Net premiums written in 1997 were $4.545 billion compared to $4.573 billion in 1996. The slight decrease in net written premiums was driven by a decrease in international property and casualty written premiums, reflecting competitive market conditions, repositioning certain portfolios to minimize loss accumulations and foreign currency translation due to the strengthening of the U.S. dollar. This decrease in international property and casualty net premiums written was substantially offset by an increase in domestic business, reflecting strong growth in life reinsurance business and the assumption of the renewal rights of a portfolio of specialty property and casualty insurance business obtained as a result of GE Capital's acquisition of Coregis Insurance Company.
Net earnings in 1997 increased $81 million or 14%, including an increase in after-tax net realized investment gains on investments of $49 million. Excluding after-tax net realized gains on investments, 1997 net earnings increased $32 million or 7.0%. This 1997 increase was primarily attributable to a $73 million increase in investment income resulting from continued growth in the investment portfolio and a $61 million increase in other revenues reflecting an increase in revenues generated from investment-related life and financial reinsurance products. These increases were partially offset by a decrease in property and casualty underwriting results reflecting increased underwriting and operating expenses and competitive market conditions.
- -------- (1) Represents data for the applicable periods calculated in accordance with GAAP. Claims and claim expenses ratio represents incurred claims and claim expenses as a percentage of net premiums earned. Underwriting expense ratio represents acquisition costs and other underwriting expenses (excluding amortization of intangibles, interest expense and minority interest in net earnings of consolidated subsidiaries) as a percentage of net premiums earned. The combined ratio represents the sum of the claims and claim expenses ratio and the underwriting expense ratio.
Net investment income of $389 million in 1997 was comparable to the $390 million in 1996. Net investment income decreased $5 million in 1996, 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 activities.
Earnings before income taxes, excluding net realized gains on investments, increased $31 million or 13% in 1997, primarily due to a 1.6% decrease in the GAAP combined ratio associated with a decrease in catastrophe costs partially offset by an increase in underwriting and operating costs. Earnings before income taxes, excluding net realized gains on investments, increased $17 million in 1996, reflecting lower catastrophe costs and the non-renewal of certain unprofitable contracts, partially offset by a slight reduction in reinsurance premium rates, and a slight decline in net investment income.
Earnings before income taxes, excluding realized gains, decreased $23 million or 11% in 1997. This decrease reflects a 4.3% increase in the combined ratio partially offset by a $26 increase in net investment income and a $27 million increase in other revenues related to growth in financial reinsurance products. Earnings before income taxes, excluding net realized gains on investments, increased $136 million in 1996 resulting from the inclusion of a full year of the Acquired Businesses operating results in 1996 compared to recording only five months in 1995 and improvement in the underwriting results, as illustrated by the 3.7% improvement in the GAAP combined ratio.
Revenues from the Company's life reinsurance segment include life insurance premium revenues, net investment income, net realized gains on investments and income from investment-related and financial reinsurance products. The 1997 increase in revenues of $402 million or 46% reflects growth in the domestic traditional life and credit life business principally related to four significant quota share reinsurance contracts as well as growth in investment-related and financial reinsurance life products. Revenues increased $225 million or 34% in 1996, which primarily reflected a full year's operating results from the Acquired Businesses.
GE Global's ability to meet its obligations, including debt service and operating expenses, and pay dividends to its shareholder depends primarily upon receiving sufficient funds from its insurance subsidiaries. The payment of dividends by ERC is subject to restrictions set forth in the insurance laws of Missouri, as well as other restrictions. Historically, the Company's liquidity requirements are met by funds provided by operations and from the maturity and sales of investments.
Cash flows from operating activities primarily consists of premiums collected during the period in excess of payments made for claims and claim expenses. The 1997 and 1996 decrease in cash flows from operating activities is principally due to an increase in claim settlements relative to the collection of premiums and an increase in underwriting and operating cash outlays due to the implementation of new strategic business initiatives.
Cash flows used for investing activities increased $290 million in 1997, principally due to the purchase of other invested assets and the acquisition of minority shares associated with the Company's 1995 acquisition of Frankona Re. Cash used for investing activities decreased $1.377 billion in 1996, principally due to the $1.024 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 $353 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 $47 million in 1997, reflecting an increase in dividends paid to affiliates partially offset by an increase in contract deposits and proceeds from short-term borrowings. 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.
In structuring its fixed maturity portfolios, the Company considers the duration of its assets and claims and claim expenses 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 funds are managed for total return, and performance is measured against equity benchmarks.
On a worldwide basis, the Company manages 70% of its investments internally. General Electric Investment Corporation manages an additional 20% 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, equity securities or derivatives.
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 returns in the longer term. The Company's domestic life investment portfolios are largely invested in taxable debt securities.
The following table categorizes the Company's domestic fixed maturity portfolios by rating based on market values.
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 other bonds with an investment grade rating. The Company does not contemplate significant investment in non-investment grade securities in either the property and casualty or life portfolios.
As of December 31, 1997, the ERC Frankona Group's investments totaled $6.4 billion, an increase of $151 million from December 31, 1996. The composition of ERC Frankona Group's investments was as follows:
On a limited basis, and as part of ongoing customer activities, the Company utilizes interest rate swaps and options to minimize its exposure to movements in interest rates and financial markets that have a direct correlation with certain of its reinsurance products.
New accounting standards issued in 1997 are described below. Neither of these standards will have any effect on the financial position or results of operations of the Company.
The Company's 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.