The Company and its subsidiaries conduct their businesses from various facilities, most of which are leased. In addition, the Company owns its administrative offices in Overland Park, Kansas, Copenhagen, Denmark and Aachen and Munich, Germany.
Net earnings in 1995 increased $79 million, including an increase in after-tax net realized gains on investments of $57 million. Excluding after-tax net realized gains on investments, 1995 net earnings increased $22 million. This 1995 increase consisted of $40 million from the Acquired Businesses and $42 million from increased net investment income resulting from growth in the investment portfolio, due mostly to cash flow from operations, offset by a $47 million increase in underwriting losses primarily related to long-term disability business.
Domestic net premiums written decreased $380 million or 18% in 1996, principally due to management's decision to not renew certain unprofitable reinsurance contracts and a general decrease in reinsurance premium rates. Domestic net premiums written increased $146 million in 1995, principally due to the Acquired Businesses and lower retrocession costs.
Net investment income decreased $5 million or 1% in 1996. The 1996 decrease was due primarily to the transfer of significant assets to the ERC Frankona Group in the second half of 1995 which was substantially offset by investment of cash flow from operating activites. Net investment income increased $24 million in 1995, due primarily to the Acquired Businesses and growth in the investment portfolio caused from cash flow from operating activities.
International property and casualty net premiums written increased $1.194 billion or 119% in 1996, of which $1.203 billion reflects recording a full year of the Acquired Businesses operating results in 1996 compared to recording only five months of operating results in 1995. This 1996 increase in net premiums written related to the Acquired Businesses was partially offset by a minor decrease in other international net premiums written, primarily due to the integration of international operations. Net written premiums increased $597 million in 1995, including $426 million related to the Acquired Businesses. The balance of the 1995 increase related to improved market conditions, an increase in premium rates in Europe and intensified marketing efforts.
The 3.7% improvement in the 1996 GAAP combined ratio was caused by favorable loss experience and is indicative of improved international premium rates and market conditions in recent years. The 1996 GAAP combined ratio was also favorably impacted by a decline in both the frequency and severity of international catastrophe losses.
Net investment income increased $141 million or 113% in 1996, including $126 million related to recording a full year of the Acquired Businesses operating results in 1996 compared to recording only five months of operating results in 1995. The remaining $15 million 1996 increase was due primarily to growth in the investment portfolio resulting from cash flow from operating activities. Net investment income increased $86 million in 1995, due primarily to the Acquired Businesses.
Earnings before income taxes, excluding net realized gains on investments, increased $136 million or 170% in 1996 as a result of two major factors: (1) inclusion of a full year of the Acquired Businesses operating results in 1996 compared to recording only five months of operating results in 1995 and (2) a significant improvement in the underwriting results, as illustrated by the 3.7% improvement in the GAAP combined ratio. Earnings before income taxes, excluding net realized gains on investments, increased $53 million in 1995, due primarily to the Acquired Businesses.
Cash flows from operating activities primarily consists of premiums collected during the period in excess of payments made for claims and claim expenses. The 1996 decrease in cash flows from operating activities is principally due to a slight increase in claim payments and the timing of reinsurance settlements. The increase in 1995 cash flows from operating activities primarily reflects cash flow activity from the Acquired Businesses.
Cash used for investing activities decreased $1.377 billion in 1996, principally due to the $1.022 billion purchase of the Acquired Businesses in 1995. The purchases of the Acquired Businesses in 1995 were partially funded by GE Capital Services contributing $300 million to the equity of GE Global and GE Capital Corporation, an affiliate of GE Global, purchasing 1,500 shares of 5% cumulative preferred stock issued by GE Global for an aggregate purchase price of $150 million. The remaining $355 million 1996 decrease in cash used for investing activities was primarily attributable to a decrease in purchases of investments, net of sales and maturities, which was caused by a decline in cash flows from operations.
Cash flows from financing activities decreased $958 million in 1996, due primarily to the financing and capitalization of the 1995 acquisitions described above, partially offset by an increase in contract deposits related to the life financial reinsurance business.
General. The Company follows a conservative investment strategy that emphasizes maintaining a high quality investment portfolio. The primary goals include a growing stream of investment income and improving total investment returns. All investments are administered under guidelines established and approved by the Company's Board of Directors. The Company's guidelines require that no more than 2.5% of the Company's bond portfolio may be invested in any one issue of debt securities and no more than 10% of the stock portfolio may be invested in the equity securities of any one issuer.
In structuring its fixed maturity portfolios, the Company considers the duration of its assets and claims and claim expenses reserves. Each fixed maturity portfolio has a total return benchmark against which relative performance is measured. The total return benchmark includes 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.
Domestic Investment Operations. The Company's domestic property and casualty investment portfolios are principally invested in tax-exempt state and municipal bonds, which the Company believes provide the most attractive after tax yield. Some additional commitment was made to equity securities in 1996 and 1995 to enhance total investment return in the longer term. The Company's domestic life investment portfolios are largely invested in taxable debt securities.
The Company's emphasis on investment quality is evidenced by the table above, 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 "A" or above. The Canadian securities held by the Company were similar in quality to the other securities held in its domestic property and casualty portfolio. Bonds held by the Company in its domestic life portfolios include mortgage-backed securities that are matched to the liability profile of specific life reinsurance contracts. Investments in mortgage-backed securities are limited to lower risk tranches and do not include any interest only or principal only elements. Mortgage-backed securities in the Company's investment portfolio were principally issued by Federal agencies. The balance of the other securities held in the domestic life portfolios were principally U.S. government and government agency securities and bonds with a rating of "A" or higher. The Company does not contemplate significant investment in non-investment grade securities in either the property and casualty or life portfolios.
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 the investment department of ERC.
As of December 31, 1996, the ERC Frankona Group's investments totaled $6.2 billion, an increase of $204 million from December 31, 1995. The composition of ERC Frankona Group's investments was as follows:
ERC Frankona Group's foreign exchange risk management program assists in mitigating its foreign currency exposures. The ERC Frankona Group's investment portfolios are globally diversified, with most fixed maturities having a term less than ten years. The currency structure of the investment portfolios is determined by the underlying reinsurance business and is matched with the corresponding 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 foreign currency exposures.
The Company's Consolidated Financial Statements and the Reports of Independent Auditors thereon and the Supplementary Financial Statement Schedules listed on the accompanying Index to Financial Statements and Financial Statement Schedules are filed as part of this report.