NAICO periodically reviews the reserve estimates relating to insurance business written or assumed by NAICO and CIB and the methods used to arrive at such reserve estimates. NAICO also retains independent professional actuaries who review such reserve estimates and methods. Any changes in the estimates are reflected in current operating results. See Notes to Consolidated Financial Statements.
Gross premiums earned in the surety bond program decreased 31% in 1996, increased 8% in 1997 and decreased 3% in 1998. Net premiums earned in the surety bond program decreased 29% in 1996, increased 11% in 1997 and decreased 11% in 1998. Net premiums earned from surety bonds produced by L&W increased 58% and 22% in 1996 and 1997, respectively, and decreased 8% in 1998. Increased competition, higher reinsurance costs and/or changes in risk retained contributed to the decline in 1998. The remaining reduction in 1998 was attributable to production and reinsurance adjustments related to the runoff of a portion of the surety bond program which was terminated on December 31, 1995.
Litigation expenses reflect expenses related to the ongoing legal proceedings involving the CenTra Group. Litigation expenses were a credit of approximately $2.7 million in 1998 compared to expense of approximately $4.8 million in 1997, and were a credit of $108,000 in 1996. During the second quarter of 1998, the United States District Court in Oklahoma City, Oklahoma (the "Oklahoma Federal Court") denied the CenTra Group's request for costs and attorney fees. Accordingly, the Company reduced the previous first quarter of 1997 net charge for litigation matters by approximately $3.8 million in 1998.
Net income for 1996 was affected by charges totaling $1.5 million for the settlement attributed to legal proceedings and related matters arising from the termination of an underwriting and production contract with the Company's former underwriting manager for a portion of the Company's surety bond program. In addition, legal expenses related to this matter were $441,000 which were reflected in general and administrative expenses for 1996. The Company's results for 1996 also reflect a charge totaling $1.1 million from an arbitration award that was lower than expected. Legal expenses related to the arbitration award were $527,000 which were reflected in general and administrative expenses in 1996.
The Company is a holding company receiving cash principally through equity sales, borrowings and subsidiary dividends, subject to various regulatory restrictions described in "Regulation" and the Notes to Consolidated Financial Statements. The capacity of insurance and reinsurance companies to underwrite insurance and reinsurance is based on maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due. The primary sources of liquidity for the Company's subsidiaries are funds generated from insurance and reinsurance premiums, investment income, capital contributions from the Company and proceeds from sales and maturities of portfolio investments. The principal expenditures are payment of losses and loss adjustment expenses, insurance operating expenses and commissions.
Some of the statements made in this Form 10-K report, as well as statements made by the Company in periodic press releases, oral statements made by the Company's officials to analysts and shareholders in the course of presentations about the Company and conference calls following earnings releases, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among other things, (i) general economic and business conditions; (ii) interest rate changes; (iii) competition and regulatory environment in which the Company operates; (iv) claims frequency; (v) claims severity; (vi) the number of new and renewal policy applications submitted by the Company's agents; (vii) the ability of the Company and its third party providers, agents and reinsurers to adequately address Year 2000 Problems; and (viii) other factors such as the ongoing litigation matters involving a significant concentration of ownership of common stock.