Selected financial data for the five years ended December 31, 1993 are incorporated by reference from the Corporation's 1993 Annual Report to Shareholders, pages 38 and 39.
Net income amounted to $324 million in 1993 compared with $617 million in 1992 and $552 million in 1991. Net income in 1993 reflects a net charge of $357 million after taxes related to an agreement for the settlement of asbestos-related litigation and the Corporation's intention to exercise its option to commute an unrelated existing medical malpractice reinsurance agreement. Net income in 1993 also reflects a one-time charge of $20 million for the cumulative effect of adopting new accounting requirements for postretirement benefits other than pensions and for income taxes.
Net income included realized investment gains after taxes of $152 million, $124 million and $43 million in 1993, 1992 and 1991, respectively. Decisions to sell securities are governed principally by considerations of investment opportunities and tax consequences. Thus, realized investment gains and losses may vary significantly from year to year. As a result, net income may not be indicative of our operating performance for the period.
Property and casualty income was significantly lower in 1993 compared with 1992 and 1991 due to a $675 million increase in loss reserves related to an agreement for the settlement of asbestos-related litigation (the "$675 million charge"), which is further described under Loss Reserves. This was partially offset by a $125 million return premium to the property and casualty insurance subsidiaries related to the Corporation's intention to exercise its option to commute an existing medical malpractice reinsurance agreement (the "$125 million return premium").
Net premiums written, excluding the $125 million return premium, amounted to $3.5 billion in 1993, an increase of 9% compared with 1992, which was in turn 4% higher than 1991. Personal coverages accounted for $814 million or 23% of 1993 premiums written, standard commercial coverages for $1,202 million or 34%, specialty commercial coverages for $1,270 million or 36% and reinsurance assumed for $235 million or 7%. The marketplace continued to be competitive, particularly in the commercial classes. Property related business experienced some rate firming in 1993 in the wake of the unprecedented catastrophes of 1992, but price increases in casualty lines continued to be difficult to
achieve. We have continued to be selective in the writing of new business and to reinforce the sound relationships with our customers who appreciate the stability, expertise and added value we provide.
Due to the adverse effect of the $675 million charge, underwriting results were extremely unprofitable in 1993. The combined loss and expense ratio, the common measure of underwriting profitability, was 114.8% in 1993 compared with 101.1% in 1992 and 99.5% in 1991. Excluding the effects of the $675 million charge and the $125 million return premium, the combined loss and expense ratio was 99.0% in 1993.
The loss ratio was 82.5% in 1993 compared with 66.7% in 1992 and 64.4% in 1991. Excluding the effects of the $675 million charge and the $125 million return premium, the loss ratio was 65.5% in 1993, continuing to reflect the favorable experience resulting from the consistent application of our underwriting standards. Losses from catastrophes represented 2.5, 5.6 and 2.4 percentage points of the loss ratio in 1993, 1992 and 1991, respectively.
Our expense ratio was 32.3% in 1993 compared with 34.4% in 1992 and 35.1% in 1991. Excluding the effect of the $125 million return premium, the expense ratio was 33.5% in 1993. The improvement from the comparable 1992 ratio was due to lower commissions and to growth in written premiums at a somewhat greater rate than the increase in overhead expenses. The decrease in the expense ratio in 1992 was due to lower commissions. Expenses were reduced by contingent profit sharing accruals of $9 million in each of the three years relating to the medical malpractice reinsurance agreement. We anticipate a similar accrual during 1994. There will be no further profit sharing allowance under this agreement after 1994.
The effect of Hurricane Andrew on our underwriting results in 1992 was mitigated to a great extent by our catastrophe reinsurance program. The catastrophe reinsurance market has suffered large losses in recent years. As a result, the reinsurance market's capacity was substantially reduced in 1993 and the cost of available coverages rose significantly. We responded by increasing our retention levels for individual catastrophe losses. The effect of this change on our 1993 underwriting results was not significant due to the absence of severe catastrophe losses.
The uncertainties relating to asbestos and toxic waste claims on insurance policies written many years ago are exacerbated by judicial and legislative interpretations of coverage that in some cases have tended to erode the clear and express intent of such policies and in others have expanded theories of liability. The industry is engaged in extensive litigation over these coverage and liability issues and is thus confronted with a continuing uncertainty in its effort to quantify these exposures.
