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 1993 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 1993 Annual Report to Shareholders, pages 11, 12 and 40 through 61.
Property and casualty income after taxes was $118 million in 1993 compared with $407 million in 1992 and $416 million in 1991. 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. Results for 1993 benefited from lower catastrophe losses and an increase in investment income compared with the prior year. The earnings decrease in 1992 was due to a decline in underwriting results caused by substantial catastrophe losses, including those from Hurricane Andrew, partially offset by an increase in investment income. Catastrophe losses were $89 million in 1993 compared with $175 million in 1992 and $72 million in 1991.
Premiums from personal insurance increased 2% in 1993 compared with a 2% decrease in 1992. It continues to be difficult to write new homeowners and other non-automobile business due to our disciplined pricing as well as the weakness in residential real estate markets. Personal automobile premiums have remained level over the past three years as modest rate increases have offset a reduction in the number of in force policies, which is consistent with our plan to control our exposure in this class.
Our personal insurance business produced an underwriting profit in 1993 compared with underwriting losses in 1992 and 1991. All classes contributed to the 1993 improvement. The combined loss and expense ratio was 95.8% in 1993 compared with 104.6% in 1992 and 103.1% in 1991. Underwriting results in each of these years were adversely affected by significant catastrophe losses in the homeowners class, particularly Hurricane Andrew in 1992.
Excluding the $125 million return premium discussed below, premiums from standard commercial insurance, which include coverages for multiple peril, casualty and workers' compensation, increased 6% in 1993 compared with 2% in 1992. The competitive market has continued to place significant pressure on rates. Premium growth in 1993 was most significant in the multiple peril class; such growth was due primarily to improved renewal retention as well as exposure growth on such renewals.
Medical malpractice business, which we stopped writing in 1984, was reinsured effective year-end 1985. Under the provisions of the reinsurance agreement, we may elect to commute the remaining liability from the reinsurer as of December 31, 1995 and receive payment, at that time, of an amount determined by the agreement. In August 1993, the Corporation announced its intention to exercise this election. As the result of the favorable loss payment pattern in the eight years since this business was reinsured, the commutation will result in a return premium to the property and casualty insurance subsidiaries of approximately $125 million, which was recognized in the third quarter of 1993.
Our standard commercial underwriting results were unprofitable in each of the past three years. Such results were extremely unprofitable in 1993 due to the adverse effect of the $675 million charge. The combined loss and expense ratio was 149.7% in 1993 compared with 105.7% in 1992 and 102.6% in 1991. Excluding the effects of the $675 million charge and the $125 million return premium, the combined loss and expense ratio was 107.6% in 1993.
Casualty results include the effects of the $675 million charge and the $125 million return premium. Excluding the effects of these items, casualty results were near breakeven in 1993 compared with profitable results in 1992 and 1991. The excess liability component deteriorated somewhat in 1993 but remained profitable due to the relative price adequacy and favorable loss experience in this class. These favorable results were offset in varying degrees in each of the past three years 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 modestly profitable in each of the last three years.
Workers' compensation results were extremely unprofitable in each of the past three years. Results in our voluntary business have benefited somewhat from rate increases and a reduced frequency of losses. Results in this class have been aggravated each year, but particularly in 1991, by our share of the significant losses incurred by the involuntary pools and mandatory business in which we must participate by law.
Premiums from specialty commercial insurance increased 10% in 1993 compared with 11% in 1992. The growth was due primarily to rate and exposure increases in several of our smaller specialty classes. Price increases for most of our executive protection and financial fidelity coverages were difficult to achieve. Our strategy of working closely with our customers and our ability to differentiate our products has enabled us to retain a large percentage of our business.
The specialty commercial business produced substantial underwriting profits in each of the past three years with combined loss and expense ratios of 91.0% in 1993, 90.5% in 1992 and 90.3% in 1991. Our executive protection, financial fidelity and surety results were highly profitable in each year due to favorable loss experience.
Premiums from reinsurance assumed, which is primarily treaty reinsurance assumed from the Sun Alliance Group plc, increased 46% in 1993 compared with 9% in 1992. The growth in 1993 was due to an increase in our participation in the business of Sun Alliance and a firming of rates in Sun Alliance's markets, primarily in the United Kingdom.
Underwriting results for this segment, while substantially improved in 1993 due to the firming of rates, have been unprofitable in each of the last three years. The combined loss and expense ratio was 111.8% in 1993 compared with 126.9% in 1992 and 119.3% in 1991. Results in 1992 were adversely affected by our share of the substantial mortgage indemnity insurance losses experienced by Sun Alliance in the United Kingdom. Results in 1991 reflect the adverse effect on Sun Alliance of excessive price competition and a damaging recession in the United Kingdom.
In 1988, voters in California approved Ballot Proposition 103, an insurance reform initiative which affects most property and casualty insurers writing business in the state. Approximately 14% of the direct business of the Corporation's property and casualty subsidiaries is written in California. Provisions of Proposition 103 would have required insurers to roll back property and casualty insurance rates for certain lines of business to 20 percent below November 1987 levels and would have required an additional 20 percent reduction in automobile rates by November 1989. In 1989, the California Supreme Court, ruling on the constitutional challenge to Proposition 103, ruled that an insurer is entitled to a fair rate of return.
