Travelers 2002 Annual Report Download - page 71

to our Report on Form 8-K dated July 23, 2002. That document
includes more detailed information about the settlement agreement.
Pursuant to the provisions of the settlement agreement, on
November 22, 2002, the MacArthur Companies filed voluntary peti-
tions under Chapter 11 of the Bankruptcy Code to permit the channel-
ing of all current and future asbestos-related claims solely to a trust to
be established pursuant to Section 524(g) of the Bankruptcy Code.
Consummation of most elements of the settlement agreement is con-
tingent upon bankruptcy court approval of the settlement agreement
as part of a broader plan for the reorganization of the MacArthur
Companies (the “Plan”). Approval of the Plan involves substantial
uncertainties that include the need to obtain agreement among exist-
ing asbestos plaintiffs, a person to be appointed to represent the inter-
ests of unknown, future asbestos plaintiffs, the MacArthur Companies
and the USF&G Parties as to the terms of such Plan. Accordingly,
there can be no assurance that bankruptcy court approval of the Plan
will be obtained.
Upon final approval of the Plan, and upon payment by the USF&G
Parties of the amounts described below, the MacArthur Companies
will release the USF&G Parties from any and all asbestos-related
claims for personal injury, and all other claims in excess of $1 million
in the aggregate, that may be asserted relating to or arising from
directly or indirectly, any alleged coverage provided by any of the
USF&G Parties to any of the MacArthur Companies, including any
claim for extra contractual relief.
The after-tax impact on our 2002 net income, net of expected rein-
surance recoveries and the re-evaluation and application of asbestos
and environmental reserves, was approximately $307 million. This
calculation, summarized in the table below, reflected payments of
$235 million during the second quarter of 2002, and $740 million on
January 16, 2003. The $740 million (plus interest) payment, together
with $60 million of the original $235 million, shall be returned to the
USF&G Parties if the Plan is not finally approved. The settlement
agreement also provides for the USF&G Parties to pay $13 million
and to advance certain fees and expenses incurred in connection with
the settlement, bankruptcy proceedings, finalization of the Plan and
efforts to achieve approval of the Plan, subject to a right of reimburse-
ment in certain circumstances of amounts advanced. That amount
was also paid in the second quarter.
As a result of the settlement, pending litigation with the MacArthur
Companies has been stayed pending final approval of the Plan.
Whether or not the Plan is approved, $175 million of the $235 million
will be paid to the bankruptcy trustee, counsel for the MacArthur
Companies, and persons holding judgments against the MacArthur
Companies as of June 3, 2002 and their counsel, and the USF&G
Parties will be released from claims by such holders to the extent of
$110 million paid to such holders.
The $307 million after-tax impact to our net income in 2002 was
calculated as follows.
Year ended
December 31, 2002
(In millions)
Total cost of settlement $995
Less:
Utilization of existing IBNR loss reserves (153)
Net reinsurance recoverables (370)
Net pretax loss 472
Tax benefit @ 35% 165
Net after-tax loss $307
When the settlement agreement was initially announced in June
2002, we had estimated that the settlement would result in a net pre-
tax loss of $585 million, which included an estimate of $250 million of
reinsurance recoverables. In the fourth quarter of 2002, as we contin-
ued to prepare to bill our reinsurers, we completed an extensive
review of the relevant reinsurance contracts and the related underly-
ing claims and other recoverable expenses, and increased our esti-
mate of the net reinsurance recoverable to $370 million.
A rollforward of asbestos reserve activity related to Western
MacArthur is as follows.
(In millions)
Net reserve balance related to Western MacArthur at Dec. 31, 2001 $6
Announced cost of settlement:
Utilization of existing asbestos IBNR reserves $153
Gross incurred impact of settlement during second quarter of 2002 835
Subtotal 988
Less: originally estimated net reinsurance recoverable on unpaid losses (250)
Adjustments subsequent to announcement:
Change in estimate of loss adjustment expenses 7
Change in estimate of net reinsurance recoverable on unpaid losses (120)
Subtotal (113)
Payments, net of $75 million of estimated reinsurance
recoverables on paid losses (189)
Net reserve balance related to Western MacArthur at Dec. 31, 2002 $442
Our gross asbestos reserves at December 31, 2002 included
$740 million of reserves related to Western MacArthur ($442 million
of net reserves after consideration of $295 million of estimated net
reinsurance recoverables and $3 million of bankruptcy fees recover-
able from others). On January 16, 2003, pursuant to the terms of
the settlement agreement, we paid the remaining $740 million settle-
ment amount, plus interest, to the bankruptcy trustee in respect of
this matter.
4. SEPTEMBER 11, 2001 TERRORIST ATTACK
On September 11, 2001, terrorists hijacked four commercial pas-
senger jets in the United States. Two of the jets were flown into the
World Trade Center towers in New York, NY, causing their collapse.
The third jet was flown into the Pentagon building in Washington, DC,
causing severe damage, and the fourth jet crashed in rural
Pennsylvania. This terrorist attack caused significant loss of life and
property damage and resulted in unprecedented losses for the prop-
erty-liability insurance industry.
As of December 31, 2001, our estimated gross pretax losses and
loss adjustment expenses incurred as a result of the terrorist attack
totaled $2.3 billion, with an estimated net pretax operating loss of
$941 million.These estimated losses were based on a variety of actu-
arial techniques, coverage interpretation and claims estimation
methodologies, and included an estimate of losses incurred but not
reported, as well as estimated costs related to the settlement of
claims. Our estimate of losses was originally based on our belief that
property-liability insurance losses from the terrorist attack will total
between $30 billion and $35 billion for the insurance industry. In 2002,
our estimate of ultimate losses was supplemented by our ongoing
analysis of both paid and reported claims related to the attack. Our
estimate of losses remains subject to significant uncertainties and
may change over time as additional information becomes available.
We regularly evaluate the adequacy of our estimated net losses
related to the terrorist attack, weighing all factors that may impact the
total net losses we will ultimately incur. Based on the results of those
regular evaluations, we reallocated certain estimated losses among
our property-liability segments in 2002. In addition, during 2002, we
recorded both an additional loss provision of $20 million and a
$33 million reduction in our estimated provision for uncollectible rein-
surance related to the attack.
We and other insurers have obtained a summary judgement ruling
that the World Trade Center property loss is a single occurrence.
Certain insureds have appealed that ruling, asking the court to deter-
mine that the property loss constituted two separate occurrences
rather than one. In addition, through separate litigation, the aviation
losses could be deemed four separate events rather than three, for
purposes of insurance and reinsurance coverage. Even if the courts
ultimately rule against us regarding the number of occurrences or
events, we believe the additional amount of estimated after-tax
losses, net of reinsurance, that we would record would not be mate-
rial to our results of operations.
The St. Paul Companies 2002 Annual Report 69