The Company conducts business from various facilities, most of which are leased. In addition, the Company owns its administrative offices in Overland Park, Kansas, Copenhagen, Denmark and Munich, Germany.
Net premiums written increased $1,439 million or 32% in 1998, primarily attributable to growth in various product lines, including new P&C business associated with the acquisition of the renewal rights of business from IRI and Coregis and the acquisitions of Medical Protective and Kemper Re. This increase was partially offset by three significant quota share life reinsurance contracts obtained in 1997 that did not recur in 1998, the impact of foreign currency translation in association with the strengthening of the U.S. dollar and continued competitive market conditions.
Typically, the underwriting performance of P&C business is measured in terms of a combined ratio. The combined ratio is the sum of the loss ratio and the underwriting expense ratio, with a ratio lower than 100% indicating an underwriting profit and a ratio greater than 100% indicating an underwriting loss. Although the combined ratio has been greater than 100% for the three years presented above, the operating results of insurance/reinsurance companies include net investment income which generally yields an overall operating profit as reflected above in the caption "Earnings before income taxes, excluding net realized gains on investments."
Net investment income increased $30 million or 8% in 1998, primarily attributable to the acquisitions of Medical Protective and Kemper Re and continued growth in the investment portfolios. Net investment income of $389 million in 1997 was comparable to the $390 million in 1996.
Net investment income decreased $6 million or 2% in 1998, primarily attributable to market conditions, partially offset by the acquisition of Kemper Re. Net investment income increased $26 million or 10% in 1997, primarily attributable to continued growth in the investment portfolios, partially offset by the impact of foreign currency translation in association with the strengthening of the U.S. dollar.
Cash flows from operating activities, which primarily consists of premiums collected during the period in excess of payments made for claims and claim expenses, decreased $586 million in 1998. This decrease was primarily attributable to an increase in claim settlements relative to the collection of premiums, the timing of reinsurance settlements in association with catastrophe loss recoverables and an increase in underwriting and operating cash outlays associated with the acquisition of the renewal rights of business from IRI and Coregis and the acquisitions of Medical Protective and Kemper Re. Cash flows from operating activities increased $31 million in 1997, primarily attributable to a decrease in claim settlements relative to the collection of premiums, partially offset by an increase in underwriting and operating cash outlays associated with the implementaion of new strategic business initiatives.
In 1996, GE Global Insurance executed a $1 billion shelf registration statement of senior unsecured debt securities rated AA by Standard & Poor's, of which $600 million was outstanding as of December 31, 1998. On March 1, 1999, the Company issued the remaining $400 million of redeemable senior unsecured debt securities at 6.45% per annum that are scheduled to mature on March 1, 2019. The Company received $395 million in net proceeds from the issuance of these notes (after deduction of underwriting discounts and commissions) which was used to repay a significant portion of the outstanding short-term borrowings under the intercompany credit agreement with GE Capital Services in association with the funding of the Kemper Re acquisition.
In addition, the Company has a one-year $600 million revolving credit agreement with GE Capital Services which enables the Company to borrow from GE Capital Services at an interest rate per annum equal to GE Capital Services' cost of funds for a one year period. The agreement shall be automatically extended for successive terms of one year each unless terminated in accordance with terms of the agreement.
In structuring its fixed maturity portfolios, the Company considers the duration of its assets and claims and claim expense reserves. Most fixed maturity portfolios have total return benchmarks against which relative performance is measured. The total return benchmarks include investment income and realized and unrealized gains and losses on investments. Equity funds are managed for total return, and performance is measured against equity benchmarks.
International Investment Operations. The investment portfolios of the Company's international operations (other than certain equity portfolios, which are managed by outside managers) are managed by the ERC Frankona Group's investment personnel based in Munich, within guidelines established by the management of the ERC Frankona Group and under the overall supervision and review of ERC's investment department.
The ERC Frankona Group's investment portfolios are globally diversified, with most fixed maturities having a term less than ten years. The fixed maturity securities consist of high credit quality securities, and almost all bonds are investment grade securities with a comparable average rating equal to or above a Moody's or S&P "AA" rating. Fixed maturity securities include German and Danish mortgage-backed securities, although these mortgage-backed securities have significantly less principal and interest prepayment risk than typical U.S. mortgage-backed securities, as the German and Danish tax and social environments are not conducive to risks of prepayment of interest and principal. Equity securities and other invested assets were internationally diversified with principal holdings in Germany, the United Kingdom and the United States.
One means of assessing exposure to changes in currency exchange rates is to model effects on reported earnings using a sensitivity analysis. Year-end 1998 consolidated currency exposures, including financial instruments designated and effective as hedges, were analyzed to identify Company assets and liabilities denominated in other than their relevant functional currency. Net unhedged exposures in each currency were then remeasured assuming a 10 percent decrease (20 percent for hyperinflationary economies) in currency exchange rates compared with the U.S. dollar. Under this model, it is estimated that, all else constant, such a decrease would reduce the 1999 net earnings of the Company based on December 31, 1998 positions by an insignificant amount.
Recent economic developments in parts of Asia have altered somewhat the risks and opportunities of Company activities in affected economies. These activities encompass providing certain reinsurance products and investing in marketable securities within those Asian economies. As such, exposure exists to, among other things, increased receivable delinquencies and potential bad debts, impairment of marketable securities and increased reinsurance claims activity. Conversely, new reinsurance opportunities may arise and the liberalization of financial and reinsurance regulation may open new opportunities to penetrate Asian markets. Taken as a whole, while this situation bears close monitoring and increased management attention, the current situation is expected to have an immaterial impact on the Company's results of operations, financial position and cash flows in 1999.
Year 2000 will test the capability of business processes to function correctly. The Company, in conjunction with GE Company and GE Capital Services, has undertaken a global effort to identify and mitigate Year 2000 issues in their information systems, products and services, facilities and suppliers, as well as to assess the extent to which Year 2000 issues will affect its customers. Each business within the GE Company structure has a Year 2000 leader who oversees a multi-functional remediation project team responsible for applying a Six Sigma quality approach in four phases: (1) define/measure - identify and inventory possible sources of Year 2000 issues; (2) analyze - determine the nature and extent of Year 2000 issues and develop project plans to address those issues; (3) improve - execute project plans and perform a majority of the testing; and (4) control - complete testing, continue monitoring readiness and complete necessary contingecy plans. The progress of this program is monitored at each business and Company-wide reviews with senior management are conducted monthly. The first three phases of the program have been completed for a substantial majority of mission-critical activities. Management plans to have nearly all significant information systems, product and services and facilities through the control phase of the program by mid-1999.
In addition, the Company has evaluated the possibility of experiencing an increase in property and casualty insurance and reinsurance claims and claim expenses arising as a result of Year 2000-related exposures. Management is unable to reasonably estimate the amount or range of loss that may occur due to the uncertainty surrounding the likelihood of computer system failures and what portion, if any, will be deemed to be insured losses. Accordingly, the Company is unable to determine whether such losses may have an adverse effect on its results of operations, financial position or cash flows. The Company's loss mitigation strategy includes adding Year 2000 considerations to its underwriting guidelines, as well as its decisions to purchase retrocessional coverage. In addition, the Company employs an active claims management strategy which will include the coordinated handling of any Year 2000-related claims.
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, requires that, upon adoption, all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged items; effects of certain changes in fair value are recorded in equity pending recognition in earnings. The Company will adopt the Statement on January 1, 2000. The impact of adoption will be determined by several factors, including the specific hedging instruments in place and their relationships to hedged items, as well as market conditions. Management has not estimated the effects of adoption as it believes that such determination will not be meaningful until closer to the adoption date.