for the year ended December 31, 2020 (75.9% for the year ended December 31, 2019). Gross fee income for the Company declined from $24.9 million for the year ended December 31, 2019 to $20.9 million for the year ended December 31, 2020. The Rasier termination resulted in a $7.5 million decline of gross fee income in the Excess and Surplus Lines segment for the year ended December 31, 2020. This was partially offset by $3.5 million higher fee income in the Specialty Admitted Insurance segment due to new fronting programs and growth in existing fronting programs. In the Casualty Reinsurance segment, our expense ratio declined from 29.2% for the year ended December 31, 2019 to 25.6% for the year ended December 31, 2020. The Casualty Reinsurance segment typically structures its reinsurance treaties with loss mitigation features including sliding scale ceding commissions. Net adverse reserve development on treaties with such features reduced our commissions in the respective years by $11.0 million or 8.2 percentage points and $7.1 million or 5.0 percentage points.
Gross written premiums for the Excess and Surplus Lines segment (which represents 55.6% of our consolidated gross written premiums in 2020) decreased 24.2% from the prior year. The decrease was largely due to the termination of the Rasier commercial auto business effective December 31, 2019. Excluding commercial auto policies, gross written premiums for the Excess and Surplus Lines segment increased 29.5% over the prior year. Policy submissions excluding the commercial auto policies were 11.1% higher and 17.7% more policies were bound in 2020 than in 2019. Renewal rates for the Excess and Surplus Lines segment excluding commercial auto were up 13.7% compared to 2019. The change in gross written premiums was notable in several divisions as shown below:
The components of gross written premiums for the Specialty Admitted Insurance segment (which represents 32.5% of our 2020 consolidated gross written premiums) are as follows:
The net premium retention for the Excess and Surplus Lines segment decreased for the year ended December 31, 2020 as compared to the prior year due to growth in written premium for the Excess Casualty and Excess Property underwriting
The net premium retention for the Casualty Reinsurance segment decreased slightly for the year ended December 31, 2020 as compared to the prior year due to a change in the renewal date of a retrocessional treaty/fronting arrangement under which 100% of the premiums are ceded.
The loss ratios of 76.7% and 84.4% for the years ended December 31, 2020 and 2019 include $59.4 million and $51.2 million (14.3 and 8.2 percentage points, respectively) of net adverse development in our loss estimates for prior accident years. The net adverse reserve development included $91.4 million and $57.4 million, respectively, of adverse development in the commercial auto line of business that was primarily related to Rasier, which was terminated effective December 31, 2019. The net adverse reserve development for commercial auto was partially offset by net favorable development on prior accident years in our Core E&S divisions of $32.0 million and $6.2 million for the years ended December 31, 2020 and 2019, respectively, and a reduction of the 2020 accident year loss ratio for Core E&S to reflect a significant decline in claims frequency experienced in the most recent year.
As a result of the items discussed above, the underwriting profit of the Excess and Surplus Lines segment decreased 49.1%, from $19.2 million for the year ended December 31, 2019 to $9.8 million for the year ended December 31, 2020.
(1) Underwriting Profit is a non-GAAP Measure. See “Reconciliation of Non-GAAP Measures” for a reconciliation to income before tax and for additional information.
(2) Underwriting profit includes fee income of $19.3 million and $15.8 million for the years ended December 31, 2020 and 2019, respectively.
The expense ratio of the Specialty Admitted Insurance segment was 19.8% for the year ended December 31, 2020 compared to the prior year ratio of 24.9%. The expense ratio decline in 2020 was primarily due to a 22.0% increase in gross fee income from the fronting business driven by a mix shift to fronting arrangements with higher fees and the addition of eight new fronted programs in 2020, as well as additional ceding commissions on the third-party quota share reinsurance coverage purchased on individual risk workers' compensation business resulting from an increase in the cession from 50% to 70% effective January 1, 2020.
Underwriting results for the Specialty Admitted Insurance segment in 2020 were favorably impacted by a $1.0 million adjustment to fee income on one fronted program (a reduction in commission expense, representing a 1.8 point reduction in the combined ratio for the respective period).
(1) Underwriting Loss is a non-GAAP Measure. See “Reconciliation of Non-GAAP Measures” for a reconciliation to income before tax and for additional information.
The expense ratio of the Casualty Reinsurance segment declined from 29.2% for the year ended December 31, 2019 to 25.6% for the year ended December 31, 2020. The Casualty Reinsurance segment typically structures its reinsurance treaties with loss mitigation features including sliding scale ceding commissions. Net adverse reserve development on treaties with such features reduced our commissions by $11.0 million and $7.1 million (8.2 and 5.0 percentage points, respectively) for the years ended December 31, 2020 and 2019.
