Travelers 2005 Annual Report Download - page 87

75
$694 million in 2005, primarily due to charges to increase asbestos reserves by $830 million and
environmental reserves by $30 million. That unfavorable development was partially offset by other net
favorable prior year reserve development of $166 million, primarily in the commercial automobile,
commercial multi-peril, workers’ compensation and property lines of business. Net unfavorable prior year
reserve development totaled $1.34 billion in 2004, which included a $927 million charge to strengthen
asbestos reserves and a $286 million charge to strengthen environmental reserves. Also included in the net
unfavorable prior year reserve development in 2004 was a $157 million addition to the reserve for
uncollectible reinsurance recoverables, $38 million from the commutation of agreements with a major
reinsurer and other net unfavorable prior year reserve development primarily concentrated in the Company’s
Gulf operations. Partially offsetting the impact of these reserve increases in 2004 was favorable prior year
reserve development in core Commercial operations, which resulted from reductions in thefrequency of non-
catastrophe related losses.
The asbestos charge in 2005 resulted, 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 charge also considered the January 2006 court decision voiding, on procedural grounds, the
previously rendered favorable arbitration decision in the ongoing ACandS litigation. The asbestos charge
recorded in2004 primarily resulted from an increase in litigation costs and activity surrounding peripheral
defendants. With regard to environmental reserve additions, the 2005 charge was primarily related to
declaratory judgment costs, whereas the significant 2004 charge was related to revised estimates of costs
related to settlement initiatives. See the “Asbestos Claims and Litigation” and Environmental Claims and
Litigation” sections herein for further discussion of these reserves.
In 2003, net unfavorable prior-year loss development in the Commercial segment totaled $676 million,
the most significant component of which was $521 million of reserve strengthening in the Gulf operations.
That reserve strengthening was primarily related to a line of business that insured the residual values of
leased vehicles and that had been placed in runoff in late 2001, and the resolution of a residual value claim
dispute. In addition, in 2003 the Company strengthenedprior year reserves for certain runoff lines of
business, including assumed reinsurance. Catastrophe losses in 2003 totaled $103 million.
General and administrativeexpenses in 2005 totaled $1.65 billion, an increase of 5% over the 2004 total
of $1.58 billion, which primarily reflected the impact of the merger. The 2004 total included merger-related
charges and charges to increase the allowances for estimated amounts due from policyholders receivables.
The Commercial segment has realized significant expense savings since the completion of the merger
primarily through the elimination of duplicate functions throughout the combined operation.
GAAP Combined Ratio
The loss and loss adjustment expense ratio in 2005 included a 14.0 point impact from catastrophe losses,
compared with a 4.1 point impact from catastrophe losses in 2004. Net unfavorable prior year reserve
development accounted for 8.1 points and 15.3 points, respectively, of the 2005 and 2004 loss andloss
adjustment expense ratios. Excluding these factors from both years, the adjusted 2005 loss and loss
adjustment expense ratio was 0.9 points less than the comparable 2004 adjusted ratio, reflectingthe
improvement in current accident year loss experience compared with 2004. The adjusted 2004 loss and loss
adjustment expense ratio was 1.1 points better than the 2003 loss andloss adjustment expense ratio adjusted
to exclude prior year reserve development and catastrophes, primarily driven by a reduction innon-
catastrophe weather-related losses during the year.
The underwriting expense ratio in 2005 was 1.7 points higher than 2004, primarily reflecting the
significant earned premium declines described previously, and the 0.4point negative impact of the $52 million
in reinstatement premiums and $18 million of catastrophe-related state assessments. These factors were
partially offset by the favorable impact of merger-related expense savings throughout the segment and
personnel reductions in the Commercial Other sector. The 2004 underwriting expense ratio included the