In addition, as a result of net increases in estimates of losses occurring in prior years, net losses and loss adjustment expenses were increased by $35.7 million. Significant adverse development was recorded in 2001 on losses occurring in 1994 through 1998 in medical malpractice, 1997 through 2000 in auto liability, 1998 and 1999 in accident and health and 2000 in the fire line. These increases to incurred losses were partially offset by favorable development in 2001 on losses occurring primarily from 1990 through 1996 and 1999 through 2000 in the other liability line.
However, in 2002 as compared to 2000, the lower effective tax rate is caused by the fact that adjustments reducing 'expected' tax expense to actual tax expense represent a larger portion of pre-tax income in 2002 than in 2000. While these tax adjustments have increased, pre-tax income in 2002 (for the reasons discussed above) and the related 'expected' tax expense have declined in 2002 as compared to 2000.
TRH's fixed maturity investments, approximately 79.9% of total investments as of December 31, 2002, are predominantly investment grade, liquid securities, approximately 43% of which will mature in less than 10 years. Also as of that date, approximately 8.4% of total investments were in common and nonredeemable preferred stocks, approximately 5.1% of total investments were in other invested assets, including investments in partnerships, approximately 6.4% of total investments were in the short-term investment of funds received under securities loan agreements, and the remaining 0.2% consisted of short-term investments. Based on the foregoing, TRH considers its liquidity to be adequate through the end of 2003 and thereafter for a period the length of which is difficult to predict, but which TRH believes will be at least one year.
Activity within the fixed maturities available for sale portfolio for the years under discussion generally represented strategic portfolio realignments to maximize after-tax income. TRH adjusts its mix of taxable and tax-exempt investments, as appropriate, generally as a result of strategic investment and tax planning considerations. In addition, TRH engaged in securities lending transactions whereby certain securities (i.e., fixed maturities and common stocks available for sale) from its portfolio were loaned to third parties (see Note 2(b) of Notes to Consolidated Financial Statements). The market values of fixed maturities and common stocks available for sale that are on loan are reflected parenthetically as pledged on the balance sheet and totaled $327.3 million and $13.4 million, respectively, as of December 31, 2002.
Of the amount of reinsurance recoverable on paid and unpaid losses and loss adjustment expenses, which totaled $817.6 million as of December 31, 2002, $589.8 million represented balances that were unsecured. Of such unsecured balances, $123.9 million was due from affiliates (which are rated AAA) and 88.7% of the remaining balance was due from companies rated A or better. (See Note 14 of Notes to Consolidated Financial Statements.)
SFAS No. 142, 'Goodwill and Other Intangible Assets,' was issued by the FASB in June 2001. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, 'Intangible Assets.' The new standard addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Among other things, goodwill and some intangible assets will no longer be amortized, but will be subject to impairment tests at least annually. In accordance with the statement, TRH adopted SFAS No. 142 on January 1, 2002. The implementation of this standard did not have a material effect on TRH's results of operations, financial position or cash flows.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Additionally, loss and loss adjustment expense reserves, net of related reinsurance recoverables, include amounts resulting from the September 11, 2001 terrorist attack which are principally related to property (including business interruption), other liability, workers' compensation and aviation coverages. These amounts are subject to significant uncertainty due to a variety of issues such as coverage disputes, the assignment of liability and a potentially long latency period for claims due to respiratory disorders and stress. (See Note 8.)
(a) STATUTORY DEPOSITS: Investments, the substantial majority of which are fixed maturities and common stocks available for sale, were deposited with governmental authorities as required by law and amounted to approximately $142,000,000 and $126,000,000 at December 31, 2002 and 2001, respectively.
The U.S. federal income tax rate was 35% for 2002, 2001 and 2000. Actual tax expense (benefit) on income (loss) before income taxes differs from the 'expected' amount computed by applying the U.S. federal income tax rate because of the following:
The domestic current tax benefit for 2001 includes $17.7 million resulting from a tax net operating loss carryback to prior years. In addition, the 2001 domestic deferred tax benefit includes $19.6 million resulting from a minimum tax credit carryforward which, by law, was able to be carried forward indefinitely in accordance with U.S. federal income tax law in effect for 2001.
5. LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED) tax charge to net income. Such net adjustment was largely caused by the impact of losses principally occurring between 1998 and 2000 in certain casualty lines. Such lines include other liability (a portion of which represents certain specialty casualty classes such as directors' and officers' liability and professional liability other than medical malpractice), medical malpractice and surety. This fourth quarter reserve adjustment was based primarily on an unexpected increase in the frequency and severity of reported claims late in the year reflecting industry-wide trends. In addition, as a result of greater than expected reported loss activity in 2002 indicating that TRH's estimates as of the end of 2001 of the ultimate amounts of losses occurring in 2001 and prior years required a further net increase, significant adverse development was also recorded in 2002 on losses occurring in 1998 through 2001 in the auto liability and aviation lines and in 1999 through 2001 in the accident and health line. These increases to incurred losses were partially offset by favorable development on losses occurring in 2001, principally in fire and allied lines and other liability lines.
In addition, under TRH's 1990 Employee Stock Purchase Plan, as amended, full-time employees with at least one year of employment with the Company or any of its subsidiaries are eligible to receive privileges to purchase shares of the Company's common stock at a price which is 85% of the fair market value of such stock on the date of subscription. An aggregate of 1,125,000 shares of common stock has been authorized for subscription and 1,122 shares were purchased under the plan in 2002.
Rent expense approximated $8,249,000, $7,844,000 and $8,281,000 in 2002, 2001 and 2000, respectively.