(1) For all periods presented, debt is shown net of unamortized debt issuance costs which were previously reported as a part of other assets.
ProAssurance Corporation is a holding company for property and casualty insurance companies. Our wholly owned insurance subsidiaries provide professional liability insurance for healthcare professionals and facilities, professional liability insurance for attorneys, liability insurance for medical technology and life sciences risks and workers' compensation insurance. We are also the majority capital provider for Syndicate 1729 and the sole capital provider for Syndicate 6131 at Lloyd's of London.
Specialty P&C - This segment includes our professional liability business and medical technology liability business. Professional liability insurance is primarily offered to healthcare providers and institutions and, to a lesser extent, to attorneys and their firms. Medical technology liability insurance is offered to medical technology and life sciences companies that manufacture or distribute products including entities conducting human clinical trials. The underwriting results of SPCs that assume healthcare professional liability business were previously reported in this segment and are now reported in our Segregated Portfolio Cell Reinsurance segment.
Lloyd's Syndicates - This segment includes the operating results from our participation (62% for 2018) in Lloyd's of London Syndicate 1729 and our 100% participation in Syndicate 6131, which is a SPA that began writing business effective January 1, 2018. For the 2019 underwriting year, we slightly decreased our participation in the operating results of Syndicate 1729 from 62% to 61%. The results of this segment are normally reported on a quarter delay, except when information is available that is material to the current period. Syndicate 1729 underwrites risks over a wide range of property and casualty insurance and reinsurance lines in both the U.S. and international markets while Syndicate 6131 focuses on contingency and specialty property business, also within the U.S. and international markets.
Corporate - This segment includes our investment operations, other than those reported in our Segregated Portfolio Cell Reinsurance and Lloyd's Syndicates segments, interest expense and U.S. income taxes. The results of investment assets solely allocated to SPC operations were previously reported in this segment and are now reported in our Segregated Portfolio Cell Reinsurance segment. This segment also includes non-premium revenues generated outside of our insurance entities and corporate expenses.
In 2014, we strengthened our position in the healthcare liability space by acquiring Eastern, a provider of workers' compensation insurance which currently represents the second largest product line in our gross premiums written (31% in 2018, including alternative market premiums). The workers’ compensation industry is highly competitive in the geographic markets in which we operate and multi-line insurers continue to increase their leverage of workers’ compensation business in their product offerings. We believe our workers' compensation products allow us to provide flexibility in offering solutions to our customers at a competitive price. In addition, we believe that our claims handling and risk management services are attractive to our customers and provide us with a competitive advantage even when our pricing is higher than our competitors.
The underwriting expense ratio which is calculated as underwriting, policy acquisition and operating expenses incurred divided by net premiums earned and is a component of underwriting profitability.
The combined ratio which is the sum of the net loss ratio and the underwriting expense ratio and measures underwriting profitability.
The investment income ratio which is calculated as net investment income divided by net premiums earned and measures the contribution investment earnings provide to our overall profitability.
The tax ratio which is calculated as total income tax expense divided by income (loss) before income taxes and measures our effective tax rate.
Book value per share which is calculated as total shareholders’ equity at the balance sheet date divided by the total number of common shares outstanding. This ratio measures the net worth of the company to shareholders on a per-share basis. The declaration of dividends decreases book value per share. Growth in book value per share, adjusted for dividends declared, is an indicator of overall profitability.
We particularly focus on our combined ratio and investment returns, both of which directly affect our ROE and growth in our book value. We currently target a dynamic ROE of 700 basis points above the 10-year U.S. Treasury rate, which at December 31, 2018 was approximately 9.7%.
Our emphasis on rate adequacy, selective underwriting, effective claims management and prudent investments is a key factor in our ability to achieve our ROE target. We closely monitor premium revenues, losses and loss adjustment costs, and underwriting and policy acquisition expenses. Our overall investment strategy is to focus on maximizing current income from our investment portfolio while maintaining safety, liquidity, duration and portfolio diversification. While we engage in activities that generate other income, these activities, such as insurance agency services, do not constitute a significant use of our resources or a significant source of revenues or profits.
As of December 31, 2018 our reserve is comprised almost entirely of long-tail exposures. The estimation of long-tailed losses is inherently difficult and is subject to significant judgment on the part of management. Due to the nature of our claims, our loss costs, even for claims with similar characteristics, can vary significantly depending upon many factors, including but not limited to the specific characteristics of the claim and the manner in which the claim is resolved. Long-tailed insurance is characterized by the extended period of time typically required both to assess the viability of a claim and potential damages, if any, and to reach a resolution of the claim. The claims resolution process may extend to more than five years. The combination of continually changing conditions and the extended time required for claim resolution results in a loss cost estimation process that requires actuarial skill and the application of significant judgment, and such estimates require periodic modification.
Our reserve is established by management after taking into consideration a variety of factors including premium rates, claims frequency and severity, historical paid and incurred loss development trends, the expected effect of inflation, general economic trends, the legal and political environment and the conclusions reached by our internal and consulting actuaries. We update and review the data underlying the estimation of our reserve for losses each reporting period and make adjustments to loss estimation assumptions that we believe best reflect emerging data. Both our internal and consulting actuaries perform an in-depth review of our reserve for losses on at least a semi-annual basis using the loss and exposure data of our insurance subsidiaries.
The risks insured in our medical technology liability business (4% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2018) are more varied, and policies are individually priced based on the risk characteristics of the policy and the account. The insured risks range from startup operations to large multinational entities and the larger entities often have significant deductibles or self-insured retentions. Reserves are established using our most recently developed actuarial estimates of losses expected to be incurred based on factors which include results from prior analysis of similar business, industry indications, observed trends and judgment. Claims in this line of business primarily involve bodily injury to individuals and are affected by factors similar to those of our HCPL line of business. For the medical technology liability business, we also establish an initial reserve using a loss ratio approach, including a provision in consideration of historical loss volatility that this line of business has exhibited.
Segregated Portfolio Cell Reinsurance Segment. The factors that affect the ultimate losses incurred for the workers' compensation and healthcare professional liability coverages assumed by the SPCs at Eastern Re and Inova Re (3% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2018) are consistent with that of our Workers’ Compensation Insurance and Specialty P&C segments, respectively.
Lloyd's Syndicates Segment. Due to the relatively short history of Syndicate 1729 (January 1, 2014) we are influenced by historical claims experience of the Lloyd's market for similar risks in estimating the appropriate initial reserves for our Lloyd's Syndicates segment (4% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2018). We expect loss ratios to fluctuate from quarter to quarter as Syndicate 1729 writes more business and the book begins to mature. Loss ratios can also fluctuate due to the timing of earned premium adjustments. Such adjustments may be the result of premiums for certain policies and assumed reinsurance contracts being reported subsequent to the coverage period and may be subject to adjustment based on loss experience. Premium and exposure for some of Syndicate 1729's insurance policies and reinsurance contracts are initially estimated and subsequently recorded over an extended period of time as reports are received under delegated underwriting authority programs. When reports are received, the premium, exposure and corresponding loss estimates are revised accordingly. Changes in loss estimates due to premium or exposure fluctuations are incurred in the accident year in which the premium is earned.
The Adjusted Reported and the Adjusted Paid Methods. These methods are based on the premise that the relative change in a given accident year's adjusted reported loss estimates (Adjusted Reported Method) or adjusted paid losses (Adjusted Paid Method) from one evaluation point to the next is similar to changes observed for earlier accident years at the same evaluation
For our Workers’ Compensation Insurance segment and for the workers' compensation exposures in our Segregated Portfolio Cell Reinsurance segment, we utilize the reported development method, paid development method and Bornhuetter-Ferguson method, to develop our reserve for each accident year. The actuarial review includes the stratification of claims data (lost time claims, medical only claims) using different variations that allow us to identify trends that may not be readily identifiable if the data was evaluated only in the aggregate. Reported and paid loss development factors are key assumptions in the reserve estimation process and are based on our historical reported and paid loss development patterns. As accident years mature, the various actuarial methodologies produce more consistent loss estimates.
HCPL. Over the past several years the most influential factor affecting the analysis of our HCPL reserves and the related development recognized has been the change in the severity of claims. The severity trend is an explicit component of our pricing models, whereas in our reserving process the severity trend's impact is implicit. Our estimate of this trend and our expectations about changes in this trend impact a variety of factors, from the selection of expected loss ratios to the ultimate point estimates established by management.
Because of the implicit and wide-ranging nature of severity trend assumptions on the loss reserving process, it is not practical to specifically isolate the impact of changing severity trends. However, because severity is an explicit component of our HCPL pricing process we can better isolate the impact that changing severity can have on our loss costs and loss ratios in regards to our pricing models for this business component. Our current HCPL pricing models assume a severity trend of approximately 3% in most states and products. We have observed potentially higher severity trends in our case reserve estimates but these have not yet been confirmed by actual claim payments. If the severity trend were to be higher by 1 percentage point, the impact would be an increase in our expected loss ratio for this business of 3.2 percentage points, based on current claim disposition patterns. An increase in the severity trend of 3 percentage points would result in a 10.1 percentage point increase in our expected loss ratio. Due to the long-tailed nature of our claims and the previously discussed historical volatility of loss costs, selection of a severity trend assumption is a subjective process that is inherently likely to prove inaccurate over time. Given the long tail and volatility, we are generally cautious in making changes to the severity assumptions within our pricing models. All open claims and accident years are generally impacted by a change in the severity trend, which compounds the effect of such a change.
Although the future degree and impact of the ultimate severity trend remains uncertain due to the long-tailed nature of our business, we have given consideration to observed loss costs in setting our rates. For our HCPL business this practice had generally resulted in rate reductions as claim frequency declined and remained at historically low levels. For example, on average, excluding our podiatry business acquired in 2009, we had gradually reduced the premium rates we charged on our standard physician renewal business (our largest HCPL line) by approximately 17% from the beginning of 2006 to December 31, 2016. However, from the beginning of 2017 to December 31, 2018, the average charged rates on our standard physician renewal business have increased by 4% and we anticipate further rate increases due to indications of increasing loss severity. Loss ratios for recent accident years have thus remained fairly constant because expected loss changes have been reflected in our rates; however, we have recognized a higher current accident year net loss ratio during 2018 due to those recent severity indications.
