We lease office space in Bermuda, where our principal executive offices are located. We and our subsidiaries also lease office space in the United States, United Kingdom, Italy, Belgium, Brazil, the United Arab Emirates, Switzerland, Malta, Singapore and various geographic locations throughout the world. The properties are leased on terms and for durations that are reflective of commercial standards in the communities where these properties are located. We believe the facilities we occupy are adequate for the purposes in which they are currently used and are well maintained.
For the year ended December 31, 2019, we reported a net loss of $8.4 million, or $0.25 per fully diluted share. For the year ended December 31, 2018, we reported net income of $63.6 million, or $1.83 per fully diluted share. For the year ended December 31, 2017 we reported net income of $50.3 million, or $1.42 per fully diluted share.
(1) For purposes of calculating the percentage points impact on the loss, expense and combined ratios, earned premiums were adjusted to exclude outward reinstatement and other catastrophe-related premium adjustments of $0.8 million, $9.0 million and $17.9 million the years ended December 31, 2019, 2018 and 2017.
Consolidated earned premiums were relatively flat for the comparative periods, decreasing $2.2 million, or 0.1%. Earned premiums in our U.S. Operations increased $40.8 million, or 3.8%, while International Operations’ earned premiums decreased $42.9 million, or 6.6%. In both segments, we have decreased our percentage of net retained premiums (net written premiums as a percentage of gross written premiums), and, as a result, our net earned premiums, due in large part to an increase in the ongoing strategic use of reinsurance programs, most notably within Property lines, as part of overall risk management initiatives. We also increased our use of third-party capital in International Operations.
As part of the full integration of the reinsurance business of Ariel Re, beginning in 2018 we changed the capital structure supporting that business by introducing certain third-party trade capital to participate in the exposures we underwrite. This trade capital receives a corresponding proportion of the gross written premiums. As such, this structure has the effect of reducing the gross written premiums reported in our financial statements. In exchange, we receive certain remuneration for generating this business and for the underlying underwriting performance. There was no such structure for our Ariel Re business in 2017.
Our gross written and earned premiums are further discussed by reporting segment and major lines of business under the heading “Segment Results” below.
The increase in consolidated net investment income for the year ended December 31, 2019 as compared to the same period in 2018 was primarily due to a $17.9 million increase in net investment income from our core portfolio due to growth in our invested asset base and higher investment yields. Net investment income from our alternative investment portfolio was relatively flat, increasing $0.1 million for the year ended December 31, 2019 as compared to the same period in 2018.
Consolidated net realized investment gains for the year ended December 31, 2018 included a $105.1 million decrease in the fair value of equity securities. The remaining $33.1 million net realized investment gain consisted of $38.2 million in realized gains primarily from the sale of equity securities and $2.5 million of foreign currency exchange gains, including $2.7 million on our forward currency forward contracts. Additionally, for the year ended December 31, 2018, we recognized $7.6 million in other-than-temporary impairment losses within our fixed maturity and other invested asset portfolios.
Consolidated net realized investment gains for the year ended December 31, 2017 consisted of $60.1 million in realized gains primarily from the sale of fixed maturity and equity securities. Partially offsetting these realized gains was $17.6 million of realized foreign currency exchange losses, including $8.6 million on our foreign currency forward contracts and $9.0 million on our fixed maturity and equity securities portfolios, as well as $0.7 million of losses from other invested assets, primarily overseas deposits. Additionally, for the year ended December 31, 2017, we recognized a $2.5 million other-than-temporary impairment loss within our equity and fixed maturity portfolios.
The consolidated loss ratio for the year ended December 31, 2018 was 60.1%, compared to 66.8% for the same period in 2017, driven by decreased catastrophe losses (5.4 percentage points), improvement in the current accident year non-catastrophe loss ratio (0.8 percentage points), as well as higher net favorable prior-year reserve development in 2018 compared to 2017 (0.5 percentage points). In connection with the acquisition and integration of Ariel Re in 2017, we made a number of one-time catastrophe and risk-management reinsurance purchases. These 2017 purchases reduced earned premiums by $20.8 million, resulting in a 0.7 percentage point increase in the 2017 loss ratio.
