The following discussion generally focuses on the change in financial condition, results of operation and cash flows for the year ended December 31, 2020 as compared to the year ended December 31, 2019 and be should be read in conjunction with the Consolidated Financial Statements and Notes to those statements which accompany this report. For a full discussion of the changes in the financial condition, results of operations and cash flows for the year ended December 31, 2019 as compared to the year ended December 31, 2018, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of ProAssurance's December 31, 2019 report on Form 10-K.
ProAssurance Corporation is a holding company for property and casualty insurance companies. Our wholly owned insurance subsidiaries provide professional liability insurance, liability insurance for medical technology and life sciences risks and workers' compensation insurance. We also provide capital to Syndicate 1729 and Syndicate 6131 at Lloyd's of London.
•Segregated Portfolio Cell Reinsurance - This segment includes the results (underwriting profit or loss, plus investment results, net of U.S. federal income taxes) of SPCs at Inova Re and Eastern Re, our Cayman Islands SPC operations. Each SPC is owned, fully or in part, by an agency, group or association, and the results of the SPCs are attributable 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 ranges from a low of 20% to a high of 85%. SPC results attributable to external cell participants are reflected as an SPC dividend expense (income) in our Segregated Portfolio Cell Reinsurance segment. The SPCs assume workers' compensation insurance, healthcare professional liability insurance or a combination of the two from our Workers' Compensation Insurance and Specialty P&C segments.
•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. This segment also includes non-premium revenues generated outside of our insurance entities and corporate expenses.
We operate in very competitive markets and face strong competition from other insurance companies for all of our insurance products. HCPL insurance represents the largest product line in our gross premiums written (41% in 2020) and the healthcare market has been trending toward the formation of larger medical practice groups and the employment of physicians by hospitals. Large medical groups and facilities frequently manage their healthcare professional liability exposure outside of the traditional first dollar insurance marketplace using self-insured mechanisms and other risk sharing arrangements. In response to these trends, we offer products designed to provide greater risk sharing options to hospitals and large physician groups. Since the middle of 2019, new senior leadership in our Specialty P&C segment has executed a comprehensive underwriting strategy in response to emerging loss trends and changing conditions in the HCPL industry. This includes organizational structure enhancements, recruitment of additional talent in specialty underwriting, focus on state strategies to achieve greater concentration and predictability, price strengthening and tightening of underwriting criteria, terms and conditions. Furthermore, the new senior leadership team for our Specialty P&C segment executed several strategic business decisions intended to improve operating performance by bringing together all of the Specialty P&C segment lines of business and operations under a unified organizational and management structure.
COVID-19 continues to present challenges for all in the insurance marketplace. Policyholders, agency partners and insurance carriers are conducting business in ways never before considered, and some of these changes may persist even after the pandemic subsides. We believe our enhanced operating structure and strategy have positioned us well to face these challenges and support our policyholders and agency partners as we navigate the current environment.
In evaluating our performance, we consider a number of performance measures, including the following:
•The net loss ratio which is calculated as net losses and loss adjustment expenses incurred divided by net premiums earned and is a component of underwriting profitability.
•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 tax ratio which is calculated as total income tax expense (benefit) divided by income (loss) before income taxes and measures our effective tax rate.
•ROE which is calculated as net income (loss) 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.
•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.
Our Consolidated Financial Statements are prepared in conformity with GAAP. Preparation of these financial statements requires us to make estimates and assumptions that affect the amounts we report on those statements. We evaluate these estimates and assumptions on an ongoing basis based on current and historical developments, market conditions, industry trends and other information that we believe to be reasonable under the circumstances. We can make no assurance that actual results will conform to our estimates and assumptions; reported results of operations may be materially affected by changes in these estimates and assumptions.
As of December 31, 2020, 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, historical paid and incurred loss development trends and our evaluation of the current loss environment including frequency, severity, the expected effect of inflation, general economic and social trends, and the legal and political environment. We also take into consideration 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.
We partition our reserves by accident year, which is the year in which the claim becomes our liability. For claims-made policies, the insured event generally becomes a liability when the event is first reported to us. For occurrence policies, the insured event becomes a liability when the event takes place. For retroactive coverages, the insured event becomes a liability at inception of the underlying contract. As claims are incurred (reported) and claim payments are made, they are aggregated by accident year for analysis purposes. We also partition our reserves by reserve type: case reserves and IBNR reserves. Case reserves are established by our claims departments based upon the particular circumstances of each reported claim and represent our estimate of the future loss costs (often referred to as expected losses) that will be paid on reported claims. Case reserves are decremented as claim payments are made and are periodically adjusted upward or downward as estimates regarding the amount of future losses are revised; reported loss for an individual claim is the case reserve at any point in time plus the claim payments that have been made to date. IBNR reserves represent our estimate in the aggregate of future development on losses that have been reported to us and our estimate of losses that have been incurred but not reported to us.
The current accident year net loss ratio in the Specialty P&C segment has ranged from 87% to 106% in recent years, excluding the effect of a single large national healthcare account that generated outsized losses and distorted results for 2019 and 2020. We recorded a higher than average current accident year net loss ratio in 2019 due to increased reserve estimates related to this large national healthcare account that exceeded the assumptions we made when originally underwriting the account. During the second quarter of 2020, the policy term associated with this account's claims-made coverage expired. This account did not renew on terms offered by us and the insured exercised its contractual option to purchase the extended reporting endorsement or "tail" coverage resulting in a net underwriting loss of $45.7 million recognized in the second quarter of 2020 associated with this policy, which increased our current accident year net loss ratio for the year ended December 31, 2020. Excluding the impact of this large national healthcare account, the current accident year net loss ratio was 94.7% for the year ended December 31, 2020. This reflects loss severity in the broader medical professional liability industry and a higher loss pick in our Specialty line of business.
the actuarial methodologies with trends in exposure base, medical expense inflation, general inflation, severity, and claim counts, among other things, to select an expected loss ratio.
Similar to our Specialty P&C segment, we have also observed a reduction in claims frequency in our Workers' Compensation Insurance segment, some of which is likely associated with the COVID-19 pandemic. During the third quarter of 2020, we reduced our current accident year net loss ratio in response to the continuation of favorable trends in 2020, including lower claims frequency and severity, as our workers' compensation claims are shorter-tailed in nature as compared to our HCPL claims; however, we remain cautious in our evaluation of the current accident year reserve due to uncertainty surrounding the length and severity of the pandemic, and legislative and regulatory bodies in certain states changing or attempting to broaden compensability requirements for COVID-19 claims. If these legislative and regulatory bodies are successful, it could have an adverse impact on the frequency and severity related to COVID-19 claims. See previous discussion in Part I under the heading "Insurance Regulatory Matters- COVID-19." Furthermore, as it relates to both our Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments, the current economic conditions resulting from the COVID-19 pandemic have introduced significant risk of a prolonged recession, which could have an adverse impact on our return to wellness efforts and the ability of injured workers to return to work, resulting in a potential reduction in favorable claim trends in future periods.
Segregated Portfolio Cell Reinsurance Segment. The factors that affect the ultimate losses incurred for the workers' compensation and HCPL coverages assumed by the SPCs at Inova Re and Eastern Re (4% of our consolidated gross reserve for losses and loss adjustment expenses as of December 31, 2020) are consistent with that of our Workers’ Compensation Insurance and Specialty P&C segments, respectively.
In addition to setting the initial reserve for the current accident year, each period we reassess the amount of reserve required for prior accident years.
The foundation of our reserve re-estimation process is an actuarial analysis that is performed by both our internal and consulting actuaries. This very detailed analysis projects ultimate losses based on partitions which include line of business, geography, coverage layer and accident year. The procedure uses the most representative data for each partition, capturing its unique patterns of development and trends. We believe that the use of consulting actuaries provides an independent view of our loss data as well as a broader perspective on industry loss trends.
amortized over the average expected life of the reserve of 6 years. The fair value adjustment was fully amortized as of December 31, 2019.
The process of estimating reserves involves a high degree of judgment and is subject to a number of variables. These variables can be affected by both views of internal and external events, such as changes in views of economic inflation, legal trends and legislative changes, as well as differentiating views of individuals involved in the reserve estimation process, among others. We continually refine our estimates in a regular, ongoing process as historical loss experience develops and additional claims are reported and settled. Our objective is to consider all significant facts and circumstances known at the time.
