The transaction allowed the Group to stop writing business in the New Jersey private passenger auto market beginning in March of 2002. In recent years, the market in New Jersey private passenger auto had become more unstable due to the inability to control both the volume of writings and the profitability. Under the terms of the transaction, OCNJ agreed to pay $40.6 million to a third party, Proformance Insurance Company (Proformance), to transfer its renewal obligations. The before-tax amount of $40.6 million was charged to income in the fourth quarter of 2001 with payments made over the course of twelve months beginning in early 2002. The contract stipulates that a premiums-to-surplus ratio of 2.5 to 1 must be maintained on the transferred business during the three year period beginning March 2002. The final measurement date is December 31, 2004 and will include use of the statutory insurance expense exhibit which is due April 1, 2005. If this criteria is not met, OCNJ will have a contingent liability of up to $15.6 million to be paid to Proformance to maintain this premiums-to-surplus ratio. At December 31, 2002, the Group has evaluated the contingency based upon financial data provided by Proformance. The Group has concluded that it is not probable that the liability will be incurred, and therefore has not recognized a liability in the financial statements. The Group will continue to monitor the contingency for any future liability recognition.
Management believes that it will recover the cost basis in the securities held with unrealized losses as it has both the intent and ability to hold the securities until they mature or recover in value. Securities are sold to achieve management's investment goals, which include the diversification of credit risk, the maintenance of adequate portfolio liquidity and the management of interest rate risk. In order to achieve these goals, sales of investments are based upon current market conditions, liquidity needs and estimates of the future market value of the individual securities.
Commercial Lines combined ratio for the year 2002 decreased 1.1 points to 115.1% from 116.2% in 2001. This improvement was not as great as expected due to $73.9 million of development in loss and loss adjustment expenses from prior years adding 10.2 points to the combined ratio. Of this amount, approximately $51.6 million of development from prior years was related to construction defect issues which added 7.1 points to the combined ratio for 2002. The 2000 combined ratio was 130.0%. Renewal price increases had a positive impact during 2002 and 2001. The 2002 average renewal price increase2 was 16.3% for the Commercial Lines direct premiums written, compared with a 15.2% average renewal price increase in 2001.
The commercial auto product line net premiums written increased $26.7 million, or 14.3% in 2002 to $213.4 million, compared with $186.7 million in 2001 and $178.7 million in 2000. The 2002 and 2001 increase was driven by renewal price increases, averaging 15.2% and 15.5%, respectively.
The Group began direct marketing of personal auto coverage in January 1998. In 2000, the Corporation first restructured its private passenger auto - direct product line operations with an Internet-only strategy, and later discontinued private passenger auto - direct in the fourth quarter
of 2000. The product line was discontinued in order to focus on the independent agency system as the distribution channel for the Group. As a result of the restructuring, net premiums written dropped from $6.8 million in 2001 to $3.2 million in 2002. The Group wrote $10.7 million of net premiums in 2000. Combined ratios were 162.0%, 155.2% and 167.9% for 2002, 2001 and 2000, respectively. The 2001 underwriting expense ratio for the private passenger auto - direct product line included $2.0 million, or 29.3 points, in expenses for fees for the removal of certain obligations related to assigned private passenger auto policies in New York.
For the Specialty Lines operating segment, the losses and loss adjustment expenses for prior accident years recorded during 2002 was $(2.2) million and was concentrated in the commercial umbrella product line. Comparable amounts for 2001 and 2000 were $4.1 million and approximately $(3.5) million, respectively. In 2001, this was concentrated in the commercial umbrella product line. For 2000, the favorable development was from the bond product line. For 2000, the commercial umbrella product line was included with the general liability product line in accident year analyses.
The investment portfolio of the Corporation and the Group include non- publicly traded securities such as private placements, non-exchange traded equities and limited partnerships which are carried at fair value. Fair values are based on valuations from pricing services, brokers and other methods as determined by management to give the most accurate price. The carrying value of this portfolio at December 31, 2002 was $319.4 million. This compares to $295.9 million in 2001 and $317.4 million in 2000.