In addition to the underwriting, acquisition and insurance expenses of the Excess and Surplus Lines segment, the Specialty Admitted Insurance segment and the Casualty Reinsurance segment discussed previously, other operating expenses for the Company also includes the expenses of the Corporate and Other segment.
Other operating expenses for the Corporate and Other segment include personnel costs associated with the Bermuda and U.S. holding companies, professional fees, and various other corporate expenses that are included in our calculation of our expense ratio and our combined ratio including equity compensation expense for the full Company. Other operating expenses of the Corporate and Other segment represent the expenses of both the Bermuda and U.S. holding companies that were not reimbursed by our subsidiaries, including costs associated with our internal quota share, rating agencies and strategic initiatives. These costs vary from period-to-period based on the status of these initiatives.
Of our total cash and invested assets of $2,359.3 million at December 31, 2020 (excluding restricted cash equivalents), $162.3 million represents the cash and cash equivalents portion of the portfolio. The majority of the portfolio, or $1,783.6 million, is comprised of fixed maturity securities that are classified as available-for-sale and carried at fair value with unrealized gains and losses on these securities reported, net of applicable taxes, as a separate component of accumulated comprehensive income or loss. Also included in our investments are $147.6 million of bank loan participations, $89.0 million of equity securities, $130.3 million of short-term investments, and $46.5 million of other invested assets.
Prior to January 1, 2020, bank loans were classified as held-for-investment and reported at amortized cost, net of any allowance for credit losses. Changes in the credit allowance were included in net realized and unrealized gains (losses). Under the prior accounting method, management concluded that seven loans from six issuers in the Company's bank loan portfolio were impaired at December 31, 2019. The impaired loans had a carrying value of $6.9 million, unpaid principal of $14.3 million, and an allowance for credit losses of $7.2 million, $5.1 million of which related to two loans from one issuer that was experiencing liquidity concerns resulting from revenue declines and poor growth prospects in its most profitable segment.
For the year ended December 31, 2020, the Company recognized net realized and unrealized investment losses of $16.0 million, including $16.7 million of net realized investment losses on the sale of bank loans, $1.4 million of net realized investment losses on the sale of equity securities, $1.3 million of gains for the change in fair value of bank loans, and $1.0 million of net realized investment gains on the sale of fixed maturity securities.
For the year ended December 31, 2019, the Company recognized net realized and unrealized investment losses of $2.9 million, including $8.9 million of net realized investment losses from an increase in our bank loan credit allowance, $1.1 million of net realized investment losses on the sale of bank loan securities, $6.3 million of gains for the change in fair value of equity securities, and $1.1 million of net realized investment gains on the sale of fixed maturity securities.
In conjunction with its outside investment managers, the Company performs quarterly reviews of all securities within its investment portfolio to determine whether any impairment has occurred.
At December 31, 2020, our available-for-sale fixed maturity securities had net unrealized gains of $92.8 million representing 5.5% of the amortized cost of the portfolio. Additionally, at December 31, 2020, 99.6% of our fixed maturity security portfolio was rated “BBB-” or better (“investment grade”) by Standard & Poor’s or had an equivalent rating from another nationally recognized statistical rating organization. The average duration of our investment portfolio was 3.8 years at December 31, 2020.
At December 31, 2020, our portfolio of available-for-sale fixed maturity securities contained corporate fixed maturity securities with a fair value of $766.8 million. A summary of these securities by industry segment is shown below as of December 31, 2020:
Corporate available-for-sale fixed maturity securities include public traded securities and privately placed bonds as shown below as of December 31, 2020:
At December 31, 2020, the Company had no investments in securitizations of alternative-A mortgages or sub-prime mortgages.
Interest expense was $10.0 million and $10.6 million for the years ended December 31, 2020 and 2019, respectively. See “-Liquidity and Capital Resources-Sources and Uses of Funds” for information regarding our senior debt facilities and trust preferred securities.
The Company recorded $538,000 and $597,000 of amortization of intangibles for the years ended December 31, 2020 and 2019, respectively.
The Company completed its impairment tests and fair value analysis for goodwill and other intangible assets during the fourth quarter of 2020 and 2019. No impairment was present for the years ended December 31, 2020 or 2019. Falls Lake General was merged into Falls Lake National in the fourth quarter of 2018. In connection with this merger, Falls Lake General surrendered its licenses to the various state insurance departments and reduced the carrying value of its intangible asset for "State Licenses" to $0. This caused a $200,000 impairment in 2018.
