The Company shares its operating facilities with Mutual pursuant to the terms of the 2000 Management Agreement, and subject to regulatory approval, the 2005 Management Agreement. The Company’s corporate headquarters are located in Columbus, Ohio, in buildings owned by Mutual that contain approximately 280,000 square feet of office space. The Company and Mutual also own or lease other office facilities in numerous locations throughout the State Auto Group’s geographical areas of operation.
The following table sets forth a chronology of the participant and participant percentage changes that have occurred in the Pooling Arrangement since January 1, 2002:
On November 13, 2003 State Auto Financial issued $100.0 million unsecured 6.25% senior notes. State Auto Financial used the proceeds from these debt instruments to contribute additional paid-in capital to its insurance subsidiaries as follows: $39.0 million to State Auto P&C, $30.0 million to SA National and $15.0 million to Milbank. Milbank used the $15.0 million additional paid-in capital contribution to repay its $15.0 million surplus note with Meridian Security. State Auto Financial also used these proceeds to repay $15.0 million of its bank debt and invested the remaining amount in fixed maturity and equity securities.
unacceptable underwriting results. The Company terminated or suspended eleven fast growing, but extremely unprofitable, nonstandard auto oriented agencies in Kentucky. While this action adversely affected this segment’s premium growth, it is expected to improve long term underwriting results.
Net cash provided by operating activities was $147.6 million, $138.0 million and $126.6 million for the 2004, 2003 and 2002 years, respectively. The significant sources of operating cash flows are derived from underwriting operations and investment income. The increase in the cash flows over the three year period is attributable to improved underwriting and investment income cash flows, offset by increases in cash paid on estimated federal income taxes, interest expense
Net cash provided by financing activities was $7.1 million in 2004, $86.2 million in 2003, and $25.0 million in 2002. The decreased net financing activity during 2004 was due to the absence of $85.5 million in net proceeds the Company received in 2003 and $30.0 million in 2002 from the issuance of debt, partly offset by payment of dividends and repurchase of Company common shares. Positively impacting cash flows during 2004 was the Company’s termination of two separate fair value hedge transactions, described below, for a cash settlement of $3.8 million on future net swap payments.
and length of decline in fair value, events impacting the issuer, and overall market conditions. When a security in the Company’s investment portfolio has been determined to have a decline in fair value that is other than temporary, the Company adjusts the cost basis of the security to fair value. This results in a charge to earnings as a realized loss, which is not changed for subsequent recoveries in fair value. Future increases or decreases in fair value, if not other than temporary, are included in other comprehensive income.
The amortized cost and fair value of fixed maturities at December 31, 2004, by contractual maturity, are summarized as follows:
At December 31, 2004, total investments at fair value comprise approximately 84.0% of the Company’s total assets. Of the total investments, 88.4% are invested in fixed maturities, 11.4% in equity securities, and 0.2% in other invested assets. Cash and cash equivalents represent approximately 3.2% of the Company’s total assets at December 31, 2004.
Total net losses and loss expenses payable increased 4.3% at December 31, 2004 from 2003, due in part to the total earned premium increase of 4.8% during 2004 from 2003. More of the growth was contributed by commercial lines, where the reserve needs are typically higher due to the extended time necessary to identify and settle claims. Another contributing factor was seasonal catastrophes, mostly coming from hurricanes in
New and changing insurance risks such as asbestos, mold, silica and acts of terrorism
uncertainties for various reasons. The Company’s results of operations and financial condition could be impacted in the future should the ultimate payments required to settle claims vary from the amount of the liability currently provided.
Income taxes are accounted for using the liability method. Using this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
As part of the Company’s management of its exposure to fluctuations in interest rates, the Company utilizes interest rate swap agreements in connection with its $100.0 million 6.25% senior notes. At December 31, 2004, there are no agreements outstanding (see Note 7). The interest rate swap agreements are accounted for in accordance with Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This Statement requires all derivatives to be recorded at fair value on the consolidated balance sheet.
For the period October 1, 2001 through December 31, 2003, Mutual entered into a stop loss reinsurance arrangement (Stop Loss) with the STFC Pooled Companies. Under the Stop Loss, Mutual agreed to participate in the Pooling Arrangement’s quarterly underwriting losses and gains in the manner described. If the Pooling Arrangement’s statutory loss and loss adjustment expense ratio (loss ratio) was between 70.75% and 80% (after the application of all available reinsurance), Mutual reinsured the STFC Pooled Companies 27% of the Pooling Arrangement’s losses in excess of a loss ratio of 70.75% up to 80.00%. The STFC Pooled Companies were responsible for their share of the Pooling Arrangement’s losses over the 80% threshold. Also, Mutual had the right to participate in the profits of the Pooling Arrangement. Mutual assumed 27% of the Pooling Arrangement’s underwriting profits attributable to loss ratios less than 69.25%, but more than 59.99%. During 2003 and 2002, the STFC Pooled Companies ceded to Mutual, $5.6 million and $8.8 million in losses, respectively, and $12.8 million and $1.4 million, respectively, in premiums under the Stop Loss. The Stop Loss ceased at December 31, 2003.
The Company’s pension and postretirement benefit plans’ weighted average asset allocations by asset category at the Plans’ measurement date of September 30, 2004 and 2003, respectively, are as follows: