Distribution 10 Consolidated Results of Operations: Operating Summary 10 North American Property & Casualty 12 Life 14 International 17 Runoff 18 Reserves 20 Environmental and Asbestos Claims 20 Investments 22 Capital Resources and Liquidity 29 Regulatory Initiatives 32 Effect of Inflation 32
The effective tax rates for 1996, 1995 and 1994 were 20%, 24% and 25%, respectively, excluding the impact of other charges in 1996. Tax-exempt interest earned on invested assets was the principal cause of effective rates lower than the 35% U.S. statutory rate. Income taxes paid in 1996, 1995 and 1994 were $170, $302 and $317, respectively. For additional information, see "Tax Allocation Agreement" under Capital Resources and Liquidity.
1995 underwriting performance deteriorated $108 compared with 1994, increasing the combined ratio 4.1 points to 106.6. Excluding the impact of the Dow Corning settlement, 1995 results declined $68 over 1994. This decline was the result of higher claims and claim adjustment expense costs in workers' compensation and liability products and the increase in intensity of competition.
Management believes that it has developed and implemented strategies to maintain and enhance its position as a market leader within the financial services industry, to continue the Life segment's asset growth and to maximize shareholder value. The Life segment's strong market position in each of its businesses, coupled with the growth potential management believes exists in its markets, provides opportunities to increase sales of the Life segment's products and services as individuals increasingly save and plan for retirement, protect themselves and their families against disability or death and prepare their estates for an efficient transfer of wealth between generations.
The outlook for 1997 for commercial and personal lines at ITT London & Edinburgh is a continuation of heightened competition. Personal lines should experience strong growth in homeowners business due to an agreement entered into during 1996 with Nationwide Building Society. This agreement provides exclusive rights to ITT London & Edinburgh to sell homeowners products to the retail customers of Nationwide. Continuing competition from direct writing companies and entry by non-traditional risk bearers into markets such as homeowners is anticipated.
Although the Closed Book GRC asset portfolio as a whole is duration matched with its liabilities, certain investments continue to have a longer maturity than their corresponding liabilities and will need to be liquidated prior to maturity in order to meet the specific liability commitments. To protect the existing value of these investments, the Company entered into various hedge transactions in late September 1996 which substantially eliminated further fluctuation in fair value of the investments due to interest rate changes.
Other charges primarily consist of a $169 third quarter 1996 charge in the Closed Book GRC (as discussed previously) and an increase in environmental and asbestos reserves at First State of $81 as discussed in the Environmental and Asbestos Claims section.
The study included a review of identified environmental and asbestos exposures of North American Property & Casualty, U.S. exposures of The Hartford's International segment and exposures of the Runoff segment, and covered the Company's Commercial, Personal, and Reinsurance operations. The methodology utilized a ground up analysis of policy, site and exposure level data for a representative sample of The Hartford's claims. The results of the evaluation were extrapolated against the balance of the claim population to estimate the Company's overall exposure for reported claims.
Net realized capital gains decreased to $29 in 1995 from $69 in 1994. The reduction was primarily from the impact of the sale of the majority of the real estate portfolio along with the sale of the lower yielding taxable bonds, both at realized losses.
During 1996, the Life segment continued its objective of managing exposure to securities that "underperform" in a falling interest rate environment. The segment concentrated on reducing exposure to CMO and MBS asset sectors, and re-deployed the funds into public and private corporate bonds, and other nonresidential asset-backed securities. At December 31, 1996, holdings in CMO and residential MBS were $1.5 billion, or 12%, of total invested assets excluding policy loans compared to $2.7 billion, or 23%, at December 31, 1995.
For the year ended December 31, 1996, before-tax net investment income totaled $334 compared to $477 in 1995, a decrease of 30%. Before-tax yields on average invested assets decreased to 5.27% in 1996 from 5.85% in 1995. Before-tax net investment income decreased primarily due to asset sales and maturities in the Closed Book GRC. The decrease in yield was primarily the result of sales and maturities of higher yielding securities in the Closed Book GRC.
On February 10, 1997, HLI filed a registration statement with the Securities and Exchange Commission relating to an initial public offering of up to 20% of HLI common stock. HLI is the holding company parent of The Hartford's significant life insurance and related subsidiaries. Management intends to use the proceeds from the offering to reduce certain debt outstanding, to fund growth initiatives, and for other general corporate purposes. Management of The Hartford believes the offering will strengthen the Company's financial position and flexibility. If and when the offering is completed, The Hartford's current intent is to continue to beneficially own at