Travelers 2004 Annual Report Download - page 169

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9. INSURANCE CLAIMS RESERVES, Continued
million in 2003. Approximately 22% in 2004 and 57% in 2003 of total net paid losses relate to policyholders
with whom the Company previously entered into settlement agreements that would limit the Company’s liability.
The decrease in the percentage of net paid settlements to total paid losses in 2004 primarily reflected an increase
in reinsurance billings in 2004, which related to gross payments made in prior periods. In 2004, gross payments
associated with policyholders with settlement agreements totaled $199 million, compared with $289 million in
2003.
At December 31, 2004, asbestos reserves, net of reinsurance, were $3.93 billion, compared with $2.98
billion as of December 31, 2003. The Company acquired $311 million of net asbestos reserves in the merger with
SPC. Net incurred asbestos losses and loss adjustment expenses totaled $928 million in 2004, driven by a $922
million provision to strengthen reserves in the fourth quarter following completion of the Company’s annual
ground-up review of asbestos exposures. That review included an analysis of exposure and claim payment
patterns by policyholder category, as well as recent settlements, policyholder bankruptcies, state judicial rulings
and legislative actions. The $922 million provision was largely driven by an increase in litigation costs and
activity surrounding peripheral defendants.
At December 31, 2003, asbestos reserves were $2.98 billion compared to $3.40 billion as of December 31,
2002. The decrease primarily reflected the $452 million of payments made during the course of 2003, partly
offset by accretion of discounts of $25 million on reserves for certain policyholders with structured agreements.
Other than accretion of discounts, there were no additions to asbestos reserves in 2003 compared to an addition
of $2.95 billion in 2002.
In March 2002, Citigroup entered into an agreement under which it provided TPC with financial support for
asbestos claims and related litigation, in any year that TPC’s insurance subsidiaries record asbestos-related
income statement charges in excess of $150 million, net of any reinsurance, up to a cumulative aggregate of $800
million, reduced by the tax effect of the highest applicable federal income tax rate. During 2002, TPC recorded
$2.95 billion of asbestos incurred losses, net of reinsurance, and accordingly has fully utilized the total benefit
available under the agreement.
In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder
and the anticipated cost of resolution, if any. In the course of this analysis, the Company considers the probable
liability, available coverage, relevant judicial interpretations and historical value of similar exposures. In
addition, the Company considers the many variables presented, such as the nature of the alleged activities of the
policyholder at each site; the allegations of environmental harm at each site; the number of sites; the total number
of potentially responsible parties at each site; the nature of environmental harm and the corresponding remedy at
each site; the nature of government enforcement activities at each site; the ownership and general use of each
site; the overall nature of the insurance relationship between the Company and the policyholder, including the
role of any umbrella or excess insurance the Company has issued to the policyholder; the involvement of other
insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of
non-environmental claims or potential non-environmental claims, in any resolution process; and the applicable
law in each jurisdiction. Conventional actuarial techniques are not used to estimate these reserves. In 2004, the
Company recorded a pretax charge of $290 million, net of reinsurance, to increase environmental reserves due to
revised estimates of costs related to recent settlement initiatives. Net environmental losses paid were $152
million, $155 million and $161 million for the years ended December 31, 2004, 2003 and 2002, respectively.
As a result of the processes and procedures described above, management believes that the reserves carried
for asbestos and environmental claims at December 31, 2004 are appropriately established based upon known
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