The following financial information has been derived from the audited Consolidated Financial Statements and notes thereto which appear elsewhere in this or previously issued Annual Reports on Form 10-K and should be read in conjunction with such financial statements and related notes thereto.
Since 1987, soft market conditions characterized by intense competition on rate and contract terms have prevailed in the property and casualty insurance industry. The industry continues to be relatively well-capitalized and underleveraged on an operating basis which exerts continued pressure on rates and terms. Although the industry has sustained unprecedented losses from catastrophes in 1992 through 1994, as well as the adverse impact of rising interest rates in 1994, there has not been a meaningful improvement in market conditions. Due to the nature of its business, these market conditions have had little impact on Western Surety; however, United Capitol has been significantly affected by prevailing market conditions. United Capitol has responded to these difficult market conditions by maintaining a disciplined underwriting approach and electing to decline business that may result in unacceptable or inadequately compensated risk. Management believes prevailing market conditions are likely to persist for the near and possibly long-term. Capsure will continue to focus its resources in lines of business where it has or can acquire the requisite underwriting and business processing experience and for which consistent long-term underwriting profits can reasonably be expected. The September 22, 1994 acquisition of Universal Surety, as described below, is an example of this philosophy.
which it will utilize supplemental collateral arrangements and excess rates for contractors not qualified for standard surety rates. Universal Surety also reduces its exposure through participation in the Small Business Administration ("SBA") Surety Bond Guarantee Program. Under this program, the SBA will generally reimburse Universal Surety for 80% of losses and loss adjustment expenses incurred on any SBA guaranteed bond in exchange for 20% of the premium. Contract bonds are more affected by prevailing market and general economic conditions than noncontract bonds.
Universal Surety's preacquisition financial results have been exceptional. Gross written premiums have grown from $5.1 million for the year ended December 31, 1990 to $15.3 million for the twelve months (including results prior to acquisition) ended December 31, 1994. A weighted average combined ratio below 80.0% was maintained over this same period. These results compare favorably to national contract surety bond insurers. Universal Surety's overall growth in gross written premiums and underwriting income during this period was attributable to its product specialization, underwriting expertise and the strong economy in its geographic region. Such growth was also characterized by measured expansion restricted by its ability to attract qualified underwriting and claims personnel and maintain distinctive service to its agents. The planned expansion of Universal Surety's small contract surety products through Western Surety's broad distribution network will be similarly controlled. However, there can be no assurance that Universal Surety's preacquisition results will be indicative of future operating results under the ownership and management of Capsure.
Surety and fidelity represents the combined results of Western Surety, since its acquisition in August 1992, and Universal Surety, since its September 22, 1994 acquisition. Surety and fidelity are the principal lines of business of Western Surety and Universal Surety. Excess and surplus lines represents the results of United Capitol. United Capitol's principal lines of business are other liability, product liability and commercial property primarily written on an excess and surplus lines basis.
Gross written premiums increased $1.6 million for the year ended December 31, 1994. Western Surety experienced a 1.1% decrease in gross written premiums, mainly due to a decline in public official bond premiums as compared to 1993. This decline, which was expected, was caused by the cyclical nature of these bonds. Writings for this product typically increase every other year, following the November elections. Universal Surety contributed $4.0 million of gross written premiums since its acquisition in September 1994. United Capitol's gross written premiums decreased 5.8%, or $1.7 million in 1994. Significant declines in the asbestos abatement and other primary casualty business were partially offset by the addition of $5.7 million in gross written premiums of D&O business produced by the Company's Fischer Underwriting Group, Incorporated ("Fischer") which was acquired in November 1993 by a subsidiary of United Capitol. United Capitol's premium volume, particularly in the increasingly competitive asbestos abatement line, continued to be significantly affected by prolonged soft market conditions.
Gross written premiums increased $50.7 million for the year ended December 31, 1993, principally due to the inclusion of Western Surety results for a full year. United Capitol's gross written premiums increased $1.6 million, or 6.1%, primarily due to increases in the property and non-asbestos general liability insurance lines of business combined with the addition of D&O insurance more than offsetting the decline in the asbestos abatement liability business.
Net earned premiums increased $44.8 million for the year ended December 31, 1993, primarily due to the inclusion of a full year of operating results of Western Surety. United Capitol's net earned premiums increased 12.0%, or $1.9 million in 1993, reflecting the increase in net written premiums in prior years.
Capsure's insurance companies invest funds provided by operations predominantly in high-quality, short-duration, taxable fixed income securities. Beginning in 1994, the Investment Committees of the Board of Directors of the Company and its insurance subsidiaries have approved the investment of up to $26 million in the aggregate by the insurance subsidiaries and at the parent company level in publicly traded nonaffiliated real estate investment trust ("REIT") equity securities. At December 31, 1994, the carrying value of the Company's REIT portfolio was approximately $24.3 million. The preservation of capital and utilization of the Company's available NOLs are Capsure's principal investment objectives.
ANALYSIS OF OTHER OPERATIONS Net investment gains were $0.9 million, $2.1 million and $0.4 million for the years ended December 31, 1994, 1993 and 1992, respectively. Net investment gains of $1.9 million in 1994 and $3.1 million in 1993 resulted from the sale of equity securities in the investment portfolio at the parent company level which more than offset net investment losses of $0.4 million and $1.0 million, respectively, from the insurance operations. There were no parent company level net investment gains recognized in 1992. Included in 1994 net investment gains were $0.5 million of net unrealized investment losses on the trading securities portfolio held at the parent company level. The net investment losses from the insurance operations in 1993 were primarily due to a $2.5 million write-down to fair value of two interest-only securities reflecting lower future expected cash flows of these securities as a result of an accelerated level of mortgage prepayments, partially offset by $1.5 million of net investment gains from the sale of other securities.
actual taxes paid, primarily due to the utilization of the Company's NOLs. Actual income taxes paid were $0.6 million for the years ended December 31, 1994 and 1993, respectively, and $0.7 million for the year ended December 31, 1992.
On March 29, 1994, the Company formed a direct, wholly owned subsidiary, Capsure Financial Group, Inc. ("CFG"), to which Capsure contributed substantially all its assets and liabilities. Concurrently, CFG entered into a senior reducing revolving credit agreement with a syndicate of banks for $135 million (the "Credit Facility"). At closing, $68 million of funds drawn under the Credit Facility, together with a portion of the Company's cash, were used to repay $84.6 million of previously existing bank term debt. Paydowns of $25 million and borrowings of $28 million for the acquisition of Universal Surety have occurred since then. The remaining availability under the Credit Facility of $64 million may be used to finance future acquisitions and for general corporate purposes.
Another critical factor affecting the Company's financial condition is the Company's policies with respect to loss and loss adjustment expense reserves. Each of Capsure's insurance subsidiaries employs prudent reserving approaches in establishing the estimated liability for unpaid loss and loss adjustment expenses due to the inherent difficulty and variability in the estimation process. The liability for unpaid losses and loss adjustment expenses is based on estimates of (a) the ultimate settlement value of reported claims, (b) incurred but not reported ("IBNR") claims, (c) future expenses to be incurred in the settlement of claims and (d) claim recoveries. The liability for unpaid losses and loss adjustment expenses is an accounting estimate and, similar to other accounting estimates, there is the potential that actual future loss payments will differ from the initial estimate. The methods of determining such estimates and the resulting estimated liability are continually reviewed and updated. Changes in the estimated liability are reflected in operating income in the year in which such changes are determined.
As a result of favorable claim settlements and changes in estimates of insured events in prior years, the provision for losses and loss adjustment expenses decreased by $14.5 million ($8.3 million, net of reinsurance) in 1994, $15.0 million ($11.3 million, net of reinsurance) in 1993 and $9.9 million ($7.5 million, net of reinsurance) in 1992.
United Capitol provides coverage to asbestos abatement contractors against third parties who have alleged bodily injury or property damage as a result of exposure to asbestos. Employees of the insured contractor and others required to be in the abatement area are not intended to be covered by United Capitol's policies and management believes such coverage exclusions are enforceable. Through the date hereof, there have been no valid claims against United Capitol's asbestos abatement liability policies alleging bodily injury arising from exposure to asbestos. Management believes that none of the other insurance products offered by Capsure's insurance subsidiaries creates any potential material environmental exposure.