We conduct business from various facilities, most of which are leased. In addition, we own our administrative offices in Fort Wayne, Indiana and Munich, Germany.
In 2003, our total revenues increased $2,345 (25%), primarily due to the increase in net premiums earned discussed above. Also contributing to the revenue growth was a $131 million (12%) increase in net investment income, which resulted principally from an increase in average invested assets. The slight decrease in net realized gains on investments ($17 million or 7%) was fully offset by a $17 million increase in other revenues.
The significant 2002 net loss was largely attributable to the fourth quarter 2002 decision to strengthen reserves by $2.5 billion ($1.6 billion after-tax) across a large portion of our liability-related exposures underwritten in 1997 through 2001. With the amounts recognized in the first three quarters of 2002, the total pre-tax charge for adverse development amounted to $3.7 billion ($2.4 billion after tax). In 2003, we continued to monitor our reported claims activity compared with our revised expected loss levels. In a majority of lines of business, reported claims activity in 2003 was reasonably close to expected amounts. In a few lines--principally medical malpractice, product liability and certain director and officer related coverages--reported claims volumes exceeded our revised loss expectations. Accordingly, we increased our loss reserves to the newly-indicated ultimate levels in 2003, recording adverse development of $0.9 billion.
See the section titled "Property and Casualty Reserves for Unpaid Claims and Claim Expenses" on pages 4-6 and Note 6 to our consolidated financial statements for a more detailed discussion of the general approach we follow in establishing and adjusting claim-related reserves.
Insurance loss provisions are based on the best available estimates at a given time. As described on pages 18-19 under the caption "Insurance Liabilities and Reserves," these estimates will be adjusted in the future as required.
The ceding of a portion of the risks underwritten by our insurance and reinsurance businesses to other insurers and reinsurers--commonly referred to as retrocession--is an integral part of our overall risk management program. Our coordinated retrocession program ranges from the ceding of individual risks that we are not prepared to accept in part or whole; to portfolio arrangements designed to address concentrations of specified risks above our agreed-upon retention thresholds; to aggregate excess-of-loss treaties principally designed to reduce company-wide volatility associated with large unanticipated insurance events.
During 1999 through 2001, accident year loss ratios exceeded the attachment point specified in our aggregate excess-of-loss reinsurance contracts and, accordingly, we have accrued for the expected recovery on an undiscounted basis (consistent with our establishment of the related undiscounted reserves--a GAAP requirement). Additionally, during 2002, 2001 and 2000, the recognition of adverse development related to prior year loss events resulted in additional recoveries being accrued under the aggregate contracts. As of December 31, 2002, the coverage under the 1999, 2000 and 2001 aggregate contracts had been substantially exhausted. No claim is currently anticipated with respect to the 2002 and 2003 aggregate contracts as the accident year losses and loss expenses recognized to date are less than the attachment points specified in those contracts. The additional 2003 ceded losses reflected in the chart below resulted from updating certain estimates related to the 1999 and 2000 aggregate contracts. The impact of these aggregate contracts on our reported operating results for 2003, 2002 and 2001 was as follows:
Exchange rate and interest rate risks are managed with a variety of straightforward techniques, including match funding and selective use of derivatives. We use derivatives to mitigate or eliminate certain financial and market risks because we conduct business in diverse markets around the world. We apply strict policies to manage each of these risks, including prohibitions on derivatives trading, derivatives market-making or other speculative activities.
o If, on January 1, 2004, interest rates had increased 100 basis points across the yield curve (a "parallel shift" in the yield curve) and that increase remained in place for 2004, we estimate, based on our year-end 2003 portfolio and holding everything else constant, that the effect on our 2004 net earnings would be insignificant.