We recognized net favorable reserve development of $92.1 million for the year ended December 31, 2018, of which $77.1 million related to our Specialty P&C segment, $8.0 million related to our Workers' Compensation Insurance segment and $9.0 million related to our Segregated Portfolio Cell Reinsurance segment, slightly offset by unfavorable development of $2.0 million related to our Lloyd's Syndicates segment.
As a writer of third-party liability insurance, we have historically resolved more than 85% of our physician and hospital professional liability claims with no indemnity payment. As an accident year matures, the number of claims resolved with indemnity payments progressively increases. In a similar fashion, we typically expend more in loss adjustment expenses (legal fees) as claims mature.
This can be seen in looking at both the absolute amount of favorable reserve development recognized for the less developed accident years as well as the size of such development when compared to established ultimates for those same accident years at the end of the preceding calendar year. The following table provides this information for years ended December 31, 2018, 2017 and 2016 with respect to the three then most recent prior accident years:
Claims in our workers’ compensation line of business have historically closed at a faster rate than in our HCPL or medical technology liability lines of business. This faster disposition rate, along with a lower net retention after the application of reinsurance, has resulted in less volatility in loss estimates on a net basis. However, a change in the number of individually-severe claims can create volatility in a given accident year. The following table presents additional information about the loss development for our workers' compensation line of business:
In 2018, we recognized $9.0 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment and $8.0 million of net favorable development in our Workers' Compensation Insurance segment. In 2017, we recognized $8.5 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment and $5.7 million of net favorable development in our Workers' Compensation Insurance segment. In 2016, we recognized $4.6 million of net favorable development in our Segregated Portfolio Cell Reinsurance segment and $1.6 million of net favorable development in our Workers' Compensation Insurance segment. In each of the years ended December 31, 2018, 2017 and 2016, net favorable development in our Workers' Compensation Insurance segment included $1.6 million related to the amortization of the purchase accounting fair value adjustment.
As previously noted, the number of data points and variables considered and the subjective process followed in establishing our loss reserve makes it impractical to isolate individual variables and demonstrate their impact on our estimate of loss reserves. However, to provide a better understanding of the potential variability in our reserves, we have modeled implied reserve ranges around our single point net reserve estimates for our various lines of business assuming different confidence levels. The ranges have been developed by aggregating the expected volatility of losses across partitions of our business to obtain a consolidated distribution of potential reserve outcomes. The aggregation of this data takes into consideration correlations among our geographic and specialty mix of business. The result of the correlation approach to aggregation is that the ranges are narrower than the sum of the ranges determined for each partition.
We use insurance and reinsurance (collectively, “reinsurance”) to provide capacity to write larger limits of liability, to provide reimbursement for losses incurred under the higher limit coverages we offer, to provide protection against losses in excess of policy limits, and, in the case of risk sharing arrangements, to align our objectives with those of our strategic business partners and to provide custom insurance solutions for large customer groups. The purchase of reinsurance does not relieve us from the ultimate risk on our policies, however it does provide reimbursement for certain losses we pay.
We evaluate each of our ceded reinsurance contracts at inception to confirm that there is sufficient risk transfer to allow the contract to be accounted for as reinsurance under current accounting guidance. At December 31, 2018, all ceded contracts were accounted for as risk transferring contracts.
The financial strength of our reinsurers and their ability to pay us may change in the future due to forces or events we cannot control or anticipate. We have not experienced significant collection difficulties due to the financial condition of any reinsurer as of December 31, 2018; however, reinsurers may periodically dispute our demand for reimbursement from them based upon their interpretation of the terms of our agreements. We have established appropriate reserves for any balances that we believe may not be ultimately collected. Should future events lead us to believe that any reinsurer will not meet its obligations to us, adjustments to the amounts recoverable would be reflected in the results of current operations. Such an adjustment has the potential to be material to the results of operations in the period in which it is recorded; however, we would not expect such an adjustment to have a material effect on our capital position or our liquidity.
We record the majority of our investments at fair value as shown in the table below. At December 31, 2018, the distribution of our investments based on GAAP fair value hierarchies (levels) was as follows:
We hold interests in certain investment funds, primarily LPs/LLCs, which measure fund assets at fair value on a recurring basis and provide us with a NAV for our interest. As a practical expedient, we consider the NAV provided to approximate the fair value of the interest. In accordance with GAAP, for disclosure purposes we do not categorize these investments within the fair value hierarchy.
We measure the fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. These assets include investments carried principally at cost, investments in tax credit partnerships and equity method investments that do not provide a NAV, fixed assets, goodwill and other intangible assets.
Certain of our investments, in accordance with GAAP for the type of investment, are measured using methodologies other than fair value. At December 31, 2018, these investments represented approximately 5% of total investments, and are detailed in the following table. Additional information about these investments is provided in Notes 2 and 3 of the Notes to Consolidated Financial Statements.
the current credit standing of the issuer, including credit rating downgrades, whether before or after the balance sheet date;
The TCJA was signed into law on December 22, 2017 and contains several key provisions that impact our business, including the reduction of the corporate tax rate to 21% effective January 1, 2018, the reduction in the amount of executive
In computing taxable income, property and casualty insurance companies reduce their premiums earned by losses incurred. The tax deduction for losses incurred is discounted using interest rates and factors prescribed by the IRS. The TCJA modified the rules for discounting losses incurred by changing the definition of the applicable interest rate that is used and amending the time periods for the loss payment pattern. These new provisions are effective for tax years beginning after December 31, 2017 and are subject to a transition rule.
We evaluate tax positions taken on tax returns and recognize positions in our financial statements when it is more likely than not that we will sustain the position upon resolution with a taxing authority. If recognized, the benefit is measured as the largest amount of benefit that has a greater than 50% probability of being realized. We review uncertain tax positions each period, considering changes in facts and circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law, and make adjustments as we consider necessary. Adjustments to our unrecognized tax benefits may affect our income tax expense, and settlement of uncertain tax positions may require the use of cash. Other than differences related to timing, no significant adjustments were considered necessary during 2018 or 2017. At December 31, 2018, our liability for unrecognized tax benefits approximated $3.6 million.
Impairment of goodwill is tested at the reporting unit level, which is consistent with our reportable segments identified in Note 16 of the Notes to Consolidated Financial Statements. Of the five reporting units, three have goodwill - Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance. We evaluate goodwill for impairment annually on October 1, upon the occurrence of certain triggering events or substantive changes in circumstances that indicate the fair value of goodwill may be impaired, and immediately before and after a reorganization that affects the composition of one or more of our reporting units.
When testing goodwill for impairment on our annual test date, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely than not, we are then required to perform the two-step quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment test. As of the most recent annual evaluation date on October 1, 2018, we elected to perform a quantitative goodwill impairment assessment for our Specialty P&C, Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units.
As a result of the quantitative assessments performed on October 1, 2018, management concluded that the fair value of each of our three reporting units that have goodwill were greater than their carrying value as of the testing date; therefore, goodwill was not impaired and no further impairment testing was required. No goodwill impairment was recorded in 2018, 2017 or 2016.
As discussed in Note 16 of the Notes to Consolidated Financial Statements, we reorganized our segment reporting in the third quarter of 2018 to align with how our CODM currently oversees the business, allocates resources and evaluates operating performance. As a result of the segment reorganization, we added an operating and reportable segment: Segregated Portfolio Cell Reinsurance. The Segregated Portfolio Cell Reinsurance segment also became a reporting unit for purposes of testing goodwill for impairment. We allocated goodwill to our revised reporting units using a relative fair value approach which resulted in a nominal amount of goodwill reallocated from the Workers' Compensation Insurance reporting unit to the Segregated Portfolio Cell Reinsurance reporting unit. We performed a quantitative goodwill impairment assessment for the Workers' Compensation Insurance reporting unit immediately prior to the reallocation and a quantitative goodwill impairment assessment for the Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance reporting units immediately after the reallocation and determined that no impairment existed.
all of our reporting units as part of this interim goodwill impairment assessment, we made certain assumptions regarding the fair value of our other reporting units in reconciling to our market capitalization.
We did not have any change in accounting estimate or policy that had a material effect on our results of operations or financial position during 2018. We are not aware of any accounting changes not yet adopted as of December 31, 2018 that would have a material effect on our results of operations or financial position. Note 1 of the Notes to Consolidated Financial Statements provides additional detail regarding accounting changes.
ProAssurance Corporation is a holding company and is a legal entity separate and distinct from its subsidiaries. As a holding company our principal source of external revenue is our investment revenues. In addition, dividends from our operating subsidiaries represent a significant source of funds for our obligations, including debt service and shareholder dividends. We also charge our operating subsidiaries within our Specialty P&C and Workers' Compensation Insurance segments a management fee based on the extent to which services are provided to the subsidiary and the amount of gross premium written by the subsidiary. At December 31, 2018, we held cash and liquid investments of approximately $236 million outside our insurance subsidiaries that were available for use without regulatory approval or other restriction, of which $43 million was used to pay shareholder dividends in January 2019. We also have $200 million in permitted borrowings under our Revolving Credit Agreement and an accordion feature available which, if subscribed successfully, would allow another $50 million in available funds. As of February 15, 2019, no borrowings were outstanding under our Revolving Credit Agreement.
During the first quarter of 2018, we retrospectively adopted accounting guidance that resulted in a change in classification
of distributions received from unconsolidated subsidiaries. Additional information regarding the impact of accounting guidance adopted during the current period can be found in Note 1 to the Notes to Consolidated Financial Statements.
The principal components of our operating cash flows are the excess of premiums collected and net investment income received over losses paid and operating costs, including income taxes. Timing delays exist between the collection of premiums and the payment of losses associated with the premiums. Premiums are generally collected within the twelve-month period after the policy is written, while our claim payments are generally paid over a more extended period of time. Likewise, timing delays exist between the payment of claims and the collection of any associated reinsurance recoveries.
The increase in operating cash flows in 2018 as compared to 2017 of $3.9 million was primarily due to an increase in premium receipts of $60.8 million, a decrease in 2018 estimated tax payments as compared to 2017 of $11.5 million and a decrease in cash paid for operating expenses of $1.6 million, partially offset by an increase in paid losses of $64.3 million and a decrease in cash received from investment income of $5.1 million. The increase in premium receipts was driven by our Specialty P&C segment, primarily due to premiums received from a loss portfolio transfer entered into during the second quarter of 2018 and, to a lesser extent, our Workers' Compensation Insurance segment, primarily due to premiums received related to the third quarter 2017 acquisition of the Great Falls book of business. The decrease in 2018 estimated tax payments was primarily due to the lower statutory federal income tax rate in 2018 as compared to 2017. The increase in paid losses was driven by all of our operating segments, particularly in our Specialty P&C segment, primarily due to the timing of loss payments between periods, and our Lloyd's Syndicates segment, primarily due to 2017 storm-related losses which were paid in the current year. The decrease in cash paid for operating expenses was primarily due to a decrease in compensation related costs, largely offset by an increase in cash paid for operating expenses in our Lloyd's Syndicates segment primarily due to the start-up of Syndicate 6131. The decrease in cash received from investment income was primarily due to a reduction in interest received on our fixed maturities portfolio resulting from lower average balances.
The increase in operating cash flows in 2016 as compared to 2015 of $39.8 million was primarily due to a decrease in net tax payments driven by a $35.5 million reduction in estimated tax payments and a $15.0 million refund received in 2016 for the 2015 tax year. In addition, the increase reflected premium receipts of $11.8 million from a novation entered into during the fourth quarter of 2016. The increase in operating cash flows was partially offset by a decrease in cash received from investment income of $33.0 million primarily due to a reduction in interest received on our fixed maturities portfolio resulting from lower average balances.
The table includes losses on both a direct and an assumed basis and is net of anticipated reinsurance recoverables. The gross liability for losses before reinsurance, as shown on the balance sheet, and the reconciliation of that gross liability to amounts net of reinsurance are reflected below the table. We do not discount our reserve for losses to present value. Information presented in the table is cumulative and, accordingly, each amount includes the effects of all changes in amounts for prior years. The table presents the development of our balance sheet reserve for losses; it does not present accident year or policy year development data. Conditions and trends that have affected the development of liabilities in the past may not
necessarily occur in the future. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on this table.
These adverse severity trends later moderated, with that moderation becoming more pronounced beginning in 2009. We have been cautious in giving full recognition to indications that the pace of severity increase had slowed, however we have given measured recognition of the improved trend in our reserve estimates, as discussed more fully under the heading “Reserve for Losses and Loss Adjustment Expenses" in the Critical Accounting Estimates section (reserve for losses or reserve). The favorable development was most pronounced for years 2004 to 2008, as the initial reserves for these accident years were established prior to substantial indication that severity trends were moderating. We have given stronger recognition to the lower severity trend as time has elapsed and a greater percentage of claims have closed.
In 2017, we became concerned again around potential higher severity trends in HCPL business and began to reflect this concern in our case reserve estimates for both 2017 and 2018. This concern was also reflected in more conservative estimates of ultimate losses for open claims for earlier accident years. Furthermore, we are responding to these initial loss indications by seeking rate increases where we believe appropriate and maintaining our underwriting discipline.
Activity in our net reserve for losses during 2018, 2017 and 2016 is summarized below:
Within our Specialty P&C segment, we use insurance and reinsurance (collectively, “reinsurance”) to provide capacity to write larger limits of liability, to provide reimbursement for losses incurred under the higher limit coverages we offer and to provide protection against losses in excess of policy limits. Within our Workers' Compensation Insurance segment, we use reinsurance to reduce our net liability on individual risks, to mitigate the effect of significant loss occurrences (including catastrophic events), to stabilize underwriting results, and to increase underwriting capacity by decreasing leverage. In both our Specialty P&C and Workers' Compensation Insurance segments, we use reinsurance in risk sharing arrangements to align our objectives with those of our strategic business partners and to provide custom insurance solutions for large customer groups. The purchase of reinsurance does not relieve us from the ultimate risk on our policies; however, it does provide reimbursement for certain losses we pay. We pay our reinsurers a premium in exchange for reinsurance of the risk. In the majority of our excess of loss arrangements, the premium due to the reinsurer is determined by the loss experience of the business reinsured, subject to certain minimum and maximum amounts. Until all loss amounts are known, we estimate the premium due to the reinsurer. Changes to the estimate of premium owed under reinsurance agreements related to prior periods are recorded in the period in which the change in estimate occurs and can have a significant effect on net premiums earned.
We offer alternative market solutions whereby we cede certain premiums from our Workers' Compensation Insurance and Specialty P&C segments to either the SPCs at Eastern Re or Inova Re, our Cayman Islands reinsurance subsidiaries which are reported in our Segregated Portfolio Cell Reinsurance segment, or, to a limited extent, unaffiliated captive insurers. During 2018 and 2017, we wrote total alternative market premium of approximately $89.6 million and $84.5 million, respectively. The majority of these policies ($85.1 million and $77.7 million in 2018 and 2017, respectively) are reinsured to the SPCs at Eastern Re or Inova Re, net of a ceding commission. Each SPC at Eastern Re and Inova Re is owned, fully or in part, by an agency, group or association and the operating results of the SPCs are due to the participants of that cell. We participate to a varying degree in the results of selected SPCs and, for the SPCs in which we participate, our participation interest is as low as 25% and as high as 85%. SPC operating results due to external cell participants are reflected as a SPC dividend expense in our Segregated Portfolio Cell Reinsurance segment. See further discussion on our SPC operations in the Segment Operating Results - Segregated Portfolio Cell Reinsurance section that follows. The alternative market workers' compensation policies are ceded from our Workers' Compensation Insurance segment to the SPCs under 100% quota share reinsurance agreements. The
Prior to January 1, 2018, Syndicate 1729 served as a reinsurer on a quota share basis for a wholly owned insurance subsidiary in our Specialty P&C segment. Syndicate 1729 did not renew the quota share agreement with our Specialty P&C segment on January 1, 2018.
We generally reinsure risks under treaties (our excess of loss reinsurance agreements) pursuant to which the reinsurers agree to assume all or a portion of all risks that we insure above our individual risk retention levels, up to the maximum individual limits offered. These agreements are negotiated and renewed annually. Renewal dates for our healthcare professional liability, medical technology liability and workers' compensation treaties are October 1, January 1 and May 1, respectively. There were no significant changes in the cost or structure of our healthcare professional liability and medical technology liability treaties which renewed October 1, 2018 and January 1, 2019, respectively. Our workers' compensation treaty renewed May 1, 2018 at a higher rate than the previous agreement. The significant coverages provided by our current excess of loss reinsurance agreements are detailed in the following table.
For the workers' compensation business ceded to Eastern Re and Inova Re, each SPC has in place its own reinsurance arrangements; which are illustrated in the following table.
(2) The attachment point is based on a percentage of written premium (average is 89%) and varies by cell.
Reinsurance is utilized on a per risk basis for the property insurance and casualty coverages in order to mitigate risk volatility.
We are involved in various legal actions related to insurance policies and claims handling including, but not limited to, claims asserted against us by policyholders. These types of legal actions arise in the ordinary course of business and, in accordance with GAAP for insurance entities, are generally considered as a part of our loss reserving process, which is described in detail in our Critical Accounting Estimates section under the heading "Reserve for Losses and Loss Adjustment Expenses." We also have other direct actions against the Company unrelated to our claims activity which we evaluate and account for as a part of our other liabilities. For these corporate legal actions, we evaluate each case separately and establish what we believe is an appropriate reserve based on GAAP guidance related to contingent liabilities. As of December 31, 2018 there were no material reserves established for corporate legal actions.
Our investments at December 31, 2018 and December 31, 2017 are comprised as follows:
The distribution of our investments in available-for-sale fixed-maturity securities by rating were as follows:
A detailed listing of our investment holdings as of December 31, 2018 is located under the Financial Information heading on the Investor Relations page of our website which can be reached directly at www.proassurance.com/investmentholdings, or through links from the Investor Relations section of our website, investor.proassurance.com.
Investment fund LPs/LLCs are by nature less liquid and may involve more risk than other investments. We manage our risk through diversification of asset class and geographic location. At December 31, 2018, we had investments in 34 separate investment funds with a total carrying value, as shown in the table above, which represented approximately 9% of our total investments. We review and monitor the performance of these investments on a quarterly basis.
There were no business combinations during the years ended December 31, 2018, 2017 or 2016.
In the fourth quarter of 2017, we provided 100% of the capital for the newly formed SPA, Syndicate 6131, which began writing business effective January 1, 2018. The capital for Syndicate 6131 was provided through an increase in our FAL securities, which at December 31, 2018 had a fair value of approximately $142.7 million, as discussed in Note 3 of the Notes to Consolidated Financial Statements. We have a total capital commitment to support our Lloyd's Syndicate operations through 2019 of up to $200 million, referred to as FAL. The Board, through a non-binding resolution, extended this commitment through 2022. See further discussion in our Segment Operating Results - Lloyd's Syndicates section that follows.
Treasury share activity for 2018, 2017 and 2016 was as follows:
Our Board declared cash dividends during 2018, 2017 and 2016 as follows:
Each dividend was paid in the month following the quarter in which it was declared. Cash dividends totaling $316 million, $315 million and $119 million were paid during the years ended December 31, 2018, 2017 and 2016, respectively. Any decision to pay future cash dividends is subject to the Board’s final determination after a comprehensive review of financial performance, future expectations and other factors deemed relevant by the Board.
At December 31, 2018, our debt included $250 million of outstanding unsecured senior notes. The notes bear interest at 5.3% annually and are due in 2023 although they may be redeemed in whole or part prior to maturity. There are no financial covenants associated with these notes.
