The HO QS Arrangement, which was put in place in 2011, provided capital support and additional catastrophe protection over the past three years, over which time we undertook a number of actions aimed at improving the financial performance of our homeowners line. See the “Personal Insurance Segment” discussion included in this Item 7 for further information. Since 2011, the financial performance of our homeowners line improved due to the actions we undertook as well as improved weather. We evaluated various reinsurance structures to replace the expired HO QS Arrangement, ultimately entering into a one-year property aggregate excess catastrophe reinsurance agreement effective January 1, 2015. Because we believe our homeowners line is positioned to generate adequate margins to absorb weather volatility, we are not willing to cede those margins to reinsurers as we would under a quota share arrangement. The one-year property aggregate excess catastrophe reinsurance agreement provides protection against significant downside earnings risk resulting from the occurrence of multiple catastrophe events such as those that materially impacted our 2011 results.
For 2014, we strengthened loss and ALAE reserves related to the terminated RED program business in run-off by a total of $96.7 million, which included the net cost of the ADC reinsurance agreement. The majority of the reserve strengthening related to the two largest terminated RED programs, the restaurant and commercial trucking programs. In addition, the State Auto Group entered into the ADC reinsurance agreement to protect against adverse development of loss and ALAE reserves for the restaurant program. The ADC reinsurance agreement provides the State Auto Group with $40.0 million of adverse development cover in excess of the restaurant program’s carried reserves at December 31, 2014.
Although our results were favorably impacted by fewer and less severe catastrophe events during the year, our goal is to achieve strong underwriting profitability through disciplined underwriting, responsive and adequate pricing and superior performance levels in our claim organization.
We continue to utilize the following additional strategies to improve our homeowners results:
The following table sets forth the net written premiums by major product line of business for our business insurance segment for the years ended December 31, 2014, 2013 and 2012.
Net written premiums for the specialty insurance segment for the year ended December 31, 2014 increased 23.0% when compared to the same 2013 period (Table 5). The increase in premiums was primarily due to (i) new business growth in our E&S property unit, (ii) growth in our E&S casualty unit due to the addition of underwriters in more geographic locations and new distribution relationships, including Partners General Insurance Agency which was acquired by our parent State Auto Mutual in the second quarter 2014, (iii) rate increases and new programs in the Programs unit, and (iv) rate increases and new business growth in our Workers' compensation unit.
The E&S casualty unit's 2014 SAP non-catastrophe loss and ALAE ratio improved 10.4 points, when compared to the same 2013 period (Table 6), primarily due to prior year rate actions emerging in earned premiums. The E&S casualty unit's 2013 SAP non-catastrophe loss and ALAE ratio increased 12.2 points when compared to the same 2012 period (Table 6), primarily due to greater prior year favorable development in 2012 compared to prior accident year favorable development in 2013.
The strategy of the Workers’ compensation unit focuses on accounts under $25,000 and debit mod accounts over $100,000 with higher average losses driven mostly by injuries that impact soft tissue. The Workers' compensation unit's 2014 SAP non-catastrophe loss and ALAE ratio was 58.8% compared to 55.5% and 74.8% for 2013 and 2012, respectively (Table 6). The 3.3 point increase in the Workers' compensation unit's 2014 SAP non-catastrophe loss and ALAE ratio compared to the same 2013 period (Table 6), was primarily driven by greater prior year favorable development in 2013 compared to 2014. The improvement from 2012 to 2013 was primarily due to favorable reserve development of prior accident years in 2013 as compared to 2012. The favorable development in 2013 was primarily attributable to better than anticipated severity emerging across all accident years, with approximately one third coming from accident year 2012.
The loss and loss expenses payable at December 31, 2014 increased $22.8 million from the loss and loss expenses payable at December 31, 2013. This change reflected an increase of $39.4 million in the Programs unit driven primarily by revised loss and loss expense reserve estimates for the two largest RED programs, both of which are in run-off. Loss and loss expenses payable in our personal auto line of business declined $12.8 million primarily due to a decline in exposure. We conduct quarterly reviews of loss development reports and make judgments in determining the reserves for ultimate losses and loss expenses payable. Several factors are considered by us when estimating ultimate liabilities including consistency in relative case reserve adequacy, consistency in claims settlement practices, recent legal developments, historical data, actuarial projections, exposure changes, anticipated inflation, current business conditions, catastrophe developments, late reported claims, and other analytical reviews.
At December 31, 2014, our fixed maturity investment portfolio included obligations of states and political subdivisions with a total carrying value of $769.5 million, with $181.4 million of these securities, or 23.6% of our municipal securities portfolio (“Muni Portfolio”), enhanced by third party monoline insurers (a “Credit Enhancement”) for the payment of principal and interest in the event of an issuer default. A Credit Enhancement is not a primary consideration to us when purchasing a municipal security, as we consider the underlying credit quality of the security as the primary rating factor in our evaluation process. At December 31, 2014, 79.4% of the total $769.5 million of municipal securities in our investment portfolio were rated AA or better, without the benefit of a Credit Enhancement. We do not believe that a loss of a Credit Enhancement would have a material adverse impact on our results of operations, financial position or liquidity, due to the underlying strength of the issuers of the securities, as well as our ability and intent to hold the securities. In addition, at December 31, 2014, we had no direct investment in any guarantor including any bond insurer.
