Travelers 2005 Annual Report Download - page 184

THE ST. PAUL TRAVELERS COMPANIES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
172
9. INSURANCE CLAIMS RESERVES (Continued)
asbestos claim is a products/completed operation claim subject to an aggregate limit and the available
coverage, if any, for that claim. When an estimate of the gross ultimate exposure for indemnity and related
claim adjustment expense is determined for a policyholder, the Company calculates, by each policy year, a
ceded reinsurance projection based on any applicable facultative and treaty reinsurance, as well as past
ceded experience and reinsurance collections. Conventional actuarial methods are not utilized to establish
asbestos reserves. The Company’s evaluations have not resulted in any data from which a meaningful
average asbestos defense or indemnity payment may be determined.
With respect to asbestos exposures, the Company also compares its historical gross and net loss and
expense paid experience, year-by-year, to assess any emerging trends, fluctuations, or characteristics
suggested by the aggregate paid activity. Net asbestos losses and expenses paid in 2005 were $399 million,
compared with$301 million in 2004. This increase was primarily driven by inclusion of the SPC business
for the full year in 2005 and substantial reinsurance recoveries in the third quarter of 2004. Approximately
42% in 2005 and 22% in2004 of total net paid losses relate to policyholders with whom the Company
previously entered into settlement agreements limiting the Company’s liability. The lower percentage
experienced in 2004 reflected substantial reinsurance billings during the year. In 2005, gross payments
associated with policyholders with settlement agreements totaled $203 million, compared with$199 million
in 2004.
The $830 million and $928 million asbestos reserve provisions in2005 and 2004, respectively, were
recorded pursuant to the completion of the Company’s annual ground-up asbestos liability review in the
fourth quarter, which included an analysis of exposure and claim payment patterns by policyholder
category, as well as recent settlements, policyholder bankruptcies, judicial rulings and legislative actions.
The asbestos provision in2005resulted, in part, from higher than expected defense costs due to increased
trial activity for seriously impaired plaintiffs and prolonged litigation before cases are settled or dismissed.
The 2005 provision also considered the January 2006 court decision voiding, on procedural grounds, the
previously rendered favorable arbitration decision in the ongoing ACandS litigation (described in more
detail in note 17). The asbestos provision recorded in 2004 primarily resulted from an increase in litigation
costs and activity surrounding peripheral defendants.
At December 31, 2005, asbestos reserves, net of reinsurance, were $4.36 billion, compared with
$3.93 billion as of December 31, 2004. The Company acquired $311 million of net asbestos reserves in the
merger with SPC in2004.
Environmental Reserves.In establishingenvironmental 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