Net premiums written by the Company's U.S. insurance subsidiaries for 1997 were approximately 24% of the combined statutory surplus of these subsidiaries. Premium writings of 200% to 300% of surplus are generally considered acceptable by regulatory authorities. Accordingly, the Company has the ability to significantly increase its business without seeking additional capital to meet statutory guidelines.
Other operating expenses for 1996, before credits for allowances from reinsurers, increased $3.3 million (17.2%) to $22.5 million. Salary related expenses increased $2.1 million (18.7%) due primarily to a 16% increase in the number of employees, as the Company's new products continue to expand, and equity appreciation rights accruals which are tied to the Company's book value. Direct commission expense increased $.9 million (34.5%) as the result of increases in premiums from Sagamore's personal automobile product. Allowances from reinsurers decreased $.7 million (42.7%) as the result of the termination of the quota share reinsurance treaty covering the Company's "work accident" program. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 29.2% during 1996 compared to 28.0% for 1995. Including the agency operations, the ratio of other operating expenses to total revenue, adjusted for net realized gains, was 27.1% for 1996 compared with 21.9% for 1995.
Cash flows related to federal income taxes paid, net of refunds received, for 1997, 1996 and 1995 were $7,800, $11,805 and $13,600, respectively, including Section 847 special tax deposits. Future tax benefits on approximately $6,210 of deferred tax assets at December 31, 1997 arising from loss reserve discounting is assured based on Section 847 of the Internal Revenue Code.
Note E - Reinsurance The insurance subsidiaries cede portions of their gross premiums written to certain other insurers under excess and quota share treaties and by facultative placements. Risks are reinsured with other companies to permit the recovery of a portion of related direct losses. Protective also serves as an assuming reinsurer under retrocessions from certain other reinsurers. These retrocessions include individual risks as well as catastrophe pools. Accordingly, the occurrence of a major catastrophic event could have a significant impact on the Company's financial statements. In addition, the insurance subsidiaries participate in certain involuntary reinsurance pools which require insurance companies to provide coverages on assigned risks. The assigned risk pools allocate participation to all insurers based upon each insurer's portion of premium writings on a state or national level.
Net income of the insurance subsidiaries, as determined in accordance with statutory accounting practices, was $24,975, $20,249 and $22,849 for 1997, 1996 and 1995, respectively. Consolidated statutory shareholder's equity for these subsidiaries was $248,154 and $222,720 at December 31, 1997 and 1996, respectively.
NOTE K - INDUSTRY SEGMENTS (CONTINUED) Intersegment commissions, which are eliminated in the consolidated statements of income, are included in revenue and income for the insurance brokerage/agency segment.