At December 31, 2014, 2013 and 2012, each of our insurance subsidiaries was in compliance with statutory requirements relating to capital adequacy.
The principal positive evidence that led us to determine at December 31, 2014 that the valuation allowance against our net deferred tax assets was no longer necessary included (i) three consecutive years of pre-tax income; (ii) cumulative three-year pre-tax income of $98.7 million through December 31, 2014; and (iii) expected future pre-tax income. Since the establishment of the valuation allowance in the second quarter of 2011, our homeowners line underwriting results, a key contributor to the initial establishment of the valuation allowance, have significantly improved. The improvement in our homeowners underwriting results is attributable to actions undertaken by management, including rate increases, deductible expansion, and changes in the geographic mix, among others. See the "Personal Insurance Segment” discussion included in this Item 7 for further information. Since 2011, underwriting results have also been impacted by our RED underwriting results, which have included reserve strengthening in 2012, 2013 and 2014. Due to the actions taken in 2014, including the reserve strengthening and the placement of the ADC reinsurance agreement, which provides $40.0 million of adverse development cover over carried Loss and LAE reserves for the RED restaurant program, along with the fact that the RED program business has been terminated and is in run-off, future underwriting results are not expected to be materially impacted by RED underwriting results. See the "Specialty Insurance Segment” discussion included in this Item 7 for further information.
Our consolidated financial statements, including the notes thereto, and the reports of Ernst & Young LLP on our consolidated financial statements and our internal controls over financial reporting are as follows:
We have audited the accompanying consolidated balance sheets of State Auto Financial Corporation and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedules listed in the Index at Item 15(a)(2). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
Investments in fixed maturities, equity securities and certain other invested assets are classified as available-for-sale and are carried at fair value. The unrealized holding gains and losses, net of applicable deferred income taxes, are shown as a separate component of stockholders’ equity as a part of accumulated other comprehensive income (loss) and, as such, are not included in the determination of net income. Realized gains and losses on the sales of investments are computed using the first-in, first-out method.
Proceeds on sales of available-for-sale securities in 2014, 2013 and 2012 were $263.3 million, $220.4 million and $435.3 million, respectively.
The following tables set forth the Company’s available-for-sale investments within the fair value hierarchy at December 31, 2014 and 2013:
Included in other invested assets are the FHLB membership common stock ("FHLB common stock"), purchased when State Auto P&C joined the FHLB in 2013, and the Trust Securities (as defined in Note 6b). The Trust Securities and FHLB common stock are carried at cost, which approximates fair value. The fair value of the FHLB common stock at December 31, 2014 was $4.8 million and the fair value of the Trust Securities were $0.5 million. Both investments have been placed in Level 3 of the fair value hierarchy.
Under these agreements, the Company earned interest of $4.9 million for each of the three years ended December 31, 2014, 2013 and 2012, respectively. See Note 3 for the notes receivable fair value discussion.
Stateco provides State Auto Mutual and its affiliates investment management services. Investment management income is recognized quarterly based on a percentage of the average fair value of investable assets and the equity portfolio performance of each company managed. Revenue related to these services amounted to $1.5 million, $1.6 million and $2.9 million in 2014, 2013 and 2012, respectively, and is included in other income (affiliates) on the consolidated statements of income.
valuation allowance was reversed at December 31, 2014. With the reversal of the valuation allowance at December 31, 2014, the Company recorded an income tax benefit of $82.6 million. At December 31, 2013, the valuation allowance was $82.6 million, with $11.8 million recorded as a reduction of income tax expense in the income statement.
State Auto P&C, Milbank and SA Ohio are subject to regulations and restrictions under which payment of dividends from statutory surplus can be made to State Auto Financial during the year without prior approval of regulatory authorities. Under the insurance regulations of Iowa and Ohio (the states of domicile), the maximum amount of dividends that the Company may pay out of earned surplus to shareholders within a twelve month period without prior approval of the Department is limited to the greater of 10% of the most recent year-end policyholders' surplus or net income for the twelve month period ending the 31st day of December of the previous year-end. Pursuant to these rules, approximately $77.8 million is available for payment to State Auto Financial from its insurance subsidiaries in 2015 without prior approval. State Auto Financial received dividends from its insurance subsidiaries in the amount of $20.0 million, $10.0 million and $20.0 million in 2014, 2013 and 2012, respectively.
The Equity Plan provides that qualified stock options may be granted at an option price not less than the fair market value of the common shares at the date of grant and that nonqualified stock options may be granted at any price determined by the Compensation Committee of the Board of Directors. Options granted generally vest over a three-year period, with one-third of the options vesting on each anniversary of the grant date, and must be exercised no later than ten years from the date of grant. Stock options granted under the Equity Plan for 2014, 2013 and 2012 were 0.2 million, 0.5 million and 0.3 million, respectively.