Investments and cash increased $134.2 million (10.4%) since the prior year primarily due to the $203.4 million of operating cash flow offset by cash outflows of $40.4 million for fixed assets, $20.0 million for debt servicing, $8.5 million in shareholder dividends, and $0.3 million net change in various accounts.
Increased advertising, compensation and other operating costs through December 31, 2004, associated with increased customer volume, contributed to an increase in deferred policy acquisitions costs ("DPAC") of $5.7 million to $58.8 million, compared to $53.1 million at December 31, 2003. The Company's DPAC is estimated to be fully recoverable (see Critical Accounting Estimates - Deferred Policy Acquisition Costs).
As of December 31, 2004, our insurance subsidiaries had a combined statutory surplus of $614.9 million compared to $535.0 million at December 31, 2003. The change in statutory surplus was primarily due to statutory net income of $110.3 million. This was partially offset by a decrease in net deferred tax assets of $20.9 million and an increase in nonadmitted assets of $10.0 million. Our ratio of net premiums written to statutory surplus improved to 2.2 at December 31, 2004, compared to 2.3 at December 31, 2003.
Property and equipment is recorded at cost and depreciated on a straight-line basis. We capitalize certain consulting costs, payroll and payroll-related costs for employees related to computer software developed for internal use. The estimated useful lives used for depreciation purposes are: furniture and leasehold improvements - 7 years; equipment - 3 to 5 years; automobiles - 5 years; software currently in service - 3 to 15 years.
Total advertising costs included in acquisition costs deferred during 2004, 2003 and 2002 were $66.7 million, $53.9 million, and $43.3 million, respectively.
At December 31, 2004 and 2003, the Company's reinsurance recoverables, net of payables, from AIG subsidiaries were $1.5 million and $5.8 million, respectively. The Company ceded $1.1 million, $0.9 million, and $29.1 million in net premiums earned to AIG subsidiaries in 2004, 2003 and 2002, respectively. Losses and LAE incurred of $0.1 million, $1.6 million, and $28.4 million were ceded to AIG subsidiaries in 2004, 2003 and 2002, respectively.
Effective December 4, 2003, the Company changed its state of incorporation from California to Delaware. In connection with the change, the Company's stock was assigned a par value of $0.001 per share, resulting in a reclassification of $419.2 million from common stock to additional paid-in capital. There was no impact to the Company's financial condition or results of operations as a result of the reincorporation.
At December 31, 2004, 5,366,518 stock options remain available for future grants under the 2004 Plan. Options granted to employees generally have ten-year terms and vest over various periods, generally three years. Options granted to nonemployee directors expire one year after a nonemployee director ceases service with the Company, or ten years from the date of grant, whichever is sooner. Nonemployee director options vest over one year, provided that the nonemployee director is in the service of the Company at that time. Currently, the Company uses the intrinsic-value method to account for stock-based compensation paid to employees for their services.
The following table reconciles consolidated GAAP net income (loss) to statutory net income (loss).
The Company has received some Northridge earthquake claims reported after the closing of the window established by SB 1899 which are based upon alternative legal theories. The Company is contesting these claims and has only nominal reserves for them. Should the courts determine that these claims, or additional claims brought in the future, are not barred by the applicable statute of limitations and the provisions of SB 1899, additional reserves may be needed to resolve these claims.
The Company evaluates segment performance based on pretax underwriting profit (loss). The Company does not allocate assets, net investment income, net realized investment gains (losses), other revenues, nonrecurring items, interest and fees expense, or income taxes to operating segments. Depreciation and amortization expense was $22.3 million in 2004, $20.2 million in 2003 and $19.3 million in 2002. The accounting policies of the reportable segments are the same as those described in Note 2 of the Notes to Consolidated Financial Statements. All revenues are generated from external customers and the Company does not rely on any major customer.