During 2017, two of our subsidiaries each entered into ten-year mortgage loans collectively totaling approximately $40 million (Mortgage Loans) with one lender in connection with the recapitalization of two office buildings. The Mortgage Loans accrue interest at three-month LIBOR plus 1.325% with principal and interest payable on a quarterly basis. At December 31, 2018, the outstanding balance of the Mortgage Loans was approximately $39 million and we are in compliance with the financial covenant of the Mortgage Loans, which mature in December 2027.
During 2017, we entered into an interest rate cap agreement with a notional amount of $35 million to manage our exposure to increases in LIBOR on our Mortgage Loans. Per the interest rate cap agreement, we are entitled to receive cash payments if and when the three-month LIBOR exceeds 2.35%. Additional information on our interest rate cap agreement is provided in Note 11 of the Notes to Consolidated Financial Statements.
Two of our insurance subsidiaries are members of an FHLB. Through membership, those subsidiaries have access to secured cash advances which can be used for liquidity purposes or other operational needs. In order for us to use FHLB
Our operating lease obligations are primarily for the rental of office space and, to a lesser extent, office equipment. Our funding commitments are primarily related to non-public investment entities but also include the unused commitment under our Syndicate Credit Agreement as we presume it will be fully advanced within the next year for purposes of the disclosure in the table above. For more information regarding these agreements see Note 9 of the Notes to Consolidated Financial Statements.
All of our operating segments contributed to the increase in net premiums earned during the year ended December 31, 2018 as compared to 2017. The largest component of the increase in consolidated net premiums earned during 2018 was $26.6 million of premium written and fully earned from a loss portfolio transfer entered into during the second quarter of 2018 in our Specialty P&C segment (see further discussion in our Segment Operating Results - Specialty Property & Casualty section that follows). The increase in net premiums earned in our Workers' Compensation Insurance segment primarily reflected the late 2017 acquisition of the Great Falls book of business (see further discussion in our Segment Operating Results - Workers' Compensation Insurance section that follows).
During 2018, we recognized OTTI in earnings of $0.5 million related to debt instruments from two issuers in the energy sector. During 2017, we recognized OTTI in earnings of $13.0 million, including an $8.5 million impairment related to an early stage business investment. Other net realized investment losses during 2018 was driven by changes in the fair value of our equity trading portfolio, partially offset by gains realized on the sale of certain equity securities. See further discussion in our Segment Operating Results - Corporate section that follows.
The increase in our consolidated current accident year net loss ratio for the year ended December 31, 2018 as compared to 2017 was primarily due to a higher current accident year net loss ratio in our Specialty P&C segment. The higher current accident year net loss ratio in our Specialty P&C segment was driven by an increase in expected losses in our excess and surplus lines business and, to a lesser extent, the decrease to net premiums earned as a result of an increase in our estimate of premiums owed to reinsurers for expected recoveries on prior year ceded losses. Additionally, the higher current accident year net loss ratio in our Specialty P&C segment reflected the effect of a loss portfolio transfer (net premiums earned at a 95% loss ratio) entered into during the second quarter of 2018 (see further discussion in our Segment Operating Results - Specialty Property & Casualty section that follows). Partially offsetting the increase in the consolidated current accident year net loss ratio in 2018 was a decrease in the current accident year net loss ratio in our Lloyd's Syndicates segment driven by higher net premiums earned, partially offset by an increase in net losses incurred related to natural catastrophes and large property losses as compared to 2017, including the impact of estimated losses recognized in connection with Hurricane Michael (see further discussion in our Segment Operating Results - Lloyd's Syndicates section that follows).
Our consolidated underwriting expense ratio decreased for the year ended December 31, 2018 as compared to 2017 driven by an increase in net premiums earned across all of our operating segments and, to a lesser extent, a decrease in operating expenses in our Corporate segment, primarily driven by a decrease in share-based compensation expenses and other compensation related costs. In addition, the decrease reflected a loss portfolio transfer (net premiums earned with minimal associated operating expenses) entered into during the second quarter of 2018 in our Specialty P&C segment, which accounted for 1.0 percentage point of the decrease in our consolidated underwriting expense ratio (see further discussion in our Segment Operating Results - Specialty Property & Casualty section that follows). The decrease in our consolidated underwriting expense ratio for 2018 was partially offset by an increase in consolidated DPAC amortization, primarily in our Specialty P&C segment due to an increase in commission and brokerage expenses, and an increase in operating expenses in our Lloyd's Syndicates segment, primarily due to the establishment of Syndicate 6131.
Our effective tax rates for the years ended December 31, 2018 and 2017 were a benefit of 62.1% and an expense of 16.6%, respectively. The largest drivers of the change in the effective tax rate between 2018 and 2017 were the lower statutory federal income tax rate in 2018 as compared to 2017 used to develop the effective tax rate due to the TCJA and the impact of tax credits on the effective tax rate due to lower pre-tax income in 2018 as compared to 2017.
ROE is calculated as net income divided by the average of beginning and ending shareholders’ equity. This ratio measures our overall after-tax profitability and shows how efficiently capital is being used. ROE for the years ended December 31, 2018 and 2017 was as follows:
The decrease in our ROE in 2018 was primarily due to the decrease in net income, partially offset by a lower average equity base as compared to 2017. The decrease in net income was driven by the change in the fair value of our equity trading portfolio and a lower amount of prior year favorable development in our Specialty P&C segment. The lower average equity base was primarily due to cumulative dividend declarations since the 2017 in excess of net income and, to a lesser extent, lower AOCI primarily resulting from changes in unrealized gains and losses in our fixed maturity available-for-sale securities.
We believe the payment of dividends is currently our most effective tool for the deployment of excess capital even though, in the short-term, dividend declarations dampen growth in book value per share. Our book value per share at December 31, 2018 as compared to December 31, 2017 is shown in the following table.
(1) Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell Reinsurance segment and the portion of SPC operating earnings, including the gain or loss, net of our participation, is due to the external cell participants through the SPC dividend expense (income). To be consistent with our exclusion of net realized investment gains (losses) recognized in earnings, we are excluding the portion of net realized investment gains (losses) that is included in the SPC dividend expense (income) which is due to the external cell participants.
Physician policies were our greatest source of premium revenues in both 2018 and 2017. The decrease in twelve month term policies in 2018 was due to timing differences of $10.9 million primarily related to the shifting in 2018 renewal dates of a few large policies that were renewed in the first quarter of 2019. Excluding the effect of these timing differences, twelve month term policies increased $2.9 million as compared to 2017. This increase was primarily due to new business written, an increase in premiums assumed in which we participate on a quota share basis and an increase in renewal pricing, largely offset by retention losses during the period. Renewal pricing increases in 2018 is reflective of our concern about potential increases in loss severity as well as more moderate marketplace price competition. Twelve month term premium in 2018 also reflected an increase in coverage from one insured who acquired an entity that was not previously insured by us. We also offer twenty-four month term policies to our physician insureds in one selected jurisdiction. The decrease in twenty-four month term policies in 2018 as compared to 2017 primarily reflected the normal cycle of renewals (policies subject to renewal in 2018 were previously written in 2016 rather than in 2017).
We offer extended reporting endorsement or "tail" coverage to insureds who discontinue their claims-made coverage with us, and we also periodically offer tail coverage through custom policies. The amount of tail coverage premium written can vary significantly from period to period. The increase in tail premiums in 2018 was driven by $7.9 million of tail coverage provided in connection with a loss portfolio transfer with a large healthcare organization entered into during the second quarter of 2018 (see further discussion in footnote 6 that follows), partially offset by the effect of tail coverage purchased in 2017 for a few large claims-made policies in one jurisdiction that were rewritten to occurrence coverage. These policies are a part of one of our shared risk arrangements and therefore, a large portion of the premium written was also ceded during 2017 (see further discussion in the Ceded Premiums Written section that follows).
coverage provided for the existing inventory of claims was classified as retroactive coverage and resulted in $18.7 million of one-time premium written and fully earned during 2018. The premiums received for the prospective (tail) coverage resulted in $7.9 million of one-time premium written and fully earned during 2018. See Note 4 of the Notes to Consolidated Financial Statements for further information on this transaction.
Our medical technology liability business is marketed throughout the U.S.; coverage is offered on a primary basis, within specified limits, to manufacturers and distributors of medical technology and life sciences products including entities conducting human clinical trials. In addition to the previously listed factors that affect our premium volume, our medical technology liability premium volume is impacted by the sales volume of insureds. The slight increase in 2018 was primarily due to new business written and, to a lesser extent, an increase in the premium charged for certain renewed policies as a result of an increase in the sales volume of the insureds, partially offset by retention losses. Retention losses in 2018 are largely attributable to an increase in competition on terms and pricing.
We generally reinsure risks under our excess of loss reinsurance arrangements pursuant to which the reinsurers agree to assume all or a portion of all risks that we insure above our individual risk retention levels, up to the maximum individual limits offered. In the majority of our excess of loss reinsurance arrangements, the premium due to the reinsurer is determined by the loss experience of that business reinsured, subject to certain minimum and maximum amounts. The increase in ceded premiums written under our excess of loss reinsurance arrangements in 2018 primarily reflected an increase in the premiums we expect to owe our reinsurers based upon increases to our estimates of losses recoverable from our reinsurance partners.
We have entered into various shared risk arrangements, including quota share, fronting, and captive arrangements, with certain large healthcare systems and other insurance entities. These arrangements include our Ascension Health and CAPAssurance programs. While we cede a large portion of the premium written under these arrangements, they provide us an opportunity to grow net premium through strategic partnerships. The increase in 2018 was primarily driven by growth in our Ascension Health and CAPAssurance programs, largely offset by the effect of a few large tail endorsements that were written, and substantially ceded, during 2017 related to one of these shared risk arrangements, as previously discussed under the heading "Gross Premiums Written."
As shown in the table below, our ceded premiums ratio was affected in both 2018 and 2017 by revisions to our estimate of premiums owed to reinsurers related to coverages provided in prior accident years.
The decrease in the current accident year ceded premiums ratio for the year ended December 31, 2018 was primarily due to the decrease in premiums ceded to Syndicate 1729 and the effect of the loss portfolio transfer entered into during the second quarter of 2018 (increase in gross premiums written with no premium ceded), partially offset by an increase in premiums ceded under our excess of loss reinsurance arrangements. See discussion above under the heading "Ceded Premiums Written."
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to our reinsurers for their assumption of a portion of our losses. Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums written. Generally, our policies carry a term of one year, however, as discussed above, we write certain policies with a twenty-four month term, and a few of our medical technology liability policies have a multi-year term. Tail coverage premiums are generally 100% earned in the period written because the policies insure only incidents that occurred in prior periods and are not cancellable. Retroactive coverage premiums are 100% earned at the inception of the contract, as all of the underlying loss events occurred in the past. Additionally, ceded premium changes due to changes to estimates of premiums owed under reinsurance agreements for prior accident years are fully earned in the period of change.
The increase in gross premiums earned in 2018 was driven by the effect of the loss portfolio transfer entered into during the second quarter of 2018 which resulted in $26.6 million of one-time premium written and fully earned in the current period (see discussion under the heading "Gross Premiums Written"). The increase also included the pro rata effect of higher premiums written during the preceding twelve months, predominantly in our healthcare facilities and physicians lines of business, partially offset by the effect of a few large tail policies written and earned during 2017.
The following table summarizes calendar year net loss ratios by separating losses between the current accident year and all prior accident years. Additionally, the table shows our current accident year net loss ratio was affected by revisions to our estimate of premiums owed to reinsurers related to coverages provided in prior accident years. Net loss ratios were as follows:
The current accident year net loss ratio, excluding the effect of prior year ceded premium adjustments, increased 2.7 percentage points as compared to 2017 driven by our consideration of potential higher severity trends associated with our excess and surplus lines business, which accounted for approximately 2.0 percentage points of the increase. The remaining increase in the current accident year net loss ratio was primarily due our continued concern around potential loss trends in the broader HCPL industry including large, more complex risks. The increase in the current accident year net loss ratio was partially offset by a decrease to our reserves related to DDR coverage endorsements as compared to an increase in 2017. In addition, the current accident year net loss ratio for 2018 also reflected the effect of a loss portfolio transfer (net premiums earned at a 95% loss ratio) entered into during the second quarter of 2018. See discussion in the Premiums section for our Specialty P&C segment under the heading "Gross Premiums Written" for additional information on the loss portfolio transfer.
A detailed discussion of factors influencing our recognition of loss development is included in our Critical Accounting Estimates section under the heading "Reserve for Losses and Loss Adjustment Expenses." Assumptions used in establishing our reserve are regularly reviewed and updated by management as new data becomes available. Any adjustments necessary are reflected in the then current operations. Due to the size of our reserve, even a small percentage adjustment to the assumptions can have a material effect on our results of operations for the period in which the change is made, as was the case in both 2018 and 2017.
The decrease in the underwriting expense ratio for 2018 was primarily due to the impact of the loss portfolio transfer entered into during the second quarter of 2018 (net premiums earned with minimal associated operating expenses), which accounted for 1.2 percentage points of decrease in the underwriting expense ratio (see further discussion under the heading "Gross Premiums Written"). After removing the impact of the loss portfolio transfer, the underwriting expense ratio for 2018 remained relatively flat as compared to 2017.
In the third quarter of 2018, we reorganized our segment reporting which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance (see further discussion under the heading "ProAssurance Overview"). The Segregated Portfolio Cell Reinsurance segment provides the results of SPCs at our Eastern Re and Inova Re subsidiaries, including SPCs that assume healthcare professional liability business which were previously reported within our Specialty P&C segment. As such, there is no longer a SPC dividend expense reported in the Specialty P&C segment associated with these SPCs. See more information on our Cayman Islands SPC operations in the Segment Operating Results - Segregated Portfolio Cell Reinsurance section that follows.
Our Workers' Compensation Insurance segment provides workers' compensation products to employers generally with 1,000 or fewer employees. Workers' compensation products offered include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies, deductible policies and alternative market solutions. Alternative market products include program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management services. Alternative market premiums are 100% ceded to either the SPCs within our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, unaffiliated captive insurers. Our Workers' Compensation Insurance segment operating results reflected pre-tax underwriting profit or loss from these workers' compensation products, exclusive of investment results, which are included in our Corporate segment. Segment operating results included the following:
Gross premiums written in our traditional business increased during the year ended December 31, 2018 as compared to 2017, which primarily reflected new business written, including $11.7 million of new business premium related to the third quarter 2017 acquisition of the Great Falls book of business, an improvement in renewal pricing and an increase in audit premium. The growth in our alternative market business for the year ended December 31, 2018 primarily reflected new business written and an improvement in renewal pricing. We retained 22 of the 23 available alternative market programs up for renewal for the year ended December 31, 2018, including 6 programs available for renewal during the fourth quarter of 2018.
Our Workers' Compensation Insurance segment cedes alternative market business under a 100% quota share reinsurance agreement, net of a ceding commission, to SPCs in our Segregated Portfolio Cell Reinsurance segment. The ceding commission consists of an amount for fronting fees, cell rental fees, commissions, premium taxes, claims administration fees and risk management fees. The fronting fees, commissions, premium taxes and risk management fees are recorded as an offset to underwriting, policy acquisition and operating expenses (see discussion that follows under the heading "Underwriting, Policy Acquisition and Operating Expenses"). Cell rental fees are recorded as a component of other income and claims administration fees are recorded as ceded ULAE. The increase in premiums ceded to SPCs in 2018 primarily reflected growth in our alternative market premium, as previously discussed, as well as the designed consolidation of certain unaffiliated captive insurers into SPCs at Inova Re (see discussion below).
Under our external reinsurance agreement, we retain the first $0.5 million in risk insured by us and cede losses in excess of this amount up to $119.5 million on each loss occurrence under our primary external reinsurance contract. Per our reinsurance agreements, we cede premiums related to our traditional business on an earned premium basis. The increase in premiums ceded to external reinsurers during the year ended December 31, 2018 was driven by an increase in earned premium, an increase in reinsurance rates effective May 1, 2018 and a decrease in revenue sharing with our reinsurance broker, primarily due to a change in estimate during the second quarter of 2017.
The decrease in premiums ceded to unaffiliated captive insurers during the year ended December 31, 2018 primarily reflected the impact of the 2017 designed consolidation of two unaffiliated captive programs. During 2017, we added one new SPC at Inova Re that writes business previously ceded to two non-renewed unaffiliated captive programs. The premium now written through this new SPC is reflected in premiums ceded to SPCs in the table above. During the fourth quarter of 2018, one of the two remaining unaffiliated captive programs was also moved to Inova Re.
Changes in the return premium estimate reflected the loss experience under the reinsurance contract for the years ended December 31, 2018 and 2017. The increase in the return premium estimate for the year ended December 31, 2018 primarily reflected favorable loss experience in prior contract years.
The above table reflects ceded premiums earned as a percent of gross premiums earned. As discussed above, we cede premiums related to our traditional business to external reinsurers on an earned premium basis. The increase in the ceded premiums ratio for the year ended December 31, 2018 when compared to 2017 primarily reflected an increase in reinsurance rates and the impact of broker revenue sharing, as previously discussed.
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to SPCs in our Segregated Portfolio Cell Reinsurance segment, external reinsurers or unaffiliated captive insurers. Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums written. Our workers’ compensation policies are twelve-month policies and premiums are earned on a pro rata basis over the policy period. Net premiums earned also include premium adjustments related to the audit of our insureds' payrolls. Payroll audits are conducted subsequent to the end of the policy period and any related adjustments are recorded as fully earned in the current period. In addition, we record an estimate for EBUB and evaluate the estimate on a quarterly basis. We did not adjust the EBUB estimate during the years ended December 31, 2018 or 2017. The increase in net premiums earned primarily reflected the pro rata effect of higher net premiums written during the preceding twelve months.
We estimate our current accident year loss and loss adjustment expenses based on an expected loss ratio. Incurred losses and loss adjustment expenses are determined by applying the expected loss ratio to net premiums earned, which includes audit premium, for the respective period. The following table summarizes calendar year net loss ratios by separating losses between the current accident year and all prior accident years. Calendar year and current accident year net loss ratios by component were as follows:
Current accident year incurred losses (excluding IBNR) ceded to our external reinsurers totaled $12.6 million for the year ended December 31, 2018 compared to $9.8 million for 2017. The increase in ceded incurred losses for the year ended December 31, 2018 primarily reflected the aforementioned increase in severity-related claim activity.
We recognized net favorable prior year development related to our previously established reserve of $8.0 million for the year ended December 31, 2018 as compared to $5.7 million for 2017. The net favorable prior year development for the year ended December 31, 2018 reflected overall favorable trends in claim closing patterns, primarily in the 2015 and 2016 accident years. For each of the years ended December 31, 2018 and 2017, the net favorable prior year development included $1.6 million related to the amortization of the purchase accounting fair value adjustment.
The increase in DPAC amortization for the year ended December 31, 2018 as compared to 2017 primarily reflected the increase in net premiums earned. The increase in other underwriting and operating expenses for the year ended December 31, 2018 as compared to 2017 primarily reflected an increase in expenses associated with the start-up of our New England region through the Great Falls acquisition and an increase in compensation related costs.
As previously discussed, alternative market premiums written through our Workers' Compensation Insurance segment's alternative market business unit are 100% ceded, less a ceding commission, to either the SPCs in our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, unaffiliated captive insurers. SPC ceding commission income includes fronting fees, commissions, premium taxes and risk management fees, which are reported as an offset to underwriting, policy acquisition and operating expenses. The increase in SPC ceding commissions earned in 2018 as compared to 2017 was due to growth in the alternative market business over the preceding twelve months.
