Honeywell 2004 Annual Report Download - page 98

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
all present and future individual actions in state or federal courts and requiring all asbestos related claims based on exposure to
NARCO products to be made against the federally-supervised trust. NARCO has deferred filing its plan of reorganization pending
resolution of the bankruptcy proceedings related to one of its sister companies. We now expect the NARCO plan of reorganization and
the NARCO trust to be approved by the Court in 2005. As part of its ongoing settlement negotiations, Honeywell has reached
agreement in principle with the representative for future NARCO claimants to cap its annual contributions to the trust with respect to
future claims at a level that would not have a material impact on Honeywell's operating cash flows. Given the substantial progress of
negotiations between Honeywell and NARCO related asbestos claimants and between Honeywell and the Committee of Asbestos
Creditors during the fourth quarter of 2002, Honeywell developed an estimated liability for settlement of pending and future asbestos
claims and recorded a charge of $1.4 billion for NARCO related asbestos litigation charges, net of insurance recoveries. This charge
consisted of the estimated liability to settle current asbestos related claims, the estimated liability related to future asbestos related
claims through 2018 and obligations to NARCO's parent, net of insurance recoveries of $1.8 billion.
The estimated liability for current claims is based on terms and conditions, including evidentiary requirements, in definitive
agreements with in excess of 90 percent of current claimants. Substantially all settlement payments with respect to current claims are
expected to be made by the end of 2007.
The liability for future claims estimates the probable value of future asbestos related bodily injury claims asserted against NARCO
through 2018 and obligations to NARCO's parent as discussed above. The estimate is based upon the disease criteria and payment
values contained in the NARCO Trust Distribution Procedures negotiated with the NARCO Committee of Asbestos Creditors and the
NARCO future claimants representative. In light of the uncertainties inherent in making long-term projections we do not believe that
we have a reasonable basis for estimating asbestos claims beyond 2018 under Statement of Financial Accounting Standards No. 5.
Honeywell retained the expert services of Hamilton, Rabinovitz and Alschuler, Inc. (HR&A) to project the probable number and
value, including trust claim handling costs, of asbestos related future liabilities based upon historical experience with similar trusts.
The methodology used to estimate the liability for future claims has been commonly accepted by numerous courts and is the same
methodology that is utilized by an expert who is routinely retained by the asbestos claimants committee in asbestos related
bankruptcies. The valuation methodology includes an analysis of the population likely to have been exposed to asbestos containing
products, epidemiological studies to estimate the number of people likely to develop asbestos related diseases, NARCO claims filing
history, the pending inventory of NARCO asbestos related claims and payment rates expected to be established by the NARCO trust.
Honeywell has approximately $1.3 billion in insurance limits remaining that reimburses it for portions of the costs incurred to
settle NARCO related claims and court judgments as well as defense costs. This coverage is provided by a large number of insurance
policies written by dozens of insurance companies in both the domestic insurance market and the London excess market. At
December 31, 2004, a significant portion of this coverage is with insurance companies with whom we have agreements to pay full
policy limits based on corresponding Honeywell claims costs. This includes agreements with a substantial majority of the London-
based insurance companies entered into primarily in the first quarter of 2004. We conduct analyses to determine the amount of
insurance that we estimate is probable that we will recover in relation to payment of current and projected future claims. While the
substantial majority of our insurance carriers are solvent, some of our individual carriers are insolvent, which has been considered in
our analysis of probable recoveries. In the second quarter of 2004, based on our ongoing evaluation of our ability to enforce our rights
under the various insurance policies, we concluded that we had additional probable insurance recoveries of $47 million, net of
solvency reserves, which has been reflected in insurance receivables. We made judgments
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