broadening risk-funding sources and the development of vehicles that utilize third-party capital.
We also present operating income (loss) per diluted common share and operating ROACE, which are derived from the operating income (loss) measure and are reconciled to the most comparable GAAP financial measures, earnings per diluted common share and return on average common equity ("ROACE"), respectively, in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Executive Summary - Results of Operations'.
Tax cost (benefit) of ($11,036), ($2,839) and $nil for the year ended December 31, 2018, 2017 and 2016, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
Operating income (loss) per diluted common share is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to the most comparable GAAP financial measures (earnings per diluted common share) is provided in the table above, and a discussion of the rationale for the presentation of this item is included in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures'.
Transaction and reorganization expenses were $67 million and $27 million for 2018 and 2017, respectively, related to the transformation program launched in 2017. This program encompasses the integration of Novae which commenced in the fourth quarter of the prior year, the realignment of our accident and health business, together with other initiatives designed to increase our efficiency and enhance our profitability while delivering a customer-centric operating model. Pre-tax transaction and reorganization charges of $94 million have been incurred since the third quarter of 2017. These expenses are not included in operating income.
On April 1, 2017, we acquired Aviabel, a general aviation insurer and reinsurer. The purchase price was allocated to the assets acquired and liabilities assumed of Aviabel based on estimated fair values on the closing date and a bargain purchase gain of $15 million was recognized.
We consider book value per diluted common share to be an appropriate measure of our returns to common shareholders, as we believe growth in our book value on a diluted basis will ultimately translate into appreciation of our stock price.
agreement with Northshore. In connection with the reinsurance agreement, Northshore issued notes to unrelated investors in an amount equal to the full $350 million of coverage provided under the reinsurance agreement covering a three year period. At the time of the agreement, we performed an evaluation of Northshore to determine if it meets the definition of a VIE. We concluded that Northshore is a VIE. In addition, we concluded that we do not have a variable interest in the entity, as the variability in results is expected to be absorbed entirely by the investors in Northshore. Accordingly, Northshore is not consolidated in our consolidated financial statements. The premium ceded to Northshore for the year ended December 31, 2017 was $27 million.
The following table provides details of the components of our combined ratio:
$43 million of net favorable prior year reserve development on liability business due to progressively increased weight given by management to experience based indications on older accident years, particularly 2008 through 2010.
Pre-tax yield is calculated by dividing net investment income by the average month-end amortized cost balances for the periods indicated.
Includes U.S. government-sponsored agencies, Residential mortgage-backed securities ("RMBS") and Commercial mortgage-backed securities ("CMBS").
At December 31, 2018, net unrealized investment losses on non-U.S. government debt was $15 million (2017: net unrealized investment gains of $8 million) which included gross unrealized foreign exchange losses of $13 million (2017: $8 million), mainly on U.K. government bonds.
The table below provides information on the severity of the unrealized loss position as a percentage of amortized cost for all investment grade fixed maturities in an unrealized loss position and includes any impact of foreign exchange:
In contrast to our short and medium-tail business, the claim tail for our long-tail business is expected to be notably longer, as claims are often reported and ultimately paid or settled years, or even decades, after the related loss events occur. Our long-tail business primarily relates to liability business written in our insurance and reinsurance segments, as well as our reinsurance motor business and discontinued lines - Novae in our insurance and reinsurance segments.
The following tables show the effect on our estimate of gross loss reserves of reasonably likely changes in the two key assumptions used to estimate our gross loss reserves at December 31, 2018.
During 2018, we recorded an OTTI charge in net income of $10 million (2017: $14 million; 2016: $26 million) (refer to 'Net Investment Income and Net Investment Gains (Losses)' for further details).
(ii) the financial condition, near-term and long-term prospects of the issuer of the security;
The Company may enter into derivative instruments such as futures, options, interest rate swaps and foreign currency forward contracts as part of its overall foreign currency risk management strategy, to obtain exposure to a particular financial market or for yield enhancement.
Reserves for losses and loss expenses: To reflect adjustments arising from the alignment of premium recognition accounting policies and reserving methodologies, as well as the price associated with the Reinsurance to Close ("RITC") of the 2015 and prior years of account of Syndicate 2007;
Distribution network: Distribution network including coverholders, large broker and SME brokers was valued using the Distributor Method, an application of the Income Approach. Key inputs used in the valuation model used for this intangible asset included net premiums earned attributable to existing distributors, attrition rates, profit margins, projected pre-tax operating profit attributable to existing distributors, contributory asset charges which represent the required return on and of intangibles assets utilized to generate future revenue and operating income, and an appropriate discount rate.
At December 31, 2018, the fair value of the Company's non-agency RMBS was $41 million (2017: $47 million), consisting primarily of $31 million (2017: $34 million) of Prime and $5 million (2017: $8 million) of Alt-A MBS. At December 31, 2018, the Company concluded that there are no credit losses anticipated for any of its non-agency RMBS other than those already recorded.
At December 31, 2018, the Company held $189 million (2017: $37 million) of reverse repurchase agreements. These loans are fully collateralized, are generally outstanding for a short period of time and are presented on a gross basis as part of cash and cash equivalents in the Company's consolidated balance sheets. The required collateral for these loans is either cash or U.S. Treasuries at a minimum rate of 102% of the loan principal. Upon maturity, the Company receives principal and interest income. The Company monitors the estimated fair value of the securities loaned and borrowed on a daily basis with additional collateral obtained as necessary throughout the duration of the transaction.
CMBS include mostly investment-grade bonds originated by non-agencies. The fair values of these securities are determined using a pricing model which uses dealer quotes and other available trade information along with security level characteristics to determine deal specific spreads. As the significant inputs used to price these securities are observable market inputs, the fair values of CMBS securities are generally classified as Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, the fair values of these securities are classified as Level 3.
At December 31, 2018, senior notes are recorded at amortized cost with a carrying value of $1,342 million (2017: $1,341 million) and a fair value of $1,334 million (2017: $1,412 million). The fair values of these senior notes are based on prices obtained from a third party pricing service and are determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As the yields for the risk-free yield curve and the spreads are observable market inputs, the fair values of senior notes are classified as Level 2.
Medium-tail business generally has claim reporting and settlement periods longer than those of short-tail reserve classes. For the Company's earliest accident and underwriting years, initial key actuarial expected loss ratio and loss development assumptions were established utilizing industry benchmarks. Due to the longer claim tail, the length of time required to develop its own credible loss history for use in the reserve process is greater for medium-tail business than for short-tail business. As a result, the number of years where the Company has relied heavily on industry benchmarks to establish its key actuarial assumptions is greater for medium-tail business.
the financial institutions and professional indemnity lines of business that Novae exited or placed into run-off in the first quarter of 2017. This business is predominantly written on a claims-made basis. Typically this reserve class is anticipated to exhibit medium to long tail claim reporting and payment patterns.
Non-U.S. dollar denominated loss data is converted to U.S dollar at the rates of exchange in effect at the balance sheet date for material underlying currencies. Fluctuations in currency exchange rates cause material shifts in loss development. Reserves for losses and loss expenses, disclosed in the consolidated balance sheets, are also revalued using the exchange rate at the balance sheet date.
Shares are repurchased from employees to satisfy withholding tax liabilities that arise upon the vesting of restricted stock awards and restricted stock units. Share repurchases from employees are excluded from the authorized share repurchase plan noted above.