Changes in economic conditions and steps taken by the federal government and the Federal Reserve in response to COVID-19 could lead to inflation trends that are different from those we anticipated when establishing our reserves, which could in turn lead to an increase or decrease in our loss costs and the need to strengthen or reduce reserves. These impacts of inflation on loss costs and reserves could be more pronounced for our HCPL line of business as that business generally requires a longer period of time to settle claims for a given accident year and, accordingly, is relatively more inflation sensitive.
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.
Our professional liability line of business includes both our HCPL and Small Business Unit lines, with our HCPL line representing the largest component of our reserve. In support of our concern that the decline in frequency will result in a higher severity trend for our HCPL claims, we saw our closed-with-indemnity-payment ratio (i.e., the number of claims closed with an indemnity or loss payment as compared to the total number of closed claims) for our claims increase from 10% in 2005 to 18% in 2020.
The following table presents additional information about the loss development for our professional liability line of business, excluding loss development for HCPL coverages assumed by the SPCs at Inova Re and Eastern Re:
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:
Any change in our estimate of net ultimate losses for prior years is reflected in net income (loss) in the period in which such changes are made.
Due to the size of our consolidated reserve for losses and the large number of claims outstanding at any point in time, even a small percentage adjustment to our total reserve estimate could have a material effect on our results of operations for the period in which the adjustment is made, as was the case in 2020, 2019 and 2018.
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 make a determination of the amount of insurance risk we choose to retain based upon numerous factors, including our risk tolerance and the capital we have to support it, the price and availability of reinsurance, the volume of business, our level of experience with a particular set of exposures and our analysis of the potential underwriting results. We purchase excess of loss reinsurance to limit the amount of risk we retain and we do so from a number of companies to mitigate concentrations of credit risk. As of December 31, 2020, there is no reinsurer, on an individual basis, for which our recoverables for both paid and unpaid claims (net of amounts due to the reinsurer) and our prepaid balances are aggregately $51 million or more. We utilize reinsurance brokers to assist us in the placement of these reinsurance programs and in the analysis of the credit quality of our reinsurers. The determination of which reinsurers we choose to do business with is based upon an evaluation of their then current financial strength, rating, stability and claims payment practices.
Our reinsurance receivables are exposed to credit losses but to-date have not experienced any significant amount of credit losses. To partially mitigate our exposure to credit losses, reinsurance receivables totaling approximately $96.1 million were collateralized by letters of credit or funds withheld as of December 31, 2020. We measure expected credit losses on our reinsurance receivables on a collective basis when similar risk characteristics exist or on an individual basis if we determine a receivable does not share similar risk characteristics. We measure expected credit losses associated with our reinsurance receivables (related to both paid and unpaid losses) at the consolidated level as our reinsurance receivables share similar risk characteristics including type of financial asset, type of industry and similar historical and expected credit loss patterns. We measure expected credit losses over the average contractual term of our reinsurance receivables utilizing a loss rate method. Historical internal credit loss experience is the basis for our assessment of expected credit losses; however, we may also consider historical credit loss information from external sources. We also consider reasonable and supportable forecasts of future economic conditions in our estimate of expected credit losses. Expected credit losses associated with our reinsurance receivables (related to both paid and unpaid losses) were nominal in amount as of December 31, 2020. We had no allowance for expected credit losses related to our reinsurance receivables at December 31, 2019. No reinsurance balances were written off for credit reasons during the years ended December 31, 2020 or 2019. Should our expected credit loss analysis or other facts or circumstances lead us to believe that any reinsurer may not meet its obligations to us, adjustments to the allowance for expected credit losses or to reinsurance receivables would be reflected in 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. For further information on our allowance for expected credit losses related to our receivables from reinsurers see Note 1 of the Notes to Consolidated Financial Statements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. All of our fixed maturity and equity investments are carried at fair value. The fair value of our short-term securities approximates the cost of the securities due to their short-term nature.
The pricing services provide a single value per instrument quoted. We review the values provided for reasonableness each quarter by comparing market yields generated by the supplied value versus market yields observed in the marketplace. We also compare yields indicated by the provided values to appropriate benchmark yields and review for values that are unchanged or that reflect an unanticipated variation as compared to prior period values. We utilize a primary pricing service for each security type and compare provided information for consistency with alternate pricing services, known market data and information from our own trades, considering both values and valuation trends. We also review weekly trades versus the prices supplied by the services. If a supplied value appears unreasonable, we discuss the valuation in question with the pricing service and make adjustments if deemed necessary. Historically our review has not resulted in any material changes to the values supplied by the pricing services. The pricing services do not provide a fair value unless an exchange-traded price or multiple observable inputs are available. As a result, the pricing services may provide a fair value for a security in some periods but not others, depending upon the level of recent market activity for the security or comparable securities.
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, fixed assets, goodwill and other intangible assets. These assets would also include any equity method investments that do not provide a NAV. During the third quarter of 2020, we recognized a nonrecurring fair value measurement related to the goodwill in our Specialty P&C reporting unit with a carrying value of $161.1 million prior to the fair value measurement. This nonrecurring fair value measurement resulted in the goodwill being written down to its implied fair value of zero resulting in an impairment of the goodwill of $161.1 million (see following discussion under the heading "Goodwill / Intangibles"). The inputs used in the fair value measurement were non-observable and, as such, were categorized as a Level 3 valuation. We did not have any other assets or liabilities that were measured at fair value on a nonrecurring basis at December 31, 2020 or December 31, 2019.
•if it is more likely than not that the security will be required to be sold before full recovery of its amortized cost basis; or
•the current credit standing of the issuer, including credit rating downgrades, whether before or after the balance sheet date;
•for asset-backed securities, the origination date of the underlying loans, the remaining average life, the probability that credit performance of the underlying loans will deteriorate in the future and our assessment of the quality of the collateral underlying the loan;
•any changes to the rating of the security by a rating agency;
•recoveries or additional declines in fair value subsequent to the balance sheet date;
•disruption in the business model resulting from changes in technology or new entrants to the industry.
Policy acquisition costs (primarily commissions, premium taxes and underwriting salaries) which are directly related to the successful acquisition of new and renewal premiums are capitalized as DPAC and charged to expense, net of ceding commissions earned, as the related premium revenue is recognized. We evaluate the recoverability of our DPAC typically at the segment level each reporting period or in a manner that is consistent with the way we manage our business. Any amounts estimated to be unrecoverable are charged to expense in the current period.
Deferred federal income taxes arise from the recognition of temporary differences between the basis of assets and liabilities determined for financial reporting purposes and the basis determined for income tax purposes. Our temporary differences principally relate to our loss reserves, unearned and advanced premiums, DPAC, tax credit carryforwards, compensation related items, unrealized investment gains (losses) and basis differences on fixed assets, intangible assets and operating leases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be in effect when such benefits are realized. We review our deferred tax assets quarterly for impairment. If we determine that it is more likely than not that some or all of a deferred tax asset will not be realized, a valuation allowance is recorded to reduce the carrying value of the asset. In assessing the need for a valuation allowance, management is required to make certain judgments and assumptions about our future operations based on historical experience and information as of the measurement period regarding reversal of existing temporary differences, carryback capacity, future taxable income of the appropriate character (including its capital and operating characteristics) and tax planning strategies.
A valuation allowance was established in a prior year against the deferred tax asset related to the NOL carryforwards for the U.K. operations. In addition, a valuation allowance was established in 2020 against a portion of the deferred tax asset related to the U.S. state NOL carryforwards. Management concluded that it was more likely than not that these deferred tax assets will not be realized. We also established a valuation allowance in a prior year against the deferred tax assets of certain SPCs at our wholly owned Cayman Islands reinsurance subsidiary, Inova Re. Due to the limited operations of these SPCs, management concluded that a valuation allowance was required. As of December 31, 2020, management concluded that a valuation allowance was still required against the deferred tax assets related to the NOL carryforwards for the U.K. operations and against the deferred tax assets of certain SPCs at Inova Re. See further discussion in Note 5 of the Notes to Consolidated Financial Statements.
The TCJA introduced a minimum tax on payments made to related foreign entities referred to as the BEAT. The BEAT is imposed by adding back into the U.S. tax base any base erosion payment made by the U.S. taxpayer to a related foreign entity and applying a minimum tax rate to this newly calculated modified taxable income. Base erosion payments represent any amount paid or accrued by the U.S. taxpayer to a related foreign entity for which a deduction is allowed. Premiums we cede to the SPCs at Inova Re, one of our wholly owned Cayman Islands reinsurance subsidiaries, do not fall within the scope of base erosion payments as the SPCs at Inova Re have elected to be taxed as U.S. taxpayers. However, premiums that we cede to any active SPC at our other wholly owned Cayman Islands reinsurance subsidiary, Eastern Re, fall within the scope of base erosion payments and therefore could be significantly impacted by the BEAT. We have evaluated our exposure to the BEAT and have concluded that our expected outbound deductible payments to related foreign entities are below the threshold for application of the BEAT; therefore, we have not recognized any incremental tax expense for the BEAT provision of the TCJA during the years ended December 31, 2020 or December 31, 2019. See further discussion on our Cayman Islands SPC operations in the Segment Results - Segregated Portfolio Cell Reinsurance section that follows. See discussion in Note 5 of the Notes to Consolidated Financial Statements.
The TCJA also requires a U.S. shareholder of a controlled foreign corporation to include its GILTI in U.S. taxable income. The GILTI amount is based on the U.S. shareholder’s aggregate share of the gross income of the controlled foreign corporation reduced by certain exceptions and a net deemed tangible income return. The net deemed tangible income return is based on the controlled foreign corporation’s basis in the tangible depreciable business property. Cell rental fee income earned by Inova Re and Eastern Re fall within the scope of the GILTI provisions of the TCJA. We have evaluated the new GILTI provisions of the TCJA, and we have made an accounting policy election to treat the taxes due on the inclusion of GILTI in U.S. taxable income as a current period expense when incurred. We recognized a nominal amount of tax expense for the GILTI provision of the TCJA during each of the years ended December 31, 2020 and December 31, 2019. See discussion in Note 5 of the Notes to Consolidated Financial Statements.
In response to COVID-19, the CARES Act was signed into law on March 27, 2020 and contains several provisions for corporations and eases certain deduction limitations originally imposed by the TCJA. The CARES Act, among other things, includes temporary changes regarding the prior and future utilization of NOLs, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes and the creation of certain refundable employee retention credits. We anticipate the temporary changes regarding NOL carryback provisions will have a favorable impact on our liquidity (see discussion that follows in the Liquidity and Capital Resources and Financial Condition section under the heading "Taxes"). We have evaluated the other provisions of the CARES Act and concluded that they will not have a material impact on our financial position or results of operations. See discussion in Note 5 of the Notes to Consolidated Financial Statements.
Goodwill is tested for impairment annually or more frequently if circumstances indicate an impairment may have occurred. The date of our annual goodwill impairment testing is October 1.
Performance of the qualitative goodwill impairment assessment requires judgment in identifying and considering the significance of relevant key factors, events, and circumstances that affect the fair values of our reporting units. This requires consideration and assessment of external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as our actual and planned financial performance. We also give consideration to the difference between each reporting unit's fair value and carrying value as of the most recent date that a fair value measurement was performed. If the results of the qualitative assessment conclude that it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, additional quantitative impairment testing is performed.
Determining the fair value of a reporting unit under the quantitative goodwill impairment test requires judgment and often involves the use of significant estimates and assumptions, including an assessment of external factors such as macroeconomic, industry, and market conditions, as well as entity-specific factors, such as actual and planned financial performance. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the magnitude of any such charge. To assist management in the process of determining any potential goodwill impairment, we may review and consider appraisals from accredited independent valuation firms. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. These approaches involve significant estimates and assumptions, including projected future cash flows (including timing), discount rates reflecting the risks inherent in those future cash flows, perpetual growth rates, and selection of appropriate market comparable metrics and transactions.
We evaluate our operating lease ROU assets for impairment at the asset group level whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. The carrying amount of an asset group, which includes the operating lease ROU asset and the related operating lease liability, is not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows expected to result from the use of the asset group over the life of the primary asset in the asset group. That assessment is based on the carrying amount of the asset group, including the operating lease ROU asset and the related operating lease liability, at the date it is tested for recoverability, and an impairment loss is measured and recognized as the amount by which the carrying amount of the asset group exceeds its fair value. Any impairment loss is allocated to each asset in the asset group, including the operating ROU asset.
When a lease of an office facility is to be abandoned and will not be subleased, we first evaluate whether or not the operating lease ROU asset’s inclusion in an existing asset group continues to be appropriate and if the commitment to abandon
the lease constitutes a change in circumstances requiring the operating lease ROU asset, or the larger asset group, to be tested for impairment. If an impairment test is required, it is performed in the same manner as discussed above. Any remaining carrying value of the operating lease ROU asset is amortized from the date we commit to a plan to abandon the lease to the expected date that we will cease to use the leased property. Leases to be abandoned in which we have the intent or practical ability to sublease continue to be accounted for under a held and use model, with no change to the amortization period of the operating lease ROU asset, and are evaluated for impairment as a separate asset group at the date the sublease is executed.
For certain insurance policies and reinsurance contracts written in our Lloyd’s Syndicates segment, premiums are initially recognized based upon estimates of ultimate premium. Estimated ultimate premium consists primarily of premium written under delegated underwriting authority arrangements, which consist primarily of binding authorities, and certain assumed reinsurance agreements. These estimates of ultimate premium are judgmental and are dependent upon certain assumptions, including historical premium trends for similar agreements. As reports are received from programs, ultimate premium estimates are revised, if necessary, with changes reflected in current operations.
We did not have any other change in accounting estimate or policy that had a material effect on our results of operations or financial position during 2020. We are not aware of any accounting changes not yet adopted as of December 31, 2020 that would have a material effect on our results of operations, financial position or cash flows. Note 1 of the Notes to Consolidated Financial Statements provides additional detail regarding accounting changes not yet adopted.
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 another 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, 2020, we held cash and liquid investments of approximately $260 million outside our insurance subsidiaries that were available for use without regulatory approval or other restriction. We also have $250 million in permitted borrowings available under our Revolving Credit Agreement as well as the possibility of a $50 million accordion feature if successfully subscribed. As of February 19, 2021, no borrowings were outstanding under our Revolving Credit Agreement.
The decrease in operating cash flows in 2020 as compared to 2019 of $55.8 million was primarily due to an increase in paid losses of $89.1 million driven by our Specialty P&C and Segregated Portfolio Cell Reinsurance segments. The increase in paid losses in our Specialty P&C segment was primarily due to higher average claim payments which we believe is an indication that the higher severity trends that we are experiencing in our HCPL case reserve estimates are emerging in actual claim payments. The increase in paid losses in our Segregated Portfolio Cell Reinsurance segment reflected the payment of a $10 million claim during the first quarter of 2020 by an SPC at Eastern Re in which we do not participate. The payment related to a reserve established by the SPC in 2019 related to an errors and omissions liability policy. Furthermore, the decrease in operating cash flows reflected a decrease in net cash received of $7.4 million associated with the cash settlement of the 2017 calendar year quota share reinsurance agreement between our Specialty P&C segment and Syndicate 1729 due to the reduction
The decrease in operating cash flows in 2019 as compared to 2018 of $29.1 million was primarily due to an increase in paid losses of $30.2 million, a decrease in cash received from investment income of $9.8 million and an increase in cash paid for operating expenses of $8.1 million. The increase in paid losses was driven by our Specialty P&C and Workers' Compensation Insurance segments. The increase in paid losses in our Specialty P&C segment primarily reflected higher average claims payments in 2019 as compared to 2018 and the increase in paid losses in our Workers' Compensation Insurance segment primarily reflected the timing of loss payments between periods. The decrease in cash received from investment income was primarily due to a decline in distributed earnings from our unconsolidated subsidiaries. The increase in cash paid for operating expenses was driven by an increase in brokerage expenses in our Lloyd's Syndicates segment from the continuing growth of Syndicate 6131 as well as an increase in fees associated with a data analytics services agreement entered into during the fourth quarter of 2018 in our Specialty P&C segment. In addition, the decrease in operating cash flows reflected a decrease in net cash received of $3.0 million associated with the cash settlement from the commutation of the 2017 and 2016 calendar year quota share reinsurance agreements between our Specialty P&C segment and Syndicate 1729 due to the reduction in premiums ceded to Syndicate 1729. The decrease in operating cash flows was partially offset by an increase in net premium receipts of $19.0 million and a decrease in estimated tax payments of $3.0 million. The increase in net premium receipts was primarily due to the growth in written premium in our Lloyd's Syndicates and Specialty P&C segments.
We manage our investing cash flows to ensure that we will have sufficient liquidity to meet our obligations, taking into consideration the timing of cash flows from our investments, including interest payments, dividends and principal payments, as well as the expected cash flows to be generated by our operations as discussed in this section under the heading "Investing Activities and Related Cash Flows."
Our financing cash flows are primarily composed of dividend payments and borrowings and repayments under our Revolving Credit Agreement. See further discussion of our financing activities in this section under the heading "Financing Activities and Related Cash Flows."
•The section entitled “Cumulative net paid, as of” reflects the cumulative amounts paid as of the end of each succeeding year with respect to the previously recorded Balance Sheet Reserves.
•Reserves for 2012 and thereafter include gross and net reserves acquired in 2012 business combinations of $21.8 million and $19.2 million, respectively, which considers reductions of $3.6 million and $3.3 million, respectively, recorded in 2013 due to the re-estimation of the fair value of the acquired reserves.
•Reserves for 2013 include gross and net reserves acquired in 2013 business combinations of $201.1 million and $126.0 million, respectively.
(2) Current year net losses for the year ended December 31, 2019 included a PDR of $9.2 million associated with the unearned premium of a large national healthcare account's claims-made policy in the Specialty P&C segment. Current year net losses for the year ended December 31, 2020 included the amortization of the aforementioned $9.2 million PDR which offsets the impact of the losses incurred associated with the premium earned related to the large national healthcare account's claims-made policy. For additional information regarding the PDR see Note 7 of the Notes to Consolidated Financial Statements.
(3) During 2020, the aforementioned large national healthcare account did not renew on terms offered by us and exercised its contractual option to purchase extended reporting endorsement or "tail" coverage. As a result, we recognized total current year losses of $60.0 million (assumes a full limit loss) within the Specialty P&C segment for the year ended December 31, 2020 (see Note 8 of the Notes to Consolidated Financial Statements).
At December 31, 2020 our gross reserve for losses included case reserves of approximately $1.4 billion and IBNR reserves of approximately $1.0 billion. Our consolidated gross reserve for losses on a GAAP basis exceeds the combined gross reserves of our insurance subsidiaries on a statutory basis by approximately $0.2 billion, which is principally due to the portion of the GAAP reserve for losses that is reflected for statutory accounting purposes as unearned premiums. These unearned premiums are applicable to extended reporting endorsements (“tail” coverage) issued without a premium charge upon death, disability or retirement of an insured who meets certain qualifications.
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 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. Generally, these agreements are negotiated and renewed annually. Our HCPL treaty renews annually on October 1 and, for the October 1, 2020 renewal, we increased our retention to $2 million from $1 million and added provisions for reinstatement premiums which resulted in a reduction to the gross rate paid under the renewed treaty. Historically, our Medical Technology Liability treaty renewed annually on January 1; however, the treaty that renewed on January 1, 2020 renewed on a short-term basis and was renewed again for a full year term on October 1, 2020 along with our HCPL treaty. Our Medical Technology Liability treaty which renewed on October 1, 2020 renewed at a lower rate than the previous agreement, with an increase in retention to $2 million from $1 million. Our Workers' Compensation treaty renews annually on May 1. Our traditional workers' compensation treaty renewed May 1, 2020 at a higher rate than the previous agreement, with an increase in the AAD to 3.16% from 2.1% of subject earned premium, in excess of the $0.5 million retention per loss occurrence; all other material treaty terms were consistent with the expiring agreement. The significant coverages provided by our current excess of loss reinsurance agreements are detailed in the following table.
(5) Includes an AAD where retention is 3.16% of subject earned premium in annual losses otherwise recoverable in excess of the $500K retention per loss occurrence.
Large HCPL risks that are above the limits of our basic reinsurance treaties are reinsured on a facultative basis, whereby the reinsurer agrees to insure a particular risk up to a designated limit. We also have in place a number of risk sharing arrangements that apply to the first $2 million of losses for certain large healthcare systems and other insurance entities, as well as with certain insurance agencies that produce business for us.
•Catastrophic protection is utilized on both our property insurance and casualty coverages to protect against losses in excess of policy limits as well as natural catastrophes.
•Both quota share reinsurance and excess of loss reinsurance are utilized to manage the net loss exposure on our property reinsurance coverages.
•Property umbrella excess of loss reinsurance is utilized for peak catastrophe and frequency of catastrophe exposures.
•External excess of loss reinsurance is utilized by Syndicate 1729 to manage the net loss exposure on the specialty property and contingency coverages ceded to Syndicate 6131. For the second half of 2020, external quota share reinsurance was utilized by Syndicate 6131 to manage the net loss exposure on the specialty property and contingency coverages it assumed from Syndicate 1729 by ceding essentially half of the premium assumed to an unaffiliated insurer; this agreement was non-renewed on January 1, 2021 (see further discussion in the Segment Results - Lloyd's Syndicates section that follows).
As a result of the CARES Act that was signed into law on March 27, 2020, as previously discussed, we now have the ability to carryback NOLs generated in tax years 2018, 2019 and 2020 for up to five years. We have an NOL of approximately $45.3 million from the 2020 tax year that will be carried back to the 2015 tax year and is expected to generate a tax refund of approximately $15.9 million. Additionally, we had an NOL of approximately $25.6 million from the 2019 tax year which was carried back to the 2014 tax year and generated a tax refund of approximately $9.0 million which we received in February 2021. Furthermore, our effective tax rate for the year ended December 31, 2020 was affected by the tax rate differential on the carryback of the 2020 and 2019 NOLs to the 2015 and 2014 tax years, respectively, when the federal statutory tax rate was 35% as compared to the current tax rate of 21%. See further discussion on our effective tax rate for the year ended December 31, 2020 in the Segment Results - Corporate section that follows under the heading "Taxes." We have evaluated the other provisions of the CARES Act and concluded that they will not have a material impact on our financial position or results of operations. See further discussion in Note 5 of the Notes to Consolidated Financial Statements.
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, 2020 there were no material reserves established for corporate legal actions.
Our investments at December 31, 2020 and December 31, 2019 are comprised as follows:
We did not repurchase any common shares subsequent to December 31, 2020 and as of February 19, 2021 our remaining Board authorization was approximately $110 million.
Our Board declared cash dividends during 2020, 2019 and 2018 as follows:
At December 31, 2020, 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.
We have Mortgage Loans with one lender in connection with the recapitalization of two office buildings, which mature in December 2027. The Mortgage Loans accrue interest at three-month LIBOR plus 1.325% with principal and interest payable on a quarterly basis. At December 31, 2020, the outstanding balance of the Mortgage Loans was approximately $36 million; we are in compliance with the financial covenant of the Mortgage Loans.
We utilize 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.
Results of Operations - Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The following sections provide an overview of our consolidated and segment results of operations for the year ended December 31, 2020 as compared to the year ended December 31, 2019. See the Segment Results sections that follow for additional information regarding each segment's results. For a full discussion of the changes in the financial condition, results of operations and cash flows for the year ended December 31, 2019 as compared to the year ended December 31, 2018, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of ProAssurance's December 31, 2019 report on Form 10-K. Any significant retrospective revisions in the presentation of the changes in the financial condition, results of operations and cash flows for the year ended December 31, 2019 as compared to the year ended December 31, 2018 as reported in ProAssurance's December 31, 2019 report on Form 10-K are located in this report under the section that follows titled "Results of Operations - Year Ended December 31, 2019 Compared to Year Ended December 31, 2018."
The following table shows our consolidated and segment net premiums earned:
For the year ended December 31, 2020, consolidated net premiums earned included $14.3 million of tail premium written and fully earned during the second quarter of 2020 in connection with a large national healthcare account in our Specialty P&C segment (see further discussion under the heading "Expenses" in this section and in our Segment Results - Specialty Property & Casualty section that follows). Consolidated net premiums earned for the year ended December 31, 2019 included $2.7 million of premium written and fully earned from a loss portfolio transfer entered into during the third quarter of 2019 in our Specialty P&C segment (see further discussion in our Segment Results - Specialty Property & Casualty section that follows). Excluding the impact of the large national healthcare account's tail policy premium and the 2019 loss portfolio transfer, consolidated net premiums earned decreased $66.4 million during 2020 as compared to 2019. All of our operating segments contributed to the remaining decrease in consolidated net premiums earned, particularly our Specialty P&C segment due to our re-underwriting efforts as we continue to emphasize careful risk selection, rate adequacy and a willingness to walk away from business that does not fit our goal of achieving a long-term underwriting profit. For our Workers' Compensation Insurance and Segregated Portfolio Cell Reinsurance segments, the decrease in net premiums earned primarily reflected the competitive workers' compensation market conditions and, for the Segregated Portfolio Cell Reinsurance segment, the reduction in premium funding for a large workers' compensation alternative market program. The decrease in net premiums earned in our Lloyd's Syndicates segment was driven by our decreased participation in the results of Syndicate 1729 for the 2020 underwriting year to 29% from 61%.
We recognized $17.2 million of consolidated other net realized investment gains in 2020, driven by realized gains on the sale of our available-for-sale fixed maturities and equity investments which were partially offset by unrealized holding losses resulting from decreases in the fair value on our equity portfolio due to the volatility in the global financial markets related to COVID-19. Consolidated other net realized investment gains recognized in 2019 reflected both realized gains from the sale of equity investments and unrealized holdings gains on our equity portfolio due to the improvement in the market since December 31, 2018, which caused our equity securities to increase in value. See further discussion in our Segment Results - Corporate section that follows.
The following table shows our consolidated and segment net loss ratios and net loss development:
Our operating ratio is our combined ratio, less our investment income ratio. This ratio provides the combined effect of underwriting profitability and investment income. Our operating ratio for the years ended December 31, 2020 and 2019 was as follows:
Our operating ratio for the year ended December 31, 2020 as compared to 2019 decreased approximately 3.5 percentage points driven by a lower net loss ratio in our Specialty P&C segment. The decrease in our net loss ratio in our Specialty P&C segment was driven by the change in prior year reserve development and, to a lesser extent, an improvement in our current accident year net loss ratio primarily the result of our re-underwriting efforts and focus on rate adequacy. See previous discussion in this section under the heading "Expenses" and further discussion in our Segment Operating Results - Specialty Property & Casualty section that follows under the heading "Losses and Loss Adjustment Expenses." The decrease in our operating ratio in 2020 as compared to 2019 was partially offset by a lower investment income ratio primarily due to a decrease in our allocation to equities and lower yields on our short-term investments and corporate debt securities given the recent actions taken by the Federal Reserve in response to COVID-19.
Our ROE for the year ended December 31, 2020 primarily reflected a $161.1 million pre-tax goodwill impairment recognized related to the Specialty P&C reporting unit during the third quarter of 2020, which decreased our ROE by approximately 11.2 percentage points. See further discussion of the goodwill impairment under the heading "Goodwill / Intangibles" in the Critical Accounting Estimates section and Notes 1 and 6 of the Notes to Consolidated Financial Statements. Additionally, the decrease in our ROE in 2020 as compared to 2019 reflected lower consolidated net realized investment gains
and, to a lesser extent, a decrease in our consolidated net investment income (see previous discussion in this section under the heading "Revenues").
The following table is a reconciliation of net income (loss) to Non-GAAP operating income (loss):
(2) The 21% rate is the statutory tax rate associated with the taxable or tax deductible items listed above. The taxes associated with the net realized investment gains (losses) related to SPCs in our Segregated Portfolio Cell Reinsurance segment are paid by the individual SPCs and are not included in our consolidated tax provision or net income (loss); therefore, both the net realized investment gains (losses) from our Segregated Portfolio Cell Reinsurance segment and the adjustment to exclude the portion of net realized investment gains (losses) included in the SPC dividend expense (income) in the table above are not tax effected. The portion of the 2020 goodwill impairment loss that is tax deductible was tax affected at the statutory tax rate (21%). The remaining portion of the 2020 goodwill impairment loss is not tax deductible and therefore had no associated income tax benefit.
Our Specialty P&C segment focuses on professional liability insurance and medical technology liability insurance as discussed in Note 16 of the Notes to Consolidated Financial Statements. Segment results reflected pre-tax underwriting profit or loss from these insurance lines. Segment results included the following:
Changes in our premium volume within our Specialty P&C segment are driven by four primary factors: (1) the amount of new business written, (2) our retention of existing business, (3) the premium charged for business that is renewed, which is affected by rates charged and by the amount and type of coverage an insured chooses to purchase and (4) the timing of premium written through multi-period policies. In addition, premium volume may periodically be affected by shifts in the timing of renewals between periods. The professional liability market, which accounts for a majority of the revenues in this segment, remains challenging as physicians continue joining hospitals or larger group practices and are thus no longer purchasing individual or group policies in the standard market. In addition, some competitors have chosen to compete primarily on price; both factors may impact our ability to write new business and retain existing business. Furthermore, the insurance and reinsurance markets have historically been cyclical, characterized by extended periods of intense price competition and other periods of reduced competition. The professional liability area has been particularly affected by these cycles. Underwriting cycles are generally driven by an excess of capacity available and actively pursuing business that is deemed profitable. Changes in the frequency and severity of losses may affect the cycles of the insurance and reinsurance markets significantly. During “soft markets” where price competition is high and underwriting profits are poor, growth and retention of business become challenging which may result in reduced premium volumes.
During the second quarter of 2020, we reorganized our presentation of gross premiums written by component and related metrics below to better align with the current internal management reporting structure within the segment. All prior period information has been recast to conform to the current period presentation.
(1)Standard Physician premium was our greatest source of premium revenues in both 2020 and 2019 and is predominately comprised of twelve month term policies. The decrease in twelve month term policies in 2020 was driven by retention losses and, to a lesser extent, premium credits granted as a result of the COVID-19 pandemic, partially offset by an increase in renewal pricing, conversion of twenty-four month term policies and, to a lesser extent, new business written. In addition, twelve month term policies in 2020 included adjustments related to loss sensitive policies which increased written and earned premium. Renewal pricing increases in 2020 reflect the rising loss cost environment and new business written reflects the impact of lower submissions as a result of the COVID-19 pandemic as well as general market conditions. The lower retention for 2020 is largely attributable to our focus on underwriting discipline as we continue to emphasize careful risk selection, rate adequacy, improved contract terms and a willingness to walk away from business that does not fit our goal of achieving a long-term underwriting profit. In addition, we have implemented a targeted state strategy to reassess our underwriting appetite in certain unprofitable states which impacted our retention rate in the current period. We will continue to perform a detailed evaluation of venues, specialties and other areas to improve our underwriting results. These strategies resulted in our non-renewal of several large policies totaling $8.7 million in 2020. We anticipate a lower than average level of retention to persist as we continue to reevaluate certain states and books of business and set our rates to reflect our observations of higher severity trends. Standard Physician premium also includes twenty-four month term premiums that were offered to physician insureds in one selected jurisdiction. The decrease in twenty-four month term premiums in 2020 primarily reflected the normal cycle of renewals (policies subject to renewal in 2020 were previously written in 2018, rather than in 2019). In addition, the decrease in twenty-four month term premiums also reflected our re-underwriting of the majority of renewed policies to twelve month term policies, as we ceased offering twenty-four month term policies beginning in the second quarter of 2020.
(2)Custom Physician premium includes large complex physician groups, multi-state physician groups and non-standard physicians and is written primarily on an excess and surplus lines basis. The decrease in premium in 2020 was driven by retention losses due to our focus on underwriting discipline as we continue to emphasize careful risk selection, rate adequacy, improved contract terms and a willingness to walk away from business that does not fit our goal of achieving a
long-term underwriting profit. Included in these retention losses is a large national healthcare account that did not renew on terms offered by us during the second quarter of 2020 which resulted in a $9.0 million decrease in Custom Physician premium and, as a result, a decrease to our Specialty retention rate of 4 percentage points; this account exercised its contractual option to purchase extended reporting endorsement or "tail" coverage (see further discussion in footnote 7 that follows). We anticipate retention rates to begin to normalize going forward as we substantially completed our re-underwriting efforts as of the end of 2020, except for a few large accounts that were renewed on a two-year term in 2019 that will be carefully evaluated in 2021. The decrease in Custom Physician premium in 2020 as compared to 2019 also reflects net timing differences of $1.9 million related to the prior year renewal of two policies, partially offset by an increase in renewal pricing and, to a lesser extent, new business written. Renewal pricing increases in 2020 reflect the rising loss cost environment and new business written reflects the impact of lower submissions as a result of the COVID-19 pandemic as well as general market conditions.
(5)We offer custom alternative risk solutions including loss portfolio transfers for healthcare entities who, most commonly, are exiting a line of business, changing an insurance approach or simply preferring to transfer risk. In the third quarter of 2019, we entered into a loss portfolio transfer with a regional hospital group which resulted in $0.9 million of retroactive premium written and fully earned in 2019 (see further discussion in footnote 7 that follows).
(7)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 stand-alone policies. 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. The amount of tail coverage premium written can vary significantly from period to period. The increase in 2020 as compared to 2019 was due to a large national healthcare account that exercised its contractual option to purchase tail coverage which resulted in $14.3 million of one-time premium written and fully earned in the second quarter of 2020, somewhat offset by the tail coverage provided in connection with the aforementioned third quarter 2019 loss portfolio transfer.
