(4) Includes twelve months pro forma net premiums written for American Reliance.
Property and casualty insurers are regulated by the various state insurance departments that coordinate their efforts through the NAIC. See "Business-- Regulation." Regulation includes rate and policy form approval, licensing of insurance agents and companies and solvency oversight.
Gross Premiums Written. Gross premiums written for 1999, 1998 and 1997 were $364.1 million, $378.1 million and $346.0 million, respectively. The decrease of $14.0 million or 3.7% in 1999 compared to 1998 is due primarily to three factors. First, the Company continues to focus on underwriting standards and adequate pricing during a period of competitive pricing in both commercial and personal lines. Second, service disruptions in early 1998 associated with the implementation of a new policy issuance system at the end of 1997 negatively impacted new and renewal policy processing and agents' willingness in 1999 to place business with the Company. The Company believes that these service disruptions were eliminated in 1999 and the related premium decline ended during the second half of 1999. Finally, the reduction in the A.M. Best rating of Highlands to B++ from A-, announced by A.M. Best in June 1998, caused a decline in premium production as certain agents were unwilling to use a B++ market. In 1998, the Company entered into an agreement with an insurance company to provide certain of its customers access to A+ paper, and in 1999 the Company entered into new arrangements with three other companies, rated A+ to A-. These agreements were entered into to mitigate the impact of A.M. Best's rating change for Highlands.
Net premiums written for 1998 increased $97.1 million compared to 1997 due to the 1998 non-recurring additional premium associated with the Stop Loss Agreement and the inclusion of American Reliance for the full year 1998. Excluding the Stop Loss Agreement and comparing the American Reliance business on a full-year 1997 basis, net premiums written for 1998 declined 6% compared to 1997 for the same reasons noted for gross premiums written.
Loss and loss adjustment expenses incurred for 1998 increased $81.9 million compared to 1997 primarily due to: $50 million of reserve increases associated with the 1998 termination of the Stop Loss Agreement; an increase in weather related catastrophe losses of $12.1 million; an increase in California construction defect losses of $1.9 million; higher incurred losses on retrospectively rated polices; and the inclusion of American Reliance for the full year 1998.
Underwriting results of the property and casualty industry are significantly influenced by estimates of loss and loss adjustment expense reserves. (See Note 11 to the Consolidated Financial Statements.) These reserves are an accumulation of the estimated amounts necessary to settle and pay all outstanding and unreported claims including loss adjustment expenses, net of estimated claim recoveries. The case reserve estimates for reported claims are based upon the facts of each case and the Company's experience with similar cases. Consideration is given to historical trends regarding reserving patterns, changes in the Company's operations (such as underwriting and claims handling), loss payments, and the effects of court decisions, economic conditions and public attitudes. The process of establishing reserves is imprecise involving significant judgment and assumptions. As information develops that varies from experience, provides additional data or, in some cases, augments data that previously was not considered sufficient for use in determining reserves, changes in the Company's estimate of ultimate liabilities may be required. Changes in prior year reserve estimates (net of reinsurance), which may be material, are reflected in the results of operations in the period such changes are determined to be required.
During the last several years, the Company has experienced significant adverse development on prior years net ultimate loss estimates. The following table sets forth the amount of the adverse development for the periods indicated.
Highlands Group is a holding company, the principal assets of which at December 31, 1999 are all of the capital stock of Highlands Insurance Company and American Reliance, Inc. The Company's property and casualty insurance business is conducted by its direct and indirect wholly-owned insurance subsidiaries. The liquidity and capital resource considerations for the Highlands Group are different than those of the Company's insurance operations.
Management believes that Highlands Group's liquid assets and tax sharing payments and dividends available from its subsidiaries will enable it to meet its liquidity needs for the next year.
As of the date of this filing, the Company has not experienced any Year 2000 problems that have materially affected its operations, the realization of financial assets, or its results of operations. The Company will continue to monitor its operations for non-compliant components. The Company is also monitoring its open transactions with customers and vendors to ensure that there are no undetected Year 2000 problems that could have a material adverse effect on the Company or its operations.
The statements included in this 1999 Annual Report regarding future financial performance and results and other statements that are not historical facts are forward-looking statements. The words "expect," "project," "estimate," "predict," "anticipate," "believes" and similar expressions are also intended to identify forward-looking statements. Such statements are subject to numerous risks, uncertainties and assumptions, including but not limited to, the uncertainties relating to industry and market conditions, natural disasters and other catastrophes, and other risks and uncertainties described in this 1999 Annual Report and in the Company's other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.