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 1994 Annual Report to Shareholders, pages 15, 16 and 46 through 67.
Property and casualty income was significantly higher in 1994 compared with 1993; such 1993 income was significantly lower than that in 1992. Results in 1993 were adversely affected by 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").
premium from the 1993 amount. Net premiums written in 1993, excluding the $125 million return premium, were 9% higher than 1992. Personal coverages accounted for $814 million or 21% of 1994 premiums written, standard commercial coverages for $1,338 million or 34%, specialty commercial coverages for $1,476 million or 37% and reinsurance assumed for $323 million or 8%. The marketplace continued to be competitive, particularly in the commercial classes. Price increases in the casualty classes have been difficult to achieve for several years. Property related prices remained stable in 1994 despite the significant catastrophe losses early in the year. Such prices had experienced some firming in 1993 in the wake of the unprecedented catastrophes of 1992. Premium growth in 1994 and 1993 was due primarily to the selective writing of new business, improved renewal retention of customers who appreciate the stability, expertise and added value we provide, and exposure growth on existing business. A significant portion of premium growth in both years was achieved outside the United States, from both our expanding foreign branch network and our increased participation in the business of the Sun Alliance Group plc.
The combined loss and expense ratio, the common measure of underwriting profitability, was 99.5% in 1994 compared with 114.8% in 1993 and 101.1% in 1992. Underwriting results were extremely unprofitable in 1993 due to the adverse effect of the $675 million charge. 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.
Premiums from personal insurance were virtually unchanged in 1994 compared with a 2% increase in 1993. Our disciplined approach to pricing continues to make it difficult to write new homeowners and other non-automobile business. Personal automobile premiums have remained level over the past three years, which was consistent with our plan to control our exposure in this class.
Our personal insurance business produced breakeven underwriting results in 1994 compared with an underwriting profit in 1993 and an underwriting loss in 1992. The combined loss and expense ratio was 100.3% in 1994 compared with 95.8% in 1993 and 104.6% in 1992. Underwriting results in each of these years were adversely affected by significant catastrophe losses in the homeowners class, particularly the winter storms and, to a lesser extent, the California earthquake in 1994 and Hurricane Andrew in 1992.
Our standard commercial 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 107.6% in 1994 compared with 149.7% in 1993 and 105.7% in 1992. 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.
The liability component of this business was particularly unprofitable in 1993 due to an increased frequency and severity of losses.
Workers' compensation results improved substantially in 1994, but remained unprofitable. Results in our voluntary business have benefited from rate increases and the impact of medical cost containment and disability management activities. Results in this class were aggravated in 1992 and 1993 by our share of the losses incurred by the involuntary pools and mandatory business in which we must participate by law.
Marine results were unprofitable in 1994 compared with profitable results in 1993 and 1992. The deterioration was mostly due to significant catastrophe losses, resulting primarily from the earthquake in California. Results in our smaller specialty classes improved in 1994, particularly outside the United States. Results in these classes had deteriorated in 1993 due primarily to an increased frequency of large losses.
Premiums from reinsurance assumed, which is primarily treaty reinsurance assumed from Sun Alliance, increased 37% in 1994 compared with 46% in 1993. The growth in both years was primarily 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.
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. 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. Approximately 14% of the direct business of the Corporation's property and casualty subsidiaries during the rollback period was written in California. 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. Since the approval of Proposition 103, the California Insurance Department has established regulations to implement its provisions. These regulations were challenged in the California courts by numerous insurers.
In November 1994, the property and casualty subsidiaries were ordered by the Insurance Commissioner to refund premiums for the rollback period in the amount of $86 million, plus interest of $53 million. The property and casualty subsidiaries have notified the Insurance Department of their objection to the rollback amount. Based on our analysis of the operating results of our property and casualty subsidiaries in the State of California during the rollback period, as well as the regulations governing Proposition 103 rollbacks, we have not reflected the rollback amount in our financial statements. It is management's belief that it is probable that the final resolution of this matter 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 1994, gross loss reserves totaled $8.9 billion compared with $8.2 billion and $7.2 billion at year-end 1993 and 1992, respectively. Reinsurance recoverable on such loss reserves was $2.0 billion at the end of 1994 compared with $1.8 billion and $2.0 billion at year-end 1993 and 1992, respectively. Loss reserves, net of reinsurance recoverable, increased 7% in 1994, after increases of 22% and 11% in 1993 and 1992, 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. Loss and expense payments related to this settlement aggregated $204 million in 1994. Substantial reserve growth has occurred each year in those liability coverages, primarily excess liability and executive protection, that are characterized by delayed loss reporting and extended periods of settlement.
Judicial decisions and legislative actions continue to broaden liability and policy definitions and to increase the severity of claim payments. As a result of this and other societal and economic developments, the uncertainties inherent in estimating ultimate claim costs on the basis of past experience have increased significantly, further complicating the already difficult loss reserving process.
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
All of the parties have agreed to use their best efforts to seek court approval of the global settlement agreement. Although this agreement has been challenged, management is optimistic that the courts will approve the settlement. The period of judicial review is now expected to extend at least into 1996.
Other than Fibreboard, our remaining asbestos exposures are mostly peripheral defendants, principally distributors, premises owners and
Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques. We have established case reserves and reserves for costs of related litigation 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. Loss reserve increases relating to asbestos and toxic waste claims were $115 million in 1994, $1,076 million in 1993 and $120 million in 1992. Excluding 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. Further increases in such reserves in 1995 and future years are possible as legal and factual issues concerning these claims are clarified, although the amounts cannot be reasonably estimated.
During 1994, we experienced overall favorable development of $30 million on loss reserves established as of the previous year-end. This compares with unfavorable development of $665 million in 1993 and favorable development of $28 million in 1992. 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
maintaining investments in those foreign currencies in which we transact business, with characteristics similar to the liabilities in those currencies.
Life and health insurance earnings after taxes were $14 million in 1994 compared with $62 million in 1993 and $56 million in 1992. Premiums and policy charges were $836 million in 1994 compared with $801 million in 1993 and $689 million in 1992.
Premiums and policy charges amounted to $272 million in 1994 compared with $240 million in 1993 and $214 million in 1992. New sales of personal insurance as measured by annualized premiums were $97 million in 1994 compared with $88 million in 1993 and $71 million in 1992. Marketing initiatives conducted with our property and casualty distribution system together with the increasing popularity of variable universal life products continue to contribute to our growth.
Group insurance operations resulted in a loss of $19 million in 1994 compared with earnings of $25 million in 1993 and $22 million in 1992. Group health rate levels, which had kept pace with medical costs during 1993 and 1992, proved inadequate during 1994 in New York, which is our major market. Group life and dental insurance, which are primarily marketed as ancillary products to group health insurance, contributed modest earnings in each of the last three years.
Premiums were $564 million in 1994 compared with $561 million in 1993 and $475 million in 1992. New group sales as measured by annualized premiums were $52 million in 1994 compared with $323 million in 1993 and $118 million in 1992.
We continue to 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. We have accelerated our efforts to lessen our dependence on traditional indemnity medical premium. We are offering managed care products through ChubbHealth, Inc., a health maintenance organization (HMO), which commenced business in the New York City metropolitan area during the second quarter of 1994.
In 1994, new cash was invested primarily in mortgage-backed securities. In 1993, new cash was invested in mortgage-backed securities and corporate bonds. We invest predominantly in investment grade current coupon fixed-income securities with stable cash flows and maturities which are consistent with life insurance liability characteristics. Approximately 95% are investment grade and more than half are rated AAA. We maintain sufficient funds in short-term securities to meet unusual needs for cash.
Mortgage-backed securities comprised 47% and 41% of the fixed maturity portfolio of the life and health subsidiaries at December 31, 1994 and 1993, respectively. Our mortgage-backed securities portfolio consists of government agency pass-through securities, government agency collateralized mortgage obligations (CMO's) and AAA rated non-agency CMO's backed by either government agency collateral or single family home mortgages. The majority of the CMO's in the portfolio are actively traded in liquid markets and market value information is readily available from broker/dealers. The notion of impairment typically associated with corporate bonds (default in paying principal) is less applicable to CMO's. Other risks, most notably prepayment and extension risks, are monitored regularly. Changes in prepayment patterns can either lengthen or shorten the expected timing of the principal repayments and thus the average life and the effective yield of the security. We primarily invest in those classes of CMO instruments that are subject to less prepayment and extension risk and are therefore less volatile than other CMO instruments.
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.
Our continuing investment interests in joint ventures generally consist of the ownership and lease of the underlying land and the management and operation of the buildings. Our agreements with joint ventures to manage all aspects of the ventured properties, including debt structures, tenant leasing, and building improvements and maintenance, have put us in a strong position to protect our ongoing financial interests in the current difficult real estate environment.
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. Corporate restructurings and downsizings have 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 continue to cause downward pressure on the earnings of the real estate development 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 activitiy over the past three 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 1995 a larger portion of interest costs will be charged directly to expense as a result of development activities being curtailed at some of our office parks.
Ultimate net realizable value for real estate assets is determined based on our ability to fully recover costs through a future revenue stream supported principally by rental revenues. 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.
We expect to refinance, under similar terms, most of the term loans and mortgages which become due in 1995. Cash from operations combined with the ability to utilize the Corporation's commercial paper facility will provide sufficient funds for 1995.
Chubb Capital has outstanding 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 1994, the Corporation acquired Personal Lines Insurance Brokerage, Inc. (PLI), a multi-state agency that specializes in personal lines insurance products. PLI then acquired the personal lines business of Alexander & Alexander Inc. PLI will operate as an independent agency and will continue to place business with a number of insurance companies including the property and casualty subsidiaries of the Corporation. The total of the cash and common stock issued for these acquisitions was $32 million.
Investment gains were realized by the Corporation and its insurance subsidiaries in 1994, 1993 and 1992. Such gains before taxes consisted of the following:
Equity securities are reported in our financial statements at market value.
Fixed maturities which the Corporation and its insurance subsidiaries have the ability and intent to hold to maturity are classified as held-to-maturity. The remaining fixed maturities, 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 classified as available-for-sale.
The unrealized market appreciation of those fixed maturities carried at amortized cost was $13 million, $736 million and $523 million at December 31, 1994, 1993 and 1992, respectively. Such unrealized appreciation was not reflected in the consolidated financial statements. The decrease in unrealized market appreciation of fixed maturities in 1994 was due to rising interest rates.
The Omnibus Budget Reconciliation Act of 1993, enacted in August 1993, 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 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 $6 million in 1992. There was no similar benefit in 1993 or 1994 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.
In 1994, the Corporation adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. In 1993, the Corporation adopted SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, and SFAS No. 109, Accounting for Income Taxes. These pronouncements and their effect on the consolidated financial statements are discussed in Note (2) of the Notes to Consolidated Financial Statements on page 53.