In 2001, the Group introduced into limited production a new internally developed application for issuing and maintaining insurance policies named P.A.R.I.S. sm , a policy administration, rating and issuance system. The Group continued the roll out of the new application during 2002 to include all product lines in the Commercial Lines operating segment. The roll out is currently on target for completion in 2003 for the Commercial and Specialty segments. The Group capitalizes costs incurred during the application development stage, primarily relating to payroll and payroll- related costs for employees, along with costs incurred for external consultants who are directly associated with the internal-use software project. The cost associated with this application is amortized on a straight-line basis over the estimated useful life of ten years from the date placed into service. Upon full implementation, the new application should impact results by approximately $4.0 million to $6.0 million before tax per year in amortization expense until 2012. Although management believes the carrying value of the asset represents its fair value, the useful life of the internally developed software was determined by using certain assumptions and estimates. Inherent changes in these assumptions could result in an immediate impairment to the asset and a corresponding charge to net income.
The 2002 combined ratio includes a reallocation of loss adjustment expense reserve estimates related to claims adjuster salaries, benefits and similar costs from Commercial and Specialty segments to the Personal Lines segment. This increased the 2002 Personal Lines segment combined ratio by 1.5 points and decreased the Commercial Lines segment and Specialty Line segment combined ratio by .6 points and 2.4, respectively.
The 2002 commercial auto combined ratio increased to 110.2%, from 107.6% in 2001. The combined ratio was 121.5% in 2000. The increase in the combined ratio from 2001 is due to greater than expected average settlement amounts (loss severity) from prior years. The improvement in 2001 was largely due to better underwriting and risk selection and the effect of renewal price increases. The year 2000 was hindered by increased severity combined with inadequate pricing. The accident year loss ratios for this line of business continue to show significant improvement from 74.0% in 2000 to 61.5% in 2001 to 57.6% in 2002, resulting in accident year combined ratios of 119.1% in 2000, 105.1% in 2001 and 101.7% in 2002.
Regularly the Group's financial strength is reviewed by independent rating agencies. These agencies may upgrade, downgrade, or affirm their previous ratings of the Group. These agencies may also place an outlook on the Group's rating. On March 11, 2002, Standard & Poor's Rating Services (S&P) removed its negative outlook and placed a stable outlook on the Group's "BBB" financial strength rating. S&P also announced that it assigned its "BB" senior debt rating on the Corporation's convertible notes. Following the Corporation's announcement of third quarter 2002 results, S&P indicated that financial strength rating would be reviewed for possible downgrade, however to date there has been no change. S&P revised its outlook to negative from stable based upon the Corporation's announcement of third quarter 2002 results. On March 13, 2002, Moody's Investor Services (Moody's) assigned its "Baa2" rating to the Corporation's convertible notes. On November 27, 2002, Moody's downgraded the Group's "A2" financial strength rating to "A3" and placed a stable outlook on the Group's rating. Moody's also announced that it placed a "Baa3" rating on the Corporation's convertible notes. On March 14, 2002, Fitch, Inc. (Fitch) assigned its "BBB-" rating to the Corporation's convertible notes and placed a stable outlook on its rating. On November 5, 2002, Fitch, affirmed its "BBB-" rating on the Corporation's convertible notes and placed a stable outlook on its rating. On September 6, 2002, A.M. Best Company affirmed the Group's financial strength rating of "A-" and assigned a positive outlook. In addition, A.M. Best Company assigned an initial rating of "bbb" to Ohio Casualty Corporation's convertible notes. On November 4, 2002, A.M. Best Company affirmed its financial strength rating of "A-" for the Group and maintained its positive outlook.