Hazardous waste sites are another significant potential exposure. Under the existing "Superfund" law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators will have the work done and then attempt to establish legal liability against the PRPs. The PRPs, with proper government authorization in many instances, disposed of toxic materials at a waste dump site or transported the materials to the site. Most sites have multiple PRPs. As the cost of environmental clean-up continues to grow, PRPs and others continue to file claims with their insurance carriers. Insurance policies issued to PRPs were not intended to cover the clean-up costs of pollution and, in many cases, did not intend to cover the pollution itself. Pollution was not a recognized hazard at the time many of these policies were written. In some cases, however, more recent policies specifically excluded such exposures. Ensuing litigation extends to issues of liability, coverage and other policy provisions.
There is great uncertainty involved in estimating our liabilities related to these claims. First, the underlying liabilities of the claimants are extremely difficult to estimate. At any given clean-up site, the allocation of financial responsibility among the governmental authorities and PRPs varies greatly. Second, various courts have addressed liability and coverage issues regarding pollution claims and have reached inconsistent conclusions in their interpretation of several issues. These significant uncertainties are not likely to be resolved in the near future.
Uncertainties also remain as to the Superfund law itself. The law, which is subject to reauthorization in 1994, has generated far more litigation than it has provided clean up. The Clinton Administration has recently unveiled its plan for rewriting the Superfund law. The proposal creates a new Superfund insurance trust and includes a new non-judicial arbitration process aimed at removing Superfund disputes from the courts. It also creates a new tax on commercial insurance companies to be used to fund the trust and to settle Superfund related lawsuits between PRPs and their insurers. It also
provides for some relaxation of clean-up standards under certain conditions. We view this proposal as a positive first step. However, it does not yet come close to achieving its essential objectives -- resolving 90% of Superfund claims in litigation at a cost which is fair and affordable to the insurance industry. It is important to note that the proposal does not address non-Superfund site cases. For that reason, it does not cover all existing toxic waste litigation, for example, sites that are subject to state law only.
Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques. Case reserves and costs of related litigation have been established where sufficient information has been developed to indicate the involvement of a specific insurance policy. In addition, IBNR reserves have been established to cover additional exposures on both known and unasserted claims. These reserves are continually reviewed and updated. Other than the $675 million increase in loss reserves related to the Fibreboard settlement and the reclassification of $300 million of general liability IBNR reserves as specific reserves for this settlement, the increase in loss reserves relating to asbestos and toxic waste claims was $101 million in 1993 compared with $120 million in 1992 and $88 million in 1991. Further increases in such reserves in 1994 and future years are possible as legal and factual issues concerning these claims are clarified, although the amounts cannot be reasonably estimated.
Cash available for investment was approximately $480 million in 1993 compared with $655 million in 1992 and $730 million in 1991. The decrease in 1993 was due to the $538 million paid in December into an escrow account related to the Fibreboard settlement.
In 1993 and 1992, we invested new cash primarily in tax-exempt bonds. In each year we tried to achieve the appropriate mix in our portfolio to balance both investment and tax strategies. In 1993, we reduced our taxable bond portfolio by approximately $225 million and increased our short-term investments.
The property and casualty subsidiaries have consistently invested in high quality marketable securities. Taxable bonds in our domestic portfolio comprise U.S. Treasury, government agency and corporate issues. Approximately 90% of our taxable bonds are either backed by the U.S. government or rated AA or better by Moody's or Standard & Poor's. Of the tax-exempt bonds, practically all are rated A or better, with approximately half rated AAA. Both taxable and tax-exempt bonds have an average maturity of 9 years. Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations. Common stocks are high quality and readily marketable. Foreign investments are managed to provide liquidity to support insurance operations outside of the United States, while minimizing our exposure to currency fluctuations.
Earnings from personal insurance were $37 million in 1993 compared with $34 million in 1992 and $33 million in 1991. Earnings increased in 1993 primarily due to an increase in the spread between interest earned on our invested assets and interest credited to policyholders on interest-sensitive products. Earnings in 1992 were adversely affected by higher mortality experience, primarily in our universal life and term life products. As the result of various adjustments, the tax rate on personal insurance earnings was 26%, 18% and 28% in 1993, 1992 and 1991, respectively.
