Our net premiums written and net premiums earned increased $1,837 million (23%) and $2,214 million (28%), respectively, in 2003. Direct and assumed premiums earned grew $802 million principally as a result of the continued favorable pricing environment within the overall property and casualty insurance/reinsurance industry and, to a lesser degree, core volume growth in certain European health insurance products. Also contributing to the growth in premiums was the impact of foreign currency exchange rates as a result of the significant weakening of the U.S. dollar against most European currencies in 2003. Somewhat offsetting the growth from these factors was the loss of certain business as a result of our continued application of discipline in underwriting activities by rejecting risks that either fail to meet our established standards of price or terms and conditions, or that involve risks for which sufficient historical data do not exist to permit us to make a satisfactory evaluation. For risks that pass our criteria, we have sought to retain or even judiciously expand our business. On the other hand, we have curtailed or exited business in particular channels (both property/casualty and accident/health) when expected returns do not appear to justify the risks. Incorporated into these evaluations are realistic expectations of investment returns in the current low interest rate environment and the resulting understanding that greater levels of underwriting profits will be required in order to meet desired levels of profitability in the foreseeable future. As a recent example, in the fourth quarter of 2003, we announced our intent to cease underwriting U.S. mortality business and all life and health business in Canada, Latin America and the Asia Pacific region in order to focus on lines of business that we believe offer the potential for higher investment returns. Also contributing to the increase in net premiums earned was a decline in ceded reinsurance premiums of $1,412 million, primarily due to a decrease in contingently payable premiums resulting from lower levels of adverse development on prior year loss events in 2003 as compared to 2002.
During 2003, we generated $656 million of net earnings, which compares to a net loss of $1,733 million in 2002. The principal factors contributing to this dramatic increase in profitability include: (1) a significant improvement in underwriting results driven by the combination of the current favorable industry pricing environment, continued commitment to established underwriting discipline, lower levels of adverse development related to prior year loss events and the lower than average occurrence of catastrophic-type loss events in 2003; (2) an after-tax gain of $153 million on the sale of ERC Life; and (3) the $131 million increase in net investment income discussed above. Partially offsetting these factors was a modest increase ($35 million or 6%) in other operating costs and expenses. While the sale of ERC Life generated a $116 million pre-tax loss, this loss was more than offset by associated tax benefits resulting from ERC Life's tax basis being substantially in excess of its book basis.
During each of the years in the three-year period ended December 31, 2003, we entered into aggregate excess-of-loss reinsurance treaties providing coverage when company-wide accident year loss ratios exceed the attachment point specified in the respective contracts. In general, the terms of these aggregate treaties require the payment of an initial premium to our reinsurers upon inception of the contract. On these contracts, we also pay additional contingent premiums when we incur losses that are subject to recovery under the treaty. Alternatively, certain contracts allow for the required additional contingent premiums to be paid to our reinsurers (plus financing charges) when we settle the related losses and loss expenses (often many years after the incurred date). Other than the referenced contingent premiums paid or accrued at the time a claim for recovery is recognized (plus financing costs, if applicable), we are not obligated to pay any additional future premiums under the terms of these aggregate treaties. Although we do not intend to renew this coverage in 2004, the total financing charges related to our 2001 and prior aggregate excess-of-loss contracts are estimated to be approximately $125 million in 2004.
Our insurance company businesses remain liable to their policyholders if the reinsurers they cede to are unable to meet their contractual obligations under the applicable reinsurance agreements. To minimize our exposure to significant losses from reinsurance insolvencies, we routinely evaluate the financial condition of our reinsurers and monitor concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurers. Of the $9.6 billion of consolidated reinsurance recoverables at December 31, 2003, approximately 36% is due from 4 specific retrocessionaires, primarily in connection with our aggregate excess-of- loss retrocession program. All of these retrocessionaires are large, highly rated reinsurance entities or members of similarly rated reinsurance groups. At this time, we do not anticipate that any significant portion of recorded reinsurance recoverables will be uncollectible.
o If, on January 1, 2004, currency exchange rates were to decline by 10% against the U.S. dollar and that decline 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.
(a) Includes capital expenditures, ordinary course of business purchase orders and other commitments. (b) Includes guaranteed investment contracts, structured settlements and single premium immediate annuities based on scheduled payouts, as well as those contracts with readily determinable cash flows such as workers' compensation tabular indemnity and long-term disability claims. (c) Due to the indeterminate nature of their cash outflows, certain categories of other noncurrent liabilities are not presented in the above table. These include deferred taxes, fair values of financial instruments and other sundry items. Refer to notes 7 and 15 for further information on these items.
Cash flows from operating activities, which consist primarily of premiums collected during the period (net of related acquisition costs) and payments made for claims and claim expenses, decreased $915 million in 2003, principally as a result of an increase in claim payments in 2003 attributable to both significant payments made in connection with the events of September 11, 2001 and a general increase in reported claims activity experienced in recent periods. Cash flows used in investing activities decreased $2.4 billion in 2003, primarily due to lower levels of operating and financing cash flows available for investment, offset slightly by the cash proceeds from the sale of ERC Life. Cash flows from financing activities decreased $1.3 billion in 2003, primarily attributable to the lack of a current year counterpart to the $1.8 billion capital contribution received in 2002, partially offset by cash receipts from a related party credit facility. The $1.8 billion capital contribution received in 2002 was made to replenish capital sufficient to cover the after-tax impact of the $2.5 billion charge taken in the fourth quarter to strengthen prior year claim reserves.
In connection with the 2002 $1.8 billion capital contribution and other transactions, we transferred our international property and casualty businesses from ERC Life to GE Investments, Inc. ("GEII"), and following those transactions, we own all the outstanding shares of Class C common stock of GEII. The Class C stock is intended to reflect the value and the financial performance of the transferred businesses. Because GE Company has delegated control of the transferred businesses to us, we continue to consolidate the financial results of those businesses with our results. Our Class C shares represent less than 20% of the outstanding common stock of GEII. The following table provides summary balance sheet information of the transferred businesses as of December 31, 2003 and 2002:
We have a one-year $600 million revolving credit agreement in place with GE Capital Services which enables us 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 is automatically extended for successive terms of one year each unless terminated in accordance with terms of the agreement. The total amount outstanding on this credit facility, including accrued interest payable, was $111 million and $190 million as of December 31, 2003 and 2002, respectively.
We, along with GE Capital Corporation, are participants in a revolving credit agreement that involves an international cash pooling arrangement on behalf of certain of our European affiliates. In such roles, either participant may make short-term loans to the other as part of the cash pooling arrangement. Each such borrowing shall be repayable upon demand, but not to exceed 364 days. This unsecured line of credit has an interest rate per annum equal to GE Capital Services' cost of funds for the currency in which such borrowing is denominated. This credit facility has a current expiration date of August 26, 2004, but is automatically extended for successive terms of one year each, unless terminated in accordance with the terms of the agreement. We had a net payable of $103 million under this credit facility at December 31, 2003 and a net receivable of $459 million at December 31, 2002.
The property and casualty reinsurance industry historically 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 we believe 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.
Insurance liabilities and reserves differ for short and long-duration insurance contracts. Short-duration contracts such as property and casualty policies are accounted for based on actuarial estimates of losses inherent in that period's claims, including losses for which claims have not yet been reported. Short-duration contract loss estimates rely on actuarial observations of ultimate loss experience for similar historical events. Measurement of long-duration insurance liabilities (such as term and whole life insurance policies) also is based on approved actuarial methodologies that include assumptions about mortality morbidity, lapse rates and future yield on related investments. Historical insurance industry experience indicates that a greater degree of inherent variability exists in assessing the ultimate amount of losses under short-duration property and casualty contracts than exists for long-duration mortality exposures. This inherent variability is particularly significant for liability-related exposures, including latent claims issues (such as asbestos and environmental related coverage disputes), because of the extended period of time--often many years--that transpires between when a given claim event occurs and the ultimate full settlement of such claim. This situation is then further exacerbated for reinsurance entities (as opposed to primary insurers) due to coverage often being provided on an "excess-of-loss" basis and the resulting lags in receiving current claims data. Benefit-related insurance liabilities totaled $31.6 billion at year-end 2003. Of that total, approximately $25.3 billion ($16.5 billion net of reinsurance recoverables) related to unpaid claims and claims adjustment expenses under short-duration insurance contracts.
We continually evaluate the potential for changes in loss estimates with the support of qualified reserving actuaries and use the results of these evaluations both to adjust recorded reserves and to proactively modify underwriting criteria and product offerings. For actuarial analysis purposes, reported and paid claims activity is segregated into several hundred reserving segments, each having differing historical settlement trends. A variety of actuarial methodologies are then applied to the underlying data for each of these reserving segments in arriving at an
Impairment of investment securities results in a charge to operations when a market decline below cost is considered other than temporary. We regularly review investment securities for impairment based on criteria that include the extent to which the investment's carrying value exceeds its related market value, the duration of the market decline, our ability to hold to recovery and the financial strength and specific prospects of the issuer of the security. Our investment securities amounted to $29.0 billion at year-end 2003. Gross unrealized gains and losses included in that carrying amount related to debt securities were $704 million and $177 million, respectively. Gross unrealized gains and losses on equity securities were $31 million and $40 million, respectively. Of securities with unrealized losses at year-end 2003, and based on application of our accounting policy for impairment, approximately $40 million of portfolio value is at risk of being charged to earnings in 2004. We actively perform comprehensive market research and analysis and monitor market conditions to identify potential impairments. Further information is provided in Notes 2 and 4 to our consolidated financial statements.
Certain significant accounting policies do not involve the same level of measurement uncertainties as those discussed above, but are nevertheless important to an understanding of our financial statements. Policies related to revenue recognition, financial instruments and business combinations require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Certain of these matters are among topics currently under reexamination by accounting standard setters and regulators; based on their tentative conclusions, significant changes to GAAP, and therefore to certain of our accounting policies, are possible in the future. Also see Note 2 to our consolidated financial statements, Summary of Significant Accounting Policies, which discusses accounting policies that we have selected from acceptable alternatives.
In April 2003, the Financial Accounting Standards Board (FASB) finalized Statement of Financial Accounting Standards ("SFAS") 133 Implementation Issue No. B36, Modified Coinsurance Arrangements and Debt Instruments that Incorporate Credit Risk Exposures that Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor Under Those Instruments ("B36"). In summary, the FASB determined that modified coinsurance arrangements, where the ceding insurer withholds funds, might include an embedded derivative that must be bifurcated from the host instrument if it is not clearly and closely related to such host instrument. This situation often arises when the interest rate on the funds held balance is linked to the actual performance of a specified pool of assets. This guidance was effective on the first day of the first fiscal quarter beginning after September 15, 2003. The adoption of B36 did not materially impact our financial position or current operating results.
In December 2003, the FASB modified FIN 46, Consolidation of Variable Interest Entities (with FIN 46R), amending FIN 46 and deferring its application in certain cases. Our adoption of FIN 46 on July 1, 2003, was unchanged by FIN 46R. Because we have not traditionally engaged in the types of securitization vehicles within the scope of FIN 46, no cumulative or future effect on our earnings or equity resulted from either the adoption of FIN 46 or the changes outlined in FIN 46R.