Net premiums written decreased by 1.4% to $1,016.6 million in 1998 from $1,031.1 million in 1997, reflecting the decreases in international, marine, aviation and surety and facultative gross written premiums, partially offset by growth in U.S. broker and U.S. direct treaty reinsurance and insurance premiums and the decrease in ceded premiums.
EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased by 1.7% to $778.4 million in 1998 from $765.4 million in 1997. The Company's loss and LAE ratio was 72.9% for 1998 and 1997. Excluding the impact of catastrophes and the one-time return premium of $32.3 million, the Company's loss and LAE ratio increased by 0.1 percentage points to 72.2% in 1998 as compared to 72.1% in 1997. Net catastrophe losses for 1998 were $30.6 million mainly arising from Hurricanes Georges and Mitch, Canadian Ice Storm losses and a major fire impacting a facultative coverage partially offset by favorable development on prior period catastrophes compared to net catastrophe losses of $8.6 million for 1997. Catastrophe losses include the impact of both current period events and favorable and unfavorable development on prior period events and are net of reinsurance. The underlying loss ratio increase was attributable to changes to the Company's business mix consistent with its underwriting strategy together with the impact of $17.1 million in incurred losses relating to the coinsurance provisions of the Aggregate Excess of Loss Reinsurance coverage ("Stop Loss Agreement") acquired from Gibraltar Casualty Company ("Gibraltar"), an affiliate of the Prudential Insurance Company of America ("The Prudential"), the Company's former parent, at the time of the Company's initial public offering in 1995. This coverage protects the Company's consolidated earnings against up to $375.0 million of the first $400.0 million of adverse development, if any, on the Company's consolidated reserves for losses, allocated LAE and uncollectible reinsurance at June 30, 1995 (December 31, 1994 for catastrophe losses).
Gibraltar has disputed $39.7 million ceded under the Direct Excess Retrocession primarily reflecting reserve increases for asbestos losses ceded by the Company in 1998. Gibraltar is disputing the level of reserves established by the Company for such losses, but Gibraltar is not disputing its responsibility to pay the ultimate losses in accordance with the terms of the Direct Excess Retrocession. Management does not expect that this dispute will have a material adverse effect on the Company's future financial condition, results of operations or cash flows.
Underwriting expenses increased by 5.5% to $326.5 million in 1997 from $309.5 million in 1996. Commission, brokerage, taxes and fees increased by $20.2 million attributable primarily to increases in written premium and changes in the Company's business mix. Other underwriting expenses decreased by $3.2 million, as the impact of the continued reductions in the number of employees over the course of 1996 and 1997 together with other cost reduction initiatives more than offset the impact of salary and other expense increases that were generally in line with inflation. The Company's expense ratio decreased by 0.7 points to 31.1% in 1997 from 31.8% in 1996 as the increase of premiums earned more than offset the increases in underwriting expenses.
(2) Net of $39.7 million in 1998, $22.6 million in 1997 and $34.5 million in 1996 ceded as paid losses under the Stop Loss Agreement.
Everest Re employs various techniques, including licensed software modeling, to assess its accumulated exposure to property catastrophe losses and summarizes that exposure in terms of the probable maximum loss ("PML"). The company defines PML as its anticipated maximum loss, taking into account contract limits, caused by a single catastrophe affecting a broad contiguous geographic area, such as that caused by a hurricane or earthquake of such a magnitude that it is expected to occur once in every 100 years. Management estimates that the Company's greatest catastrophe exposure worldwide from any single event is to hurricanes and earthquakes in the coastal regions of the United States, where Everest Re estimates it has a PML exposure, before reinsurance, of approximately $170.0 million in each such region based on its current book of business. Similarly, management estimates that the largest current PML exposure, before reinsurance, outside the United States is approximately $86.0 million. There can be no assurance that Everest Re will not experience losses from one or more catastrophic events that exceed, perhaps by a substantial amount, its estimated PML.
COSTS. The Company's historical and expected future costs to make its systems year 2000 compliant are not material. The total expected out-of-pocket costs of the year 2000 effort are approximately $0.6 million, of which approximately $ 0.3 million had been incurred as of December 31, 1998. These figures include only expenses specifically related to Year 2000 compliance and do not include the cost of hardware or software acquisitions made in the normal course of business.
15) Changes in the role of reinsurance brokers and the relationship of the Company with such brokers;