Our effective tax rate fluctuates from period to period based on the relative mix of income reported by country and the respective tax rates imposed by each tax jurisdiction. For the years ended December 31, 2020 and 2019, our effective tax rates were 59.6% and 26.1%, respectively. In both years, the effective rate exceeded the U.S. statutory rate of 21% because U.S. pre-tax income exceeded consolidated pre-tax income. Bermuda had losses in both years due to significant adverse development on U.S. commercial auto reserves ceded from the U.S. to Bermuda under the internal quota share reinsurance and because of the unprofitable underwriting results at JRG Re and the non-deductible Bermuda holding company expenses. The Company does
not receive a U.S. tax deduction for losses in Bermuda. In addition, the Company experienced a BEAT tax for the first time in 2020 in the amount of $2.8 million over and above the amount of taxes calculated without regard to BEAT. For U.S.-sourced income, the Company’s U.S. federal income tax expense differs from the amounts computed by applying the federal statutory income tax rate to income before taxes due primarily to interest income on tax-advantaged state and municipal securities, dividends received income, and excess tax benefits on share based compensation.
For a discussion of our results for the year ended December 31, 2019 as compared to year ended December 31, 2018, please refer to our 2019 Form 10-K filed with the SEC on February 27, 2020.
The payment of dividends by our subsidiaries to us is limited by statute. In general, the laws and regulations applicable to our domestic insurance subsidiaries limit the aggregate amount of dividends or other distributions that they may declare or pay within any 12-month period without advance regulatory approval. Generally, the limitations are based on the greater of statutory net income for the preceding year or 10.0% of statutory surplus at the end of the preceding year. In addition, insurance regulators have broad powers to prevent reduction of statutory surplus to inadequate levels and could refuse to permit the payment of dividends calculated under any applicable formula. See Item 1 - “Regulation-U.S. Insurance Regulation-State Regulation” for additional information. The maximum amount of dividends available to the U.S. holding company from our U.S. insurance subsidiaries during 2020 without regulatory approval is $28.6 million. The Bermuda Insurance Act of 1978 prohibits an insurer from declaring or paying a dividend if it is in breach of its minimum solvency margin, its enhanced capital requirement, or its minimum liquidity ratio, or if the declaration or payment of such dividend would cause such a breach. An insurer can declare or pay dividends without prior regulatory approval up to 25% of the total statutory capital and surplus (as shown on its previous financial year's statutory balance sheet). See Item 1 - “Regulation- Bermuda Insurance Regulation- Restrictions on Dividends and Distributions” for additional information. Based on that calculation, the maximum combined amount of dividends and return of capital available to us from our Bermuda insurers in 2020 is calculated to be approximately $153.8 million. However, this dividend amount is subject to annual enhanced solvency requirement calculations.
The Company has a $315.0 million senior revolving credit facility (as amended or amended and restated, the “2013 Facility”). The 2013 Facility is comprised of the following at December 31, 2020:
On May 26, 2004, we issued $15.0 million of senior debt due April 29, 2034. The senior debt is not redeemable by the holder or subject to sinking fund requirements. Interest accrues quarterly and is payable in arrears at a floating rate per annum equal to the 3-month LIBOR plus 3.85%. This senior debt is redeemable at par prior to its stated maturity at our option in whole or in part. The terms of the senior debt contain certain covenants, with which we are in compliance at December 31, 2020, and which, among other things, restrict our ability to assume senior indebtedness secured by our U.S. holding company's common stock or its subsidiaries' capital stock or to issue shares of its subsidiaries' capital stock.
The following table summarizes the nature and terms of the junior subordinated debt and trust preferred securities outstanding at December 31, 2020 (including the Company’s repurchase of a portion of these trust preferred securities):
At December 31, 2020 and December 31, 2019, the ratio of total debt outstanding, including both senior debt and junior subordinated debt, to total capitalization (defined as total debt plus total shareholders’ equity) was 31.5% and 25.2%, respectively. Having debt as part of our capital structure allows us to generate a higher return on equity and greater book value per share results than we could by using equity capital alone.
Our insurance segments enter into reinsurance contracts to limit our exposure to potential losses arising from large risks, to protect against the aggregation of several risks in a common loss occurrence, and to provide additional capacity for growth. Our reinsurance is contracted under excess of loss and quota share reinsurance contracts. In excess of loss reinsurance, the reinsurer agrees to assume all or a portion of the ceding company’s losses in excess of a specified amount. The premiums payable to the reinsurer are negotiated by the parties based on their assessment of the amount of risk being ceded to the reinsurer because the reinsurer does not share proportionately in the ceding company’s losses. In quota share reinsurance, the reinsurer agrees to assume a specified percentage of the ceding company’s losses arising out of a defined class of business in exchange for a
In our Excess and Surplus Lines segment, we write a small book of excess property insurance, but we do not write primary property insurance. The Excess and Surplus Lines segment has a surplus share reinsurance treaty in effect that was specifically designed to cover property risks. The surplus share treaty along with facultative reinsurance helps ensure that our net retained limit per risk will be $5.0 million or less.
Based upon the modeling of our Excess and Surplus Lines and Specialty Admitted segments, it would take an event beyond our 1 in 1000 year PML to exhaust our $45.0 million property catastrophe treaty. In the event of a catastrophe loss exhausting our $45.0 million property catastrophe treaty, we estimate our pre-tax cost at approximately $7.3 million, including reinstatement premiums and net retentions. In addition to this retention, we would retain any losses in excess of our reinsurance coverage limits.
The following is a summary of our Specialty Admitted Insurance segment’s ceded reinsurance in place as of December 31, 2020:
(1) Excluding one program which has quota share coverage for 81.25% of the first $1.0 million per occurrence and excess of loss coverage for $49.0 million in excess of $1.0 million per occurrence.
(3) Excluding one program which has quota share coverage for 90% of the first $500,000 and excess of loss coverage for $39.5 million in excess of $500,000 per risk per occurrence.
We also have a clash and contingency reinsurance treaty to cover both the Excess and Surplus Lines and Specialty Admitted Insurance segments in the event of a claim incident involving more than one of our insureds. The treaty covers $10.0 million in excess of a $2.0 million retention for loss occurrences within the treaty term. This coverage has two reinstatements in the event we exhaust any of the coverage. As of December 31, 2020, our average net retained limit per risk is $2.5 million.
Cash provided by operating activities (excluding restricted cash equivalents) was $65.4 million, $289.9 million, and $290.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. The decline in cash provided by operations was largely driven by the run-off of Rasier. There were no associated premiums collected in 2020 for the Rasier policies terminated on December 31, 2019, but claim payments associated with the run-off continued in 2020.
Cash used in investing activities reflects our efforts to enhance the yield in our investment portfolio by investing available cash and cash equivalents into higher yielding fixed maturity securities and bank loan participations. Cash and cash equivalents (excluding restricted cash equivalents) comprised 6.9%, 9.4%, and 9.3% of total cash and invested assets at December 31, 2020, 2019 and 2018, respectively.
Cash provided by (used in) financing activities primarily relates to net draws on our senior credit facilities of $104.0 million, $40.0 million, and $20.0 million in 2020, 2019, and 2018, respectively, to help support our growth, partially offset by dividends paid to shareholders of $37.1 million in 2020, $36.7 million in 2019, and $36.1 million in 2018.
The vesting period of RSUs granted to employees range from one to five years and vest ratably over the respective vesting period, and the majority vest in three years. All RSUs granted to date to non-employee directors had a one year vesting period.
Interest on debt obligations was calculated using the LIBOR rate as of December 31, 2020 with the assumption that interest rates would remain flat over the remainder of the period that the debt was outstanding.
The following table reconciles the underwriting (loss) profit by individual segment and for the entire Company to consolidated income before income taxes for the years ended December 31, 2020, 2019 and 2018.
(1) Underwriting (loss) profit includes gross fee income of $20.9 million, $24.9 million, and $28.7 million for the years ended December 31, 2020, 2019, and 2018, respectively.
We define adjusted net operating income as net income excluding certain non-operating expenses such as net realized and unrealized investment gains and losses, expenses related to due diligence costs for various merger and acquisition activities, professional service fees related to the filing of registration statements for the offering of securities, and severance costs associated with terminated employees. We use adjusted net operating income as an internal performance measure in the management of our operations because we believe it gives our management and other users of our financial information useful
Key financial measures that we use to assess our longer term financial performance include the percentage growth in our tangible equity per share and our return on tangible equity. We believe tangible equity is a good measure to evaluate the strength of our balance sheet and to compare returns relative to this measure. Tangible equity before dividends increased 9.8% from $559.8 million at December 31, 2019 to $614.5 million at December 31, 2020, largely due to net income of $4.8 million and $50.8 million of unrealized gains, net of taxes, on available-for-sale fixed maturity securities. Tangible equity after dividends increased 3.1% from $559.8 million at December 31, 2019 to $577.4 million at December 31, 2020. Tangible equity per common share was $18.84 at December 31, 2020, net of $1.20 of dividends per share paid by the Company during 2020. The 2020 adjusted net operating income return on average tangible equity was 3.8%, which compares to 7.9% for the full year 2019.