The decrease in the expense ratio for the year ended December 31, 2018, exclusive of the items noted in the table, primarily reflected the increase in net premiums earned. There were no other individually significant variances by expense category that contributed to the remaining decrease in the expense ratio.
In 2018, we restructured our Cayman Islands SPC operations. Effective January 1, 2018, all new and renewing alternative market business previously ceded to the SPCs at Eastern Re, with the exception of one program, is now ceded to SPCs operated by a newly formed wholly owned Cayman Islands subsidiary, Inova Re. As part of the restructuring, all SPCs previously operated by Eastern Re, with the exception of one program, ceased assuming new and renewing business on or after January 1, 2018. The external cell participants' cumulative undistributed earnings and the results of all SPCs for the current period due to external cell participants continue to be reported as SPC dividends payable and SPC dividend expense, respectively.
Premiums in our Segregated Portfolio Cell Reinsurance segment are 100% assumed from either our Workers' Compensation Insurance or Specialty P&C segments. Premium volume is driven by five primary factors: (1) the amount of new business written, (2) retention of the existing book of business, (3) premium rates charged on the renewal book of business and, for workers' compensation business, (4) audit premium and (5) changes in payroll exposure.
Gross premiums written for the years ended December 31, 2018 and 2017 was primarily comprised of workers' compensation coverages assumed from our Workers' Compensation Insurance segment. Gross premiums written increased during 2018 as compared to 2017, driven by new business written and an improvement in renewal pricing. We retained 22 of the 23 available alternative market programs up for renewal for the year ended December 31, 2018. In addition, we added a new program at Inova Re during the fourth quarter of 2018 related to the designed consolidation of an unaffiliated captive insurer (see further discussion in our Segment Operating Results - Workers' Compensation Insurance section).
For the workers' compensation business, each SPC has in place its own external reinsurance arrangements. The healthcare professional liability business is assumed net of reinsurance from our Specialty P&C segment; therefore, there are no ceded premiums related to the healthcare professional liability business reflected in the table above. The risk retention for each loss occurrence ranges from $0.3 million to $0.35 million based on the program, with limits up to $119.7 million. In addition, each program has aggregate reinsurance coverage between $1.1 million and $2.1 million on a program year basis. Per the SPC external reinsurance agreements, premiums are ceded on a written premium basis and the slight increase in premiums ceded to external reinsurers for the year ended December 31, 2018 primarily reflected an increase in written premium. External reinsurance rates vary based on the alternative market program.
Net premiums earned consist of gross premiums earned less the portion of earned premiums that the SPCs cede to external reinsurers. Because premiums are generally earned pro rata over the entire policy period, fluctuations in premiums earned tend to lag those of premiums written. Policies ceded to the SPCs are twelve month term policies and premiums are earned on a pro rata basis over the policy period. Net premiums earned also include premium adjustments related to the audit of workers' compensation insureds' payrolls. Payroll audits are conducted subsequent to the end of the policy period and any related adjustments are recorded as fully earned in the current period. The increase in net premiums earned primarily reflected the pro rata effect of higher net premiums written during the preceding twelve months.
Net investment income for the years ended December 31, 2018 and 2017 was primarily attributable to interest earned on available-for-sale fixed maturity investments, which primarily includes investment-grade corporate debt securities. Net realized investment losses for the years ended December 31, 2018 and 2017 primarily reflected changes in the value of the SPCs' equity portfolio.
Audit premium from workers' compensation insureds results in a decrease in the net loss ratio, whereas audit premium returned to workers' compensation insureds results in an increase in the net loss ratio. We recognized audit premium of $1.6 million and $1.4 million for the years ended December 31, 2018 and 2017, respectively, the effect of which is reflected in the previous table. We estimate our current accident year losses and loss adjustment expenses based on the underlying actuarial methodologies without consideration of audit premium. As a result, we removed the effects of audit premium in the previous table for purposes of evaluating the current accident year net loss ratio.
Our Lloyd's Syndicates segment includes operating results from our participation in certain Syndicates at Lloyd's of London. We have a total capital commitment to support our Lloyd's Syndicate operations through 2019 of up to $200 million, referred to as FAL. The Board, through a non-binding resolution, extended this commitment through 2022. For the 2018 underwriting year, our FAL was comprised of investment securities deposited with Lloyd's which at December 31, 2018 had a fair value of approximately $142.7 million, as discussed in Note 3 of the Notes to Consolidated Financial Statements. During the fourth quarter of 2018, we increased our FAL securities in order to support Syndicate 1729's accumulated losses from prior years, stemming primarily from property and natural catastrophe losses.
In addition to the results of our participation in Lloyd's Syndicates, as discussed above, our Lloyd's Syndicates segment also includes 100% of the operating results of our wholly owned subsidiaries that support our operations at Lloyd's. For the years ended December 31, 2018 and 2017, the results of our Lloyd's Syndicates segment were as follows:
Segment operating results for both of the years ended December 31, 2018 and 2017 also included our allocated share of the estimates for losses in connection with other significant natural catastrophes that occurred during the past two years. These estimates also included reinstatement premiums we expect to receive from insureds as well as pay reinsurers, both of which were written and earned during the respective period. For the year ended December 31, 2018, we estimate our allocated share of the net pre-tax losses associated with these natural catastrophe and property losses to be approximately $12.1 million, which includes the estimated $6.8 million in losses in connection with Hurricane Michael, as discussed above. The remaining estimated losses in 2018 were primarily in connection with lava damage caused by the volcanic eruptions in Hawaii and storm damage related to Hurricane Florence, which affected several states along the Mid-Atlantic U.S. Estimated net pre-tax losses in 2018 were partially offset by subsequent adjustments of approximately $2.1 million related to prior year storm-related losses. For the year ended December 31, 2017, our estimated allocated share of net pre-tax losses associated with natural catastrophe and property losses was $7.1 million and was primarily in connection with Hurricanes Harvey, Irma and Maria, which affected Texas, several states in the Southeastern U.S. and islands in the Caribbean.
The impact of these natural catastrophe and property losses on our Lloyd's Syndicates segment's operating results for the years ended December 31, 2018 and 2017 was as follows:
The 2016 and 2015 calendar year quota share arrangements with our Specialty P&C segment were commuted in December 2017 and 2016, respectively. Due to the quarter delay, the effect of the 2016 and 2015 commutation was reported in both segments' results during the first quarters of 2018 and 2017, respectively, and is reflected in the Lloyd's Syndicates segment results for the years ended December 31, 2018 and 2017, respectively. The commutations did not differ significantly from previously recorded amounts.
Syndicate 1729 utilizes reinsurance to provide the capacity to write larger limits of liability on individual risks, to provide protection against catastrophic loss and to provide protection against losses in excess of policy limits. Ceded premiums written increased for the year ended December 31, 2018 primarily due to the increased utilization of reinsurance on new business written directly by Syndicate 1729 to replace the business previously assumed through the quota share agreement with our Specialty P&C segment. The increase in ceded premiums written was partially offset by a decrease in reinsurance reinstatement premiums Syndicate 1729 expects to owe to reinsurers in connection to the previously mentioned natural catastrophe-related losses. Reinsurance reinstatement premiums were approximately $0.2 million in 2018 as compared to $2.2 million in 2017.
The increase in net premiums earned for the year ended December 31, 2018 primarily reflected the pro rata effect of shifts in the mix of premiums written during the preceding twelve months; a larger proportion of premiums were written through the open-market, as compared to previous years, which are predominately earned over twelve months. The increase in gross premiums earned in 2018 as compared to 2017 was partially offset by an increase in ceded premiums earned which reflected the effect of higher ceded premiums written during the preceding twelve months primarily due to a revision in our reinsurance agreements at the beginning of 2017 and, to a lesser extent, the effect of reinstatement premiums earned, net of reinsurance reinstatement premiums recognized, in 2018 as compared to 2017 in connection with the natural catastrophe-related losses, as previously discussed. Net premiums earned for the years ended December 31, 2018 and 2017 included premium assumed from our Specialty P&C segment of approximately $5.0 million and $11.8 million, respectively.
Losses for the year were primarily recorded using the loss assumptions by risk category incorporated into the business plan submitted to Lloyd's for Syndicate 1729 with consideration given to loss experience incurred to date. The assumptions used in the business plan were consistent with loss results reflected in Lloyd's historical data for similar risks. Syndicate 6131, which began writing business effective January 1, 2018, follows a process similar to Syndicate 1729 for the establishment of initial reserves. We expect loss ratios to fluctuate from quarter to quarter as Syndicate 1729 writes more business and the book begins to mature. We also expect loss ratios of Syndicate 6131 to fluctuate from quarter to quarter as Syndicate 6131 assumes more business from Syndicate 1729. The loss ratios will also fluctuate due to the timing of earned premium adjustments (see discussion in this section under the heading "Net Premiums Earned"). Premium and exposure for some of Syndicate 1729's insurance policies and reinsurance contracts are initially estimated and subsequently adjusted over an extended period of time as underlying premium reports are received from cedants and insureds. When reports are received, the premium, exposure and corresponding loss estimates are revised accordingly. Changes in loss estimates due to premium or exposure fluctuations are incurred in the accident year in which the premium is earned.
We recognized $2.0 million of unfavorable prior year development for the year ended December 31, 2018 as compared to $0.8 million of favorable prior year development for the year ended December 31, 2017. The unfavorable prior year development for the year ended December 31, 2018 was driven by higher than expected losses and development on certain large claims which resulted in unfavorable development with respect to a previous year of account.
Underwriting, policy acquisition and operating expenses increased by $4.7 million for the year ended December 31, 2018 as compared to 2017 primarily due to the anticipated growth in Syndicate 1729 operations, an increase in various operational expenses associated with establishing Syndicate 6131 and, to a lesser extent, an increase in DPAC amortization primarily due to an increase in broker commissions.
Net investment income for the years ended December 31, 2018 and 2017 was primarily attributable to interest earned on our FAL investments, which primarily includes investment-grade corporate debt securities. In the fourth quarter of 2017, Syndicate 1729 expanded its fixed maturities portfolio to include certain debt securities classified as trading securities. Investment results associated with these fixed maturity trading securities are reported on the same quarter delay.
The decrease in our investment income from fixed maturity securities during 2018 was due to lower average fixed maturity investment balances. We reduced the size of our fixed portfolio over the last year in order to pay dividends and invest in other asset classes. On an overall basis, our average investment in fixed maturity securities was approximately 16.0% lower in 2018 as compared to 2017.
Our tax credit partnership investments are designed to generate returns in the form of tax credits and tax-deductible project operating losses and are comprised of qualified affordable housing project tax credit partnerships and historic tax credit partnerships. We account for our tax credit partnership investments under the equity method and record our allocable portion of the operating losses of the underlying properties based on estimates provided by the partnerships. For our qualified affordable housing project tax credit partnerships, we adjust our estimates of our allocable portion of operating losses periodically as actual operating results of the underlying properties become available. Our historic tax credit partnerships are short-term in nature and remaining operating losses are expected to be recognized primarily in 2018. Based on operating results received, we increased our estimate of partnership operating losses by $3.0 million for the year ended December 31, 2018, as compared to $2.3 million for the same respective period in 2017. The results from our tax credit partnership investments for the year ended December 31, 2018 reflected an increase in partnership operating losses as compared to the same respective period of 2017.
The tax benefits received from our tax credit partnerships, which are not reflected in our investment results above, reduced our tax expenses in 2018 and 2017 as follows:
During 2017, we recognized OTTI in earnings of $13.0 million, including an $8.5 million impairment related to an early stage business investment accounted for under the equity method. This impairment charge represented the difference between the investment's carrying value and fair value, which was measured as our ownership percentage in the projected earnings expected to be generated by the investment. In addition, we recognized OTTI in earnings of $3.4 million in 2017 related to our qualified affordable housing project tax credit investments. The current estimated tax benefits expected to be received from our allocable portion of the operating losses of the underlying properties have declined, due to the newly enacted corporate tax rate of 21%, as compared to those at the time the investments were acquired. During 2017, we also recognized credit-related OTTI in earnings of $0.2 million and non-credit OTTI of $0.2 million in OCI, both of which related to corporate bonds.
Consolidated interest expense for the years ended December 31, 2018 and 2017 was comprised as follows:
Consolidated interest expense decreased during 2018 as compared to 2017 driven primarily by a decrease in the weighted average outstanding borrowings on our Revolving Credit Agreement and, to a lesser extent, the change in the fair value of our interest rate cap, partially offset by interest expense incurred on our Mortgage Loans. The weighted average outstanding borrowings on our Revolving Credit Agreement were $41 million for the year ended December 31, 2018 as compared to $169 million for the year ended December 31, 2017. The interest rate cap was entered into during the fourth quarter of 2017 and is designated as an economic hedge of interest rate risk associated with our variable rate Mortgage Loans. See further discussion of our outstanding debt in Note 10 and further discussion of our interest rate cap agreement in Note 11 of the Notes to Consolidated Financial Statements.
Tax expense allocated to our Corporate segment includes U.S. tax only, which would include U.S. tax expense incurred from our corporate membership in Lloyd's of London and tax expense incurred from SPCs at Inova Re, one of our Cayman Islands reinsurance subsidiaries, which intend to elect to be taxed as U.S. taxpayers. The U.K. tax expense incurred by the U.K. based subsidiaries of our Lloyd's Syndicates segment is allocated to that segment. Consolidated tax expense reflects tax expense of both segments, as shown in the table below:
Our effective tax rate for 2018 and 2017 was a benefit of 62.1% and an expense of 16.6%, respectively, and differs from the statutory federal income tax rate primarily due to the utilization of tax credits transferred to us from our tax credit partnership investments and a portion of our investment income being tax-exempt. Tax credits utilized were $21.0 million for 2018 as compared to $23.1 million for 2017 while tax-exempt income was $2.5 million and $8.4 million in the same respective years. The impact of tax credits and tax-exempt income on our effective tax rate was greater in 2018 due to lower pre-tax income in 2018 as compared to 2017. While the enactment of the TCJA will not impact the amount of the tax credits we will receive, we expect the future utilization of our tax credits to take longer than in previous years due to the lower corporate tax rate. Additionally, our effective tax rate in 2018 was impacted by a tax benefit of 8.0% related to provision-to-return differences. These differences primarily reflected the impact of the change in the federal corporate tax rate on our temporary provision-to-return differences as well as higher tax credits received for the 2017 tax year than the previously estimated tax benefit.
For 2017, the most significant item that decreased our effective tax rate, other than the previously mentioned tax credits and tax-exempt investment income, was the excess tax benefit on share-based compensation that resulted from the application of revised accounting guidance, which was effective January 1, 2017, and lowered the effective tax rate by 2.1%. Under the revised guidance, the difference between the deduction for tax purposes, which is based upon the fair market value of share-based awards and the time of vesting, and the compensation cost recognized for financial reporting purposes, which is based upon the fair market value of the share-based awards on the date of grant, is to be recognized as income tax expense (benefit) in the current period rather than an adjustment to OCI as was required under prior guidance.
Consolidated net premiums earned increased in 2017 as compared to 2016. The decrease in net premiums earned in our Specialty P&C segment was due to the effect of a prior year novation which resulted in $11.8 million in premium earned in 2016 (see further discussion in our Segment Operating Results - Specialty Property & Casualty section that follows). After removing the impact of the prior year novation in the Specialty P&C segment, net premiums earned increased in all our operating segments in 2017 as compared to 2016.
Our consolidated current accident year net loss ratio increased 1.6 percentage points for the year ended December 31, 2017 as compared to 2016 primarily driven by higher current accident year net loss ratios in our Lloyd's Syndicate and Specialty P&C segments. The higher current accident year net loss ratio in our Lloyd's Syndicate segment was primarily due to losses related to Hurricanes Harvey, Irma and Maria during 2017 which resulted in a 0.9 percentage point increase in our consolidated current accident year net loss ratio (see further discussion in the Segment Operating Results - Lloyd's Syndicate section that follows).
Our operating ratio (calculated as our combined ratio, less our investment income ratio) increased by 4.6 percentage points in the year ended December 31, 2017 as compared to 2016. The increase reflected a higher consolidated net loss ratio driven by a lower amount of prior year favorable development in our Specialty P&C segment and estimated losses recognized during 2017 related to Hurricanes Harvey, Irma and Maria in our Lloyd's Syndicate segment (see further discussion in the Segment Operating Results - Lloyd's Syndicate section that follows).
ROE was 6.3% for the year ended December 31, 2017 as compared to 8.0% for the same respective period of 2016. The decrease in 2017 was primarily due to a decrease in net income, partially offset by a lower average equity base (the denominator of the ROE ratio) as compared to 2016. The lower average equity base in 2017 as compared to 2016 was primarily due to dividends declared during the year ended December 31, 2017.
Our book value per share at December 31, 2017 as compared to December 31, 2016 is shown in the following table.
(1) Net realized investment gains (losses) on investments related to SPCs are recognized in our Segregated Portfolio Cell Reinsurance segment and the portion of operating earnings, including the gain or loss, net of our participation, is due to the external cell participants through the SPC dividend expense (income). To be consistent with our exclusion of net realized investment gains (losses) recognized in earnings, we are excluding the portion of net realized investment gains (losses) that is included in the SPC dividend expense (income) which is due to the external cell participants.
As previously discussed, we reorganized our segment reporting in the third quarter of 2018 which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance. The underwriting results of the SPCs that assume healthcare professional liability business were previously reported in our Specialty P&C segment and are now reported in our Segregated Portfolio Cell Reinsurance segment. All prior period segment information has been recast to conform to the current period presentation. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements.
Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance. Specialty P&C segment operating results reflect pre-tax underwriting profit or loss from these insurance lines, exclusive of investment results, which are included in our Corporate segment. Segment operating results included the following:
Our medical technology liability business is marketed throughout the U.S.; coverage is offered on a primary basis, within specified limits, to manufacturers and distributors of medical technology and life sciences products including entities conducting human clinical trials. In addition to the previously listed factors that affect our premium volume, our medical technology liability premium volume is impacted by the sales volume of insureds. The increase in 2017 primarily reflected new business written, including two large policies during the fourth quarter of 2017, partially offset
The slight increase in our alternative market healthcare facilities premium during 2017 was primarily due to new business written and, to a lesser extent, an increase in renewal pricing primarily due to increases in exposure related to a few policies, partially offset by retention losses.
Ceded premiums represent the amounts owed to our reinsurers for their assumption of a portion of our losses. Through our current excess of loss reinsurance arrangements we generally retain the first $1 million in risk insured by us and cede coverages in excess of this amount. For our healthcare professional liability coverages, we also retain from 5% - 12.5% of the next $25 million of risk for coverages in excess of $1 million. For our medical technology liability coverages, we also retain 10% of the next $9 million of risk for coverages in excess of $1 million. We pay our reinsurers a ceding premium in exchange for their accepting the risk, the ultimate amount of which is determined by the loss experience of the business ceded, subject to certain minimum and maximum amounts.
As previously discussed, we are the majority participant in Syndicate 1729 and normally record our pro rata share of its operating results in our Lloyd's Syndicate segment on a quarter delay, except when information is available that is material to the current period. We also record the cession to the Lloyd's Syndicate segment from our Specialty P&C segment on a quarter delay as the amounts are not material and this permits the cession to be reported by both the Lloyd's Syndicate segment and the Specialty P&C segment in the same reporting period. The decrease in ceded premiums to Syndicate 1729 for the year ended December 31, 2017 reflected the revised contract terms effective January 1, 2017 which reduced the premiums ceded by essentially half. We did not renew our quota share agreement with Syndicate 1729 on January 1, 2018, however the impact will not be reflected in ceded premiums until the second quarter of 2018 due to the previously mentioned quarter delay. See Lloyd's Syndicate segment results for further discussion on the quota share agreement. As our premiums are earned, we recognize the related ceding commission income which reduces underwriting expense by offsetting
DPAC amortization. For the years ended December 31, 2017 and 2016, the related ceding commission income was approximately 27% of ceded premiums written. For our consolidated results, eliminations of the inter-segment portion (58% of the Specialty P&C cession) of the transactions are also recorded on a quarter delay.
As shown in the table below, our ceded premiums ratio was affected in both 2017 and 2016 by revisions to our estimate of premiums owed to reinsurers related to coverages provided in prior accident years.
Net premiums earned consist of gross premiums earned less the portion of earned premiums that we cede to our reinsurers for their assumption of a portion of our losses. Because premiums are generally earned pro rata over the entire policy
period, fluctuations in premiums earned tend to lag those of premiums written. Generally, our policies carry a term of one year, however, as discussed above, we write certain policies with a twenty-four month term, and a few of our medical technology liability policies have a multi-year term. Tail coverage premiums are generally 100% earned in the period written because the policies insure only incidents that occurred in prior periods and are not cancellable. Additionally, ceded premium changes due to changes to estimates of premiums owed under reinsurance agreements for prior accident years are fully earned in the period of change.
We recognized net favorable loss development related to our previously established reserve of $119.4 million and $137.2 million for the years ended December 31, 2017 and 2016, respectively. The net favorable loss development in 2017 and 2016 included $10.1 million and $12.0 million, respectively, attributable to our medical technology liability line of business and $5.2
million and $9.4 million, respectively, attributable to our legal professionals liability line of business. We re-evaluate our previously established reserve each quarter based on our most recently available claims data and currently available industry trend information. Development recognized during 2017 principally related to accident years 2010 through 2014. Development recognized during 2016 principally related to accident years 2009 through 2013.
Other underwriting and operating expenses increased during the year ended December 31, 2017 as compared to 2016 primarily driven by an increase in compensation related expenses and costs associated with the amortization of new software placed into service during the first quarter of 2017. The increase was partially offset by the effect of non-recurring costs in 2016, including state assessments and a donation to a scholarship fund for which we received a wholly offsetting tax credit during 2016.
Our Workers' Compensation Insurance segment provides workers' compensation products to employers generally with 1,000 or fewer employees. Workers' compensation products offered include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies, deductible policies and alternative market solutions. Alternative market products include program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management services. Alternative market premiums are 100% ceded to either the SPCs within our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, unaffiliated captive insurers. Our Workers' Compensation Insurance segment operating results reflected pre-tax underwriting profit or loss from these workers' compensation products, exclusive of investment results, which are included in our Corporate segment. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements. Segment operating results included the following:
Our workers’ compensation premium volume is driven by five primary factors: (1) the amount of new business written, (2) audit premium, (3) retention of our existing book of business, (4) premium rates charged on our renewal book of business and (5) changes in payroll exposure.
Under our external reinsurance agreement, we retain the first $0.5 million in risk insured by us and cede losses in excess of this amount on each loss occurrence under our primary external reinsurance contract. Per our reinsurance agreements, we cede premiums related to our traditional business on an earned premium basis. The decrease in premiums ceded to external reinsurers during the year ended December 31, 2017 as compared to 2016 primarily reflected an increase in revenue sharing with our reinsurance broker, partially offset by an increase in premiums earned and reinsurance rates.
Changes in the return premium estimate reflected the loss experience under the reinsurance contract for the years ended December 31, 2017 and 2016. The decrease in the return premium estimate for the year ended December 31, 2017 primarily reflected severity-related claims activity during 2017.
We recognized net favorable prior year development related to our previously established reserve of $5.7 million for the year ended December 31, 2017 as compared to $1.6 million for 2016. The net favorable prior year development in 2017 reflected overall favorable trends in claim closing patterns, primarily in the 2015 and 2016 accident years. For each of the years ended December 31, 2017 and 2016, the net favorable prior year development included $1.6 million related to amortization of the purchase accounting fair value adjustment.
Alternative market premiums written through our Workers' Compensation Insurance segment's alternative market business unit are 100% ceded, less a ceding commission, to either the SPCs in our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, unaffiliated captive insurers. SPC ceding commission income includes fronting fees, commissions, premium taxes and risk management fees, which are reported as an offset to underwriting, policy acquisition and operating expenses.
Premiums in our Segregated Portfolio Cell Reinsurance segment are 100% assumed from either our Workers' Compensation Insurance or Specialty P&C segments. SPC premium volume is driven by five primary factors: (1) the amount of new business written, (2) retention of the existing book of business, (3) premium rates charged on the renewal book of business and, for workers' compensation business, (4) audit premium and (5) changes in payroll exposure.
For the workers' compensation business, each SPC has in place its own external reinsurance arrangements. The healthcare professional liability business is assumed net of reinsurance from our Specialty P&C segment; therefore, there are no ceded premiums related to the healthcare professional liability business reflected in the table above. The risk retention for each loss
The above table reflects ceded premiums as a percent of gross premiums written for the workers' compensation business only; healthcare professional liability business is assumed net of reinsurance, as discussed above. The ceded premiums ratio remained relatively unchanged for the year ended December 31, 2017 as compared to 2016.
The current accident year net loss ratio reflected the aggregate loss ratio for all programs. Loss reserves are estimated for each program on a quarterly basis. Due to the size of some of the programs, quarterly claims activity can cause the current accident year net loss ratio to fluctuate significantly from period to period. The increase in the accident year net loss ratio primarily reflected severity-related claims activity during the fourth quarter of 2017.
Current accident year incurred losses ceded to our external reinsurers totaled $3.2 million for the year ended December 31, 2017, compared to $3.0 million for 2016.
Audit premium from workers' compensation insureds results in a decrease in the net loss ratio, whereas audit premium returned to workers' compensation insureds results in an increase in the net loss ratio. We recognized audit premium of $1.4 million and $1.1 million for the years ended December 31, 2017 and 2016, respectively, the effect of which is reflected in the previous table. We estimate our current accident year losses and loss adjustment expenses based on the underlying actuarial methodologies without consideration of audit premium. As a result, we removed the effects of audit premium in the previous table for purposes of evaluating the current accident year net loss ratio.
We are the majority (58% for the 2017 underwriting year) capital provider to Syndicate 1729, which covers a range of property and casualty insurance and reinsurance lines. The remaining capital for Syndicate 1729 is provided by unrelated third parties, including private names and other corporate members. Syndicate 1729 had a maximum underwriting capacity of £100.0 million for the 2017 underwriting year, of which £57.6 million ($77.8 million based on December 31, 2017 exchange rates) was our allocated underwriting capacity. For the 2018 underwriting year, we increased our participation in the operating results of Syndicate 1729 from 58% to 62%.
Beginning in 2018, our Lloyd's Syndicate segment will include the operating results of a newly formed SPA, Syndicate 6131. As a SPA, Syndicate 6131 is only allowed to underwrite one quota share reinsurance contract with Syndicate 1729. We are the sole (100%) capital provider to Syndicate 6131 and for the 2018 underwriting year Syndicate 6131 had a maximum underwriting capacity of £8.0 million (approximately $10.8 million at December 31, 2017) and focuses on contingency and specialty property business.
We normally report results from our involvement in Lloyd's Syndicates on a quarter delay, except when information is available that is material to the current period. Furthermore, the investment results associated with our FAL investments and certain U.S. paid administrative expenses are reported concurrently as that information is available on an earlier time frame.
As discussed in our Specialty P&C segment operating results, Syndicate 1729 serves as a reinsurer on a quota share basis for a wholly owned insurance subsidiary in our Specialty P&C segment. For premium assumed, we include in gross premiums written an estimate of all premiums to be earned over the entire period covered by the reinsurance agreement, generally one year, in the quarter in which the reinsurance agreement becomes effective. The quota share agreement with our Specialty P&C segment renewed effective January 1, 2017 and reflected revised contract terms which reduced premium assumed by Syndicate 1729 by essentially half. Results from this ceding arrangement are reported in the Specialty P&C segment on the same quarter delay in order to be consistent with the Lloyd's Syndicate segment as the effect of doing so is not material. We did not renew the quota share agreement with our Specialty P&C segment on January 1, 2018, however, the impact will not be reflected in either segment's operating results until the second quarter of 2018 due to the previously mentioned quarter delay.
As previously discussed, we reorganized our segment reporting during the third quarter of 2018 which resulted in the creation of a new segment: Segregated Portfolio Cell Reinsurance. The Segregated Portfolio Cell Reinsurance segment includes the results of investment assets solely allocated to SPC operations at our Cayman Islands reinsurance subsidiaries which were previously reported in our Corporate segment. All prior period segment information has been recast to conform to the current period presentation. See further information regarding our segments in Note 16 of the Notes to Consolidated Financial Statements.
The decrease in our income from fixed maturity securities during 2017 was due to lower yields and lower average investment balances. We reduced the size of our fixed portfolio over 2017 in order to pay dividends and invest in other asset classes. On an overall basis, our average investment in fixed maturity securities was approximately 8% lower in 2017 as compared to 2016.
We also recognized $3.1 million OTTI in earnings during 2016 related to our interest in an investment fund that is accounted for using the cost method (classified as other investments). The fund is focused on the energy sector and securities held by the fund declined in value during 2016. An OTTI was recognized to reduce our carrying value of the investment to the NAV reported by the fund.
Operating subsidiaries within our Specialty P&C and Workers' Compensation Insurance segments are charged a management fee by the Corporate segment for services provided to these subsidiaries. The management fee is based on the extent to which services are provided to the subsidiary and the amount of gross premium written by the subsidiary. Under the arrangement, the expenses associated with such services are reported as expenses of the Corporate segment, and the management fees charged are reported as an offset to Corporate operating expenses. While the terms of the management arrangement were consistent between 2016 and 2017, fluctuations in the amount of gross premium written by each subsidiary can result in corresponding variations in the management fee charged to each subsidiary during a particular period.
Interest expense for the years ended December 31, 2017 and 2016 was comprised as follows: