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; Chattanooga, Tennessee and Santa Barbara, California. The Real Estate Group's corporate headquarters is located in Roseland, New Jersey. The insurance subsidiaries maintain zonal 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 and the Far East. Office facilities are leased with the exception of buildings in Branchburg, New Jersey, Chattanooga and Santa Barbara, 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 1994 Annual Report to Shareholders.
Selected financial data for the five years ended December 31, 1994 are incorporated by reference from the Corporation's 1994 Annual Report to Shareholders, pages 44 and 45.
Net income amounted to $528 million in 1994 compared with $324 million in 1993 and $617 million in 1992. Net income in 1993 reflected a net charge of $357 million after taxes related to an agreement for the settlement of asbestos-related litigation as well as the Corporation's intention to exercise its option to commute an unrelated existing medical malpractice reinsurance agreement. Net income in 1993 also reflected 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.
Property and casualty income after taxes was $467 million in 1994 compared with $118 million in 1993 and $407 million in 1992. Excluding the effects of the $675 million charge and the $125 million return premium, property and casualty income after taxes was $475 million in 1993. Earnings in 1994 were adversely affected by higher catastrophe losses, resulting from the earthquake in California and the winter storms in the eastern and midwestern parts of the United States in the first quarter. Earnings in 1994 benefited from an increase in investment income compared with the prior year. Results for 1993 benefited from lower catastrophe losses and an increase in investment income compared with 1992. Earnings in 1992 were adversely affected by substantial catastrophe losses, including those from Hurricane Andrew. Catastrophe losses were $169 million in 1994 compared with $89 million in 1993 and $175 million in 1992. The 1992 amount was net of recoveries under catastrophe reinsurance contracts of $106 million relating to Hurricane Andrew. There were no recoveries in 1994 and 1993 under such reinsurance contracts.
Net premiums written amounted to $4.0 billion in 1994. This represented an increase of 12% compared with 1993, after excluding the $125 million return
The loss ratio was 67.0% in 1994 compared with 82.5% in 1993 and 66.7% in 1992. Excluding the effects of the $675 million charge and the $125 million return premium, the loss ratio was 65.5% in 1993. The loss ratios continue to reflect the favorable experience resulting from the consistent application of our underwriting standards. Losses from catastrophes represented 4.5, 2.5 and 5.6 percentage points of the loss ratio in 1994, 1993 and 1992, respectively.
Our expense ratio was 32.5% in 1994 compared with 32.3% in 1993 and 34.4% in 1992. Excluding the effect of the $125 million return premium, the expense ratio was 33.5% in 1993. The expense ratio benefited in 1994 and 1993 from written premiums growing at a greater rate than overhead expenses. The expense ratio in 1993 also benefited from lower commissions. Expenses were reduced by contingent profit sharing accruals of $11 million in 1994 and $9 million in both 1993 and 1992 relating to the medical malpractice reinsurance agreement. There will be no further profit sharing allowance under this agreement.
The catastrophe reinsurance market suffered large losses in recent years, particularly in 1992. As a result, the catastrophe reinsurance market's capacity was substantially reduced in 1993 and the cost of available coverage rose significantly. We responded by increasing the initial retention level for individual catastrophe losses from $40 million to $85 million. We experienced two significant catastrophe losses in 1994; however, there were no recoveries from our catastrophe reinsurance coverage due to the higher retention level. The effect of the higher retention on our future results of operations will depend on the severity of future catastrophic events.
Excluding the impact of catastrophes, homeowners results benefited in each of the last three years from disciplined pricing and stable loss frequency and severity. Catastrophe losses represented 19.6 percentage points of the loss ratio for this class in 1994 compared with 13.4 percentage points in 1993 and 25.0 percentage points in 1992. Other personal coverages, which include insurance for personal valuables and excess liability, were increasingly profitable in 1993 and 1994. Personal excess liability results improved in both years due to favorable loss experience. Our automobile business was profitable in 1994 and 1993 compared with breakeven results in 1992. Results improved modestly in 1993 and 1994 due primarily to stable loss frequency and severity. Automobile results were adversely affected each year by significant losses from the mandated business that we are required by law to accept for those individuals who cannot obtain coverage in the voluntary market.
Premiums from standard commercial insurance, which includes coverages for multiple peril, casualty and workers' compensation, increased 11% in 1994 compared with 1993, after excluding the $125 million return premium discussed below from the 1993 premium amounts. Premiums in 1993, excluding the $125 million return premium, were 6% higher than 1992. The competitive market has continued to place significant pressure on prices. Premium growth in both years was due primarily to a combination of the selective writing of new accounts, improved renewal retention and exposure growth on existing business. Premium growth in 1994 for multiple peril was particularly strong outside the United States.
Medical malpractice business, which we stopped writing in 1984, was reinsured effective year-end 1985. The reinsurance agreement includes a commutation provision under which the property and casualty insurance subsidiaries have an option to reassume the remaining liability of the reinsurer as of December 31, 1995 and receive payment at that time of an amount determined by a formula based on experience under the agreement. In 1993, as a result of favorable loss experience, medical malpractice gross unpaid claims and the related reinsurance recoverable under this agreement were each reduced. At the same time, the Corporation announced its intention to exercise the commutation option under the agreement, which will result in a payment by the reinsurer to the property and casualty insurance subsidiaries of approximately $190 million at year-end 1995 and a concurrent reduction in reinsurance recoverable from the reinsurer of approximately $65 million. The difference of $125 million represents a return premium to the property and casualty insurance subsidiaries and was recognized as such in 1993.
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 1993 and 1994 primarily due to a decrease in the profitability of the excess liability component resulting from more competitive prices. Excess liability has remained profitable due to favorable loss experience in this class. In each of the past three years, casualty results have been adversely affected to varying degrees by increases in loss reserves on general liability business written in earlier years, particularly for asbestos-related and toxic waste claims. Results in the automobile component were profitable in each of the last three years.
Multiple peril results were similarly unprofitable in each of the last three years. The intensely competitive market for this business has resulted in inadequate prices for these coverages. Results in the property component of this business were adversely affected by significant catastrophe losses in 1994, primarily from the earthquake in California, and in 1992, primarily from Hurricane Andrew and the civil disorder in Los Angeles. Catastrophe losses represented 8.4 percentage points of the loss ratio for this class for 1994 compared with 3.6 percentage points in 1993 and 10.1 percentage points in 1992.
Premiums from specialty commercial insurance increased 16% in 1994 compared with 10% in 1993. Premium increases for our executive protection and financial fidelity coverages were due primarily to new business opportunities and exposure increases as significant competition has made price increases difficult to achieve for most of these coverages. Our strategy of working closely with our customers and our ability to differentiate our products have enabled us to renew a large percentage of our business. We have been able to obtain price increases in several of our smaller specialty classes.
Underwriting results for this segment were near breakeven in 1994 compared with unprofitable results in 1993 and 1992. Results improved substantially in each of the last two years. The combined loss and expense ratio was 100.2% in 1994 compared with 111.8% in 1993 and 126.9% in 1992. The improvement in 1994 was due to risk selection and rating measures taken as well as to favorable weather conditions in the United Kingdom. Results in 1992 were adversely affected by our share of the substantial mortgage indemnity insurance losses experienced by Sun Alliance in the United Kingdom.
The process of establishing loss reserves is an imprecise science and reflects significant judgmental factors. In many liability cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss and the settlement of the loss. In fact, approximately 50% of our loss reserves at December 31, 1994 were for claims that had not yet been reported to us, some of which were not yet known to the insured, and for future development on reported claims.
claimants against Fibreboard for all future asbestos-related bodily injury claims against Fibreboard. This agreement is subject to court approval. Pursuant to the global settlement agreement, a $1.525 billion trust fund will be established to pay future claims, which are claims that were not filed in court before August 27, 1993. Pacific Indemnity will contribute approximately $538 million to the trust fund and Continental Casualty will contribute the remaining amount. In December 1993, upon execution of the global settlement agreement, Pacific Indemnity and Continental Casualty paid their respective shares into an escrow account. Upon final court approval of the settlement, the amount in the escrow account, including interest earned thereon, will be transferred to the trust fund.
