The Group also conducts limited operations from branch offices located in Manhattan, and Rochester, New York, Boston, Massachusetts and Bedford, New Hampshire. The rental charged to the Company for these facilities is prorated in accordance with the pooling agreement described in "Pooling Agreement" under Item 1, herein.
a) Net income includes net securities (losses) gains, net of applicable tax, as follows:
b) The cumulative effects of changes in accounting principle related to changes in accounting for income taxes, post-retirement benefits and retrospectively rated reinsurance contracts.
In 1997, the Company posted a small loss and net cash was used for operations as a result of a decrease in premiums written and a program to reduce pending claims and settle claims more quickly than in the past. During the two year period ended December 31, 1996, the Company operated profitably and net cash was provided from operations.
At December 31, 1997 and 1996 the yield of the Company's fixed maturities portfolio was 5.9% and 6.1%, respectively, with an average maturity of 3.3 years for each year. Additionally, at December 31, 1997, approximately 92% of the fixed maturities portfolio was invested in issues of the U.S. Government and its agencies with the remainder invested in investment grade corporate and industrial issues. The Company presently anticipates reinvesting the majority of proceeds from maturities and investment income in substantially similar investments.
The combined ratios of the Company increased in 1997, primarily reflecting an increase in the 1997 accident year loss ratios, principally for the private passenger automobile and commercial assigned risk lines of business, based upon increased claim frequency and continued unfavorable development of prior accident year losses. This increase was partially offset by a decrease in expenses primarily due to a reduction in the reserve for prior years' servicing carrier expenses and reduced expenses reflecting reduced premium volume in 1997. Included in the Company's results for 1997, 1996 and 1995 were approximately $8.3 million in 1997, $8.1 million in 1996 and $10.3 million in 1995 for reserve strengthening related to losses from prior accident years. In 1997 and 1996, the reserve strengthening primarily related to voluntary commercial automobile and commercial package lines of business, while in 1995, the reserve strengthening primarily related to automobile and workers' compensation lines of business.
The 1997 reserve strengthening included approximately $3.3 million for commercial package lines of business and approximately $2.1 million for voluntary commercial automobile lines of business. During 1997, the Company reviewed the adequacy of the reserves carried for its open claims' files, as part of its normal ongoing practice, focusing on the commercial package, general liability and commercial automobile lines of business. As a result of this review and the continued unfavorable development of prior accident years losses, particularly the 1992 through 1994 accident years, the Company has revised its assumptions regarding future increases in average claims severity and reserves were strengthened.
The 1996 reserve strengthening included approximately $6.0 million for voluntary commercial automobile lines of business and approximately $2.4 million for commercial package lines of business. Beginning in 1992, the Company entered into new market segments of the voluntary commercial business, including specialty programs for sanitation trucks, gas stations, fuel oil deliveries and limousines. Initially, the Company based its loss ratio estimate upon its experience with similar lines of business, industry statistics and standard actuarial ultimate loss projection techniques, which consider expected loss ratios. During 1996, claims began to develop unfavorably and the Company used such claim development to revise the assumptions that formed the basis of actuarial studies and reserves were increased. With respect to commercial package lines, general liability claims for business written in 1992 through 1994 also developed unfavorably. These claims showed an increased frequency of losses as well as an increase in the time between the date the loss occurred and when the loss was reported compared to prior experience. General liability claims are susceptible to the emergence of losses over an extended period of time.
Investment income has decreased by approximately $0.7 million, or 4.1% in 1997, as compared to an increase of $1.0 million or 6.5% in 1996 and $2.2 million or 16.5% in 1995, primarily as a result of a decrease in premiums written and a program to reduce pending claims and settle claims more quickly during 1997, and higher invested assets resulting from positive cash flows in 1996 and 1995. During 1997, the Company also recorded $0.2 million in realized capital losses in the normal course of managing its investment strategy. In 1996, the Company realized gains of $1.1 million on the sale of fixed maturities, primarily U.S. Treasury Notes. During 1995, the Company realized losses of $0.2 million on the sale of certain investments in order to shorten the average duration of its investment portfolio.