The executive offices of the Corporation and the administrative offices of the Property and Casualty Group are in Warren, New Jersey. The Life Group has its administrative offices in Concord, New Hampshire; Parsippany, New Jersey and Chattanooga, Tennessee. The Real Estate Group's corporate headquarters is located in Roseland, New Jersey. The insurance subsidiaries maintain zone administrative and branch offices in major cities throughout the United States, and members of the Property and Casualty Insurance Group also have offices in Canada, Europe, Australia, the Far East and Latin America. Office facilities are leased with the exception of buildings in Branchburg, New Jersey and Chattanooga, and a portion of the Life Group's home office complex in Concord. Management considers its office facilities suitable and adequate for the current level of operations. See Note (11) of the notes to consolidated financial statements incorporated by reference from the Corporation's 1995 Annual Report to Shareholders.
The following discussion presents our past results and our expectations for the near term future. The supplementary financial information and consolidated financial statements and related notes, all of which are integral parts of the following analysis of our results and our financial position, are incorporated by reference from the Corporation's 1995 Annual Report to Shareholders, pages 15, 16 and 44 through 66.
Net income included realized investment gains after taxes of $85 million, $41 million and $152 million in 1995, 1994 and 1993, 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.
Our expense ratio was 32.1% in 1995 compared with 32.5% in 1994 and 32.3% in 1993. Excluding the effect of the $125 million return premium, the expense ratio was 33.5% in 1993. The expense ratio in 1995 and 1994 benefited from growth in written premiums at a greater rate than the increase in overhead expenses. Expenses were reduced by contingent profit sharing accruals of $11 million in 1994 and $9 million in 1993 relating to the medical malpractice reinsurance agreement.
After a review of the cost of our casualty excess of loss reinsurance, we modified the program, principally for excess liability and executive protection coverages, effective January 1, 1996. The changes include an increase in the initial retention for each loss from $5 million to $10 million and an increase in the initial aggregate amount of losses that we will retain for each year before reinsurance becomes available. These changes in our casualty reinsurance program are expected to increase net premiums written in 1996 by approximately $100 million.
The impact on underwriting results in 1996 of the changes to our casualty reinsurance program and to the agreements with Sun Alliance is not expected to be significant.
Premiums from personal insurance increased 5% in 1995 compared with 1994; such premiums in 1994 were virtually unchanged from 1993. Our disciplined approach to pricing and risk selection, together with our efforts to control exposure in catastrophe prone areas, made it difficult to increase homeowners and other non-automobile business. However, gradual progress was made in 1995 to
increase premiums written in non-catastrophe prone areas. Personal automobile premiums increased modestly in 1995 as the result of our marketing efforts to provide coverage for high value automobiles.
Casualty results in 1993 included the effects of the $675 million charge and the $125 million return premium. Excluding the effects of these items, casualty results deteriorated in 1994. Casualty results deteriorated further in 1995. In each of the past three years, casualty results have been adversely affected in varying degrees by increases in loss reserves for asbestos-related and toxic waste claims. The substantial deterioration in 1995 was due to a larger increase in such reserves compared with the prior year. The excess liability component of our casualty coverages has remained profitable due to favorable loss experience in this class. Results in the automobile component were also profitable in each of the last three years.
Our specialty commercial business produced substantial underwriting profits in each of the past three years with combined loss and expense ratios of 90.4% in 1995, 91.7% in 1994 and 91.0% in 1993. Our executive protection and financial fidelity results were highly profitable in each year due to favorable loss experience. Results in the non-fidelity portion of our financial institutions business improved in 1995; results for these coverages had deteriorated in 1994 due in part to several large losses. Surety results were unprofitable in 1995 due to several large losses compared with profitable results in 1994 and 1993.
Premiums from reinsurance assumed, which is primarily treaty reinsurance assumed from Sun Alliance, increased 15% in 1995 compared with 37% in 1994. The growth in both years was primarily due to an increase in our participation in the business of Sun Alliance. Premium growth in 1994 also benefited from a firming of rates, primarily in the United Kingdom.
Underwriting results for this segment were near breakeven in 1995 and 1994 compared with unprofitable results in 1993. The combined loss and expense ratio was 99.1% in 1995 compared with 100.2% in 1994 and 111.8% in 1993. Results in 1995 and 1994 benefited from rating measures taken by Sun Alliance as well as favorable weather conditions in the United Kingdom.
In 1988, voters in California approved Ballot Proposition 103, an insurance reform initiative affecting most property and casualty insurers writing business in the state. Provisions of Proposition 103 would have required insurers to roll back property and casualty rates for certain lines of business to 20 percent
During 1995, we experienced overall favorable development of $36 million on loss reserves established as of the previous year-end. This compares with favorable development of $30 million in 1994 and unfavorable development of $665 million in 1993. Such redundancies and deficiency were reflected in operating results in these respective years. Excluding the effect of the $675 million increase in loss reserves related to the Fibreboard settlement, we experienced favorable development of $10 million in 1993. Each of the past three years benefited from favorable claim severity trends for certain liability classes; this was offset each year in varying degrees by increases in loss reserves relating to asbestos and toxic waste claims.
Pacific Indemnity, Continental Casualty and Fibreboard have entered into a trilateral agreement, subject to final appellate court approval, to settle all present and future asbestos-related bodily injury claims resulting from insurance policies that were, or may have been, issued to Fibreboard by the two insurers. The trilateral agreement will be triggered if the global settlement agreement is disapproved by an appellate court. Pacific Indemnity's obligation under the trilateral agreement is therefore similar to, and not duplicative of, that under those agreements described above.
In July 1995, the United States District Court of the Eastern District of Texas approved the global settlement agreement and the trilateral agreement. The judgments approving these agreements have been appealed to the United States Court of Appeal for the Fifth Circuit. The appeals were argued in early March 1996. The period of ultimate judicial review continues to lengthen and may well extend into 1997.
Pacific Indemnity, Continental Casualty and Fibreboard have requested a California Court of Appeal to delay its decisions regarding asbestos-related insurance coverage issues, which are currently before it and involve the three parties exclusively, while the approval of the global settlement is pending in court. Continental Casualty and Pacific Indemnity have dismissed disputes against each other which involved Fibreboard and were in litigation.
We have additional potential asbestos exposure on insureds for which we wrote excess liability coverages. Such exposure has increased due to the erosion of much of the underlying limits. The number of claims against such insureds and the value of such claims have increased in recent years due in part to the non-viability of other defendants.
Hazardous waste sites are another significant potential exposure. Under the "Superfund" law and similar state statutes, when potentially responsible parties (PRPs) fail to handle the clean-up, regulators 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 have increasingly filed claims with their insurance carriers. Ensuing litigation extends to issues of liability, coverage and other policy provisions.
Litigation costs continue to escalate, particularly for toxic waste claims. A substantial portion of the funds expended to date by us has been for legal fees incurred in the prolonged litigation of coverage issues. Primary policies provide a limit on indemnity payments but many do not on defense costs. This
language in the policy sometimes leads to the payment of defense costs in multiples of the policy limits.
Investment income after taxes increased 7% in 1995 compared with 4% in 1994. Growth was primarily due to increases in invested assets, which reflected strong cash flow from operations over the period. Growth was tempered in 1994 by the $538 million paid in December 1993 into an escrow account related to the Fibreboard settlement. Similarly, 1995 growth was tempered as a result of the February 1995 amendment to the 1993 agreement between Pacific Indemnity and Continental Casualty, whereby an additional $480 million of the Corporation's assets were designated as funds held for asbestos-related settlement. These assets accrue income for the benefit of participants in the class settlement of asbestos-related bodily injury claims against Fibreboard.
The effective tax rate on our investment income was 15.9% in 1995 compared with 15.3% in 1994 and 14.7% in 1993. The effective tax rate increased in 1995 and 1994 as the percentage of our investment income subject to tax has increased.
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 these 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. Taxable bonds have an average maturity of 7 1/2 years while tax-exempt bonds mature on average in 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.
Earnings from personal insurance were $37 million in 1995 compared with $33 million in 1994 and $37 million in 1993. Earnings in 1995 benefited from favorable mortality. The earnings decrease in 1994 was primarily due to a decrease in the spread between interest earned on our invested assets and interest credited to policyholders on interest-sensitive products.
Premiums and policy charges amounted to $311 million in 1995 compared with $272 million in 1994 and $240 million in 1993. New sales of personal insurance as measured by annualized premiums were $112 million in 1995 compared with $97 million in 1994 and $88 million in 1993.
Our strategy is to focus on the affluent individual interested in estate planning and wealth creation utilizing equity-linked products as well as on financial planning for business owners. Our ability to increase revenues has been enhanced through marketing initiatives conducted with our property and casualty producers.
Premiums were $312 million in 1995 compared with $564 million in 1994 and $561 million in 1993. New group sales as measured by annualized premiums were $21 million in 1995 compared with $52 million in 1994 and $323 million in 1993.
Our group health business is concentrated in the New York and New Jersey markets. In 1993, both states adopted legislation which eliminated health insurance underwriting, created community based rating and limited pre-existing condition exclusions for insured groups with fewer than 50 covered lives. As a result, several insurers reduced their market share in the small group health segment in New York in 1993. We offered a competitive product and thus substantially increased our sales in that market during 1993. The high level of premium revenue in 1993 and the first six months of 1994 reflected the effect of the significant increase in sales of new policies during 1993. Due to the increased availability of alternative small group markets in 1994 as well as our significant rate increases in 1994 and 1995, many of the new policies written in 1993, which became eligible for renewal in 1994, were not renewed. Due to this increase in non-renewals, we expected the decline in premium revenue which occurred in 1995. In response, we took a number of steps to reduce our costs including the closing of field offices and regional claim offices, reducing staffing levels by 65%.