Consolidated gross reserves for loss and loss adjustment expenses were $5,157.6 million (including $238.5 million of reserves attributable to our Syndicate 1200 and 1910 trade capital providers), $4,654.6 million (including $226.2 million of reserves attributable to our Syndicate 1200 and 1910 trade capital providers) and $4,201.0 million (including $226.8 million of reserves attributable to Syndicate 1200’s trade capital providers) as of December 31, 2019, 2018 and 2017, respectively. Management has recorded its best estimate of loss reserves at each date based on current known facts and circumstances. Due to the significant uncertainties inherent in the estimation of loss reserves, there can be no assurance that future loss development, favorable or unfavorable, will not occur.
The improvement in 2018 compared to 2017 reflects the benefits of scale due to increased net earned premiums, including the favorable year-over-year impact of the aforementioned $20.8 million reduction in net earned premiums in 2017 related to one-time catastrophe and risk-management reinsurance purchases, as well as lower operating costs within the Reinsurance business unit of our International Operations due to expenses attributable to third-party capital providers. Partially offsetting these lower operating costs were the continued investments in people and technology in strategic growth areas of our business.
Consolidated interest expense was $33.6 million, $31.6 million and $27.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. The increase in 2019 when compared to 2018 was attributable to increased short-term LIBOR rates concentrated during the first six months of 2019. The increase in 2018 was primarily attributable to increases in short-term LIBOR rates throughout the year ended December 31, 2018, as compared to the same period in 2017. Additionally, during 2018 we incurred a full twelve months of interest expense on the debt acquired as part of the February 6, 2017 Ariel Re acquisition and the $125.0 million term loan entered into during the first quarter of 2017 to help fund that transaction. Comparatively, these same debt instruments accrued interest at a lower rate and for less than the full twelve months during the year ended December 31, 2017.
Consolidated foreign currency exchange gains were $9.6 million and $0.1 million for the years ended December 31, 2019 and December 31, 2018, respectively, as compared to losses of $6.3 million for the year ended December 31, 2017. The changes in the foreign currency exchange gains/losses were due to fluctuations of the U.S. Dollar, on a weighted average basis, against the currencies in which we transact our business.
During the year ended December 31, 2019, we incurred substantial non-recurring costs associated with a number of activities that began with first quarter proxy solicitation efforts and shareholder engagement. The costs associated with these and other activities, which included responding to a subpoena from the SEC, a separation agreement with our former CEO, and exiting certain contractual obligations related to sponsorships, aviation and other corporate assets are recorded in the line item “Other corporate expenses” in the Company’s Consolidated Statements of (Loss) Income. For the year ended December 31, 2019, other corporate expenses were $37.6 million. There were no comparable costs incurred during the year ended December 31, 2018. All of these other corporate expenses have been excluded from the calculation of our expense ratio.
Liability includes a broad range of primary and excess casualty products for risks on both an admitted and non-admitted basis in the United States. Internationally, Argo Group underwrites worldwide casualty risks primarily exposed in the United Kingdom, Canada, and Australia.
The following table contains a reconciliation of certain non-GAAP financial measures, specifically the current accident year non-catastrophe loss, expense and combined ratios, to their most directly comparable GAAP measures for our U.S. Operations.
The increase in gross written and earned premiums for the year ended December 31, 2019 compared to the same period in 2018 was due to a new fronted program launched earlier this year, growth from the contract, transportation and marine divisions, and rate increases that the property and public entity divisions have achieved. The increase in net earned premium for the year ended December 31, 2019 compared to the same period ended December 31, 2018 was due to gross premium production growth, partially offset by the reduction in net earned premiums associated with the impact from the ongoing strategic use of reinsurance programs, as a part of overall risk management.
The increase in gross written premiums for the year ended December 31, 2018 compared to the same period in 2017 was due to growth initiatives executed in our property, contract binding, and transportation divisions, partially offset by the termination of a fronted program in 2017. While the same products referenced above contributed to the increase in earned premiums, the margin of increase was diminished by a new reinsurance program intended to transfer more of our property exposure. Another large property program launched in 2017 has a majority of its business placed with policy terms longer than twelve months, which also impacted the growth in earned premium in 2018. Earned premiums were reduced by $7.7 million during the year ended December 31, 2018 due to net outward reinstatement premium adjustments primarily related to Hurricane Michael. Earned premiums in 2017 were reduced by $9.2 million due to various reinsurance premium adjustments.
