Travelers 2001 Annual Report Download - page 57

The St. Paul Companies 2001 Annual Report 55
9
Reserves for Losses and Loss Adjustment Expenses
Reconciliation of Loss Reserves — The following table represents a
reconciliation of beginning and ending consolidated property-liability
insurance loss and loss adjustment expense (“LAE”) reserves for
each of the last three years.
Year ended December 31 2001 2000 1999
(In millions)
Loss and LAE reserves at beginning
of year, as reported $18,196 $17,720 $ 18,012
Less reinsurance recoverables on
unpaid losses at beginning of year (4,651) (3,678) (3,199)
Net loss and LAE reserves at
beginning of year 13,545 14,042 14,813
Activity on reserves of discontinued
operations:
Losses incurred 17 (4) 279
Losses paid (131) (141) (473)
Net activity (114) (145) (194)
Net reserves of acquired companies —984 —
Provision for losses and LAE for claims
incurred on continuing operations:
Current year 6,902 4,178 3,928
Prior years 577 (265) (208)
Total incurred 7,479 3,913 3,720
Losses and LAE payments for claims
incurred on continuing operations:
Current year (1,125) (970) (959)
Prior years (4,443) (4,138) (3,411)
Total paid (5,568) (5,108) (4,370)
Unrealized foreign exchange loss (gain) (89) (141) 73
Net loss and LAE reserves at
end of year 15,253 13,545 14,042
Plus reinsurance recoverables on
unpaid losses at end of year 6,848 4,651 3,678
Loss and LAE reserves at end of year,
as reported $ 22,101 $ 18,196 $17,720
During 2001, we recorded significant prior-year loss provisions for
our Health Care segment. In 2000, loss trends in this segment had
indicated an increase in the severity of claims incurred in the 1995
through 1997 accident years; accordingly, we recorded a provision
for prior-year losses. In 2001, loss activity continued to increase not
only for the years 1995 through 1997, but also 1998, and early activity
on claims incurred in 1999 through 2001 indicated an increase in
severity for those years. Those developments led us to a much
different view of loss development in this segment which in turn
caused us to record provisions for prior year losses totaling $735
million in this segment in 2001. Excluding this specific increase, the
change in prior-year provision was a reduction of $158 million. At
the end of the year, we announced our intention to exit, on a global
basis, all business underwritten in our Health Care segment through
ceasing to write new business and the non-renewal of business
upon policy expiration, in accordance with regulatory requirements.
A reduction in prior-year losses was recorded in 2000 and 1999. In
2000, the favorable prior-year loss development was widespread
across all lines of business with the exception of the Health Care
segment. In 1999, favorable prior-year loss development in several
lines of business, including workers compensation and assumed
reinsurance, was partially offset by adverse development in our
Ocean Marine operation and certain commercial business centers.
The “activity on reserves of discontinued operations” represents
certain activity related to the 1999 sale of our standard personal
insurance business. The reserve balances associated with certain
portions of the business sold are included in our total reserves, but
the related incurred losses are excluded from continuing operations
in our statements of operations for all periods presented, and
included in discontinued operations. See Note 15 for a discussion
of reserve guarantees we made related to this sale.
In 1996, we acquired Northbrook Holdings, Inc. and its three
insurance subsidiaries (“Northbrook”) from Allstate Insurance
Company. In the Northbrook purchase agreement, we agreed to
pay Allstate additional consideration of up to $50 million in the
event a redundancy developed on the acquired Northbrook
reserves between the purchase date and July 31, 2000. During 2000,
we made a payment to Allstate in the amount of $50 million under
this agreement.
Environmental and Asbestos Reserves — Our underwriting
operations continue to receive claims under policies written many
years ago alleging injury or damage from environmental pollution
or seeking payment for the cost to clean up polluted sites. We have
also received asbestos injury claims tendered under general
liability policies.
The following table summarizes the environmental and asbestos
reserves reflected in our consolidated balance sheet at Dec. 31, 2001
and 2000. Amounts in the “net” column are reduced by reinsurance.
2001 2000
December 31 Gross Net Gross Net
(In millions)
Environmental $582$ 507 $ 665 $ 563
Asbestos 478 367 397 299
Total environmental and
asbestos reserves $1,060 $ 874 $ 1,062 $ 862