Pacific Indemnity and Continental Casualty have reached a separate agreement for the handling of all pending asbestos-related bodily injury claims against Fibreboard. Pacific Indemnity's obligation under this agreement is not expected to exceed $635 million, of which Pacific Indemnity had paid $132 million through December 31, 1994. A February 1995 amendment to the agreement has extended for several years the period over which Pacific Indemnity will pay its remaining obligation, plus interest, under the agreement. The agreement further provides that the total responsibility of both insurers with respect to pending and future asbestos-related bodily injury claims against Fibreboard will be shared between Pacific Indemnity and Continental Casualty on an approximate 35% and 65% basis, respectively.
Prior to the settlement, the Corporation's property and casualty subsidiaries had existing loss reserves of $545 million to cover a portion of their obligation under these agreements. This amount included $300 million of general liability incurred but not reported (IBNR) reserves which were not previously classified as specific reserves for asbestos claims since it was management's belief that doing so would increase the demands of plaintiffs' attorneys. Additional loss reserves of $675 million were provided in the third quarter of 1993 at the time the settlement was negotiated.
manufacturers that used asbestos in certain products. Generally, these insureds are named defendants on a regional rather than a nationwide basis. We continue to receive notices of new asbestos claims and new exposures on existing claims as more peripheral parties are drawn into litigation to replace the now defunct mines and bankrupt manufacturers. The recent claims are complex in that they include significant and yet unresolved liability issues. Further, we still do not know the universe of potential claims.
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 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.
Uncertainties also remain as to the Superfund law itself, which has generated far more litigation than it has provided clean-up. The taxes supporting Superfund will end in 1995. The new Congress is expected to address Superfund reform during 1995. It is currently not possible to predict the direction that any reforms may take or the effect that any changes may have on the insurance industry. It is important to note that the Superfund law 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.
Litigation costs continue to escalate, particularly for toxic waste claims. A substantial portion of the funds expended to date has been for legal fees incurred in the prolonged litigation of coverage issues. Many primary policies provide an indemnity policy limit but an unlimited contract for defense costs. This language in the policy sometimes leads to the payment of defense costs in sizable multiples of the policy limits.
favorable development of $10 million in 1993. Each of the past three years benefited from favorable claim frequency and 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.
Management believes that the aggregate loss reserves of the property and casualty subsidiaries at December 31, 1994 were adequate to cover claims for losses which had occurred, including both those known to us and those yet to be reported. In establishing such reserves, management considers facts currently known and the present state of the law and coverage litigation. However, given the expansion of coverage and liability by the courts and the legislatures in the past and the possibilities of similar interpretations in the future, particularly as they relate to asbestos and toxic waste claims, as well as the uncertainty in determining what scientific standards will be deemed acceptable for measuring hazardous waste site clean-up, additional increases in loss reserves may emerge which may adversely affect results in future periods. This emergence cannot reasonably be estimated.
Investment income after taxes increased 4% in 1994 compared with 8% in 1993. Growth was primarily due to increases in invested assets, which reflected strong cash flow from operations over the period. Such growth in 1994 was tempered by the $538 million paid in December 1993 into an escrow account related to the Fibreboard settlement. The effective tax rate on our investment income was 15.3% in 1994 compared with 14.7% in 1993 and 14.3% in 1992. In 1994, the effective tax rate increased due to holding a larger proportion of our investment portfolio in taxable securities. The increase in the effective tax rate in 1993 was due to the increase in the federal corporate tax rate from 34% to 35%, offset in part by holding a larger proportion of our investment portfolio in tax-exempt securities.
Cash available for investment was approximately $725 million in 1994 compared with $480 million in 1993 and $655 million in 1992. The lower amount in 1993 was due to the $538 million paid in December 1993 into an escrow account.
