● Specialty Commercial Segment. Our Specialty Commercial Segment includes our Commercial Auto business unit which offers primary and excess commercial vehicle insurance products and services; our E&S Casualty business unit which offers primary and excess liability, excess public entity liability, and E&S package and garage liability insurance products and services; our E&S Property business unit which offers primary and excess commercial property insurance for both catastrophe and non-catastrophe exposures; our Professional Liability business unit which offers healthcare and financial lines professional liability insurance products and services primarily for businesses, medical professionals, medical facilities and senior care facilities; and our Aerospace & Programs business unit which offers general aviation and satellite launch property/casualty insurance products and services, as well as certain specialty programs. These products were previously reported as the Contract Binding and Specialty Commercial operating units. This realignment did not impact our reportable segments.
● Standard Commercial Segment. Our Standard Commercial Segment includes the package and monoline property/casualty and occupational accident insurance products and services handled by our Commercial Accounts business unit (f/k/a Standard Commercial P&C operating unit) and the runoff of workers compensation insurance products handled by our former Workers Compensation operating unit. Effective June 1, 2016, we ceased marketing new or renewal occupational accident policies. Effective July 1, 2015, the former Workers Compensation operating unit ceased retaining any risk on new or renewal policies.
● Personal Segment. Our Personal Segment includes the non-standard personal automobile and renters insurance products and services handled by our Specialty Personal Lines business unit.
Certain significant accounting policies requiring our estimates and judgments are discussed below. Such estimates and judgments are based on historical experience, changes in laws and regulations, observation of industry trends and information received from third parties. While the estimates and judgments associated with the application of these accounting policies may be affected by different assumptions or conditions, we believe the estimates and judgments associated with the reported consolidated financial statement amounts are appropriate in the circumstances. For additional discussion of our accounting policies, see Note 1 to the audited consolidated financial statements included in this report.
the characteristics of the asset or liability and other factors as appropriate. These estimated fair values may not be realized upon actual sale or immediate settlement of the asset or liability.
The method followed in computing deferred policy acquisition costs limits the amount of such deferred costs to their estimated realizable value. A premium deficiency exists if the sum of expected claim costs and claim adjustment expenses, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums and expected investment income on those unearned premiums, as computed on a product line basis. We routinely evaluate the realizability of deferred policy acquisition costs. At December 31, 2019 and 2018, there was no premium deficiency related to deferred policy acquisition costs.
Goodwill. Goodwill is tested for impairment at the reporting unit level (business unit or one level below a business unit) on an annual basis (October 1) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. For purposes of evaluating goodwill for impairment, we have determined that our reporting units are the same as our business units except for the E&S Casualty and Aerospace & Programs business units for which reporting units are at the component level (“one level below”). Our consolidated balance sheet as of December 31, 2019 includes goodwill of acquired businesses of $44.7 million that is assigned to our business units as follows: Commercial Accounts business unit - $2.1 million; Commercial Auto business units - $21.3 million; E&S Casualty business unit - $6.3 million (comprised of $2.6 million for the primary/excess liability and public entity component and $3.7 million for the E&S package component); Aerospace & Programs business unit- $9.7 million (comprised entirely of the general aviation component); and Specialty Personal Lines business unit - $5.3 million. This amount has been recorded as a result of prior business acquisitions accounted for under the acquisition method of accounting. Under ASC 350, “Intangibles - Goodwill and Other,” goodwill is tested for impairment annually. We completed our last annual test for impairment on the first day of the fourth quarter of 2019 and determined that there was no impairment at that time.
The fair values of each of our business units were in excess of their respective carrying values, including goodwill, as a result of our annual test for impairment during the fourth quarter 2019. However, a 36% decline in the fair value of our Commercial Accounts business unit, a 35% decline in the fair value of our Commercial Auto business unit, a 73% decline in the primary/excess liability and public entity component, a 60% decline in the E&S package and garage liability component, a 26% decline in our general aviation and satellite component, or a 38% decline in the fair value of our Specialty Personal Lines business unit would have caused the carrying value of the respective reporting unit to be in excess of its fair value, resulting in the need to perform the second step of impairment testing prescribed by ASC 350, which could have resulted in an impairment to our goodwill.
Our actuaries estimate claim liabilities by considering a variety of reserving methods, each of which reflects a level of uncertainty. The estimated range derived from the various methods is used to assess the reasonableness of management’s estimates. There is no exclusive method for determining this range, and judgment enters into the process. The primary actuarial technique utilized is a loss development analysis in which ultimate losses are projected based upon historical development patterns. The primary assumption underlying this loss development analysis is that the historical development patterns will be a reasonable predictor of the future development of losses for accident years which are less mature. An alternate actuarial technique, known as the Bornhuetter-Ferguson method, combines an analysis of loss development patterns with an initial estimate of expected losses or loss ratios. This approach is most useful for recent accident years. In addition to assuming the stability of loss development patterns, this technique is heavily dependent on the accuracy of the initial estimate of expected losses or loss ratios. Consequently, the Bornhuetter-Ferguson method is primarily used to confirm the results derived from the loss development analysis.
The range of unpaid losses and LAE estimated by our actuary as of December 31, 2019 was $539.2 million to $767.0 million. Our best estimate of unpaid losses and LAE as of December 31, 2019 is $620.4 million. Our carried reserve for unpaid losses and LAE as of December 31, 2019 is comprised of $300.8 million in case reserves and $319.6 million in incurred but not reported reserves. In setting this estimate of unpaid losses and LAE, we have assumed, among other things, that current trends in loss frequency and severity will continue and that the actuarial analysis was empirically valid. We have established a best estimate of unpaid losses and LAE which is $32.7 million below the midpoint, or 80.9% of the high end, of the actuarial range at December 31, 2019 as compared to $44.6 million above the midpoint, or 97.8% of the high end, of the actuarial range at December 31, 2018. We expect our best estimate to move within the actuarial range from year to year due to changes in our operations and changes within the marketplace. Due to the inherent uncertainty in reserve estimates, there can be no assurance that the actual losses ultimately experienced will fall within the actuarial range. However, because of the breadth of the actuarial range, we believe that it is reasonably likely that actual losses will fall within such range.
Management overview. During fiscal 2019, our total revenues were $486.4 million, which was $107.1 million more than the $379.3 million in total revenues for fiscal 2018. During the year ended December 31, 2019, we reported net loss before tax of $1.0 million as compared to a net income before tax of $12.8 million during the same period of 2018.
The increase in revenue for the year ended December 31, 2019 was partially offset by increased losses and LAE of $106.1 million, higher operating expenses of $13.9 million and increased interest expense of $0.9 million as compared to the same period of 2018. The increase in losses and LAE was primarily the result of unfavorable net prior year loss reserve development of $60.9 million for the year ended December 31, 2019 as compared to $6.0 million of unfavorable net prior year loss reserve development for the year ended December 31, 2018, as well as higher net premiums earned. The increase in operating expenses was primarily due to increased production related expenses primarily attributable to higher net premiums earned, as well as higher salary and related expenses, professional service fees, occupancy and related and other operating expenses during the year ended December 31, 2019 as compared to the same period during 2018. The increase in interest expense was primarily the net result of the issuance of $50.0 million of senior unsecured notes during the third quarter of 2019 and the concurrent repayment of $30.0 million outstanding under a revolving credit facility. (See below under, “-Liquidity and Capital Resources-Senior Unsecured Notes” and “-Liquidity and Capital Resources-Frost Credit Facilities.”)
We reported a net loss of $0.6 million for the year ended December 31, 2019, as compared to net income of $10.3 million for the year ended December 31, 2018. On a diluted per share basis, net loss was ($0.03) per share for fiscal 2019 as compared to net income of $0.57 per share for fiscal 2018. Our effective tax rate was 39% for the year ended December 31, 2019 as compared to 19% for the same period in 2018. The increase in the effective tax rate for the year ended December 31, 2019 was due in large part to the affect of tax exempt income.
Our Specialty Commercial Segment reported a $54.5 million increase in losses and LAE which consisted of (a) a $22.5 million increase in losses and LAE in our Commercial Auto business unit due largely to $47.4 million of unfavorable prior year net loss reserve development recognized during the year ended December 31, 2019 as compared to $18.1 million of unfavorable prior year net loss reserve development during the same period of 2018, partially offset by lower current accident year loss trends and lower net earned premiums, (b) a $22.9 million increase in losses and LAE in our E&S Casualty business unit due primarily to $13.6 million of unfavorable prior year net loss reserve development during the year ended December 31, 2019 as compared to $5.2 million of favorable prior year net loss reserve development during the same period of 2018, as well as higher net earned premiums, (c) a $1.0 million decrease in losses and LAE in our E&S Property business unit due primarily to $0.3 million of net favorable prior year loss reserve development during the year ended December 31, 2019 as compared to $0.8 million of unfavorable prior year net loss reserve development during the same period of 2018, (d) a $9.0 million increase in losses and LAE attributable to our Professional Liability business unit due primarily to increased net premiums earned, partially offset by $0.7 million of net favorable prior loss reserve development during the year ended December 31, 2019 as compared to $1.5 million of net unfavorable prior year loss reserve development during the same period of 2018 as well as lower current accident year loss trends, and (e) a $1.1 million increase in losses and LAE in our Aerospace & Programs business unit due primarily to higher current accident year loss trends as well as higher net premiums earned, partially offset by $0.1 million of net unfavorable prior year loss reserve development during the year ended December 31, 2019 as compared to $1.3 million of net unfavorable prior year loss reserve development during the same period of 2018.
The Specialty Commercial Segment reported a net loss ratio of 85.0% for the year ended December 31, 2019 as compared to 75.2% for the same period during 2018. The gross loss ratio before reinsurance was 75.9% for the year ended December 31, 2019 as compared to 73.4% for the same period in 2018. The increase in the gross and net loss ratios was primarily due to higher unfavorable prior year net loss reserve development, partially offset by lower catastrophe losses. The Specialty Commercial Segment reported $60.1 million of unfavorable prior year net loss reserve development for the year ended December 31, 2019 as compared to unfavorable prior year net loss reserve development of $16.5 million for the same period of 2018. During the year ended December 31, 2019 the Specialty Commercial Segment reported $2.3 million of net catastrophe losses as compared to $6.0 million during the same period of 2018. The Specialty Commercial Segment reported a net expense ratio of 21.8% for the year ended December 31, 2019 as compared to 22.6% for the same period of 2018. The decrease in the expense ratio was due predominately to increased ceding commissions in our Commercial Auto business unit.
Gross premiums written for the Personal Segment were $99.3 million for the year ended December 31, 2019 as compared to $75.1 million for the same period in the prior year. Net premiums written for our Personal Segment were $83.6 million for the year ended December 31, 2019, which was an increase of $40.8 million from the $42.8 million reported for the same period in 2018. The increase in gross written premiums was primarily due to higher premium production in our current geographical footprint. The increase in net written premiums was due to increased production as well as increased retention of business effective October 1, 2018.
Total revenue for the Personal Segment was $88.2 million for the year ended December 31, 2019 as compared to $38.6 million for the same period in 2018. The increase in revenue was due to an increase in net premiums earned of $47.7 million and increased finance charges of $1.9 million during the year ended December 31, 2019 as compared to the same period during 2018.
Pre-tax income for the Personal Segment was $0.4 million for the year ended December 31, 2019 as compared to pre-tax income of $3.1 million for the same period of 2018. The decrease in pre-tax income was primarily the result of the increased losses and LAE of $41.0 million and increased operating expenses of $11.3 million, partially offset by the increased revenue discussed above for the year ended December 31, 2019 as compared to the same period during 2018.
Corporate pre-tax income was $0.8 million for the year ended December 31, 2019 as compared to a pre-tax loss of $32.1 million for the same period of 2018. The pre-tax income was primarily due to the higher revenue discussed above, partially offset by higher operating expenses of $2.7 million, primarily as a result of increased salary and related expenses, professional services and other general expenses, and higher interest expense of $0.9 million.
Our sources of funds are from insurance-related operations, financing activities and investing activities. Major sources of funds from operations include premiums collected (net of policy cancellations and premiums ceded), commissions and processing and service fees. As a holding company, Hallmark is dependent on dividend payments and management fees from its subsidiaries to meet operating expenses and debt obligations. As of December 31, 2019, we had $19.0 million in unrestricted cash and cash equivalents, including $12.5 million held in premium and claim trust accounts, as well as $1.0 million in debt securities, at the holding company and our non-insurance subsidiaries. As of that date, our insurance subsidiaries held $34.3 million of unrestricted cash and cash equivalents as well as $573.3 million in debt securities with an average modified duration of 1.5 years. Accordingly, we do not anticipate selling long-term debt instruments to meet any liquidity needs.
AHIC and TBIC, domiciled in Texas, are limited in the payment of dividends to their stockholders in any 12-month period, without the prior written consent of the Texas Department of Insurance, to the greater of statutory net income for the prior calendar year or 10% of statutory policyholders’ surplus as of the prior year end. HIC and HNIC, both domiciled in Arizona, are limited in the payment of dividends to the lesser of 10% of prior year policyholders’ surplus or prior year’s net income, without prior written approval from the Arizona Department of Insurance. HSIC, domiciled in Oklahoma, is limited in the payment of dividends to the greater of 10% of prior year policyholders’ surplus or prior year’s statutory net income, not including realized capital gains, without prior written approval from the Oklahoma Insurance Department. For all our insurance companies, dividends may only be paid from unassigned surplus funds. During 2020, the aggregate ordinary dividend capacity of these subsidiaries is $22.6 million, of which $15.8 million is available to Hallmark. As a county mutual, dividends from HCM are payable to policyholders. During the years ended December 31, 2019 and 2018 our insurance company subsidiaries paid $15.5 million and $5.5 million, respectively, in dividends to Hallmark.
Comparison of Years Ended December 31, 2019 and December 31, 2018
Net cash used in investing activities during the year ended December 31, 2019 was $32.4 million as compared to net cash provided by investing activities of $7.3 million for the prior year. The cash used in investing activities during the year ended December 31, 2019 was primarily comprised of an increase of $37.1 million in purchases of debt and equity securities, a decrease of $0.5 million in maturities, sales and redemptions of investment securities and a $2.1 million increase in purchases of fixed assets.
Net cash provided by financing activities during the year ended December 31, 2019 was $19.2 million as a result of net proceeds from our senior unsecured note offering of $49.0 million and proceeds from the exercise of employee stock options of $1.5 million, partially offset by the $30.0 million repayment of the principal balance on our revolving credit facility and $1.3 million in repurchases of our common stock. Net cash used in financing activities during the year ended December 31, 2018 was $1.6 million as a result of $1.8 million related to the repurchase of our common stock, partially offset by $0.2 million related to proceeds from the exercise of employee stock options.
Our Second Restated Credit Agreement with Frost Bank (“Frost”) dated June 30, 2015, as amended, provided a $15.0 million revolving credit facility (“Facility A”), with a $5.0 million letter of credit sub-facility. The outstanding balance of the Facility A bore interest at a rate equal to the prime rate or LIBOR plus 2.5%, at our election. We paid an annual fee of 0.25% of the average daily unused balance of Facility A and letter of credit fees at the rate of 1.00% per annum. On August 19, 2019, we terminated Facility A.
On August 19, 2019, Hallmark issued $50.0 million of senior unsecured notes (“Notes”) due August 15, 2029. Interest on the Notes accrues at the rate of 6.25% per annum and is payable semi-annually in arrears commencing February 15, 2020. The Notes are not obligations of or guaranteed by any of Hallmark’s subsidiaries and are not subject to any sinking fund requirements. At Hallmark’s option, the Notes are redeemable, in whole or in part, prior to the stated maturity subject to certain provisions intended to make the holders of the Notes whole on scheduled interest and principal payments. The indenture governing the Notes contains certain covenants which, among other things, restrict Hallmark’s ability to incur additional indebtedness, make certain payments, create liens on the stock of certain subsidiaries, dispose of certain assets, or merge or consolidate with other entities. As of December 31, 2019, Hallmark was in compliance with all of these covenants.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018