The following table represents information with respect to the Company's property and casualty insurance operations:
Loss and Loss Adjustment Expense. Workers' compensation loss and loss adjustment expenses ("LAE") were $436.7 million, $249.4 million and $300.5 million in 1995, 1994 and 1993, respectively. In addition, the ratio of these losses and LAE to workers' compensation insurance premiums earned was 75.9%, 62.1% and 70.4% in 1995, 1994 and 1993, respectively. The increase in incurred loss and LAE in 1995 as compared to 1994 is due primarily to the acquisition of Casualty, partially offset by lower incurred loss and LAE in California. Additionally, the increase in the loss and LAE ratio in 1995 as compared to 1994, is partially due to lower premiums on California policies which resulted from increased competition in 1995. See "Premiums." The decrease in California premiums was greater than the decrease in California incurred loss and LAE, thereby resulting in a higher loss and LAE ratio. The negative impact on the Company's profitability resulting from the higher loss and LAE ratio has been mitigated to an extent by the elimination of dividends accrued on California workers' compensation business in 1995. The dividend elimination occurred as the majority of the workers' compensation policies written in 1995 were non-participating. This type of policy is not eligible for dividend consideration. See "Dividends to Policyholders." The decrease in the loss ratio in 1994 as compared to 1993 is due primarily to the positive impacts of the continued decrease in the frequency and severity of reported claims on the 1992 and subsequent accident years, particularly in Southern California, which began in mid-1992. The Company attributes this reduction in claim frequency and severity to aggressive loss control and improved underwriting. Improved loss control has been achieved through a significant effort to reduce fraudulent workers' compensation claims by California law enforcement and regulatory authorities, the insurance industry and the Company under its "zero tolerance" program. Underwriting improvements were made to focus on businesses with stable work environments and less hazardous occupations. See "Item 1. Business -- Insurance Operations -- Loss and Loss Adjustment Expense Reserves."
The margin between the Company's interest income and cost of funds decreased in 1995 and 1994, due primarily to changes in the mix of loans in the real estate lending operation, as well as a decrease in the net margins in the commercial finance lending segment. In the real estate lending operation, the change in portfolio mix occurred under a corporate strategy which began in 1993, to shift away from high rate, high risk loans secured by personal property or junior liens on real estate, to lower yielding commercial and residential first trust deed real estate loans. The lower yields on the commercial and residential real estate portfolios are compensated for by the improved underlying collateral and by the improved lien position on the collateral. The net margins decreased in the commercial finance segment due primarily to increases in the credit quality of the loan portfolio which has resulted in lower net margins, as well as to an increase in the competitive environment.
Non-performing assets remained relatively stable at December 31, 1995 as compared to December 31, 1994, due primarily to a $11.6 million increase in non-accrual loans, more than offset by a $12.5 million decrease in REO assets. Of the increase in non-accrual loans, $8.9 million is represented by one loan in the