We share our operating facilities with State Auto Mutual pursuant to the terms of the 2005 Management Agreement. Our corporate headquarters are located in Columbus, Ohio, in buildings owned by State Auto Mutual that contain approximately 280,000 square feet of office space. State Auto Mutual also leases other office facilities in numerous locations throughout the State Auto Group’s geographical areas of operation.
The following table sets forth a tabular presentation of the development of the ultimate liability of prior accident years by line of business for the years ended December 31, 2020 and 2019:
At December 31, 2020, we had one international fund, which was included in other invested assets. The international fund had a beta of 0.74 using the MSCI EAFE Index as a benchmark. The following table sets forth what changes might occur in the value of Funds 1 given a change in the MSCI EAFE Index at December 31, 2020:
We primarily use one independent nationally recognized pricing service in developing fair value estimates. We obtain one price per security, and our processes and control procedures are designed to ensure the value is accurately recorded on an unadjusted basis. Through discussions with the pricing service, we gain an understanding of the methodologies used to price the different types of securities, that the data and the valuation methods utilized are appropriate and consistently applied, and that the assumptions are reasonable and representative of fair value. To validate the reasonableness of the valuations obtained from the pricing service, we compare to other fair value pricing information gathered from other independent pricing sources. See Note 4, “Fair Value of Financial Instruments” to our consolidated financial statements included in Item 8 of this Form 10-K for a presentation of our available-for-sale investments within the fair value hierarchy at December 31, 2020.
We maintain a portion of our investment portfolio in relatively short-term and highly liquid investments to ensure the immediate availability of funds to pay claims and expenses. At December 31, 2020 and 2019, we had $90.7 million and $78.0 million, respectively, in cash and cash equivalents, and $2,698.0 million and $2,593.3 million, respectively, of total investments. Our available-for-sale fixed maturities included $9.7 million and $9.3 million, respectively, of securities on deposit with insurance regulators, as required by law, at December 31, 2020 and 2019. In addition, substantially all of our fixed maturity and equity securities are traded on public markets. For a further discussion regarding investments, see “Results of Operations - Investments Operations Segment” included in this Item 7.
State Auto Financial’s Delaware business trust subsidiary (the “Capital Trust”) has outstanding $15.0 million liquidation amount of capital securities, due 2033. In connection with the Capital Trust’s issuance of the capital securities and the related purchase by State Auto Financial of all of the Capital Trust’s common securities (liquidation amount of $0.5 million), State Auto Financial has issued to the Capital Trust $15.5 million aggregate principal amount of unsecured Floating Rate Junior Subordinated Debt Securities due 2033 (the “Subordinated Debentures”). The sole assets of the Capital Trust are the Subordinated Debentures and any interest accrued thereon. Interest on the Capital Trust’s capital and common securities is payable quarterly at a rate equal to the three-month LIBOR rate plus 4.20%, adjusted quarterly. The applicable interest rates for December 31, 2020 and 2019 were 4.43% and 6.11%, respectively.
As of April 1, 2020, the State Auto Group renewed the property per risk excess of loss reinsurance agreement for a 15-month term. Under this reinsurance agreement, the State Auto Group retains the first $4.0 million of covered loss, with a 19.5% co-participation on the next $6.0 million of covered loss and a 14.0% co-participation on covered loss between $10.0 million and $20.0 million. The reinsurers are responsible for 80.5% of the loss excess of the $4.0 million retention up to $10.0 million and 86.0% of the loss excess of $10 million up to $20.0 million.
As of July 16, 2020, the State Auto Group’s financial strength rating from A.M. Best was A- (Excellent) with a stable outlook and its credit rating from A.M. Best was bbb- with a stable outlook.
For non-catastrophe losses, actuarial personnel use a number of methods to estimate ultimate losses. Our loss reserves include amounts related to short-tail and long-tail lines of business. “Tail” refers to the time period between the occurrence of a loss and the settlement of the claim. In general, the longer the time span between the incidence of a loss and the settlement of
Expected Loss Ratio Method: The Expected Loss Ratio Method generates ultimate losses by multiplying an expected loss ratio by earned premiums. For slower reporting lines of business, new products or data that is immature, the reported to date claim data is often too limited or too volatile to rely upon other projection methods. In such cases, an advantage of this method is that the ultimate losses are independent of losses paid or outstanding to date. With this method the premiums are used as a measure of loss exposure, and the loss ratios can be derived from pricing expectations, recent claim history or other sources. When there are underlying changes in the frequency or severity of claims, a disadvantage of this method is that the ultimate losses will not respond to those changes.
Our consolidated financial statements, including the notes thereto, are as follows:
To the Board of Directors and Stockholders of State Auto Financial Corporation
Changes in the allowance for credit losses are recorded in the "net investment gain (loss)" line item on the condensed consolidated statement of income. Losses are charged against the allowance when management believes the uncollectibility of a fixed maturity is confirmed or when either of the criteria regarding intent or requirement to sell is met. Description and disclosure of credit losses on fixed maturities are disclosed in Note 4 of the Notes to Condensed Consolidated Financial Statements.
Management assesses expected credit losses on third party reinsurance recoverables for the entire State Auto Pool and, pursuant to the Pooling Arrangement (as defined in Note 9), the Company is responsible for its share of the estimated uncollectible reinsurance for the entire pool. Management uses A.M. Best’s Financial Strength ratings or equivalent such as S&P, Moody’s, or Fitch when an A.M. Best Financial Strength rating is not available to assess the credit risk of the reinsurance recoverables. The estimate of expected credit losses considers historical credit loss information as well as current conditions and reasonable and supportable forecasts. Description and disclosure of credit losses on reinsurance recoverables are disclosed in Note 8 of the Notes to Condensed Consolidated Financial Statements.
The above information is provided for each of the Company’s reportable insurance segments and specialty run-off and then is further disaggregated between short and long-tail where "tail" refers to the time period between the occurrence of a loss and the ultimate settlement of the claims. See Note 18 for discussion of the Company’s reportable segments.
Management utilizes an aging schedule to estimate an allowance for uncollectible amounts relating to the State Auto Pool premiums receivable balance including the Company's billed and due premium from its policyholders. In addition to reliance upon recent and historical collection trends, determination of the allowance for uncollectible premiums receivable at December 31, 2020 included consideration of other factors, including macro-economic conditions and trends, in particular the estimated impact of COVID-19. Credit risk is partially mitigated by the State Auto Group's ability to cancel a policy if the policyholder does not pay the premium due. Pursuant to the Pooling Arrangement, bad debt expense for uncollectible premiums receivable is allocated to pool members on the basis of pool participation and is included in the quarterly settlement of intercompany balances. Bad debt expense is included in "other expenses" on the condensed consolidated statements of income and reflected in “due to/from affiliates” on the Company's condensed consolidated balance sheets.
Pursuant to these agreements, the Company earned interest of $2.8 million for the year ended December 31, 2020 and $3.6 million and $4.9 million for the years ended December 31, 2019 and 2018, respectively. See Note 4 for the notes receivable fair value discussion.
The following table sets forth the compilation of basic and diluted net earnings per common share for the years ended December 31, 2020, 2019 and 2018: