Honeywell 2006 Annual Report Download - page 110

HONEYWELL INTERNATIONAL INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
(Dollars in millions, except per share amounts)
Our consolidated financial statements reflect an estimated liability for resolution of pending and future Bendix related abestos
claims at December 31, 2006 of $528 million. Prior to December 2006, we only accrued for the estimated cost of pending Bendix
related abestos claims as we could not reasonably estimate losses which could arise from future Bendix related abestos claims. Due to
the steady three-year decline in the rate of Bendix related asbestos claims filed and reduced volatility in those rates, we believe that it
is now possible to determine a reasonable estimate of the costs that will be incurred for claims filed over the next five years.
Accordingly during the fourth quarter of 2006, we recorded a reserve of $335 million for the estimated cost of future Bendix related
asbestos claims based on the number of pending claims at December 31, 2006, disease classifications, and expected resolution values
and historic dismissal rates. Prior to December 2006, we have historically valued Bendix claims at the average resolution value of the
previous five years. In December 2006, based on the Bendix related experience over the last five years we now believe that the
average of the prior two years is a more accurate indicator of future resolution values, and accordingly, we have applied this two-year
resolution value in calculating both the reserves for pending and future Bendix related asbestos claims. This change resulted in a
reduction of $118 million in the reserve for pending Bendix claims in the fourth quarter of 2006. We will update the expected
resolution values used to estimate the cost of pending and future Bendix claims during the fourth quarter each year.
The estimated liability for future claims represents the estimated value of future asbestos related bodily injury claims expected to
be asserted against Bendix through 2011. In light of the uncertainties inherent in making long-term projections, as well as certain
factors unique to friction product asbestos claims, we do not believe that we have a reasonable basis for estimating asbestos claims
beyond 2011 under SFAS No. 5, “Accounting for Contingencies”. The estimate is based upon Bendix historical experience in the tort
system for the two years ended December 31, 2006 with respect to claims filing and resolution. The methodology used to estimate the
liability for future claims has been commonly accepted by numerous courts. It is substantially similar to that used to estimate the
future NARCO related asbestos claims liability, with the exception that the valuation methodology for Bendix includes payment rates
based on Bendix resolution history, rather than expected trust payment rates.
Honeywell currently has approximately $1.9 billion of insurance coverage remaining with respect to pending and potential future
Bendix related asbestos claims, of which $302 and $377 million are reflected as receivables in our consolidated balance sheet at
December 31, 2006 and 2005, respectively. 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. Insurance receivables are recorded in the
financial statements simultaneous with the recording of the liability for the estimated value of the underlying asbestos claims. The
amount of the insurance receivable recorded is based on our ongoing analysis of the insurance that we estimate is probable of
recovery. This determination is based on our analysis of the underlying insurance policies, our historical experience with our insurers,
our ongoing review of the solvency of our insurers, our interpretation of judicial determinations relevant to our insurance programs,
and our consideration of the impacts of any settlements reached with our issuers. Insurance receivables are also recorded when
structured insurance settlements provide for future fixed payment streams that are not contingent upon future claims or other events.
Such amounts are recorded at the net present value of the fixed payment stream.
On a cumulative historical basis, Honeywell has recorded insurance receivables equal to approximately 50 percent of the value of
the underlying asbestos claims recorded. However, because there are gaps in our coverage due to insurance company insolvencies,
certain uninsured periods, and insurance settlements, this rate is expected to decline for any future Bendix related asbestos liabilities
that may be recorded. Future recoverability rates may also be impacted by numerous other factors, such as future insurance
settlements, insolvencies and judicial determinations relevant to our coverage program, which are difficult to predict. Assuming
continued defense and indemnity spending at current
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