Increases in gross written and net earned premiums for the year ended December 31, 2019, as compared to the same period in 2018, were primarily due to favorable market conditions in the directors’ and officers’ liability and errors and omissions lines that resulted in more rate and new business growth, and new programs that were launched in 2018 that also drove new business.
The increase in gross written and net earned premiums for the year ended December 31, 2019 compared to the same period in 2018 was primarily due to the growth in Surety, and to a lesser extent, premium from fronted marine programs that were launched in late 2018.
The loss ratios for the years ended December 31, 2019, 2018 and 2017 were 61.7%, 58.2% and 56.4%, respectively. The higher loss ratio in 2019, as compared to 2018, was driven by a deterioration of 3.3 percentage points from net unfavorable prior-year reserve development in 2019, as compared to net favorable prior-year reserve development in 2018. The higher loss ratio in 2018, as compared to 2017, was driven by a deterioration of 2.2 percentage points related to lower net favorable prior-year reserve development in 2018, as compared to 2017.
Net unfavorable prior-year reserve development for the year ended December 31, 2019 was $15.7 million (1.4 percentage points) and related primarily to unfavorable prior-year reserve development on liability claims within our E&S lines business, as well as in property lines, partially offset by favorable prior-year reserve development in specialty lines. The net favorable prior-year reserve development for the year ended December 31, 2018 was $20.8 million (1.9 percentage points) which was primarily concentrated in our general liability and surety lines, partially offset by unfavorable loss reserve development on prior accident years in commercial multi-peril lines. The net favorable prior-year reserve development for the year ended December 31, 2017 was $38.7 million (4.1 percentage points) was primarily concentrated in our general liability, workers compensation, surety and commercial automobile lines.
Catastrophe losses for the year ended December 31, 2019 were $14.4 million (1.3 percentage points) and included Hurricane Dorian and other U.S. storms, including Midwest floods. Catastrophe losses for the year ended December 31, 2018 were $15.6 million (1.8 percentage points) and were primarily attributable to the Woolsey and Camp California wildfires, Hurricane Florence, and other smaller storms in the United States. Catastrophe losses for the year ended December 31, 2017 were $16.8 million (2.1 percentage points) and related to Hurricanes Harvey and Irma, other smaller storms and the California wildfires.
The expense ratio was unchanged at 32.9% for each of the years ended December 31, 2019 and 2018. The decrease in the expense ratio for the year ended December 31, 2018 as compared to the same period in 2017 was primarily attributable to the impact of the 15.2% year-over-year increase in earned premiums combined with lower acquisition costs, primarily offset by strategic investments in people and technology, including digital initiatives in support of premium growth.
Fee and other income, and the associated fee and other expense, decreased for the year ended December 31, 2018 as compared to the same period in 2017 primarily due to the result of a transaction that was executed in the third quarter of 2017 to transfer to a third-party the distribution rights and operations of certain business managed on behalf of unaffiliated insurance companies. The fee income and expense related to this program were recorded as part of our fee and other income and expense, respectively.
(1) For purposes of calculating the percentage points impact on the loss, expense and combined ratios, earned premiums were adjusted to exclude outward reinstatement and other catastrophe-related premium adjustments of $0.8 million, $1.3 million, and $12.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The increase in gross written premiums for the year ended December 31, 2018 as compared to the same period in 2017 was due to growth in our European operations and our Reinsurance business, partially offset by planned premium reductions within Syndicate 1200. Our European operations contributed $68.3 million of gross written premiums in the current period compared to $6.5 million of gross written premiums in the same period in 2017. The significant growth in Europe was driven by new programs and the addition of ArgoGlobal SpA (formerly Ariscom), the Italian business we acquired in early 2018. Growth in gross written premiums in our Reinsurance business was primarily due to the timing of the Ariel Re acquisition in February 2017, as Ariel Re has a significant property contract subject to renewal in January of each year which was not included in our results for the same period of 2017. This was partially offset by the introduction of certain third-party capital for Ariel Re and our resulting reduced participation in Syndicate 1910 in the current year. The decrease in net earned premiums for the year ended December 31, 2018 as compared to the same period in 2017 was also due to the aforementioned change in capital structure for Ariel Re related to the use of third-party capital.
The increase in gross written premiums for the year ended December 31, 2019 as compared to the same period in 2018 was due to increased business flow and an improved rate environment in our Bermuda Casualty operation. Net earned premiums increased in 2019 as compared to 2018 due to the earning of premiums written in 2018 related to our European binder business as well as the higher premiums from improved rates in our Bermuda Casualty operation.
The increase in gross written and net earned premiums for the year ended December 31, 2018 as compared to the same period in 2017 was due to planned geographic expansion in our European operations, growth in new business writings in Syndicate 1200 in certain motor business, and increased writings in small-to-medium sized enterprise package business resulting from prior years of account binder premium increases. These growth drivers were partially offset by lower premium production coming from Bermuda as a result of the strategic decision to non-renew certain utility accounts.
The decrease in gross written and net earned premiums for the year ended December 31, 2019 as compared to the same period in 2018 was mainly concentrated in our Syndicate 1200 business, and was due to optimization efforts concentrated in Syndicate 1200, which have resulted in our exit from onshore energy, yachts and hull lines of business, and operations in Asia. Premium reductions for prior years of account in our reinsurance business written out of our Lloyd’s platform also contributed to the decline in net earned premiums.
Net unfavorable prior-year reserve development for the year ended December 31, 2019 was $110.4 million (18.1 percentage points) and was primarily concentrated in our liability and professional lines. The charges impacted our Bermuda casualty and professional divisions, and our Syndicate 1200 and European operations. The charges in our Bermuda business stemmed from public utility business in our casualty division, which we previously exited, as well as updated estimates on a number of other casualty and professional claims based on new information received in the last three quarters of 2019. The new information included investigations regarding causes of the incidents leading to the losses, reports provided by outside counsel, audits of the underlying losses and recent court decisions, settlements and jury awards. The result was an increase in the number of claims with the potential for underlying losses to reach our attachment point. As it relates to Syndicate 1200, the adverse development generally related to businesses that we have previously exited or where aggressive remedial underwriting actions have been taken. The development related to large claims involving the marine and energy and liability divisions. Losses on small and medium enterprise package business were also higher than expected. As it relates to Europe, the adverse development primarily related to certain cover-holders whose contracts were previously terminated or where aggressive remedial underwriting actions have been taken as well as unexpected movements in large professional liability losses. The unfavorable development during the year was also attributable to the results of ongoing audits, underwriting reviews, and updates from those cover-holders, which included the identification of differences from original expectations with regard to the classes written, the distribution of writings by geography, and the rates charged by the cover-holders.
Fee and other expenses related to generating fee income were slightly reduced for the year ended December 31, 2019 as compared to the same period in 2018.
Earned premiums for the years ended December 31, 2019, 2018 and 2017 were attributable to final audits, reinstatement premiums and other adjustments on policies previously underwritten.
Losses and loss adjustment expenses for the year ended December 31, 2017 included $17.3 million of net unfavorable loss reserve development on prior accident years driven by $13.6 million in asbestos and environmental lines due to increasing defense costs and an increase in the time claims remain open, and $5.9 million in other run-off lines, partially offset by net favorable loss reserve development on prior accident years of $2.2 million in risk management.
Although the Company is still assessing the impact of this recent downgrade, we do not believe that this change in rating will materially impact the Company’s business operations. However, the downgrade may impair our ability to sell insurance policies and could materially and adversely affect our competitive position in the insurance industry, future financial condition and operating results.
Our insurance and reinsurance subsidiaries require liquidity and adequate capital to meet ongoing obligations to policyholders and claimants and fund operating expenses. During the year ended December 31, 2019, cash flow provided by operations was $183.3 million. Based on current premium volumes and other measures of capital deployed in our business, we determined we had excess capital and, therefore, returned capital to our shareholders through dividend payments to our shareholders. We believe our liquidity generated from operations and, if required, from our investment portfolio, will be sufficient to meet our obligations for the foreseeable future. We believe we have access to various sources of liquidity including cash, investments and the ability to borrow under our revolving credit facility.
The primary sources of our cash flows are premiums, reinsurance recoveries, proceeds from sales and redemptions of investments and investment income. The primary cash outflows are claim payments, loss adjustment expenses, reinsurance costs, underwriting, acquisition and overhead expenses, purchases of investments and income taxes. Management believes that cash receipts from premiums, proceeds from investment sales and redemptions and investment income are sufficient to cover cash outflows in the foreseeable future. We believe we have access to additional sources of liquidity should the need for additional cash arise.