Given the changes in our marketplace and the continuation of the shift away from traditional indemnity products to managed care alternatives, we anticipate that traditional indemnity premium revenue will continue to decline. In response to this shift, we are offering managed care products through ChubbHealth, Inc., a health maintenance organization.
Because of the continuing adverse effects of the legislative changes and other health industry factors on our group health results, we are evaluating our future role in the traditional indemnity and managed care markets.
Revenues were $288 million in 1995 compared with $205 million in 1994 and $161 million in 1993. Revenues in 1995 and 1994 included higher levels of rental revenues on owned properties. Revenues in 1995 also included increased revenues from residential development and the land sale.
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 1995, a total of 2,320,000 square feet was leased compared with 2,420,000 square feet in 1994 and 1,710,000 square feet in 1993. At December 31, 1995, we owned or had interests in 10,450,000 square feet of office and industrial space. Our vacancy rate was 6% at year-end 1995 compared with 7% at year-end 1994 and 10% at year-end 1993. The lower vacancy rates in 1995 and 1994 were due to our ability to market space as it became available despite the difficult leasing market.
Ultimate realizable value for real estate properties is determined based on our ability to fully recover costs through a future revenue stream. In many instances, there currently is not an active market for commercial real estate. Therefore, the prices which might be realized if we were forced to liquidate such properties on an immediate sale basis would probably be less than the carrying values. In light of current market conditions and our intent and ability to hold properties for the long term, our primary focus is to ensure that we can recover our costs through ownership and operation rather than sale.
December 31, 1995 adequately reflects the current condition of the portfolio. If conditions in the real estate market do not improve, however, additional reserves may be required.
The fair value of these loans receivable is estimated through the use of valuation techniques which consider current yield factors applied to the lesser of the value of the discounted future cash flows of the loan or the discounted future net cash flows from the properties serving as the underlying collateral for the loan. 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. At December 31, 1995, the aggregate fair value of the loans was $405 million and the carrying value was $410 million.
Our Florida residential development activities continued during 1995. Construction of a 171 unit oceanfront high-rise condominium project, commenced during 1994, is expected to be completed in 1996. At year-end 1995, 156 units were under contract. During 1995, construction of a 214 unit mid-rise condominium project was completed. At year-end, 123 units were sold and 22 units were under contract.
During 1994, we began development of residential projects in northern New Jersey. Our first project is a 178 unit townhome project which we expect to complete in 1996. At year-end 1995, 131 units were sold and 19 units were under contract. During 1995, we entered into a joint venture for the construction of 84 townhomes.
Real estate activities are funded with short-term credit instruments, primarily commercial paper, and debt issued by Chubb Capital Corporation as well as term loans and mortgages. The weighted average interest cost on short-term credit instruments approximated 6% in 1995 compared with 4 1/2% in 1994 and 3 1/4% in 1993. In 1995, the range of interest rates for term loans was 6% to 9 1/2% and for mortgages the range was 5% to 12%.
We expect to refinance, under similar terms, most of the term loans and mortgages which become due in 1996. Cash from operations combined with the ability to utilize the Corporation's borrowing facilities will provide sufficient funds for 1996.
In February 1994, the Board of Directors authorized the repurchase of up to 5,000,000 shares of common stock. During 1994, the Corporation repurchased approximately 1,000,000 shares in open-market transactions at a cost of $72 million.
The Corporation has a revolving credit agreement with a group of banks that provides for unsecured borrowings of up to $300 million. The agreement terminates on July 15, 1997 at which time any loans then outstanding become payable. There have been no borrowings under this agreement. The Corporation had additional unused lines of credit of approximately $178 million at December 31, 1995.
Investment income earned on corporate invested assets and interest and other expenses not allocable to the operating subsidiaries are reflected in the corporate segment. Corporate income after taxes was $15 million in 1995, $8 million in 1994 and $14 million in 1993.
Net investment gains were realized by the Corporation and its insurance subsidiaries in 1995, 1994 and 1993. Such gains before taxes consisted of the following:
In 1995 and 1994, a redistribution of invested assets from equity securities to fixed maturities resulted in significant realized investment gains. A restructuring of the equity security portfolio begun in 1992 resulted in significant realized investment gains in 1993.
At December 31, 1995 and 1994, in accordance with the requirements of SFAS No. 115, fixed maturities classified as held-to-maturity were carried at amortized cost while fixed maturities classified as available-for-sale were carried at market value. At December 31, 1993, all fixed maturities were carried at amortized cost.
The unrealized market appreciation before tax of those fixed maturities carried at amortized cost was $209 million, $13 million and $736 million at December 31, 1995, 1994 and 1993, respectively. Such unrealized appreciation was not reflected in the consolidated financial statements. The changes in unrealized market appreciation of fixed maturities were due to fluctuations in interest rates.
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: