•A decline in claim frequency in commercial auto, small commercial package, middle market commercial and workers' compensation due to reduced business and employment activity,
The personal insurance segment's SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2020 improved 3.0 points compared to 2019 (Tables 1 - 2).
The personal auto SAP non-catastrophe loss and ALAE ratio for the year ended December 31, 2020 improved 1.1 points when compared to the same 2019 period (Tables 1 - 2). The 2020 non-catastrophe loss and ALAE ratio was impacted by (i) a lower level of current accident year losses attributable to fewer miles driven as a result of people working remotely and staying at home more because of COVID-19 concerns, and (ii) adverse development from prior accident years compared to favorable
development in the same 2019 periods. The 2020 prior accident year adverse development was primarily driven by higher than expected severity for bodily injury claims from multiple accident years. The 2019 prior accident year favorable development was across multiple coverages including bodily injury and uninsured and under-insured motorist coverages, primarily from the 2018 and 2017 accident years.
•The commercial insurance segment non-catastrophe loss and ALAE reserves contributed $78.4 million of favorable development, driven by workers’ compensation, small commercial package, and middle market commercial which contributed $24.9 million, $23.0 million, and $16.7 million, respectively. Favorable development in these lines was driven by lower than anticipated severity emerging from multiple accident years.
The following table sets forth the components of net investment income for the years ended December 31, 2020 and 2019:
Our investment operations revenue for the year ended December 31, 2020 decreased when compared to the same 2019 period due to (i) less income from the MLP ETF's, (ii) the lower interest rate on notes payable from State Auto Mutual, and (iii) a lower interest rate environment when compared to the same 2019 periods.
Cash provided by operating activities was $49.0 million and cash used in operating activities was $43.9 million in 2020 and 2019, respectively. Net cash from operations will vary from period to period if there are significant changes in underwriting results, primarily the level of premiums written or loss and loss expenses paid, and in cash flows from investment income.
Cash used in investing activities was $21.8 million and cash provided by investing activities was $74.1 million in 2020 and 2019, respectively. The change from 2020 compared to 2019 was primarily driven by increases in the purchases of fixed maturities.
Cash used in financing activities was $14.5 million and $12.0 million in 2020 and 2019, respectively. The change was primarily driven by a decrease in stock option exercises in 2020 when compared to 2019.
As of July 1, 2020, the State Auto Group renewed the casualty excess of loss reinsurance agreement. Under this reinsurance agreement, the State Auto Group is responsible for the first $3.0 million of losses that involve workers' compensation, auto liability, other liability and umbrella liability policies. This reinsurance agreement provides coverage up to $10.0 million, except for commercial umbrella policies which are covered for limits up to $15.0 million.
At December 31, 2020, asbestos reserves were $1.9 million and environmental reserves were $20.3 million, for a total reserve of $22.2 million, or 2.2% of net losses and loss expenses payable. Relative to December 31, 2019, asbestos and environmental reserves decreased $0.3 million and $0.5 million, respectively.
The unfunded status on the pension plan and supplemental executive retirement plan decreased from $48.1 million at December 31, 2019, to $56.0 million at December 31, 2020. Primarily influencing the change from year to year are actuarial gains and losses arising from factors that include (i) changes in the discount rate, (ii) expected to actual demographic changes, such as retirement age, mortality, turnover, rate of compensation changes, and (iii) changes in returns on our plan assets.
In August 2018, the FASB issued ASU 2018-13 which changes the fair value measurement disclosure requirements of ASC 820 by adding, eliminating and modifying disclosures. The new guidance eliminates (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) the entity's policy for the timing of transfers between levels, and (iii) the entity's valuation process for Level 3 fair value measurements. Additionally, the guidance now requires the disclosure of (i) the changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements, and (ii) the range and weighted average used to develop significant unobservable inputs and how the weighted average was calculated for Level 3 fair value measurements. Finally, the guidance requires entities to provide information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date rather than a point in the future. The guidance became effective for annual reporting periods after December 15, 2019 and it did not have a material impact on the Company's results of operations, consolidated financial position or cash flows.
Included in other invested assets is one international fund (“the fund”) that invests in equity securities of foreign issuers and is managed by third party investment managers. The fund had a fair value of $55.8 million and $56.4 million at December 31, 2020 and 2019, respectively, which was determined using the fund’s net asset value. The Company employs procedures to assess the reasonableness of the fair value of the fund including obtaining and reviewing the fund’s audited financial statements. There is no unfunded commitment related to the fund. The Company may not sell its investment in the fund; however, the Company may redeem all or a portion of its investment in the fund at net asset value per share with the appropriate prior written notice. In accordance with Accounting Standard Codification 820-10, this investment is measured at fair value using the net asset value per share practical expedient and has not been classified in the fair value hierarchy. Fair values presented here are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
Cumulative Claim Frequency: Cumulative claim frequency is defined as the cumulative number of reported claims ("reported claims"). Reported claims include claims that do not result in a liability (e.g. those below a deductible). Reported claims disclosed in the tables below are for the State Auto Group and have not been pooled (see Note 9a for additional information regarding the Pooling Arrangement).
The State Auto Group monitors the credit quality of its reinsurance recoverables through the use of A.M. Best’s Financial Strength rating ("FSR"), or in the absence of an FSR consideration of credit ratings issued by approved rating agencies such as S&P, Moody’s, or Fitch. At December 31, 2020, the determination of the allowance for credit losses on reinsurance recoverables included analysis of (i) reinsurance recoverable balances by reinsurer FSR, (ii) estimated payment patterns associated with the claims underlying the reinsurance balances and (iii) historical default rates by reinsurer FSR as published by A.M. Best. In addition to the quantitative analysis, qualitative factors considered include but are not limited to (i) global reinsurer capital level, (ii) reinsurance market trends, (iii) the low interest rate environment and (iv) the stressed global economy, including the impact of COVID-19. The allowance for credit losses is included in the "reinsurance recoverables on losses and loss expenses payable" and "losses and loss expenses payable" line items in the Company's condensed consolidated balance sheets. The Company’s allowance for credit losses for reinsurance recoverables at December 31, 2020 was $0.9 million.
The expected life of the options for employees represented the period of time the options are expected to be outstanding and is based on historical trends. For non-employees the expected life of the option approximates the remaining contractual term of the option. The expected stock price volatility is based on the historical volatility of the Company’s stock for a period approximating the expected life and the expected dividend yield is based on the Company’s most recent period’s dividend payout. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and has a term approximating the expected life of the option.
The following table sets forth the Company’s stock option activity and related information for the years ended December 31, 2020, 2019 and 2018: