Net premiums written and net premiums earned decreased $798 million (or 10%) and $816 million (also 10%), respectively, in 2001. The majority of this decrease is attributable to the $698 million of premiums ceded in connection with the events of September 11 as discussed below. The remaining decrease in premiums is attributable to (1) the decision to exit certain lines of business and customer relationships as part of a reunderwriting initiative undertaken in 2000/2001 and (2) additional ceded premiums resulting from claims made on prior year retrocession coverages in place as a result of the adverse development on prior year losses recognized in 2001, somewhat offset by general growth in premiums due to the combination of recent hardening of pricing within the overall property and casualty insurance/reinsurance industry and a focus on growth within certain niche markets.
GE Global Insurance incurred a loss before cumulative effect of change in accounting principle (see further discussion of this accounting change in note 2 to the accompanying consolidated financial statements) of $184 million in 2001, as compared to earnings of $581 million in 2000. Operating results for 2001 as compared to 2000 were adversely impacted by approximately $575 million related to the insurance losses arising from the events of September 11. This amount, which primarily resulted from contingent premium payments contained in certain retrocession agreements, comprises $698 million recorded as a reduction in net premiums earned, and $78 million reflecting additional claims, claim expenses and policy benefits, partially offset by $201 million reflecting a reduction in insurance acquisition costs. The gross losses arising from the events of September 11 (estimated to be $3.3 billion) relate to underlying insurance policies and reinsurance contracts providing general property, general liability, aviation, business interruption, workers compensation and life and health-related coverages. Historical experience related to large catastrophic events has shown that a broad range of total insurance industry loss estimates often exists following such an event and it is not unusual for there to be significant subsequent revisions in such estimates. $575 million is management's best estimate of its existing net liability based on the information currently available, and is net of estimated recoveries under retrocession arrangements, under which a portion of losses is routinely ceded to other reinsurance entities. Further information regarding potential litigation associated with the events of September 11 is discussed in note 13 to the consolidated financial statements.
Operating results in 2001 were also adversely affected by the continued deterioration of underwriting results, reflecting higher property and casualty-related losses (principally as a result of adverse development relating to prior-year loss events) and the continued effects of low premiums in the property and casualty insurance/reinsurance industry in recent years. As the Company's underwriting results in 2001, typical of the global property and casualty industry, were realized, management began underwriting initiatives that increased premium prices for given levels of coverage. These initiatives resulted in management reconsidering and clarifying the product lines, policies, contracts and specific customers for which, given the risk, acceptable future levels of profit seem achievable. For these businesses, the Company has sought to retain or even expand its business. On the other hand, management has identified particular property and casualty business channels from which returns do not appear to justify the risks. For these channels, new business will be significantly curtailed or exited.
Net premiums written increased $1,044 million or 15% in 2000, primarily attributable to the combination of hardening pricing within the overall property and casualty insurance/reinsurance industry, a focus on growth within the niche direct commercial market and the impact of a full year of operating activity for the March 1999 acquisition of Eagle Star Re. This growth was somewhat offset by the 2000 decisions to exit certain lines of business and customer relationships as part of a reunderwriting initiative undertaken during the year, an increase in contingently payable ceded premiums related to recorded recoveries under aggregate excess retrocession programs and the impact of foreign currency translation in connection with the continued strengthening of the U.S. dollar compared to most major European currencies.
Net premiums written decreased $114 million or 3% in 2001, primarily attributable to (1) higher levels of ceded losses under aggregate excess retrocession programs (both current year principally as a result of the events of September 11 and prior years due to continued adverse claim development) and (2) the decision to exit certain lines of business and customer relationships as part of a reunderwriting initiative undertaken in 2000/2001, somewhat offset by general growth in premiums due to the combination of recent hardening of pricing within the overall property and casualty insurance/reinsurance industry and a focus on growth within certain niche markets. Net premiums written increased $431 million or 13% in 2000, primarily attributable to the combination of hardening pricing within the overall property and casualty insurance/reinsurance industry and a focus on growth within the niche direct commercial market. This increase was partially offset by the 2000 decision to exit certain lines of business and customer relationships as part of a reunderwriting initiative undertaken during the year and higher levels of ceded premiums under aggregate excess retrocession programs.
The significant increase in the 2001 combined ratio is partially attributable to higher levels of ceded premiums and incurred losses resulting from the events of September 11. Excluding this impact, the 2001 combined ratio would have been 126.6%. The relatively high combined ratios in 2001 (excluding the impact of the events of September 11), 2000 and 1999 primarily reflect the effects of continued insufficient pricing within the overall property and casualty insurance/reinsurance industry in recent years and adverse development on prior year recorded losses. The majority of the adverse development in 2001 related to higher projected ultimate losses for liability coverages, especially in the hospital liability, nonstandard automobile (automobile insurance extended to higher-risk drivers) and commercial general liability lines of business.
Net investment income decreased $44 million or 13% in 2001, primarily attributable to the general decline in interest rates during 2001. Net investment income increased $7 million or 2% in 2000, primarily attributable to the repositioning of the investment portfolio to include a higher proportion of fixed maturity securities.
Cash flows from investing activities decreased $1,307 million in 2001, primarily attributable to a net increase in the purchase of investment securities as a result of the cash inflows from higher volumes of contract deposits within the life reinsurance operations and the capital contributions discussed below under cash flows from financing activities. Cash flows from investing activities increased $447 million in 2000, primarily attributable to a net decrease in the purchases of investment securities as a result of the decrease in operating cash flows discussed above.
The Company has not utilized forms of off-balance sheet arrangements, such as asset securitizations, involving special purpose entities to facilitate improved share owner returns and securities transactions, transfer selected credit risk, or engage in speculative activities and has not provided financial support to special purpose entities under any liquidity or credit support agreements.
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 portfolios are managed for total return and performance is measured against equity benchmarks.
On a worldwide basis, based on data as of December 31, 2001, the Company manages 73% of its investments internally. GE Asset Management Incorporated, an affiliate of the Company, manages an additional 8% of the Company's investments, and the balance is managed by unaffiliated outside managers.
The Company continues to seek opportunities to enhance investment yield through a conservative, primarily fixed maturity investment strategy. Its current investment strategy does not contemplate material additional investments in non-investment grade debt securities, commercial real estate, commercial mortgages or derivatives.
The Company's domestic fixed maturity portfolios, categorized by rating based on market values, are summarized as follows:
The Company's emphasis on investment quality is evidenced by the preceding table, which indicates that the bonds in the Company's investment portfolios are principally invested in either U.S. government and government agency securities or issues rated "Baa" or above. The Canadian securities held by the Company are similar in quality to the other securities held in its domestic portfolio. Fixed maturity securities held by the Company in its domestic life portfolios include mortgage-backed and other asset-backed securities that are matched to the liability profile of specific life reinsurance contracts. Investments in mortgage-backed and other asset-backed securities are limited to lower risk tranches and do not include any interest only or principal only securities. Mortgage-backed and other asset-backed securities in the Company's investment portfolio were principally issued by Federal agencies. The majority of the balance of other securities held in both the domestic property and casualty and domestic life portfolios represent investments in non-rated debt securities. The Company does not contemplate significant additional investment in non-investment grade securities in either the property and casualty or life portfolios.
As of December 31, 2001, the fair value of the GE Frankona Re Group's investments totaled $6,597 million, a decrease of $143 million from December 31, 2000. The composition of GE Frankona Re Group's investments is summarized as follows:
The Company manages its exposure to currency principally by matching investment assets with the underlying reinsurance liabilities. Any remaining significant net asset/liability positions in a given currency are hedged with forward currency purchase or sale contracts to further mitigate currency exposures. The Company also hedges its currency risk by utilizing cross currency swaps and currency forwards. The Company manages its exposure to interest rates principally by matching floating rate liabilities with corresponding floating rate assets and by matching fixed rate liabilities with corresponding fixed rate assets. Certain of the products reinsured within the life segment include fixed rate interest rate features that are matched with fixed rate investments of a similar duration.
The property and casualty reinsurance industry has been highly cyclical. Underwriting results of primary property and casualty insurance companies and prevailing general economic and reinsurance premium rates significantly influences demand for reinsurance. The cyclical trends in the industry and the industry's profitability can also be affected significantly by volatile and unpredictable developments, including changes in what the Company believes to be the propensity of courts to grant large awards, natural disasters and other catastrophic events (such as hurricanes, windstorms, earthquakes, floods, fires and, as experienced in 2001, intentional events such as terrorist acts), fluctuations in interest rates and other changes in the investment environment which affect inflationary pressures that may tend to affect the size of losses experienced by ceding primary insurance companies.
development in these areas is highly uncertain. Further information about insurance liabilities is provided in note 6 to the consolidated financial statements.
Provision for uncollectible premium receivables and reinsurance recoverables are recognized when they are incurred. Measurement of such losses requires consideration of historical loss experience, including the need to adjust for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates, financial health of specific customers, collateral value (such as letters of credit and funds held balances) and legal right-of-offset of related claim liabilities. The Company's exposure to uncollectible premium receivables and reinsurance recoverables was approximately $15 billion at year-end 2001, against which an allowance for losses of approximately $159 million was provided. While collection prospects depend to a large degree on future economic conditions (including the impact of future claims experience), management does not forecast significant receivable write-offs in 2002. Further information is provided in notes 2 and 6 to the consolidated financial statements.
Statement of Financial Accounting Standards ("SFAS") 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets, modify the accounting for business combinations, goodwill and identifiable intangible assets. As of January 1, 2002, all goodwill and indefinite-lived intangible assets must be tested for impairment and a transition adjustment will be recognized. Management believes no goodwill impairment will be recognized under these new standards. Amortization of goodwill will cease as of January 1, 2002, and, thereafter, all goodwill and any indefinite-lived intangible assets must be tested at least annually for impairment. The effect of the non-amortization provisions on 2002 operations will be affected by 2002 acquisitions and cannot be forecast, but if these rules had applied to goodwill in 2001, management believes that full year 2001 net earnings would have increased by approximately $81 million.