The main objective of the investment portfolio of the property and casualty companies is to provide maximum support to the insurance underwriting operations. Investment strategies are developed based on many factors including underwriting results and our resulting tax position, fluctuations in interest rates and regulatory requirements.
In 1994, we invested new cash in taxable bonds and, to a lesser extent, tax-exempt bonds while reducing our equity security portfolio. In 1993, we invested new cash primarily in tax-exempt bonds and we reduced our taxable bond portfolio. In each year we tried to achieve the appropriate mix in our portfolio to balance both investment and tax strategies. In 1993 and again in 1994, we increased our short-term investments.
The property and casualty subsidiaries maintain sufficient investments in highly liquid, short-term securities at all times to provide for immediate cash needs. At year-end 1994 and 1993, such investments were at higher than normal levels so that funds would be readily available to pay amounts related to the Fibreboard settlement. Such levels of liquidity will be somewhat lower in 1995 as the payout period of Fibreboard related amounts has been extended. The Corporation maintains bank credit facilities that are available to respond to unexpected cash demands.
Earnings from personal insurance were $33 million in 1994 compared with $37 million in 1993 and $34 million in 1992. The earnings fluctuations were primarily due to changes in the spread between interest earned on our invested assets and interest credited to policyholders on interest-sensitive products. As the result of various adjustments, the tax rate on personal insurance earnings was 30%, 26% and 18% in 1994, 1993 and 1992, respectively.
Approximately 80% of our group health business is in the New York and New Jersey traditional indemnity markets. Both states have adopted legislation which eliminates health insurance underwriting, creates community based rating and limits 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 growth in premium revenue in 1993 and the first six months of 1994 reflected the effect of the significant increase in sales of new policies during the last three quarters of 1993. Due to increased levels of competition in the small group market in 1994 as well as our significant rate increases, many of the new policies written in 1993, which became eligible for renewal beginning in April 1994, were not renewed. The decline in premium revenue in the last six months of 1994 was primarily due to this increase in non-renewals.
Group health insurance results deteriorated in 1994 due to significantly higher claims than were anticipated when new rates were developed in 1993 and to higher non-renewals. The higher claims resulted from the increased cost of medical services and the increased utilization of those services. The increased utilization was largely due to the attractiveness of traditional indemnity plans to individuals and groups who are more likely to require and use medical services. In response to these factors, we increased rates substantially during 1994.
Initial results of ChubbHealth have been encouraging. Our approach has been to provide small business owners with managed care plans which have comprehensive and flexible coverages and an excellent doctor and hospital network.
Gross investment income increased 1% in 1994 compared with 7% in 1993. Premium receipts in excess of payments for benefits and expenses, together with investment income, continue to provide cash for new investments. New cash available amounted to $140 million in 1994 compared with $225 million in 1993 and $120 million in 1992. The decrease in new cash in 1994 was due to the reduced cash flows from group insurance operations. The increase in 1993 was due to the significant increase in group health premiums and to new single premium sales.
Real estate operations resulted in a loss after taxes of $2 million in both 1994 and 1993 and income of $10 million in 1992. Results continue to be adversely affected by progressively higher portions of interest being charged directly to expense rather than being capitalized and by provisions for possible uncollectible receivables related to mortgages. In addition, 1994 results were adversely affected by higher interest rates. Results in 1993 were adversely affected by a $3 million tax charge related to the federal corporate tax rate increase. Revenues were $205 million in 1994 compared with $161 million in 1993 and $150 million in 1992. Revenue growth in 1994 was primarily due to higher levels of rental income on owned properties.
In light of the current real estate market conditions, we have curtailed our construction of new office buildings in recent years. We have focused on completing and leasing newly constructed facilities and maintaining established properties at high occupancy levels. We completed one new building in 1994 but curtailed construction on two previously planned buildings. 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 1994, a total of 2,420,000 square feet was leased compared with 1,710,000 square feet in 1993 and 1,790,000 square feet in 1992. At December 31, 1994, we owned or had interests in 10,840,000 square feet of office and industrial space. Our vacancy rate was 7% at year-end 1994 compared with 10% at year-end 1993 and 14% at year-end 1992. The decreases in the vacancy rate during these years were due to our ability to market a significant amount of the new space which became available in 1991 when several multi-year projects were completed in a difficult leasing market.
We analyze both individual buildings and development sites on a continuing basis. Estimates are made of both additional costs to be incurred to complete development where necessary and the revenues and operating costs of the property in the future. The time value of money is not considered in assessing revenues versus costs. Revenue assumptions take into account local market conditions with respect to the lease-up periods, occupancy rates, and current and future construction activity. There are uncertainties as to the actual realization of the assumptions relative to future revenues and future costs. However, management does not believe there is any permanent impairment in real estate carrying values.
The loans receivable, which were 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. We continuously evaluate the ultimate collectibility of such loans, of which no significant amounts are due in the near term, and establish appropriate reserves. 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. The reserve for possible uncollectible receivables was increased by charges against income of $29 million in 1994 and $22 million in both 1993 and 1992, principally related to loans on selected properties with operating income at levels which may not fully meet debt service requirements. During 1994, such reserve was reduced by writedowns aggregating $10 million related to specific loans that are uncollectible. Management believes the reserve of $74 million at December 31, 1994 adequately reflects the current condition of the portfolio based on current accounting guidance. If conditions in the real estate market do not improve, however, additional reserves may be required.
The Corporation will adopt Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, in the first quarter of 1995. SFAS No. 114 establishes new criteria for measuring impairment of a loan. The implementation of SFAS No. 114 will result in an increase to the reserve for possible uncollectible receivables. However, the impact on the Corporation's net income in 1995 will not be significant. This pronouncement is discussed further in Note (1)(o) of the Notes to Consolidated Financial Statements on page 53.
We have also begun development of residential projects in northern New Jersey. Our first project is a 178 unit townhome project. At year-end, 45 units were sold and 45 were under contract.
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 4.6% in 1994 compared with 3.3% in 1993 and 4.6% in 1992. In 1994, the range of interest rates for term loans was 4.1% to 10.1% and for mortgages the range was 5.0% to 11.9%.
In February 1993, Chubb Capital sold $150 million of 6% notes due in 1998 and $100 million of 6 7/8% notes due in 2003. The notes are unsecured and are guaranteed by the Corporation. A substantial portion of the proceeds has been used to repay certain short-term debt and term loans incurred to support the real estate operations.
Chubb Capital also had outstanding $100 million of unsecured 8 5/8% notes, the proceeds of which were loaned to our real estate subsidiaries. The notes became due and were redeemed in January 1995. The $100 million loan to the real estate subsidiaries from Chubb Capital was renewed.
In July 1994, the Corporation entered into a revolving credit agreement with a group of banks that provides for unsecured borrowings of up to $300 million. The agreement replaced a similar agreement which was to terminate on November 30, 1994. The new agreement terminates on July 15, 1997 at which time any loans then outstanding become payable. There have been no borrowings under these agreements.
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. During 1994, the Corporation further reduced its investment in Sun Alliance, with proceeds from the sales amounting to approximately $53 million. The sales have not affected the ongoing business relationship between the Corporation's property and casualty subsidiaries and Sun Alliance.
SFAS No. 115 also requires that fixed maturities classified as available-for-sale be carried at market value. Prior to 1994, these securities were carried at the lower of the aggregate amortized cost or market value. At December 31, 1994, 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 and 1992, all fixed maturities were carried at amortized cost.
The unrealized appreciation or depreciation of equity securities and fixed maturities carried at market value is reflected in a separate component of shareholders' equity, net of applicable deferred income tax.
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 health insurance income after taxes included similar benefits of $5 million and $3 million in 1993 and 1992, respectively.
Consolidated financial statements of the Corporation at December 31, 1994 and 1993 and for each of the three years in the period ended December 31, 1994 and the Report of Independent Auditors thereon and the Corporation's unaudited quarterly financial data for the two-year period ended December 31, 1994 are incorporated by reference from the Corporation's 1994 Annual Report to Shareholders, pages 46 through 69.