Net income amounted to $697 million in 1995 compared with $528 million in 1994 and $324 million in 1993. 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 decision to exercise its option to commute an unrelated 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 was significantly higher in 1995 than in 1994; such 1994 income was significantly higher than that in 1993. 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. The $675 million charge was partially offset by a $125 million return premium to our property and casualty insurance subsidiaries related to the Corporation's decision to exercise its option to commute a medical malpractice reinsurance agreement (the "$125 million return premium").
Property and casualty income after taxes was $563 million in 1995 compared with $467 million in 1994 and $118 million in 1993. 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 1995 benefited from highly profitable underwriting results and an increase in investment income compared with 1994. 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. Investment income increased modestly in 1994 compared with the prior year.
Catastrophe losses were $64 million in 1995 compared with $169 million in 1994 and $89 million in 1993. Our initial retention level for each catastrophic event is approximately $85 million. We did not have any recoveries from our catastrophe reinsurance coverage during the past three years since there were no individual catastrophes for which our losses exceeded the initial retention.
Net premiums written amounted to $4.3 billion in 1995, an increase of 9% compared with 1994. Net premiums written in 1994 increased 12% compared with 1993, after excluding the $125 million return premium from the 1993 amount. Personal coverages accounted for $852 million or 20% of 1995 premiums written, standard commercial coverages for $1,456 million or 34%, specialty commercial coverages for $1,627 million or 38% and reinsurance assumed for $371 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. Prices for property classes have remained stable in the past two years, despite the significant catastrophe losses experienced by the industry. Premium growth in 1995 and 1994 was due primarily to the selective writing of new business and exposure growth on existing business. A significant portion of premium growth in both years was achieved outside the United States, from our expanding international branch network and our participation in the business of the Sun Alliance Group plc.
The loss ratio was 64.7% in 1995 compared with 67.0% in 1994 and 82.5% in 1993. 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 disciplined underwriting standards. Losses from catastrophes represented 1.5, 4.5 and 2.5 percentage points of the loss ratio in 1995, 1994 and 1993, respectively.
For many years, a portion of the U.S. insurance business written by the Corporation's property and casualty subsidiaries has been reinsured on a quota share basis with a subsidiary of Sun Alliance. Similarly, a subsidiary of the Corporation has assumed a portion of Sun Alliance's property and casualty business on a quota share basis, such participation having increased in recent years. Effective January 1, 1996, the agreements pertaining to the exchange of reinsurance were amended to reduce the portion of each company's business that is reinsured with the other. As a result, our property and casualty subsidiaries will retain a greater portion of the business they write directly and will reduce the amount of reinsurance they assume from Sun Alliance. As a result of the changes to the agreements with Sun Alliance, our net premiums written are expected to increase by approximately $100 million in 1996. The terms of the reinsurance agreements with Sun Alliance will be reviewed annually, at which time further reductions in the portion of each company's business that is reinsured with the other may occur.
Our personal insurance business produced a substantial underwriting profit in 1995 compared with breakeven results in 1994 and an underwriting profit in 1993. The combined loss and expense ratio was 87.5% in 1995 compared with 100.3% in 1994 and 95.8% in 1993. Results in each of our personal classes of business improved significantly in 1995.
Premiums from standard commercial insurance, which include coverages for multiple peril, casualty and workers' compensation, increased 9% in 1995 compared with 1994. Premiums in 1994 were 11% higher than in 1993, after excluding the $125 million return premium discussed below from the 1993 premium amounts. Market competition has continued to place significant pressure on prices. Premium growth in both years was due primarily to the selective writing of new accounts and exposure growth on existing business. Premium growth in 1994 and 1995 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 included a commutation provision under which our property and casualty subsidiaries had an option to reassume the remaining liability of the reinsurer as of December 31, 1995 and receive payment of an amount determined by a formula based on experience under the agreement. The property and casualty subsidiaries exercised this option, which resulted in an amount due from the reinsurer of $191 million and a reduction in reinsurance recoverable from the reinsurer of $66 million. The difference of $125 million represents a return premium to our property and casualty subsidiaries, which was recognized in 1993 at the time the Corporation announced its intention to exercise the commutation option. The amount due from the reinsurer was received in January 1996.
Our standard commercial results were unprofitable in each of the past three years. The combined loss and expense ratio was 108.8% in 1995 compared with 107.6% in 1994 and 149.7% in 1993. Results were extremely unprofitable in 1993 due to the adverse effect of the $675 million charge. Excluding the effects of that charge and the $125 million return premium, the combined loss and expense ratio was 107.6% in 1993.
Multiple peril results improved in 1995 but remained unprofitable. Results in the property component of this business improved in 1995 due to an absence of catastrophe losses. Results in 1994 were adversely affected by significant catastrophe losses, primarily from the earthquake in California. Catastrophe losses for this class represented 0.9 of a percentage point of the loss ratio for 1995 compared with 8.4 percentage points in 1994 and 3.6 percentage points 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 and 1995. Results were profitable in 1995 compared with unprofitable results in the prior two years. Results in our voluntary business have benefited from rate increases, reform of the benefit provisions of workers' compensation laws in many states, and the impact of medical cost containment and disability management activities. Results from our share of the involuntary pools and mandatory business in which we must participate by law also benefited from these positive factors.
Premiums from specialty commercial business increased by 10% in 1995 compared with 16% in 1994. Premium increases for our executive protection and financial fidelity coverages were due primarily to new business opportunities. Our strategy of working closely with our customers and our ability to differentiate our products have enabled us to renew a large percentage of this business. Growth in several of our specialty classes was particularly strong outside the United States in both years.
Marine results were profitable in 1995 compared with unprofitable results in 1994 and profitable results in 1993. Results in 1994 were adversely affected by significant catastrophe losses, resulting primarily from the earthquake in California. Results in our smaller specialty classes were near breakeven in 1995 and 1994. These classes were unprofitable in 1993 due primarily to an increased frequency of large losses.
Loss reserves are our property and casualty subsidiaries' largest liability. At the end of 1995, gross loss reserves totaled $9.6 billion compared with $8.9 billion and $8.2 billion at year-end 1994 and 1993, respectively. Reinsurance recoverable on such loss reserves was $2.0 billion at year-end 1995 and 1994 compared with $1.8 billion at the end of 1993. Loss reserves, net of reinsurance recoverable, increased 10% in 1995 compared with 7% in 1994. Loss reserves included $1.0 billion, $1.05 billion and $1.2 billion at year-end 1995, 1994 and 1993, respectively, related to the settlement of asbestos-related claims against Fibreboard Corporation, which is discussed below. Excluding such reserves, loss reserves, net of reinsurance recoverable, increased 12% in both 1995 and 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.
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, 1995 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 final appellate 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. All of the parties have agreed to use their best efforts to seek final court approval of the global settlement agreement.
Pacific Indemnity and Continental Casualty have reached a separate agreement for the handling of all asbestos-related bodily injury claims pending on August 26, 1993 against Fibreboard. In February 1995, the agreement was amended to extend for several years the period over which Pacific Indemnity will pay its remaining obligation, plus interest, under this agreement. Pacific Indemnity's obligation under this agreement is not expected to exceed $635 million, of which approximately $450 million remained unpaid at December 31, 1995. 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.
Management is optimistic that the approval of the settlement will be upheld. However, if both the global settlement agreement and the trilateral agreement are disapproved by an appellate court, there can then 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.
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. Loss and expense
payments related to the settlement aggregated $60 million and $204 million in 1995 and 1994, respectively.
Reserves for asbestos and toxic waste claims cannot be estimated with traditional loss reserving techniques. We have established case reserves and expense 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 $182 million in 1995, $115 million in 1994 and $1,076 million in 1993. 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 1996 and future years are possible as legal and factual issues concerning these claims are clarified, although the amounts cannot be reasonably estimated.
Management believes that the aggregate loss reserves of the property and casualty subsidiaries at December 31, 1995 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 would adversely affect results in future periods. The amount cannot reasonably be estimated at the present time.
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, cash receipts from operations, consisting of insurance premiums and investment income, have provided more than sufficient funds to pay losses, operating expenses and dividends to the Corporation.
The main objectives of the investment portfolio of the property and casualty subsidiaries are to maximize after-tax investment income and total investment returns while minimizing credit risks as well as 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.
New cash available for investment was approximately $495 million in 1995 compared with $725 million in 1994 and $480 million in 1993. The lower amount in 1995 was due to the designation of $480 million of new cash as funds held for asbestos-related settlement. The lower amount in 1993 was due to the $538 million paid in December into an escrow account. In 1995, we invested new cash primarily in tax-exempt bonds. In 1994, we invested new cash in taxable bonds and, to a lesser extent, tax-exempt bonds while reducing our equity security portfolio. In each year we tried to achieve the appropriate mix in our portfolio to balance both investment and tax strategies.
At December 31, 1995, the property and casualty subsidiaries held foreign investments of $1.4 billion supporting their international operations. Such foreign investments have quality and maturity characteristics similar to our domestic portfolio. We reduce the risks relating to currency fluctuations by maintaining investments in those foreign currencies in which we transact business, with characteristics similar to the liabilities in those currencies.
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, such investments were at a higher than normal level so that funds would be readily available to pay amounts related to the Fibreboard settlement. Short-term securities were reduced to a more normal level in 1995 as the expected payout period for Fibreboard related amounts has been extended. The Corporation maintains bank credit facilities that are available to respond to unexpected cash demands.
We have taken a number of steps to increase operating efficiencies in order to improve the competitive position of our personal insurance business. We reduced field office staffing levels 55% by consolidating the 40 offices as of the beginning of 1993 into 14 as of year-end 1995 and also consolidated three service centers into two. In addition, we streamlined our producer network and raised their minimum production requirements.
Group insurance operations resulted in losses of $9 million in 1995 and $19 million in 1994 compared with earnings of $25 million in 1993. Group health insurance results in 1995 and 1994 were adversely affected by a high level of claims resulting from the increased cost of medical services and the increased utilization of those services. Results in 1995 benefited from significant rate increases; this was offset in part by the adverse effect of premium revenue decreasing at a greater rate than the decrease in expenses.
Gross investment income increased 12% in 1995 compared with 1% in 1994. Growth in 1995 was primarily due to an increase in invested assets. Premium receipts in excess of payments for benefits and expenses, together with investment income, continue to provide new cash for investment. New cash amounted to $225 million in 1995 compared with $140 million in 1994 and $225 million in 1993. The increase in new cash in 1995 was primarily due to increases in deposits credited to policyholder funds. The decrease in new cash in 1994 was due to the reduced cash flow from group insurance operations.
In 1995, new cash was invested in mortgage-backed securities and, to a lesser extent, corporate bonds and U.S. Treasury securities. In 1994, new cash was invested primarily in mortgage-backed securities. We invest predominantly in fixed-income securities with 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.
The life and health subsidiaries held fixed maturity securities with a carrying value of $2.7 billion and $2.2 billion at December 31, 1995 and 1994, respectively. Corporate bonds comprised 39% and 47% of the portfolio at year-end 1995 and 1994, respectively, and mortgage-backed securities comprised 47% of the portfolio at both year-ends. More than 90% of our mortgage-backed securities holdings at December 31, 1995 and 1994 related to residential mortgages consisting of government agency pass-through securities, government agency collateralized mortgage obligations (CMOs) and AAA rated
by government agency collateral or single family home mortgages. The majority of the CMOs are actively traded in liquid markets and market value information is readily available from broker/dealers. The notion of impairment associated with default in paying principal is less applicable to residential CMOs. 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 invest primarily in those classes of residential CMO instruments that are subject to less prepayment and extension risk and are therefore less volatile than other CMO instruments.
Real estate earnings after taxes were $6 million in 1995 compared with a loss of $2 million in both 1994 and 1993. Results continue to be adversely affected by progressively higher portions of interest cost being charged directly to expense rather than being capitalized and by provisions for possible uncollectible receivables related to mortgages. Results for 1995 benefited from an increase in earnings from rental operations, residential sales and a land sale as well as from a decrease in the provision for uncollectible receivables. The provision for uncollectible receivables was lower in 1995 than in the prior year despite an increase of $10 million to the allowance for uncollectible receivables resulting from the initial application of Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, which established new criteria for measuring impairment of a loan.
Our commercial real estate activities traditionally centered around acquiring suburban, multi-site land parcels in locations considered prime for office development and then developing the land in progressive stages. In the late 1980s, 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 joint venture 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 commercial real estate industry continues to suffer from a 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 low rental rates will continue to cause 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 competitive rates. While we have experienced significant leasing activity in recent years, we have had to enter into multiple year leases at low 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.
The Corporation will adopt SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, in the first quarter of 1996. SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets. The adoption of SFAS No. 121 is not expected to have a significant impact on net income in 1996. This pronouncement is discussed further in Note (1) (p) of the Notes to Consolidated Financial Statements on page 51.
Loans receivable, which were issued in connection with our joint venture activities and other property sales, are 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 joint venture 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 $18 million in 1995, $29 million in 1994 and $22 million in 1993, principally related to loans on selected properties with operating income at levels which may not fully meet debt service requirements. The 1995 charge includes the $10 million from the initial application of SFAS No. 114. During 1995 and 1994, such reserve was reduced by writedowns aggregating $4 million and $10 million, respectively, related to specific loans that are uncollectible. Management believes the reserve of $88 million at
The Corporation has outstanding $120 million of unsecured 8 3/4% notes due in 1999. In each of the years 1996 through 1998, the Corporation will pay as a mandatory sinking fund an amount sufficient to redeem $30 million of principal.
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. The proceeds have been used to support our real estate operations.
Chubb Capital has outstanding $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 support our real estate operations.
A primary reason for the sale of fixed maturities in each of the last three years has been to improve our after-tax portfolio return without sacrificing quality, where market opportunities have existed to do so. The substantial gains realized in 1993 were due to the sale of fixed maturities in the first half of the year as part of the realignment of our portfolio and in the latter part of the year to realize gains to partially offset the reduction in statutory surplus of our property and casualty subsidiaries resulting from the decrease in income related to the Fibreboard settlement.
Effective January 1, 1994, the Corporation adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115 established more stringent criteria for classifying fixed maturity securities as held-to-maturity. Thus, upon adopting SFAS No. 115, the Corporation reclassified $4.2 billion of fixed maturities as available-for-sale which were previously classified as held-to-maturity. At December 31, 1995, 27% of our fixed maturity portfolio was classified as held-to-maturity compared with 35% at December 31, 1994 and 79% at December 31, 1993.
In 1993, life and health insurance income after taxes included a benefit of $5 million resulting from a reversal of income tax reserves based on a settlement of prior years' taxes.
In 1995, the Corporation adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan. 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 51.
Consolidated financial statements of the Corporation at December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 and the Report of Independent Auditors thereon and the Corporation's unaudited quarterly financial data for the two-year period ended December 31, 1995 are incorporated by reference from the Corporation's 1995 Annual Report to Shareholders, pages 44 through 68.