(9)This component of gross premiums written includes all other product lines within our Specialty P&C segment. The decrease in 2020 was due to the effect of our non-renewal of a $1.5 million specialty contractual liability policy.
(10)Certain components of our gross premiums written include alternative market premiums. We currently cede either all or a portion of the alternative market premium, net of reinsurance, to three SPCs of our wholly owned Cayman Islands reinsurance subsidiaries, Inova Re and Eastern Re, which are reported in our Segregated Portfolio Cell Reinsurance segment (see further discussion in the Ceded Premiums Written section that follows). The portion not ceded to the SPCs is retained within our Specialty P&C segment.
The decrease in alternative market gross premiums written in 2020 as compared to 2019 was due to retention losses driven by the loss of a $1.4 million Senior Care policy that chose to utilize self-insurance, slightly offset by policy endorsements.
The change in renewal pricing for our Specialty P&C segment, including by major component, was as follows:
For our Specialty P&C segment, we calculate retention as annualized renewed premium divided by all annualized premium subject to renewal. Retention is affected by a number of factors. We may lose insureds to competitors or to alternative insurance mechanisms such as risk retention groups or self-insurance entities (often when physicians join hospitals or large group practices) or due to pricing or other issues. We may choose not to renew an insured as a result of our underwriting evaluation. Insureds may also terminate coverage because they have left the practice of medicine for various reasons, principally for retirement, death or disability, but also for personal reasons.
Ceded premiums represent the amounts owed to our reinsurers for their assumption of a portion of our losses. For our HCPL and Medical Technology Liability excess of loss reinsurance arrangements in effect prior to October 1, 2020, we generally retained the first $1 million in risk insured by us and ceded coverages in excess of this amount. Effective October 1, 2020, we generally retain the first $2 million in risk insured by us and cede coverages in excess of this amount. For our HCPL coverages, we will also retain from 0% to 14.5% of the next $24 million of risk for coverages in excess of $2 million. For our Medical Technology Liability treaty which also renewed effective October 1, 2020, we also retain 2.5% of the next $8 million of risk for coverages in excess of $2 million. These changes in terms for both our HCPL and Medical Technology Liability treaties resulted in a reduction to the gross rate paid for the treaty year effective October 1, 2020. We pay our reinsurers a ceding premium in exchange for their accepting the risk, and in certain of our excess of loss arrangements, the ultimate amount of which is determined by the loss experience of the business ceded, subject to certain minimum and maximum amounts.
(3)As previously discussed, as a part of our alternative market solutions, all or a portion of certain healthcare premium written is ceded to SPCs in our Segregated Portfolio Cell Reinsurance segment under either excess of loss or quota share reinsurance agreements, depending on the structure of the individual program. See the Segment Results - Segregated Portfolio Cell Reinsurance section for further discussion on the cession to the SPCs from our Specialty P&C segment. The decrease in premiums ceded to SPCs during 2020 as compared to 2019 was primarily due to the loss of one large Senior Care policy (see discussion in footnote 10 under the heading "Gross Premiums Written").
(4)Given the length of time that it takes to resolve our claims, many years may elapse before all losses recoverable under a reinsurance arrangement are known. As a part of the process of estimating our loss reserve we also make estimates regarding the amounts recoverable under our reinsurance arrangements. As previously discussed, the premiums ultimately ceded under certain of our excess of loss reinsurance arrangements are subject to the losses ceded under the arrangements. As part of the review of our reserves during 2020 and 2019, we increased our estimate of expected losses and associated recoveries for prior year ceded losses, as well as our estimate of ceded premiums owed to reinsurers; however, this increase was lower in 2020 as compared to 2019 due to reaching the maximum level of premium due under certain prior year excess of loss arrangements. Changes to estimates of premiums ceded related to prior accident years are fully earned in the period the changes in estimates occur.
As shown in the table below, our ceded premiums ratio was affected in both 2020 and 2019 by revisions to our estimate of premiums owed to reinsurers related to coverages provided in prior accident years.
For the year ended December 31, 2020 the ceded premiums ratio was relatively unchanged as compared to 2019.
The decrease in gross premiums earned in 2020 as compared to 2019 was driven by the pro rata effect of a decrease in the volume of written premium during the preceding twelve months, predominantly in our Specialty line of business, due to our re-underwriting efforts. The decrease in gross premiums earned also reflects the effect of a prior year loss portfolio transfer which resulted in $2.7 million of one-time premium written and fully earned in 2019 (see previous discussion in footnotes 5 and 7 under the heading "Gross Premiums Written"). The decrease in gross premiums earned in 2020 was somewhat offset by premium adjustments related to loss sensitive policies which increased earned premium by $2.9 million and decreased earned premium by $1.6 million in 2019. In addition, the decrease in gross premiums earned was largely offset by $14.3 million of one-time premium written and fully earned in the second quarter of 2020 associated with the tail coverage purchased by a large national healthcare account (see previous discussion in footnote 7 under the heading "Gross Premiums Written").
(3)The current accident year net loss ratio, excluding the effect of prior year ceded premium adjustments (as shown in the table above), decreased 0.9 percentage points as compared to 2019. The change in the current accident year net loss ratio was primarily attributable to the following:
term associated with this account's claims-made policy expired. This account did not renew on terms offered by us and the insured exercised its contractual option to purchase the extended reporting endorsement or "tail" coverage resulting in a net underwriting loss of $45.7 million in 2020. The net impact of this large national healthcare account resulted in a 2.9 percentage point increase in our current accident year net loss ratio in 2020 as compared to 2019. Also during the second quarter of 2020, we established a $10 million reserve for COVID-19; no adjustment has been made to this reserve since the second quarter of 2020. This reserve represents our best estimate of ultimate COVID-19 related losses based on currently available information and reported incidents, and accounted for a 2.2 percentage point increase in our current accident year net loss ratio in 2020. As a result of our actuarial analysis performed at the end of 2019, we increased our reserves related to DDR coverage endorsements which accounted for approximately 1.5 percentage points of the decrease in the current accident year net loss ratio in 2020 as compared to 2019; no adjustment was made to these reserves in 2020. After removing the impact of the large national healthcare account in both 2020 and 2019, the 2020 COVID-19 reserve and actuarial adjustment to our DDR reserves in 2019, our current accident year net loss ratio in 2020 improved 4.5 percentage points primarily reflecting the impact of decreases in certain loss ratios during 2020 and, to a lesser extent, the effect of changes in premium adjustments related to loss sensitive policies (see previous discussion under the heading "Net Premiums Earned"). The decreases in loss ratios during 2020 were primarily in our Standard Physician, Specialty and Small Business Unit lines of business as a result of our re-underwriting efforts and focus on rate adequacy.
We re-evaluate our previously established reserve each quarter based upon the most recently completed actuarial analysis supplemented by any new analysis, information or trends that have emerged since the date of that study. We also take into account currently available industry trend information. We continue to see elevated loss severity in the broader medical professional liability industry and are observing indications of these increased severity trends in our paid loss data. While we have established a reserve for COVID-19 related losses, we have also observed a significant reduction in claims frequency as compared to 2019, some of which is likely associated with the COVID-19 pandemic and the disruption of the court systems; however, we have remained cautious in recognizing these favorable frequency trends in our current accident year reserve due to the possibility of delays in reporting and uncertainty surrounding the length and severity of the pandemic.
DPAC amortization decreased during the year ended December 31, 2020 as compared to 2019 driven by a decrease in earned premium, excluding the effect of the premium earned from the tail coverage associated with a large national healthcare account from the second quarter of 2020 as there were no deferred acquisition costs associated with the tail premium (see discussion under the heading "Gross Premiums Written"). In addition, the decrease in DPAC amortization reflected a decrease in brokerage expenses due to our non-renewal of certain products written on an excess and surplus lines basis in our Specialty line of business (see discussion under the heading "Gross Premiums Written") as well as a decrease in agent commissions and premium taxes due to a lower volume of premium written. Partially offsetting the decrease in DPAC amortization in 2020 was an increase in medical costs associated with employee health plans, one-time employee severance charges of $0.6 million and, to a lesser extent, a decrease in ceding commission income, which is an offset to expense, from certain of our shared risk arrangements.
Other underwriting and operating expenses decreased during the year ended December 31, 2020 as compared to 2019 primarily driven by a decrease in various operational expenses resulting from incremental improvements over the past year including organizational structure enhancements and improved operating efficiencies. The decrease in operating expenses also reflected a reduction in travel-related costs of $3.3 million in 2020 as a result of the COVID-19 pandemic and, to a lesser extent, a reduction in employer contributions to the ProAssurance Savings Plan (see further discussion in Note 17 of the Notes to Consolidated Financial Statements). Furthermore, the decrease in operating expenses in 2020 as compared to 2019 also included a reduction in fees associated with a data analytics services agreement of $0.6 million driven by an amendment to the agreement executed during the fourth quarter of 2020 (see further discussion in Note 9 of the Notes to Consolidated Financial Statements). The decrease in 2020 was largely offset by one-time expenses of $3.4 million mainly comprised of early retirement benefits granted to certain employees in 2020 as well as expenses associated with the restructuring of our HCPL field office organization, consisting of employee severance charges and lease exit costs due to a reduction in physical office locations. The decrease in operating expenses in 2020 was also somewhat offset by an increase of $0.4 million in accrued paid time off due to lower employee utilization of vacation time likely associated with the COVID-19 pandemic.
Our expense ratio for the Specialty P&C segment for the year ended December 31, 2020 as compared to 2019 was as follows:
The change in our expense ratio in 2020 as compared to 2019 was primarily attributable to the following:
The remaining decrease in our expense ratio during 2020 as compared to 2019 of 1.7 percentage points primarily reflected the impact of a decrease in various operational expenses resulting from incremental improvements over the past year including organizational structure enhancements and improved operating efficiencies and, to a lesser extent, the reduction in employer contributions to the ProAssurance Savings Plan.
Our Workers' Compensation Insurance segment includes workers' compensation products provided to employers generally with 1,000 or fewer employees, as discussed in Note 16 of the Notes to Consolidated Financial Statements. Workers' compensation products offered include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies, deductible policies and alternative market programs. Alternative market programs include program design, fronting, claims administration, risk management, SPC rental, asset management and SPC management services. Alternative market program premiums are 100% ceded to either the SPCs within our Segregated Portfolio Cell Reinsurance segment or, to a limited extent, an unaffiliated captive insurer for one program. Our Workers' Compensation Insurance segment 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 results included the following:
*The change in retrospectively-related policies included adjustments that decreased premium by $2.5 million and $2.1 million during the years ended December 31, 2020 and 2019, respectively.
Gross premiums written in our traditional business decreased during the year ended December 31, 2020 as compared to 2019, which primarily reflected renewal rate decreases, retention losses and a reduction in audit premium and new business written. The reduction in audit premium included a reduction in our EBUB estimate of $1.3 million in 2020. Renewal rate decreases were 4% in 2020, which were unchanged as compared to 2019. Renewal retention for our traditional business was 84% during 2020 as compared to 79% during 2019. New business written totaled $23.7 million in 2020 as compared to $27.0 million in 2019.
Changes in the return premium estimate reflected the loss experience under the reinsurance contract for the years ended December 31, 2020 and 2019. The change in estimated return premium for the year ended December 31, 2020 reflected prior year loss development on previously reported reinsured claims.
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 and the unaffiliated captive insurer. 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 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 our insureds' payrolls, changes in our EBUB estimate and premium adjustments related to retrospectively-rated policies. 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.
The decrease in net premiums earned during the year ended December 31, 2020 as compared to 2019 primarily reflected the pro rata effect of a reduction in net premiums written during the preceding twelve months and, to a lesser extent, the reduction in our EBUB estimate and the impact of retrospectively-rated policy adjustments. We reduced our EBUB estimate by $1.3 million during 2020 which primarily reflected a reduction in earned payroll exposure. As a result of the economic impact of COVID-19, we expect future reductions in payroll exposure related to in-force policies that could result in a significant decrease in audit premium and our EBUB estimate. We will continue to monitor and adjust the estimate, if necessary, based on changes in insured payrolls and economic conditions, as experience develops or new information becomes known; however, the length and magnitude of such changes depends on future developments, which are highly uncertain and cannot be predicted. There was no adjustment to our EBUB estimate during the year ended December 31, 2019. Premium adjustments related to retrospectively-rated policies decreased premiums by 2.5 million and $2.1 million during the years ended December 31, 2020 and 2019, respectively.
The increase in the current accident year loss ratio for the year ended December 31, 2020 primarily reflected the continuation of intense price competition and the resulting renewal rate decreases, partially offset by favorable claim trends, including lower claims frequency and severity. As a result of the COVID-19 pandemic, legislative and regulatory bodies in certain states have changed or are considering changes to compensability requirements and presumptions for certain types of workers related to COVID-19 claims. These endeavors could have an adverse impact on the frequency and severity related to COVID-19 claims. Furthermore, the current economic conditions resulting from the COVID-19 pandemic have introduced significant risk of a prolonged recession, which could have an adverse impact on our return to wellness efforts and the ability of injured workers to return to work, resulting in a potential reduction in favorable claim trends in future periods.
Calendar year incurred losses (excluding IBNR) ceded to our external reinsurers decreased $11.3 million for the year ended December 31, 2020 as compared to 2019. Current accident year ceded incurred losses (excluding IBNR) decreased $8.2 million as compared to 2019. The decrease in ceded incurred losses reflects lower severity-related claim activity during 2020 and, on a calendar year basis, favorable development on prior year reinsured claims.
We recognized net favorable prior year development related to our previously established reserve of $7.0 million for the year ended December 31, 2020 as compared to $7.8 million for 2019. The net favorable prior year reserve development for the years ended December 31, 2020 and 2019 reflected overall favorable trends in claim closing patterns. Net favorable development for the year ended December 31, 2020 primarily related to the 2014 through 2017 accident years. Net favorable development for the year ended December 31, 2019 primarily related to the 2015 and 2016 accident years and included a fair value adjustment of $1.6 million related to the amortization of purchase accounting. The fair value adjustment was fully amortized as of December 31, 2019.
Excluding the items noted in the table above, the increase in the expense ratio for the year ended December 31, 2020, primarily reflected the decrease in net premiums earned and costs related to the implementation of a new policy administration and claims system.
Gross premiums written reflected reinsurance premiums assumed by component as follows:
Our workers’ compensation premiums written were impacted by reductions in payroll exposure and policy cancellations related to the economic impact of COVID-19, and we expect continued downward pressure in future quarters on our workers' compensation premium resulting from further reductions in insured payroll exposure; however, the length and magnitude of such changes depends on future developments, which are highly uncertain and cannot be predicted.
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 for the workers' compensation business ranges from $0.3 million to $0.4 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. The decrease in ceded premiums written in 2020, as compared to 2019, primarily reflected the decrease in workers' compensation gross premiums written, partially offset by an increase in reinsurance rates for programs with renewal dates on or after May 1, 2020. External reinsurance rates vary based on the alternative market program.
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 reflects the weighted average reinsurance rates of all SPC programs. The increase in the ceded premiums ratio for the year ended December 31, 2020 primarily reflects an increase in reinsurance rates for programs renewing on or after May 1, 2020 and the reduction in premium funding for a large workers' compensation alternative market program (see previous discussion under the heading "Gross Premiums Written"). The reinsurance costs associated with this program are fixed, which resulted in an increase in the ceded ratio.
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.
We recognized net favorable prior year reserve development of $16.5 million and $10.1 million for the years ended December 31, 2020 and 2019, respectively. The net favorable prior year reserve development for 2020 included $12.1 million related to the workers’ compensation business, which primarily reflected overall favorable trends in claim closing patterns in the 2014 through 2019 accident years. In addition, net favorable prior year reserve development in 2020 included $4.4 million related to the healthcare professional liability business.
DPAC amortization primarily represents ceding commissions, which vary by program and are paid to our Workers' Compensation Insurance and Specialty P&C segments for premiums assumed. Ceding commissions include an amount for fronting fees, commissions, premium taxes and risk management fees, which are reported as an offset to underwriting, policy acquisition and operating expenses within our Workers' Compensation Insurance and Specialty P&C segments. In addition, ceding commissions paid to our Workers' Compensation Insurance segment include cell rental fees which are recorded as other income within our Workers' Compensation Insurance segment.
Other underwriting and operating expenses primarily include bank fees, professional fees and bad debt expense. The decrease in other underwriting and operating expenses for the year ended December 31, 2020 as compared to 2019 primarily reflected recoveries of premiums receivables previously written off, which resulted in an adjustment to our allowance for expected credit losses.
Excluding the effect of audit premium, the underwriting expense ratio primarily reflected the weighted average ceding commission percentage of all SPC programs. The increase in the expense ratio for the year ended December 31, 2020 as compared to 2019 was driven by the effect of a reduction in net premiums earned, as previously discussed. Additionally, the increase in the expense ratio in 2020 reflected the impact of the reduction in premium funding for a large workers'
compensation alternative market program as the ceding commissions associated with this program are fixed and do not vary directly with changes in premium (see previous discussion under the heading "Gross Premiums Written").
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 results of our wholly owned subsidiaries that support our operations at Lloyd's. For the years ended December 31, 2020 and 2019, the results of our Lloyd's Syndicates segment were as follows:
Gross premiums written in 2020 consisted of property insurance coverages (39% of total gross premiums written), casualty coverages (30%), catastrophe reinsurance coverages (13%), specialty property coverages (11%), contingency coverages (4%) and property reinsurance coverages (3%). The decrease in gross premiums written in 2020 as compared to 2019 was driven by our decreased participation in the results of Syndicate 1729, partially offset by volume increases on renewal business and renewal pricing increases, primarily on property insurance and casualty coverages, as well as new business written, also primarily property insurance and casualty coverages. In addition, gross premiums written in 2020 included a binder adjustment on a prior year of account, which reduced written and earned premium in the current period. See further discussion on these binder adjustments in our Critical Accounting Estimates section under the heading "Lloyd's Premium Estimates."
For the year ended December 31, 2020, the current accident year net loss ratio increased 6.0 percentage points as compared to 2019. The increase in the current accident year net loss ratio was driven by certain property and catastrophe related losses and, to a lesser extent, contingency related losses incurred during 2020.
For the year ended December 31, 2020, the underwriting expense ratio decreased by 4.0 percentage points as compared to 2019 driven by lower operating expenses due to our reduced participation in Syndicate 1729, partially offset by a decrease in net premiums earned, as previously discussed. Operating expenses incurred during 2020 primarily were related to the 2020 underwriting year for which our participation is 29%, whereas the net premiums earned during the same period also includes premium from other open underwriting years in which we participate at a higher degree.
The results of this segment are subject to U.K. income tax law.
Income from our equity portfolio decreased during 2020 as compared to 2019 which reflected a decrease in our allocation to this asset category.
Short-term investments, which have a maturity at purchase of one year or less are carried at fair value, which approximates their cost basis, and are primarily composed of investments in U.S. treasury obligations, commercial paper and money market funds. Income from our short-term and other investments decreased during 2020 primarily attributable to lower yields given the actions taken by the Federal Reserve to aggressively reduce interest rates in response to COVID-19.
Due to the expected NOL for the year ended December 31, 2020 and realized NOL for the year ended December 31, 2019, the tax credits generated from our tax credit partnership investments of $17.9 million and $18.2 million, respectively, were deferred and are expected to be utilized in future periods. See further discussion in Note 5 of the Notes to Consolidated Financial Statements.
Tax credits provided by the underlying projects of our historic tax credit partnership are typically available in the tax year in which the project is put into active service, whereas the tax credits provided by qualified affordable housing project tax credit partnerships are provided over approximately a ten year period.
For the year ended December 31, 2020, we recognized $1.5 million of credit-related impairment losses in earnings and a nominal amount of non-credit impairment losses in OCI. The credit-related impairment losses recognized in 2020 primarily related to corporate bonds in the energy and consumer sectors. Additionally, 2020 included credit-related impairment losses related to four corporate bonds in various sectors, which were sold during 2020. The non-credit impairment losses recognized during 2020 related to three corporate bonds in the energy and consumer sectors. For the year ended December 31, 2019, we recognized credit-related impairment losses in earnings of $0.8 million and a nominal amount of non-credit impairment losses in OCI, both of which related to three corporate bonds in the energy and consumer sectors.
We recognized $11.6 million of net realized investment gains for the year ended December 31, 2020, driven primarily by realized gains on the sale of certain available-for-sale fixed maturities and equity investments, partially offset by unrealized holding losses resulting from decreases in the fair value on our equity portfolio due to the volatility in the global financial markets related to COVID-19. For the year ended December 31, 2019, we recognized $55.1 million of net realized investment gains driven by both realized gains from the sale of equity investments and unrealized holding gains on our equity portfolio due to the improvement in the market since December 31, 2018, which caused our equity securities to increase in value. The most significant sectors that benefited from the improvement in the market were the financial and energy sectors.
Operating expenses increased during the year ended December 31, 2020 as compared to 2019 primarily due to an increase in professional fees and, to a lesser extent, an increase in share-based compensation expenses. The increase in professional fees in 2020 was driven by an increase in transaction-related costs associated with our planned acquisition of NORCAL (see Note 9 of the Notes to Consolidated Financial Statements) and corporate legal expenses. The increase in share-based compensation expenses in 2020 as compared to 2019 was primarily attributable to the effect of a decrease in the value of projected awards during 2019 based upon the decline of one of the associated performance metrics. In addition, the increase in operating expenses in 2020 as compared to 2019 included one-time costs of $0.5 million primarily comprised of employee severance and early retirement benefits granted to certain employees in 2020. The increase in operating expenses in 2020 was partially offset by a decrease in various other operational expenses, primarily employer contributions to the ProAssurance Savings Plan (see Note 17 of the Notes to Consolidated Financial Statements) and, to a lesser extent, travel-related costs as a result of the COVID-19 pandemic.
Consolidated interest expense decreased during 2020 as compared to 2019 driven by the change in the fair value of our interest rate cap and lower interest expense on our Mortgage Loans. The interest rate cap is designated as an economic hedge of interest rate risk associated with our variable rate Mortgage Loans. Our Mortgage Loans accrue interest at three-month LIBOR plus 1.325%, and the decrease in interest expense during 2020 as compared to 2019 was primarily due to a decrease in the average three-month LIBOR. Interest expense on our Revolving Credit Agreement for the years ended December 31, 2020 and 2019 primarily reflected unused commitment fees as there were no outstanding borrowings during either period. See further discussion of our interest rate cap agreement in Note 2 and further discussion of our outstanding debt 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. The U.K. tax expense incurred by the U.K. based subsidiaries of our Lloyd's Syndicates segment is allocated to that segment. The SPCs at Inova Re, one of our Cayman Islands reinsurance subsidiaries, have each made a 953(d) election under the U.S. Internal Revenue Code and are subject to U.S. federal income tax; therefore, tax expense allocated to our Corporate segment also includes tax expense incurred from any SPC at Inova Re in which we have a participation interest of 80% or greater as those SPCs are required to be included in our consolidated tax return. Consolidated tax expense (benefit) reflects the tax expense (benefit) of both segments, as shown in the table below:
additional tax rate differential of 14% on the carryback of the 2020 and 2019 NOLs to the 2015 and 2014 tax years, respectively, as a result of changes made by the CARES Act to the NOL provisions of the tax law.
(3)Hospitals and Facilities premium (which includes hospitals, surgery centers and miscellaneous medical facilities) increased in 2019 as compared to 2018 primarily due new business written and renewal price increases, largely offset by retention losses. Renewal pricing increases in 2019 reflect rate increases and contract modifications that we believe are appropriate given the current loss environment. Retention losses in 2019 were driven by our decision not to renew certain products and, to a lesser extent, the loss of a $1.4 million policy due to price competition as a result of rate increases. As we continue to reevaluate certain books of business, we anticipate our retention to remain at a lower than historic level.
(6)Our Small Business Unit is primarily comprised of premium associated with podiatrists, legal professionals, dentists and chiropractors. Our Small Business Unit premium decreased in 2019 as compared to 2018 driven by retention losses, partially offset by an increase in renewal pricing and, to a lesser extent, new business written. The increase in renewal pricing was primarily the result of an increase in the rate charged for certain renewed policies in select states.
(7)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. 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. The amount of tail coverage premium written can vary significantly from period to period. The decrease in tail premiums in 2019 was driven by $7.9 million of tail coverage provided in connection with a loss portfolio transfer entered into during the second quarter of 2018, partially offset by $1.8 million of tail coverage provided in connection with a loss portfolio transfer entered into during the third quarter of 2019.
The increase in our alternative market Senior Care premium during 2019 was primarily due to new business written, including the addition of one large policy totaling $1.4 million. The remaining increase was attributable to multiple short-term policies written throughout 2018 that renewed on January 1, 2019 with twelve month terms.
Consolidated Balance Sheets - December 31, 2020 and December 31, 2019
Consolidated Statements of Income and Comprehensive Income - Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows - Years Ended December 31, 2020, 2019 and 2018