For the year, we reported operating income from continuing operations of $40.0 million, compared with $21.9 million in 2001 and $24.0 million in 2000. Operating income from continuing operations differs from net income by the exclusion of after-tax realized gains or losses on investment sales, as well as net income from discontinued operations. It is used as an important financial measure by management, analysts and investors, but is not intended as a substitute for net income prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). This financial measure may not be comparable to similar measures reported by other companies.
On November 26, 2002 TRIA legislation was signed into law. The program terminates on December 31, 2005. TRIA requires sharing the risk of future losses from terrorism between private insurers and the federal government, and is applicable to almost all commercial lines of insurance. Insurance companies with direct commercial insurance exposure in the United Sates are required to participate in the program. With the signing of this legislation, all previously approved exclusions for terrorism are rescinded. Over the three months December 2002 to February 2003, we notified existing commercial policyholders of the existence of the federal backstop, offered comparable terrorism coverage and specified the cost of that coverage in accordance with the requirements of TRIA. Policyholders have the option to accept or decline the coverage, or negotiate other terms. These provisions apply to new policies written after enactment. An event has to cause $5 million in losses to be certified as an act of terrorism. Each participating insurance company will be responsible for paying out a certain amount in claims - a deductible - before Federal assistance becomes available. This deductible is based on a percentage of direct earned premiums from calendar year 2002. The deductible is as follows: 2002 - 1 percent (from enactment through the end of the year) ; 2003 - 7 percent; 2004 - 10 percent; and 2005 - 15 percent. For losses above a company's deductible, the Federal government will cover 90%, while the company contributes 10%. While the provisions of TRIA will serve to mitigate our exposure in the event of a large-scale terrorist attack, our deductible is substantial, approximating $60 million in 2003. Therefore, we continue to monitor concentrations of risk. Effective February 1, 2003, Selective has purchased a separate treaty that covers $45 million in the aggregate in excess of a $15 million retention in the aggregate for TRIA, as well as, nuclear, biological and chemical losses not covered by the act.
Our HR outsourcing company, Selective HR Solutions, Inc., provides human resource administration, including benefits, payroll and employee management services, and risk and compliance management products and services, including workers' compensation insurance. HR outsourcing, by the nature of its product package, provides a very high level of day-to-day services to its customers, which we believe will be attractive to small business owners, who can be accessed through existing relationships with our independent agents. HR outsourcing revenues increased 11% to $38.1 million for 2002, compared with $34.4 million for 2001 and $29.2 million for 2000. Net loss decreased to $0.7 million, compared with $4.2 million for 2001 and net income of $0.1 million for 2000. Due to market pricing pressures, revenue increases have not kept pace with increasing product costs and as a result we continue to implement new pricing and cost reduction initiatives. During 2002, labor related expenses were down about 14% over 2001 as a direct result of such initiatives. In 2001 revenue increases were more than offset by a $4.0 million workers' compensation reserve increase combined with increased variable and infrastructure costs thus resulting in a net loss compared with 2000.
Held-to-maturity debt securities are carried at amortized cost, which is calculated using the scientific method, because management has the ability and intent to hold such securities until maturity. Available-for-sale debt and equity securities are carried at fair value. Limited partnerships are carried using the equity method, which approximates fair value. Net unrealized gains and losses on held-to-maturity debt securities are not reflected in accumulated other comprehensive income. Net unrealized gains and losses on available-for-sale debt and equity securities, net of deferred income tax effect, are included as a separate component of accumulated other comprehensive income. No material investments of the Company were non-income producing for the years ended December 31, 2002 and 2001.
See Note 3 for a summary table of the fair value and related carrying amounts of financial instruments.
HR outsourcing is also subject to geographic concentration. Approximately 32% of co-employer client payroll is within the state of Florida. Other east coast states, including Georgia, Maryland, New Jersey, Virginia, North Carolina, South Carolina, Pennsylvania, New York, and Delaware, account for substantially all of our other business. Consequently, changes to economic or regulatory conditions in these states could adversely affect the HR outsourcing operations.
As of December 31, 2002 the Company adopted the FASB Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (FAS 148). FAS 148 amends FAS 123 to provide alternative methods of transition to FAS 123's fair value method of accounting for stock-based compensation. FAS 148 also amends the disclosure provisions of FAS 123 to require disclosure in the Summary of Significant Accounting Policies footnote the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share.
During 2002, the Company completed the acquisition of NHD, a 16,000-location network that operates in Connecticut and certain regions within the states of Massachusetts, Vermont, and New Hampshire. Consumer Health Network Plus, LLC (CHN), which is included in our Diversified Insurance Services segment, acquired NHD for $3.2 million, including certain acquisition and financial performance related costs, during 2002. CHN may be further required to pay additional consideration of approximately $1.0 million over the next two years based on certain criteria related to future financial performance. In connection with the acquisition, the Company recorded intangible assets of $1.7 million for network physician contracts and $0.7 million for existing client contracts. The network physician contracts have an indefinite life and will be reviewed annually for potential impairment. The client contracts are being amortized over their useful lives, 3 years, with $0.2 million amortized to expense in 2002. These amounts are included in other assets on the consolidated balance sheets.
In the ordinary course of business, the Insurance Subsidiaries assume and cede premiums with other reinsurance and insurance companies and various pools and associations of which they are members. A large portion of the reinsurance is effected under reinsurance contracts known as treaties and, in some instances, by negotiation on each individual risk. The Insurance Subsidiaries have in place excess of loss and catastrophe reinsurance treaties which protect against losses over stipulated amounts arising from any one occurrence or event and quota share reinsurance treaties where the Company and the reinsurer share the amount of premium and covered losses based on a stated percentage. The reinsurance arrangements enable greater diversification of business and can serve to limit the maximum net loss on catastrophes and large and unusually hazardous risks.
The Company has various covenants under the Indenture dated September 24, 2002, which include, but are not limited to, timely payment of securities, timely filing of Securities and Exchange Commission and other reports, and compliance with securities laws upon purchase of securities.
Under the Company's stock option plan for directors, 724,000 shares of the Company's common stock are available for issuance. Each director who is not a full-time employee of the Company participates in the plan and automatically receives a nonqualified option to purchase 3,000 shares of common stock at not less than fair value on March 1 of each year. Each option becomes exercisable one year after the option was granted and expires no more than ten years from the date the option is granted. Under this plan, the Company granted 33,000 options in 2002, 2001 and 2000.
(1) Refer to the Glossary of Terms on page 20 of our 2002 Annual Report to Shareholders, incorporated by reference herein, for definitions of specific terms.
(4) See Note 6(b) and Note 7 to the consolidated financial statements and Financial Review for a discussion of dividend restrictions.