Investment gains and losses are integral to our financial results over the long term, but our substantial discretion in the timing of investment sales may cause this value to fluctuate substantially. Also, applicable accounting standards require us to recognize gains and losses from changes in fair values of equity securities and changes in embedded derivatives without actual realization of those gains and losses. We discuss investment gains and losses for the past three years in Item 7, Investments Results.
For some lines of business that we write, a considerable and uncertain amount of time can elapse between the occurrence, reporting and payment of insured claims. The amount we will actually have to pay for such claims also can be highly uncertain. This uncertainty, together with the size of our reserves, makes the loss and loss expense reserves our most significant estimate. Gross loss and loss expense reserves were $5.646 billion at year-end 2018 compared with $5.219 billion at year-end 2017.
Investments held by the parent company and the investment portfolios for the insurance subsidiaries are managed and reported as the investments segment, separate from our underwriting business. Net investment income and net investment gains and losses for our investment portfolios are discussed in the Investments Results.
Reserve development on prior accident years continued to net to a favorable amount in 2018, and was primarily due to less-than-anticipated loss emergence on known claims. We recognized $167 million of favorable development in 2018, compared with $119 million in 2017 and $168 million in 2016. Of the $48 million increase in 2018, compared with 2017, $58 million was attributable to our commercial casualty line of business. Approximately 91 percent of our net favorable reserve development on prior accident years recognized during 2018 occurred in our commercial casualty, commercial property and workers’ compensation lines of business. In 2017, our commercial property and workers' compensation lines of business were responsible for approximately 73 percent of the favorable reserve development. As discussed in Liquidity and Capital Resources, Property Casualty Loss and Loss Expense Obligations and Reserves, Property Casualty Insurance Development of Estimated Reserves by Accident Year, commercial casualty and workers' compensation are considered long-tail lines with the potential for revisions inherent in estimating reserves. Favorable development recognized during 2016 was primarily from our commercial casualty, commercial property and workers’ compensation lines of business. Development by accident year is further discussed in Liquidity and Capital Resources, Property Casualty Insurance Development of Estimated Reserves by Accident Year.
Combined ratio - The 2018 combined ratio improved by 1.0 percentage point compared with 2017, despite a 0.8 percentage-point increase in the ratio component for natural catastrophe losses. The 2018 ratio for current accident year losses and loss expenses before catastrophes increased by 1.0 percentage point, including 0.3 points from more current accident year losses of $1 million or more per claim, shown in the table below. Development on prior accident years’ loss and loss expense reserves before catastrophes during 2018 was 2.6 percentage points more favorable than in 2017.
Premiums resulting from audits of actual sales or payrolls that confirmed or adjusted initial premium estimates have had a mixed effect on premium trends in recent years. On an earned premium basis for our commercial lines insurance segment, audits contributed $1 million to the $53 million earned premiums increase in 2018, negative $7 million to the $77 million earned premiums increase in 2017 and negative $5 million to the $93 million earned premiums increase in 2016. On a net written premium basis, audits contributed a negative amount of less than $1 million to the $43 million net written premiums increase in 2018, negative $5 million to the $81 million net written premiums increase in 2017 and negative $1 million to the $97 million net written premiums increase in 2016. These net written premium amounts are included with agency renewal written premiums in the Commercial Lines Insurance Premiums table above.
Excess and surplus lines commission expense as a percent of earned premiums for 2018 increased slightly from 2017. The ratio for other underwriting expenses decreased in 2018, compared with 2017, reflecting higher earned premiums and ongoing expense management efforts. In 2017, the ratio rose, in part due to enhancements to systems used in billing excess and surplus lines insurance policies.
As appropriate, we buy, hold or sell both fixed-maturity and equity securities on an ongoing basis to help achieve our portfolio objectives. We generally purchase fixed-maturity securities with the intention to hold until maturity. If they no longer meet our investment criteria, they are divested. Sales of fixed-maturity securities are usually due to a change in credit fundamentals. Pretax net investment losses in 2018 were primarily due to unfavorable changes in fair values of equity securities even though we continue to hold the securities, and net gains in both 2017 and 2016 were largely due to rising fair values or sales of equity holdings. Additional information about investment gains or losses is included in Item 8, Note 2 of the Consolidated Financial Statements.
Our estimate of future gross property casualty loss and loss expense payments of $5.646 billion is lower than loss and loss expense reserves of $5.707 billion reported on our balance sheet at December 31, 2018. The $61 million difference is due to certain life and health loss reserves. Reserving practices are discussed in Critical Accounting Estimates, Property Casualty Insurance Loss and Loss Expense Reserves.
The company established a reasonably likely range for net loss and loss expense reserves of $5.037 billion to $5.481 billion at year-end 2018, with the company carrying net reserves of $5.408 billion. The likely range was $4.709 billion to $5.155 billion at year-end 2017, with the company carrying net reserves of $5.032 billion. Our loss and loss expense reserves are not discounted for the time-value of money, but we have reduced the reserves by an estimate of the amount of salvage and subrogation payments we expect to recover.
Management’s best estimate of total loss and loss expense reserves as of year-end 2018 and 2017 was consistent with the corresponding actuarial best estimate.
These estimated cash outflows are undiscounted with respect to interest. As a result, the sum of the cash outflows for all years of $5.587 billion (total of life insurance obligations) exceeds the liabilities recorded in life policy and investment contract reserves and separate accounts for future policy benefits and claims of $3.576 billion (total of life insurance policy reserves and separate account policy reserves). A significant portion of the difference can be attributed to time value of money and changes in mortality, morbidity and lapse assumptions between the date the liabilities were originally established and the current date.
We have prepared the consolidated financial statements of Cincinnati Financial Corporation and our subsidiaries for the year ended December 31, 2018, in accordance with accounting principles generally accepted in the United States of America (GAAP).
The sources of dilution of our common shares are certain equity-based awards as discussed in Note 17, Share-Based Associate Compensation Plans. The above table includes the number of anti-dilutive share-based awards at year-end 2018, 2017 and 2016. We did not include these share-based awards in the computation of net income per common share (diluted) because their exercise would have anti-dilutive effects. Our 2017 net income and basic and diluted earnings per share were impacted by the Tax Act as discussed in Note 11, Income Taxes.
The company and its subsidiaries also are occasionally involved in other legal and regulatory proceedings, some of which assert claims for substantial amounts. These actions include, among others, putative class actions seeking certification of a state or national class. Such proceedings have alleged, for example, breach of an alleged duty to search national databases to ascertain unreported deaths of insureds under life insurance policies. The company's insurance subsidiaries also are occasionally parties to individual actions in which extra-contractual damages, punitive damages or penalties are sought, such as claims alleging bad faith handling of insurance claims or writing unauthorized coverage or claims alleging discrimination by former or current associates.