Cash provided by operating activities can fluctuate due to timing differences in the collection of premiums and reinsurance recoveries and the payment of losses and expenses. For the years ended December 31, 2019, 2018 and 2017, cash provided by operating activities was $183.3 million, $301.3 million and $165.0 million, respectively. The decrease in cash flows provided by operating activities in 2019 compared to 2018 and in 2017 compared to 2018 was attributable to various fluctuations within our operating activities. The decrease in cash flows from operating activities in 2019 compared to 2018 was primarily related to payments on prior accident year claims during 2019, primarily driven by catastrophe claims. Net cash flows provided by operating activities for the year ended December 31, 2018 included approximately $80 million of cash received from certain third parties in advance of certain large claim settlements related to the third quarter 2017 hurricanes. Conversely, net cash provided by operating activities for the year ended December 31, 2019 included claim payments of approximately $20 million related to the third quarter 2017 hurricanes. This transaction is included in the line item “Accrued underwriting expense and other liabilities” in the operating activities section of our Consolidated Statements of Cash Flows. Additionally, in 2019 Argo Re entered into an intercompany loan agreement with Syndicate 1910, whereby approximately $65 million was loaned to Syndicate 1910 at a commercial rate of interest, of which amount, approximately $40 million pertained to Syndicate 1910’s third party capital providers and is therefore included as a loan receivable in “Other assets” within our Consolidated Balance Sheets. The cash flows related to this transaction is included in the line item “Other, net” in the operating activities section of our Consolidated Statement of Cash Flows.
For the years ended December 31, 2019, 2018 and 2017, net cash used in investing activities was $142.8 million, $268.3 million and $121.3 million, respectively. The decrease in cash flows used in investing activities from 2018 to 2019 was mainly the result of maturities, sales of fixed maturity investments and equity securities and decrease in cash used to purchased equity securities, partially offset by an increase in cash used to purchase short-term investments. Included in cash used in investing activities in 2017 was the $235.3 million cash outflow related to the purchase of Maybrooke, net of $130.1 million of cash acquired. The increase in cash used in investing from 2017 to 2018 was mainly the result of the increase in cash used to purchase short-term investments, decrease in the proceeds from sale and maturities of fixed maturity securities, partially offset by a decrease in cash used to purchase equity investments. As of December 31, 2019, 2018 and 2017, $845.0 million, $482.3 million, and $368.5 million, respectively, of the investment portfolio were invested in short-term investments.
We invest excess cash in a variety of investment securities. As of December 31, 2019, our investment portfolio consisted of 71.3% fixed maturities, 2.4% equity securities, 9.7% other investments 16.6% short-term investments (based on fair value) compared to 72.3% fixed maturities, 7.4% equity securities,10.2% other investments and 10.1% short-term investments as of December 31, 2018. We classify the majority of our investment portfolio as available-for-sale; resulting in these investments being reported at fair market value with unrealized gains and losses, net of tax, being reported as a component of shareholders’ equity. At December 31, 2019, no investments were designated as trading. No issuer (excluding United States Government and United States Governmental agencies) of fixed maturity or equity securities represents more than 5.4% of shareholders’ equity at December 31, 2019.
Argo Group and its other non-insurance company subsidiaries are dependent on dividends and other permitted payments from their insurance and reinsurance subsidiaries in order to pay cash dividends to their shareholders, for debt service and for their operating expenses. The ability of our insurance and reinsurance subsidiaries to pay dividends is subject to certain restrictions imposed by the jurisdictions of domicile that regulate these subsidiaries and each jurisdiction has calculations for the amount of dividends that our subsidiary can pay without the approval of the insurance regulator.
In December 2019, Argo Re paid a cash dividend of $52.1 million to Argo Group which was used to repay intercompany balances related primarily to dividend payments, interest payments and other corporate expenses.
Revolving Credit Facility and Term Loan. On November 2, 2018, each of Argo Group, Argo Group U.S., Inc., Argo International Holdings Limited, and Argo Underwriting Agency Limited (the “Borrowers”) entered into a $325 million credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent. The Credit Agreement replaced the prior $325 million Credit Agreement (the “Prior Agreement”), dated as of March 3, 2017. In connection with the consummation of the Credit Agreement, Argo Group borrowed $125 million as a term loan due on November 2, 2021, which amount was used on November 2, 2018 to pay off in its entirety the $125 million of borrowings previously outstanding under the Prior Agreement. In addition, the Credit Agreement provided for a $200 million revolving credit facility, and the commitments thereunder shall expire on November 2, 2023 unless extended in accordance with the terms of the Credit Agreement. At December 31, 2019, the $125.0 million drawn on this term loan remained outstanding. The term loan bears interest based on a variable rate, which resets and is payable based on reset options we select pursuant to the terms of the Credit Agreement. As of December 31, 2019, the interest rate on this debt was equal to the three-month LIBOR (1.93% at December 31, 2019) plus 125 basis points, or 3.18%.
Senior Notes. In September 2012, Argo Group (the “Parent Guarantor”), through its subsidiary Argo Group U.S. (the “Subsidiary Issuer”), issued $143,750,000 aggregate principal amount of the Subsidiary Issuer’s 6.5% Senior Notes due September 15, 2042 (the “Notes”). The Notes are unsecured and unsubordinated obligations of the Subsidiary Issuer and rank equally in right of payment with all of the Subsidiary Issuer’s other unsecured and unsubordinated debt. The Notes are guaranteed on a full and unconditional senior unsecured basis by the Parent Guarantor. The Notes may be redeemed, for cash, in whole or in part, on or after September 15, 2017, at the Subsidiary Issuer’s option, at any time and from time to time, prior to maturity at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued but unpaid interest on the principal amount being redeemed to, but not including, the redemption date.
A summary of our outstanding junior subordinated debentures at December 31, 2019 is presented below:
On December 31, 2019, LOCs totaling $139.9 million were outstanding, of which $121.1 million were issued against the secured bilateral LOC facilities and $18.8 million were issued by a commercial bank on an uncommitted basis. Collateral with a market value of $169.9 million was pledged to these banks as security against these LOCs.
Argo Group executed an LOC facility with a commercial bank to issue LOCs in favor of Lloyd’s to support its Funds at Lloyd’s requirements. This facility has a term of one year, is unsecured, and includes customary conditions and event of default provisions. At December 31, 2019 and December 31, 2018, an LOC in the amount of £23.3 million was issued in favor of Lloyd’s, which allowed the Company to reduce its other collateral pledged to Lloyd’s by a comparable amount.
On February 18, 2020, the Board declared a quarterly cash dividend in the amount of $0.31 on each share of common stock outstanding. The dividend will be paid on March 16, 2020 to shareholders of record at the close of business on March 2, 2020.
We have committed to invest up to a total of $422.6 million in a series of hedge funds, private equity and long only funds, of which $312.6 million was funded and included in Other invested assets in our consolidated balance sheet. As of December 31, 2019, we have a remaining obligation to the private equity partnerships to invest up to an additional $110.0 million, which can be called at any time. We have not recorded this commitment in our consolidated financial statements. The investment will be recorded at such time as the capital partnership requires the additional investment.
Our estimated contractual obligations and commitments as of December 31, 2019 were as follows:
(1) Interest only on Junior Subordinated Debentures through 2037. Interest calculated based on the rate in effect at December 31, 2019. Principal due beginning May 2033.
(2) Interest only on Senior Unsecured Fixed Rate Notes through 2042. Interest calculated based on the rate in effect at December 31, 2019. Principal due September 2042.
(4) Interest only on Term Loan through 2021. Interest calculated based on the rate in effect at December 31, 2019. Principal due November 2021.
(6) Claim payments do not have a contractual maturity; exact timing of claim payments cannot be predicted with certainty. The above table estimates timing of claim payments based on historical payment patterns and excludes the benefits of reinsurance recoveries.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other” (Topic 350). ASU 2017-4 eliminates the requirement to calculate the implied fair value of goodwill that is done in Step 2 of the current goodwill impairment test to measure a goodwill impairment loss. Instead, entities will record an impairment loss based on the excess of a reporting unit’s carrying amount over its fair value. The guidance will be applied prospectively and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. We do not anticipate that this ASU will have a material impact on our financial results or disclosures.
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments” (Topic 326). ASU 2016-13 requires organizations to estimate credit losses on certain types of financial instruments, including reinsurance recoverables and available-for-sale fixed maturity securities, by introducing an approach based on expected losses. The expected loss approach will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. The estimate of expected credit losses should consider historical information, current information, as well as reasonable and supportable forecasts, including estimates of prepayments. The expected credit losses, and subsequent adjustments to such losses, are recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the amount expected to be collected.
For further discussion on the adoption of recently issued accounting policies, see Note 1, “Business and Significant Accounting Policies” in the Notes to the Consolidated Financial Statements, included in Item 8, “Financial Statements and Supplementary Data” beginning on page.
We use a variety of actuarial techniques and methods to determine loss reserves for all lines of business. Each method has its own set of assumptions, and each has strengths and weaknesses depending on the exposures being evaluated. Since no single estimation method is superior to another method in all situations, the methods and assumptions used to project loss reserves will vary by line of business and, when appropriate, by where we attach on a risk. We use what we believe to be the most appropriate set of actuarial methods and assumptions for each product line grouping. While the loss projection methods may vary by product line, the general approach for calculating IBNR remains the same: ultimate losses are forecasted first, and that amount is reduced by the amount of cumulative paid claims and case reserves.
When we initially establish IBNR reserves at the beginning of an accident year for each line of business, we often use the expected loss ratio method. This method is based upon our analyses of historical loss ratios incorporating adjustments for pricing changes, anticipated loss ratio trends, changes in mix of business and any other factors that may impact loss ratio expectations. At the end of each quarter, we review the loss ratio selections and the emerged loss experience to determine if deviating from the loss ratio method is appropriate. In general, we continue to use the loss ratio method until we deem it appropriate to begin to rely on the experience of the accident year (“AY”) being evaluated. This weighing in of the AY experience is typically done by employing the Bornhuetter-Ferguson (“BF”) reserving methodology. The BF methods compute IBNR through a blend of the expected loss ratio method and traditional loss development methods. The BF methods estimate IBNR for an accident year as the product of expected losses (earned premium multiplied by an expected loss ratio) plus an expected percentage of unreported losses. The expected percentage of unreported losses is derived from age-to-ultimate loss development factors that result from our analyses of loss development triangles. As accident years mature to the point at which the reported loss experience is more credible, we assign increasing weight to the paid and incurred loss development methods.
Each business segment is analyzed individually, with development characteristics for each short-tail and long-tail line of business identified and applied accordingly. In comparing loss reserve methods and assumptions used at December 31, 2019 as compared with methods and assumptions used at December 31, 2018, management has not changed or adjusted methodologies or assumptions in any significant manner.
Recorded gross reserves for commercial auto liability were $135.6 million as of December 31, 2019. A key assumption for commercial lines auto liability is the annual loss cost trend, particularly the severity trend component of loss costs. A 3% change in assumed annual severity is within the range of our historical experience and which management considers possible. A 3% change in assumed annual severity could change the estimated net reserve by $10.0 million, in either direction.
Recorded gross reserves for our Lloyd’s Syndicate 1200 business were $835.8 million as of December 31, 2019. Estimation of our international liability reserves are subject to late emergence and mix shifts between smaller, more routine claims and larger, more complex claims. Our international property reserves are analyzed by the characteristics of the underlying exposures. Property loss reserves are characterized by relatively short periods between occurrence, reporting, determination of coverage and ultimate claims settlement. These property loss reserves tend to be the most predictable. Catastrophic loss reserves tend to exhibit more volatility due to the nature of the underlying loss event which may cause delays and complexity in estimating ultimate loss exposure.
We perform annual impairment tests of our indefinite-lived intangible assets, including goodwill, or more frequently when impairment indicators exist. We have elected to perform our goodwill impairment test on the first day of the fourth quarter of each year.
For the year ended December 31, 2019, all of our reporting units passed the impairment test, except for our European reporting unit. As a result of this testing, we determined that the goodwill of the European reporting unit, which is included in our International Operations segment, was fully impaired and recorded a pre-tax charge of $15.6 million. For further discussion on this impairment of goodwill, see Note 1, “Business and Significant Accounting Policies” in the Notes to the Financial Statements. As a result of the reviews performed on each of our reporting units for each of the years ended December 31, 2018 and 2017, we determined that the estimated fair value exceeded the respective carrying value of our reporting units for those years and goodwill was not impaired.
We evaluated our definite lived intangibles for indicators of impairment. If indicators of impairment had been identified, we would have been required to test definite lived intangible assets for impairment. As of October 1, 2019, the testing date, no indicators of impairment were identified. Therefore, we were not required to test for impairment. As with the indefinite-lived intangible assets, we will continue to monitor for indicators of impairment and test as required.