Net cash provided by financing activities consists of proceeds from issuance of common stock and payment of dividends to shareholders. Mutual, whose ownership in State Auto Financial is approximately 68%, has waived its right to receipt of the dividends declared by State Auto Financial in an effort to enhance the statutory surplus of the insurance subsidiaries of State Auto Financial for use in support of underwriting operations. Prior to the declaration of each dividend by State Auto Financial, Mutual's directors review the facts and circumstances then present in deciding whether to waive such dividend. Beginning in 2002, dividend waiver decisions will be made by the Independent Committee of the Mutual board of directors. The Independent Committee has met and determined that it would review dividend waiver decisions on an annual basis from this point forward. It decided to waive Mutual's dividends that might be declared by the board of directors of the Company for the year 2002 in order to take better advantage of the investment opportunity STFC represents for Mutual.
Effective with the June 1, 2001 merger transaction between Meridian Mutual and Mutual, Mutual acquired all of the outstanding shares of Meridian Insurance Group, Inc. ("MIGI"), an Indiana domiciled insurance holding company. MIGI's wholly owned insurance subsidiaries are Meridian Security Insurance Company ("Meridian Security"), an Indiana domiciled property and casualty insurer, Meridian Citizens Security Insurance Company ("Meridian Citizens Security"), an Indiana domiciled property and casualty insurer, and Insurance Company of Ohio ("ICO), an Ohio domiciled property and casualty insurer. MIGI is also party to an affiliation agreement with Meridian Citizens Mutual Insurance Company ("Meridian Citizens Mutual"), an Indiana domiciled property and casualty insurer. Meridian Security, Meridian Citizens Security, ICO and Meridian Citizens Mutual are collectively referred to hereafter as the "Meridian Insurers."
To provide funding if the State Auto Insurance Companies were to incur catastrophe losses in excess of $120.0 million, State Auto Financial entered into a structured contingent financing transaction with a financial institution and a syndicate of other lenders (the "Lenders") to provide up to $100.0 million for reinsurance purposes. In the event of such a loss, this arrangement provides that State Auto Financial would sell redeemable preferred shares to SAF Funding Corporation, a special purpose company ("SPC"), which would borrow the money necessary for such purchase from the Lenders. State Auto Financial would then contribute to State Auto P&C the funds received from the sale of its preferred shares. State Auto P&C would use the contributed capital to pay its direct catastrophe losses and losses assumed under the catastrophe reinsurance agreement. State Auto Financial is obligated to repay SPC (which would repay the Lenders) by redeeming the preferred shares over a five-year period. In the event of a default by State Auto Financial, the obligation to repay SPC has been secured by a Put Agreement among State Auto Financial, Mutual and the Lenders, under which Mutual would be obligated to either purchase the preferred shares from the SPC or repay the SPC for the loan(s) outstanding. In February of 2002, the FASB initiated a project to consider guidance related to the issue of special purpose entity consolidation. Specifically, the FASB discussed issues related to identifying and accounting for special purpose entities as part of the FASB's Consolidation Project. The results of these deliberations could negatively impact the Company's accounting approach for the structured contingent financing transaction, if an event triggering this cover were to occur. Management will continue to monitor this guidance and its potential impact on the Company.
The Company is not aware of any adverse legislation or regulation that was adopted by any state where the Company did business during 2001 which would present material obstacles to the Company's overall business. Several states where the Company does business have passed or are considering more strict regulation of the use credit scoring in rating and/or risk selection in personal lines of business. This could have an adverse impact on the Company as it has adopted credit scoring as an underwriting tool. Such regulation would limit the Company's ability to take advantage of this tool.
The Company's investments in held to maturity and available for sale securities are summarized as follows:
Deferred federal income taxes on the net unrealized holding gain for available for sale investments was $6,478,000 and $10,940,000 at December 31, 2001 and 2000, respectively.
Fixed maturities with carrying values of approximately $27,666,000 and $21,633,000 were on deposit with regulators as required by law or specific escrow agreement at December 31, 2001 and 2000, respectively.
Losses and loss expenses incurred increased by $60,726,000 in 2001, and decreased by $5,638,000 in 2000 and $6,878,000 in 1999, respectively, for claims that had occurred in prior years. The increase of $60,726,000 in 2001, for claims occurring in prior years, is the result of reserve strengthening that occurred on the former Meridian Mutual Insurance Company (Meridian Mututal) business in order to bring these claim reserves in line with historic State Auto adequacy levels as well as the result of ongoing analysis of recent loss development trends. See note 6(a) regarding discussion of the Meridian Mutual business assumed by the Pooled Subsidiaries. The change in the incurred losses related to prior years over the two year period ending December 31, 2000 has resulted primarily from development in the long-tail lines such as general liability, commercial auto liability, workers' compensation and no-fault insurance. Because of the nature of the business written over the years, the Company's management believes that the Company has limited exposure to environmental claim liabilities.
(16) CONTINGENCIES The Company's insurance subsidiaries are involved in litigation and may become involved in potential litigation arising in the ordinary course of business. Additionally, the insurance subsidiaries may be impacted by adverse regulatory actions and adverse court decisions where insurance coverages are expanded beyond the scope originally contemplated in the policy(ies). In the opinion of management, the effects, if any, of such litigation and published court decicions are not expected to be material to the consolidated financial statements.