During the three-year period ended December 31, 1994, the Company sold 4,950,000 Common Shares for net proceeds of $177.0 million and repurchased 3.1 million Common Shares at a total cost of $142.3 million (average cost of $24.21 per share, split adjusted) and .5 million Serial Preferred Shares at a total cost of $12.1 million (average cost $27.37 per share). The Company also sold $350 million of notes, repaid $170.0 million borrowed under its credit facilities, and redeemed the entire $70.0 million of its 8 3/4% Debentures. During the same period, The Progressive Corporation received $299.8 million from its insurance subsidiaries, net of capital contributions made to these subsidiaries. The regulatory restrictions on subsidiary dividends are described in Item 5(c) on page 11 herein.
Capital expenditures for the three years ended December 31, 1994, aggregated $130.3 million. In 1994, the Company completed its new corporate office complex in Mayfield Village, Ohio. The new facility consists of 517,800 square feet of space and replaces office space held under expiring leases in a number of locations in the Cleveland area. The cost of the project was $75.5 million and is being funded through operating cash flows. As of December 31, 1994, $71.7 million of the project's cost had been paid.
CMOs held by the Company are highly liquid with readily available quotes and, at December 31, 1994, had an average life of 2.0 years. Eighty- five percent of the CMOs held by the Company are rated AAA by Moody's or Standard & Poor's. As of December 31, 1994, the Company's total CMO portfolio had an unrealized loss of $6.6 million. The single largest unrealized loss in any CMO security was $.9 million, or only 9.2% of such position.
Investments in the Company's portfolio have varying degrees of risk. Equity securities generally have greater risks than the non-equity portion of the portfolio since these securities are subordinate to rights of debt holders and other creditors of the issuer. As of December 31, 1994, the mark-to-market net losses in the Company's equity portfolio were $4.7 million ($3.1 million, net of taxes), as compared to net gains of $20.7 million ($13.5 million, net of taxes) in 1993.
Direct premiums written increased 35% to $2,645.1 million in 1994, compared to $1,966.4 million in 1993 and $1,636.8 million in 1992. Net premiums written increased 35% to $2,457.2 million, compared to $1,819.2 million in 1993 and $1,451.2 million in 1992. The difference between direct and net premiums written is largely attributable to premiums written under state-mandated involuntary Commercial Auto Insurance Plans (CAIP), for which the Company retains no indemnity risk, of $115.4 million in 1994, $98.0 million in 1993 and $142.2 million in 1992. The Company provided policy and claim processing services to 28 state CAIPs in 1994 and 1993, compared to 26 in 1992. Premiums earned, which are a function of the amount of premiums written in the current and prior periods, increased 31% in 1994, compared to 17% in 1993 and 11% in 1992.
The Company's core divisions' net premiums written grew 38%, 25% and 18% for 1994, 1993 and 1992, respectively, driven by an increase in unit sales, resulting from the Company's ability to keep rates relatively flat over the last three years. The Company continues to experiment with writing standard and preferred auto risks which represented between five and ten percent of total core business volume in 1994. The Company anticipates continued growth in its core business in 1995, which could result from an increase in the number of states where the Company seeks to insure all auto risks, from working with independent agents dedicated to regaining market share and from integrating other buying options. The core divisions generated underwriting profits of 7% in 1994, 10% in 1993 and 8% in 1992. The Company's strategy is to achieve a four percent underwriting margin; the Company cannot predict the timing and pace of the decrease in underwriting margins, nor the rate of growth, but monitors each program to ensure that rates are adjusted promptly and adequately.
During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve," resulting in a one-time increase in earnings of $.62 per share, a 3.2 percentage point increase in the underwriting profit margin and a $46.2 million increase in capital. The Company historically established case and IBNR reserves by product with the objective of being accurate to within plus or minus 2%. Pricing has been based on these estimates of reserves by product. Because the Company desired a very high degree of comfort that aggregate reserves were adequate, aggregate reserves were established near the upper end of the reasonable range of reserves, and the difference between such aggregate reserves and the midpoint of the reasonable range of case and IBNR reserves was called the "supplemental reserve." The Company concluded, after examining its historical aggregate reserves, that the practice of setting aggregate reserves at the upper end of the range of reasonable reserves provided an unnecessarily high level of comfort. Even without the high level of comfort provided by the "supplemental reserve," the Company's reserves have historically been redundant by approximately 2% to 4% over the most recent 5 years. The Company believes that this change in the estimate of its reserves will place it more in line with the practices of other companies in the industry.
During 1994, the Company settled the dispute, arising out of its 1985 acquisition of American Star Insurance Company (since renamed National Continental Insurance Company), over the seller's refusal to pay certain losses on pre-sale business written by American Star. Under the settlement, National Continental received $10.1 million from the seller and agreed to be solely responsible for the next $20 million of gross losses. The seller will thereafter be responsible for half the losses, net of reinsurance, if it achieves certain minimum net worth requirements. In addition to the $10.1 million, National Continental will be entitled to the proceeds of various treaty and facultative reinsurance policies that had been purchased by American Star. National Continental has established reserves for these exposures, which are mainly for product liability and environmental claims, in amounts it believes to be adequate based on information currently available to it, including a recent study by independent actuaries. Total reserves on this business are $29.7 million, of which $9.9 million is
Policy acquisition and other underwriting expenses as a percentage of premiums earned were 25% in 1994, compared to 28% in 1993 and 31% in 1992. The decrease reflects cost-cutting measures, as well as process improvements, changed workflows and lower commission programs.
Service businesses generated a pretax operating profit of $10.0 million in 1994, compared to a pretax profit of $6.8 million in 1993 and a pretax loss of $4.3 million in 1992.
Recurring investment income (interest and dividends) increased 18% to $158.5 million in 1994, compared to $134.5 million in 1993 and $139.0 million in 1992, primarily due to an increase in the average investment portfolio. Net realized gains on security sales were $23.8 million in 1994, $107.9 million in 1993 and $14.5 million in 1992. A significant portion of the 1993 realized gains resulted from the sale of certain equity securities held in the Company's investment portfolio.
President Clinton signed the Omnibus Budget Reconciliation Act of 1993, which, among other items, increased the statutory tax rate to 35%. Effective January 1, 1992, the Company adopted SFAS 109. The cumulative effect of adopting SFAS 109 increased net income $14.2 million, or $.20 per share. The Company is able to demonstrate that the benefit of deferred tax assets is fully realizable.