The regulations implementing the rate determination and premium rollback provisions of Proposition 103 continue to evolve. A California Superior Court decision declared invalid and void the rollback and rate review regulations proposed by the elected Insurance Commissioner. The Court decision prohibits the Commissioner from enforcing the regulations as well. The Commissioner has appealed the Superior Court decision to the California Supreme Court and the outcome of that appeal is uncertain. In a separate action, a California Court of Appeal has ruled that Proposition 103 regulations need not be submitted for approval to the California Office of Administrative Law. A petition for review has been filed with the California Supreme Court. There are at present no regulations in force or proposed which establish a final rollback formula.
None of our property and casualty subsidiaries have been among the companies thus far ordered to refund premiums for the rollback period. Based on our analysis of the operating results of our property and casualty subsidiaries in the State of California during the rollback period, it is management's belief that it is probable that any final court decision will not result in premium refunds of a material amount by the Corporation's property and casualty subsidiaries.
Loss reserves are our property and casualty subsidiaries' largest liability. At the end of 1993, gross loss reserves totaled $8.2 billion compared with $7.2 billion and $6.6 billion at year-end 1992 and 1991, respectively. Reinsurance recoverable on such loss reserves was $1.8 billion at the end of 1993 compared with $2.0 billion and $1.8 billion at year-end 1992 and 1991, respectively. Loss reserves, net of reinsurance recoverable, increased 22% in 1993, after increases of 11% and 10% in 1992 and 1991, respectively. The significant increase in 1993 was primarily due to the $675 million increase related to the settlement of asbestos-related litigation. Excluding this $675 million, loss reserves increased by 10% in 1993. Substantial reserve growth has occurred each year in those liability coverages, primarily excess
liability and executive protection, that have delayed loss reporting and extended periods of settlement. These coverages have become a more significant portion of our business in recent years.
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, 1993 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.
Our most costly asbestos exposure relates to an insurance policy issued to Fibreboard Corporation by Pacific Indemnity Company in 1956. In 1993, Pacific Indemnity Company, a subsidiary of the Corporation, entered into a global settlement agreement with Continental Casualty Company (a subsidiary of CNA Financial Corporation), Fibreboard Corporation, and attorneys representing 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, which could take up to two years or more, the amount in the escrow account, including interest earned thereon, will be transferred to the trust fund.
All of the parties have agreed to use their best efforts to seek court approval of the global settlement agreement. Although it is likely that this agreement will be challenged, management is optimistic that the courts will approve the settlement.
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, most of which is expected to be paid over the next two years. 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 paid $40 million and 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.
Management believes that, as a result of the global settlement agreement and the trilateral agreement, the uncertainty of our exposure with respect to asbestos-related bodily injury claims against Fibreboard has been greatly reduced. However, if both the global settlement agreement and the trilateral agreement are disapproved, there can be no assurance that the loss reserves established for future claims would be sufficient to pay all amounts which ultimately could become payable in respect of future asbestos-related bodily injury claims against Fibreboard.
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 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.
During 1993, due to the $675 million increase in loss reserves related to the Fibreboard settlement, we experienced overall unfavorable development of $665 million on loss reserves established as of the previous year-end. This compares with favorable development of $28 million and $29 million in 1992 and 1991, respectively. Such deficiency and redundancies 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 during 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, 1993 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 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 8% in 1993 compared with 6% in 1992. Growth was primarily due to significant increases in invested assets, which reflected strong cash flow from operations over the period, offset in part by lower yields on new investments. The effective tax rate on our investment income was 14.7% in 1993 compared with 14.3% in 1992 and 15.3% in 1991. 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 tax-exempt securities in our investment portfolio. In 1992, the effective tax rate decreased due to our holding a larger proportion of tax-exempt securities in our investment portfolio.
Generally, premiums are received by our property and casualty subsidiaries months or even years before we pay the losses under the policies purchased by such premiums. These funds are used first to make current claim and expense payments. The balance is invested to augment the investment income generated by the existing portfolio. Historically, more than sufficient funds have been provided from insurance revenues to pay losses, operating expenses and dividends to the Corporation.
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 1993, such investments were at a higher than normal level so that funds are readily available to pay amounts related to the Fibreboard settlement. The Corporation maintains bank credit facilities that are available to respond to unexpected cash demands.
Life and health insurance earnings after taxes were $63 million in 1993 compared with $56 million in 1992 and $51 million in 1991. Premiums and policy charges were $801 million in 1993 compared with $689 million in 1992 and $634 million in 1991.
Earnings from group insurance were $26 million in 1993 compared with $22 million in 1992 and $18 million in 1991. Group health rate levels have kept pace with medical costs over this three year period. Group life insurance, which is primarily marketed as an ancillary product to group health insurance, contributed modestly to earnings in each of the last three years.
Premiums were $561 million in 1993 compared with $475 million in 1992 and $442 million in 1991. New group sales as measured by annualized premiums were $323 million in 1993 compared with $118 million in 1992 and $161 million in 1991.
Approximately 80% of our group health premiums are written in New York and New Jersey. 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 the result of this legislation, we had anticipated a reduction in premium and sales levels in 1993. However, we were able to offer a competitive product in New York, which is our major market, at a time when several insurers reduced their market share, resulting in substantial increases in premiums and sales. Sales decreased in 1992 due to our adherence to disciplined pricing as well as state legislative actions which disrupted our markets in several jurisdictions.
Enacted and contemplated health care reform on both a national and state level are reshaping the health insurance industry. Federal legislation on health insurance is being considered which, if enacted, could create less favorable conditions for the health insurance industry. Significant changes are not expected to become operational for some time. It is currently not possible to predict the long term impact of health care reforms on our business.
We believe that traditional indemnity plans will be a less viable product option in the long term for both the consumer and the companies selling such plans. Recognizing this, we have accelerated our involvement in managed care and also worked to lessen our dependence on medical premium. The most visible action we have taken in 1993 is the development of ChubbHealth Inc., a health maintenance organization that will serve the New York City metropolitan area. ChubbHealth is in the final stages of licensing and will be operational during the first half of 1994.
Real estate operations resulted in a loss after taxes of $2 million in 1993 compared with income of $10 million in 1992 and $25 million in 1991. Earnings were adversely affected by progressively higher portions of interest costs being charged directly to expense rather than being capitalized and by provisions each year for possible uncollectible receivables related to mortgages. Results were also adversely affected in 1993 by a $3 million tax charge related to the federal corporate tax rate increase. Revenues were $161 million in 1993 compared with $150 million in 1992 and $141 million in 1991.
The real estate industry continues to suffer from a significantly reduced demand for real estate investment. For the past several years, the supply of available office space has exceeded the demand. The slowdown in the economy exacerbated the problem as businesses consolidated their facilities, increasing the supply of available space. While selected real estate markets have experienced increases in leasing activity and some stability in rental rates, the oversupply of available office space for lease in most markets and the resultant depressed rental rates will continue to cause downward pressure on the earnings of the real estate industry.
In certain markets, renewing leases in established buildings has been difficult as newly-constructed space is available nearby at similar rates. While we have experienced significant leasing activity over the past two years, we have had to enter into multiple year leases at depressed market rental rates. This, together with the lack of construction and transaction based activity, will place continued pressure on our real estate earnings for the next several years. We expect that in 1994 a larger portion of interest costs will be charged directly to expense as a result of several recently completed projects becoming fully operational during 1993 and development activities being curtailed at some of our office parks.
Individual buildings and development sites are analyzed on a continuing basis with estimates made of both additional costs to be incurred to complete development where necessary and the estimated 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.
Our Florida residential development activities continued during 1993. All but nine units at a 181 unit mid-rise condominium project completed in 1991 have been sold. We completed construction of a 120 unit oceanfront high-rise condominium during 1992. At year-end 1993, 103 units were sold. Construction of a 104 unit mid-rise condominium project commenced in 1993 with 41 units already under contract.
of the Corporation. The weighted average interest cost on short-term credit instruments approximated 3.3% in 1993 compared with 4.6% in 1992 and 7.2% in 1991. The interest rates on term loans ranged from 4.3% to 9.9% in 1993.
The Corporation has outstanding $150 million of unsecured 8 3/4% notes due in 1999. In each of the years 1995 through 1998, the Corporation will pay as a mandatory sinking fund an amount sufficient to redeem $30 million of principal.
Investment income earned on corporate invested assets and interest expense not allocable to the operating subsidiaries are reflected in the corporate segment. Corporate income after taxes was $14 million in 1993 compared with $20 million in 1992 and $16 million in 1991.
At December 31, 1993, 1992 and 1991, the unrealized market appreciation of our fixed maturity portfolio was $736 million, $523 million and $490 million, respectively. Such unrealized appreciation was not reflected in the consolidated financial statements. The 1993 amount comprises fixed maturities with gross unrealized appreciation aggregating $771 million and those with gross unrealized depreciation aggregating $35 million.
In 1993, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, SFAS No. 109, Accounting for Income Taxes, and SFAS No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. These pronouncements and their effect on the consolidated financial statements are discussed in Note (2) of the Notes to Consolidated Financial Statements incorporated by reference from the Corporation's 1993 Annual Report to Shareholders.
In January 1994, the Los Angeles area experienced a major earthquake. Also, in January 1994, the Eastern and Midwestern parts of the United States experienced severe winter storms. Losses from these catastrophes are estimated to amount to $125 million net of reinsurance, including $90 million from the earthquake and $35 million from the storm activity. The effect of these catastrophe losses on after-tax earnings is expected to approximate $81 million, which will be reflected in the first quarter of 1994. Additional claims may be reported which could increase the estimate.