The following table shows the components of our loss and loss adjustment expenses for the years ended December 31, 2020, 2019 and 2018:
Our loss ratio was 78.6% for the year ended December 31, 2020, compared to 81.4% for the year ended December 31, 2019, a decrease of 2.8% points. The prior year loss reserve development for the year ended December 31, 2020 was essentially flat. The year ended December 31, 2019 results were impacted by 4.3 points of net unfavorable loss reserve development. The 2019 prior year loss reserve strengthening of $23.8 million was related to higher than projected reported losses, primarily in U.S. casualty reinsurance, and also certain casualty exposures where greater severity of losses are expected.
Our return on average equity was 7.8% for the year ended December 31, 2020, compared to 4.8% for the year ended December 31, 2019. The increase in return on average equity was driven by net investment income of $114.0 million, offset in part by an underwriting loss of $34.0 million, interest expense of $11.6 million, preference dividends of $4.4 million and transaction costs of $4.0 million.
The loss reserves by major line of business, net of unpaid losses and loss adjustment expenses recoverable, were as follows:
The following tables summarize the composition of our non-investment grade and investment grade portfolios by sector as of December 31, 2020 and December 31, 2019:
anticipated amounts recoverable from reinsurers. Reinsurance balances recoverable on reserves for losses and loss adjustment expenses are reported separately as assets, instead of being netted with the related liabilities, since having purchased reinsurance does not discharge us of our liability to policyholders. Reinsurance balances recoverable on reserves for paid and unpaid losses and loss adjustment expenses as of December 31, 2020 and December 31, 2019 totaled $286.6 million and $171.0 million, respectively.
The Company invests in limited partnerships and limited liability companies. Such amounts are included in other investments, fair value option. These investments can often have characteristics of a variable interest entity (“VIE”). A VIE refers to entities that have characteristics such as (i) insufficient equity at risk to allow the entity to finance its activities without additional financial support or (ii) instances where the equity investors, as a group, do not have the characteristic of a controlling financial interest. If the Company is determined to be the primary beneficiary, it is required to consolidate the VIE. The primary beneficiary is defined as the variable interest holder that is determined to have the controlling financial interest as a result of having both (i) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. At inception of the VIE as well as on an ongoing basis, the Company determines whether it is the primary beneficiary based on an analysis of the Company’s level of involvement in the VIE, the contractual terms, and the overall structure of the VIE. The
We do not include claim count information in our short duration triangles for reinsurance. A significant percentage of our reinsurance business is written on a proportional basis, for which individual loss information is typically unavailable.
The following table presents the balances of premiums receivable, net of the allowance for expected credit losses, at January 1, 2020 and December 31, 2020 and changes in the allowance for expected credit losses for the year ended December 31, 2020.
(1) Net realized gains (losses) from the fixed maturities available for sale portfolio consists of realized gains and realized losses of $14.6 million and $4.0 million, respectively. Realized losses include an allowance for expected credit losses on available for sale securities of $0.2 million for the year ended December 31, 2020.
Municipal Government Bonds. Valuations are provided by independent pricing services, with all prices provided through index providers and pricing vendors. The fair values of these securities are generally determined using spreads obtained from broker-dealers who trade in the relevant security market, trade prices and the new issue market. As the significant inputs used in the pricing process for municipal bonds are observable market inputs, the fair value of these securities are classified within Level 2.
Investment Derivative Instruments. The Company values the investment derivatives, including total return swaps and options, at fair value. As the underlying investments have observable inputs, the fair value of these securities are classified within Level 2. Refer to Note 11, “Derivative instruments” for more information.
The following table summarizes information on the fair values and notional amount of the Company’s derivative instruments at December 31, 2020 and 2019:
purposes. Significant components of the Company’s deferred income tax assets and liabilities were as follows:
At December 31, 2020, ARL held approximately 12.6% of the Company’s common equity. Affiliates of ACGL held approximately 6.6% of the Company’s preference shares. On February 16, 2021 ARL sold an aggregate of 460,800 common shares, which reduced ARL's holdings to 10.3% of the Company's common equity. Refer to Note 25, “Subsequent events” for additional details.
On May 15, 2020, Watford Re renewed its letter of credit facility with Lloyds Bank Corporate Markets Plc, New York Branch (the “Lloyds Facility”). The Lloyds Facility amount is $100.0 million
accretion of the discount and issuance costs, are included in “preference dividends” in the Company’s consolidated statements of income (loss).
The following table presents a reconciliation of the preference shares for the years ended December 31, 2020, 2019 and 2018:
In connection with the Company’s initial private placement, the Company issued to Arch warrants to purchase up to 975,503 of common shares and to HPS warrants to purchase up to 729,188 of common shares. The warrants were unexercised and expired on March 25, 2020.
On February 16, 2021, ARL sold an aggregate of 230,400 common shares to affiliates of Kelso & Company (“Kelso”) and 230,400 common shares to an affiliate of Warburg Pincus LLC (“Warburg Pincus”), in each case, at a purchase price of $34.66 per common share, which was the then current market price of the common shares, based on the closing sale price of the common shares on the Nasdaq Global Select Market on February 12, 2021 (such sales collectively, the “Arch Sales”). Subsequent to the Arch Sales, ARL held approximately 10.3%, a decrease from 12.6% as of December 31, 2020, of the Company's issued and outstanding common shares. In connection with the Arch Sales, on February 16, 2021, the Company entered into a waiver to the Arch Voting