Travelers 2004 Annual Report Download - page 88

to be inconsistent and vary from jurisdiction to jurisdiction. Environmental claims when submitted rarely indicate
the monetary amount being sought by the claimant from the policyholder, and the Company does not keep track
of the monetary amount being sought in those few claims which indicate a monetary amount.
At December 31, 2004, approximately 71% of the net environmental reserve (approximately $456 million)
is carried in a bulk reserve and includes unresolved and incurred but not reported environmental claims for which
the Company has not received any specific claims as well as for the anticipated cost of coverage litigation
disputes relating to these claims. The balance, approximately 29% of the net environmental reserve
(approximately $185 million), consists of case reserves. The bulk reserve the Company carries is established and
adjusted based upon the aggregate volume of in-process environmental claims and the Company’s experience in
resolving those claims.
The resolution of environmental exposures by the Company generally occurs by settlement on a
policyholder-by-policyholder basis as opposed to a claim-by-claim basis. Generally, the Company strives to
extinguish any obligations it may have under any policy issued to the policyholder for past, present and future
environmental liabilities and extinguish any pending coverage litigation dispute with the policyholder. This form
of settlement is commonly referred to as a “buy-back” of policies for future environmental liability. In addition,
many of the agreements have also extinguished any insurance obligation which the Company may have for other
claims, including but not limited to asbestos and other cumulative injury claims. The Company and its
policyholders may also agree to settlements which extinguish any future liability arising from known specified
sites or claims. Provisions of these agreements also include appropriate indemnities and hold harmless provisions
to protect the Company. The Company’s general purpose in executing these agreements is to reduce the
Company’s potential environmental exposure and eliminate the risks presented by coverage litigation with the
policyholder and related costs.
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.
There have been judicial interpretations that, in some cases, have been unfavorable to the industry and the
Company. Additionally, payments for loss and allocated loss adjustment expenses have increased over past years.
In its review of environmental reserves, the Company considered: the adequacy of reserves for past settlements;
changing judicial and legislative trends; the potential for policyholders with smaller exposures to be named in
new clean-up action for both on- and off-site waste disposal activities; the potential for adverse development and
additional new claims beyond previous expectations; and the potential higher costs for new settlements. Based on
these trends, developments and management judgment, the Company increased its IBNR reserves accordingly. 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.
The duration of the Company’s investigation and review of these claims and the extent of time necessary to
determine an appropriate estimate, if any, of the value of the claim to the Company vary significantly and are
dependent upon a number of factors. These factors include, but are not limited to, the cooperation of the
policyholder in providing claim information, the pace of underlying litigation or claim processes, the pace of
76