ADT 2010 Annual Report Download - page 216

TYCO INTERNATIONAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Commitments and Contingencies (Continued)
Annually, the Company performs a detailed analysis with the assistance of outside legal counsel
and other experts to update its estimated asbestos-related assets and liabilities. Due to the high degree
of uncertainty regarding the pattern and length of time over which claims will be made and then settled
or litigated, the Company uses multiple estimation methodologies based on varying scenarios of
potential outcomes to estimate the range of loss. The Company’s estimate of the liability and
corresponding insurance recovery for pending and future claims and defense costs is predominantly
based on claim experience over the past five years, and a projection which covers claims expected to be
filed, including related defense costs, over the next seven years on an undiscounted basis. The Company
has concluded that estimating the liability beyond the seven year period will not provide a reasonable
estimate, as these uncertainties increase significantly as the projection period lengthens. The Company’s
estimate of asbestos-related insurance recoveries represents estimated amounts due to the Company for
previously paid and settled claims and the probable reimbursements relating to its estimated liability for
pending and future claims. In determining the amount of insurance recoverable, the Company
considers a number of factors, including available insurance, allocation methodologies, solvency and
creditworthiness of the insurers. On a quarterly basis, the company re-evaluates the assumptions used
to perform the annual analysis and records an expense as necessary to reflect changes in its estimated
liability and related insurance asset.
The Company performed its annual analysis of asbestos-related liabilities and insurance assets
during the third quarter of 2010. During the third quarter of 2010, the Company settled a higher than
expected number of claims at above average amounts as compared to the estimates used during the
Company’s valuation performed during fiscal 2009. Based on the Company’s claim experience over the
past 5 years, including the impact of the above mentioned increase in settlements and average
settlement amounts during fiscal 2010, the Company increased its estimated net liability, which resulted
in the Company recording a net charge of approximately $52 million during the third quarter of 2010.
As of September 24, 2010, the Company’s estimated net liability of $106 million was recorded within
the Company’s Consolidated Balance Sheet as a liability for pending and future claims and related
defense costs of $309 million, and separately as an asset for insurance recoveries of $203 million.
Similarly, as of September 25, 2009, the Company’s estimated net liability of $49 million was recorded
within the Company’s Consolidated Balance Sheet as a liability for pending and future claims and
related defense costs of $240 million, and separately as an asset for insurance recoveries of
$191 million. The estimated insurance asset increased due to the responsiveness of pertinent insurance
policies that cover a portion of the increased liability.
The amounts recorded by the Company for asbestos-related liabilities and insurance-related assets
are based on currently available information as well as estimates and assumptions. Key variables and
assumptions include the number and type of new claims that are filed each year, the average cost of
resolution of claims, the resolution of coverage issues with insurance carriers, amount of available
insurance and the solvency risk with respect to the Company’s insurance carriers. Furthermore,
predictions with respect to these variables are subject to greater uncertainty in the later portion of the
projection period. Other factors that may affect the Company’s liability and cash payments for asbestos-
related matters include uncertainties surrounding the litigation process from jurisdiction to jurisdiction
and from case to case, reforms of state or federal tort legislation and the applicability of insurance
policies among subsidiaries. The Company believes that its asbestos-related reserves as of
September 24, 2010 are appropriate. However, actual liabilities or insurance recoveries could be
128 2010 Financials