Achieving optimal returns on cash often involves making long-term commitments. U.S. Securities and Exchange Commission (SEC) regulations require that we present our contractual obligations, and we have done so in the table that follows. However, our future cash flow prospects cannot reasonably be assessed based on such obligations--the most significant factor affecting our future cash flows is our ability to earn and collect cash from customers. Future cash outflows, whether they are contractual obligations or not, will vary based on our future needs. While some such outflows are completely fixed (for example, commitments to repay principal and interest on fixed-rate borrowings), most depend on future events (for example, payout pattern on reserves which have been incurred but not reported). Further, normal operations involve significant expenditures that are not based on "commitments," for example, expenditures for income taxes or for payroll. As defined by reporting regulations, our contractual obligations as of December 31, 2003, follow:
During 2003, certain external credit rating agencies announced actions with respect to GE Global Insurance and its businesses. Standard's & Poor's Rating Services revised its rating on our senior debt securities from "A" to "A-". Concurrently, the financial strength rating and counterparty credit ratings on Employers Reinsurance Corporation (and affiliated non-life insurance/reinsurance entities) and Employers Reassurance Corporation were revised from "AA" to "A+". Additionally, AM Best Company revised the financial strength ratings of Employers Reassurance Corporation from "A+" to "A". These actions are consistent with actions and announcements throughout the insurance/reinsurance industry. We do not believe these actions will materially affect our liquidity or capital resources or the ability to write future business.
Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties. For all of these estimates, we caution that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.
estimated range of "reasonably possible" loss scenarios. Factors such as line of business, length of historical settlement pattern, recent changes in underwriting standards and unusual trends in reported claims activity will generally affect which actuarial methodologies are given more weight for purposes of determining the "best estimate" of ultimate losses in a particular reserving segment. As discussed in the insurance section on pages 8-10 and in Note 6 to our consolidated financial statements, reported claims activity related to prior year loss events, particularly for liability-related exposures underwritten in 1997 through 2001, has performed much worse than we
anticipated. This trend was considered in the actuarial reserve study completed in the fourth quarter of 2002, resulting in a significant increase in recorded reserves. Following these actions, we have continued to monitor reported claims volumes relative to our revised expected loss levels. While for the majority of our lines of business, reported claims activity in 2003 was reasonably close to expected amounts, for certain lines of business, the reported claims volumes exceeded our revised loss expectations. In response to this new data, we further increased our loss reserves in 2003. Actuarial reserve studies and recorded reserves continue to be updated accordingly.
Losses on uncollectible premium receivables and reinsurance recoverables are recognized when they are incurred. The nature of our operations is such that we generally expect to receive amounts due and our historical charge-off ratio is relatively low. As a result, our general reserving approach is to only establish reserves for specifically identified disputes or collection issues. In establishing required allowances, we give consideration to relevant observable data as to the nature of the dispute, the overall financial health of the customer, collateral value (such as letters of credit and funds held balances) and legal right-of-offset of related claim liabilities. Exposure to losses on uncollectible premium receivables and reinsurance recoverables at year-end 2003 was approximately $13.6 billion, against which an allowance for losses of $124 million was provided. Further information is provided in Notes 2, 6 and 10 to our consolidated financial statements. While losses depend to a large degree on future economic conditions (including the impact of future claims experience), we do not anticipate significant receivable write-offs in 2004.
Projections of future cash flows are required in order to both perform impairment testing for some asset categories and to properly account for certain reinsurance arrangements. The more significant asset categories requiring routine impairment testing using a cash flow based methodology include deferred insurance acquisition costs, present value of future profits and goodwill. At year-end 2003, these asset categories totaled $3.8 billion. While any required future impairment actions will depend to a large degree on future economic conditions (including the impact of future claims experience and, to a lesser extent, investment yields), we do not anticipate significant impairment charges in 2004. The reinsurance-specific requirements necessitating projections of future cash flows include "risk transfer" testing for both assumed and ceded business at contract inception and, for certain ceded contracts containing retrocessionaire limits expressed in terms of an "economic loss," throughout the life of the underlying contract. At year-end 2003, approximately $1.3 billion of reinsurance recoverables related to contracts containing economic loss limits. As part of our continuing updates of recorded liabilities for claims and claim expenses, we also periodically reassess the expected payout patterns and resulting cash flow projections and make indicated adjustments to recorded reinsurance recoverables. We do not anticipate significant adjustments in 2004.
SFAS 142, Goodwill and Other Intangible Assets, generally became effective for us on January 1, 2002. Under SFAS 142, goodwill is no longer amortized but is tested for impairment using a fair value methodology. We stopped amortizing goodwill effective January 1, 2002. The result of our applying the new rules as of January 1, 2002, resulted in no impairment charge.
The cumulative effect of the accounting change in 2001 related to the adoption, as of January 1, 2001, of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended. We recognized a one-time, non-cash charge of $11 million to earnings related to such adoption.
Our Consolidated Financial Statements and the Independent Auditors' Report 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.