Premiums and policy charges amounted to $240 million in 1993 compared with $214 million in 1992 and $192 million in 1991. New sales of personal insurance as measured by annualized premiums were $88 million in 1993 compared with $71 million in 1992 and $54 million in 1991. Marketing initiatives conducted with our property and casualty insurance distribution system together with the increasing popularity of variable universal life products have contributed to our growth.
We expect higher levels of competition in the small group market in 1994 and, as a result, anticipate that we will experience a reduction in premium and sales levels.
In 1993 and 1992, new cash was invested primarily in mortgage-backed securities and corporate bonds. We invest predominantly in investment grade current coupon fixed-income securities with stable cash flow characteristics and maturities which are consistent with life insurance reserve requirements. Approximately 95% are investment grade and nearly half are rated AAA. We maintain sufficient funds in short-term securities to meet unusual needs for cash.
Our commercial real estate activities centered around acquiring suburban, multi-site land parcels in locations considered prime for office development, and then developing the land in progressive stages. We expanded our activities to include a few metropolitan office building projects. We develop real estate properties ourselves rather than through third party developers. We are distinguished from most other real estate developers in that we coordinate all phases of the development process from concept to completion. Upon completion of development, the properties may be either owned and operated for our own account or sold to third parties. We directly manage virtually all of the properties which we either own or have sold and retained interests in through secured loans.
In light of the current real estate market conditions, we have curtailed our construction of new office buildings in recent years. In 1991 and 1992, we completed high-rise office buildings in Washington, D.C. and New Jersey, which are currently approximately 95% leased. Also, in 1991, we acquired a 1.2 million square foot office building, which is 87% leased, and adjacent land in Dallas for approximately $200 million, which includes a $114 million assumed mortgage.
In 1993, we focused on completing and leasing newly-constructed facilities and maintaining established properties at high occupancy levels. We also commenced construction on three new suburban office buildings in locations where there are indications of tenant interest. Other than this new construction, development activities consist almost exclusively of preconstruction type efforts such as site planning, zoning and similar activities. As a consequence, we expect revenues for the next several years to come from ongoing income from owned properties and from management and financing activities related to previously sold properties or properties held in joint ventures. This does not preclude us from entertaining proposals to purchase our properties when such offers provide a reasonable return.
Our vacancy rates are better than the average in substantially all markets in which we operate. We have been successful in both retaining existing tenants and securing new ones and have not had significant credit problems with tenants. During 1993, a total of 1,710,000 square feet was leased compared with 1,790,000 square feet in 1992 and 1,402,000 square feet in 1991. At December 31, 1993, we owned or had interests in 10,915,000 square feet of office and industrial space. Our vacancy rate was 10% at year-end 1993 compared with 14% at year-end 1992 and 17% at year-end 1991. The high vacancy rate in 1991 was the result of several multi-year projects being completed in a difficult leasing market.
The loans receivable issued in connection with our joint venture activities include primarily purchase money mortgages. Such loans, which represent only 2% of consolidated assets, are generally collateralized by buildings and land. The ultimate collectibility of such loans, of which no significant amounts are due in the near term, is evaluated continuously and appropriate reserves established. Our agreements to manage all aspects of the ventured properties have played a significant role in enabling us to control potential collectibility issues related to these receivables. We have had no significant foreclosures or in-substance foreclosures. The reserve for potential uncollectible amounts was increased by $22 million in both 1993 and 1992 and $9 million in 1991, principally related to loans on selected properties currently experiencing high vacancy rates. Management believes the reserve at December 31, 1993 adequately reflects the current condition of the portfolio; however, if conditions in the real estate market do not improve, additional reserves may be required.
The fair value of these loans receivable is estimated through the use of valuation techniques which consider the net cash flows of the properties serving as the underlying collateral for the loans. The fair value of the loans represents a point-in-time estimate that is not relevant in predicting future earnings or cash flows related to such loans. The difference between the aggregate fair value of $394 million and the carrying value of $425 million at December 31, 1993 is not expected to be realized as we intend to hold the loan portfolio to maturity.
Real estate activities are funded with short-term credit instruments, primarily commercial paper, as well as term loans and debt issued by the Corporation and Chubb Capital Corporation, a subsidiary
The Corporation called for redemption on April 15, 1991 the $200 million of 5 1/2% convertible notes that were due in 1993. Prior to the redemption date, all but $85,000 of the notes were converted, resulting in the issuance of 4,687,123 shares of the Corporation's common stock.
