The Company has invested significant amounts in computer resources, including electronic data processing equipment and the development of proprietary software to support its business. As part of the Company's disaster control strategy, all key data is backed up regularly for off site storage.
Facultative net premiums written increased 16.5% to $953.3 million for the year ended December 31, 1999, from $818.0 million for the same period in 1998. This increase was partially due to a change in the Company's facultative retrocessional program to retain more of this business. Net facultative premiums written changes included: (i) an 18.5% increase in DICO facultative net premiums written to $561.3 million for the year ended December 31, 1999, from $473.8 million for the same period in 1998; (ii) a 12.3%
Net losses and LAE incurred increased 57.8% to $2,654.4 million for the year ended December 31, 1999, from $1,682.4 million in 1998. The 1999 period includes provisions for increased losses for the current and recent accident years to reflect adverse market conditions and a loss in connection with the settlement of a dispute concerning a finite reinsurance agreement. In addition, the Company incurred $122.5 million of catastrophe losses during the year ended December 31, 1999, compared to $65.5 million during the year ended December 31, 1998.
GENERAL. The reinsurance/insurance subsidiaries are required to maintain reserves to cover their estimated ultimate liability for losses and LAE with respect to reported and unreported claims incurred as of the end of each accounting period (net of estimated related salvage and subrogation claims). These reserves are estimates that involve actuarial and statistical projections of the expected cost of the ultimate settlement and administration of claims based on facts and circumstances then known, predictions of future events, estimates of future trends in claims severity and other variable factors. The inherent uncertainties of estimating loss reserves are exacerbated for reinsurers by the significant periods of time that often elapse between the occurrence of an insured loss, the reporting of the loss to the primary insurer and, ultimately, to the reinsurer, and the primary insurer's payment of that loss and subsequent indemnification by the reinsurer (the "tail"). As a consequence, actual losses and LAE paid may deviate, perhaps substantially, from estimates reflected in the reinsurance/insurance subsidiaries' reserves in their financial statements. If actual net losses and LAE paid exceed the reinsurance/insurance subsidiaries' net reserves; the Company's net income will be reduced in the year determined.
CHANGES IN HISTORICAL RESERVES. The following table shows the year-end reserves from 1989 through 1999, and the subsequent changes in those reserves, presented on a combined basis for the reinsurance/ insurance subsidiaries. The following data is not accident year data, but a display of 1989 through 1999 year-end reserves and the subsequent changes in those reserves. For instance, the "Redundancy (Deficiency)" shown in the table for each year represents the aggregate amount by which original estimates of reserves at that year-end have changed in subsequent years. Accordingly, the cumulative deficiency for a year relates only to reserves at that year-end and such amounts are not additive. For example, the initial year-end 1989 reserves have developed a $561 million deficiency through December 31, 1999.
CHANGES IN HISTORICAL RESERVES FOR UNPAID LOSSES AND LAE FOR THE LAST TEN YEARS--GAAP BASIS AS OF DECEMBER 31, 1999
(1) Consists primarily of the application of risk transfer and retroactive accounting rules of Financial Accounting Statement No. 113 ("FAS No. 113"), "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts", and the inclusion of loss reserves for Princeton Eagle West Insurance Company, a Bermuda Insurance Company.
Travelers provides indemnification in the form of an Adverse Loss Agreement (the "Cover") for adverse development of losses and allocated loss adjustment expenses of $500.0 million representing an 80% pro rata share (American Re-Insurance retains the remaining 20%) of up to $625.0 million of losses in excess of $2,700.0 million incurred on or prior to December 31, 1991. At December 31, 1999, the Company has utilized the full limit of the Cover.