Travelers 2004 Annual Report Download - page 167

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9. INSURANCE CLAIMS RESERVES, Continued
Prior Year Development
In 2004, estimated claims and claim adjustment expenses for claims arising in prior years totaled a net $2.40
billion, including $2.39 billion of net unfavorable prior year reserve development impacting the Company’s
results of operations, excluding $75 million of accretion of discount. Pretax net unfavorable prior year reserve
development included $928 million to strengthen asbestos reserves primarily as a result of the completion of the
Company’s annual asbestos liability review in the fourth quarter, $290 million to strengthen environmental
reserves, reserve adjustments related to the merger of $500 million for construction and $300 million for surety,
$252 million related to a specific construction contractor, $113 million related to the commutation of agreements
with a major reinsurer, and other net reserving actions
The asbestos provision primarily resulted from an increase in litigation costs and activity surrounding
peripheral defendants. With regard to the environmental provision, new claims for hazardous waste and pollution
continue to decline, though the pace of the decrease has slowed. The average severity of claims has increased,
however, leading the Company to conclude that reserves for environmental losses needed to be increased. The
majority of the asbestos and environmental provision is included in the Commercial segment. Also included in
net unfavorable prior year reserve development of $1.18 billion in the Commercial segment was $38 million
related to the commutation of agreements with a major reinsurer along with a strengthening of Gulf reserves,
which was more than offset by favorable prior year reserve development in core Commercial operations due to
reductions in the frequency of non-catastrophe related losses.
The Specialty segment recorded prior year reserve development of $1.59 billion and included $500 million
and $300 million of net unfavorable prior year reserve development related to the construction and surety
reserves, respectively, acquired in the merger, as well as a $252 million charge related to a specific construction
contractor and $75 million related to the commutation of agreements with a major reinsurer. Results in 2004 also
reflected $150 million of unfavorable prior year reserve development recorded in TPC’s Construction operation
prior to the merger, other reserve increases, and a charge to increase the allowance for estimated amounts due
from a co-surety on a specific construction contractor claim.
In the Personal segment, net favorable prior year reserve development was $378 million, driven by a decline
in the frequency of non-catastrophe homeowners’ losses, as well as a reduction in the frequency and severity of
losses in the automobile line of business.
In 2003, net unfavorable prior year reserve development included in estimated claims and claim adjustment
expenses totaled $390 million. That amount included $549 million of net unfavorable development impacting the
Company’s results of operations that primarily resulted from $521 million of reserve strengthening at Gulf
Insurance Company, a subsidiary that wrote specialty insurance prior to being placed in runoff in 2004. The net
2003 total also included unfavorable development related to American Equity, an operation that was placed in
run-off in the second quarter of 2002, and environmental claims. Those provisions were partially offset by net
favorable development in other Commercial businesses, principally property coverages, in which the Company
experienced lower non-catastrophe-related claim frequency. In 2003, estimated claims and claim adjustment
expenses for claims arising in prior years included $42 million of net favorable loss development on Commercial
loss sensitive policies in various lines; however, since the business to which it relates was subject to premium
adjustments, there was no impact on results of operations.
In addition, Personal recorded $162 million in net favorable prior year reserve development in 2003
principally due to continued reduced levels of non-catastrophe claim frequency in both homeowners and non-
bodily injury automobile businesses, and a $50 million reduction in reserves held related to the terrorist attack on
September 11, 2001.
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