Chubb Capital has outstanding $100 million of unsecured 8 5/8% notes due in 1995, which are guaranteed by the Corporation. The proceeds have been used to support our real estate operations.
In May 1991, Chubb Capital sold in the Eurodollar market $250 million of 6% subordinated notes due in 1998. The notes are guaranteed by the Corporation and exchangeable into its common stock. Of the proceeds, $150 million has been used to support our real estate operations.
In November 1991, the Corporation entered into a revolving credit agreement with a group of banks that provides for unsecured borrowings of up to $300 million. There have been no borrowings under this agreement. The agreement terminates on November 30, 1994 at which time any loans then outstanding become payable. Management anticipates that a similar credit agreement will replace this agreement.
In November 1992, the Corporation and Sun Alliance partially reduced their investment in the shares of each other. The proceeds from our sale of Sun Alliance shares were approximately $230 million. The sales have not affected the ongoing business relationship between the Corporation's property and casualty subsidiaries and Sun Alliance.
Equity securities are reported in our financial statements at market value. The unrealized appreciation on such securities is reflected as a separate component of shareholders' equity, net of applicable deferred income tax.
The Corporation and its insurance subsidiaries purchase long-term fixed maturity securities which have income, duration and credit quality characteristics which fit the long-range strategic plans of our businesses. We monitor the mix of taxable and tax-exempt fixed maturity securities in order to maximize after-tax returns.
Those fixed maturity investments which may be sold prior to maturity to support our investment strategies, such as in response to changes in interest rates and the yield curve or to maximize after-tax returns, are considered available for sale and carried at the lower of the aggregate amortized cost or market value. At each of the last three year-ends, the aggregate market value of these securities has exceeded their amortized cost. Those fixed maturities which the Corporation and its insurance subsidiaries have the ability and intent to hold to maturity are considered held for investment and carried at amortized cost.
A primary reason for the sale of fixed maturities in each of the last three years has been to improve our after-tax portfolio yield without sacrificing quality, where market opportunities have existed to do so. Declining interest rates and the resulting appreciation of our fixed maturity securities made it difficult to adjust our portfolio during those years without realizing significant investment gains. The significantly higher gains in 1993 were due to the sale of fixed maturities in the first half of the year as part of the realignment of our portfolio and in the latter part of the year to realize gains to partially offset the reduction of statutory surplus of the property and casualty subsidiaries resulting from the decrease in earnings related to the Fibreboard settlement.
The Omnibus Budget Reconciliation Act of 1993 was enacted in August 1993. One provision of the Act increased the federal corporate tax rate from 34% to 35%, retroactive to January 1, 1993. In addition to applying the higher tax rate to pre-tax income for 1993, the federal income tax provision for 1993 reflects the effect of the rate increase on deferred income tax assets and liabilities. This effect was a tax benefit of approximately $5 million. The effect on the various business segments was as follows:
In 1992, property and casualty underwriting income after taxes included a benefit of $12 million resulting from a reversal of income tax reserves based on a settlement of prior years' taxes. Life and
The Tax Reform Act of 1986 requires the property and casualty subsidiaries to discount loss reserves for tax purposes as of January 1, 1987 and provides that the initial discount on such loss reserves be excluded from taxable income. The benefit of this exclusion amounted to $7 million in 1991 and $6 million in 1992. There was no similar benefit in 1993 since, for accounting purposes, the remaining "fresh start" benefit was recognized effective January 1, 1993 as part of the cumulative effect of the change in accounting principle upon the Corporation's adoption of the new accounting requirements for income taxes.
The Corporation's federal income tax payments for 1991 and 1992 were $160 million and $175 million, respectively. Tax payments for 1993 are expected to approximate only $80 million due to the substantial underwriting loss resulting from the increase in loss reserves related to the settlement of asbestos-related litigation.
The Financial Accounting Standards Board has also issued SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which is effective in 1995, and SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, which is effective in 1994. These pronouncements, which will affect the Corporation's consolidated financial statements when adopted, are discussed in Note (1)(o) of the Notes to Consolidated Financial Statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders.
Consolidated financial statements of the Corporation at December 31, 1993 and 1992 and for each of the three years in the period ended December 31, 1993 and the Report of Independent Auditors thereon and the Corporation's unaudited quarterly financial data for the two-year period ended December 31, 1993 are incorporated by reference from the Corporation's 1993 Annual Report to Shareholders, pages 40 through 63.