Travelers 2006 Annual Report Download - page 199

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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6. INSURANCE CLAIM RESERVES (Continued)
by claim and claim expense payments from runoff operations and other net favorable prior year reserve
development.
The $1.75 billion decline in reinsurance recoverables in 2006 primarily reflected significant
reinsurance recoveries in related to prior year hurricane losses, operations in runoff (primarily Gulf) and
various commutation agreements, partially offset by the impact of reinsurance recoverables acquired in the
RITC transaction described above. In2005, the $574 million increase in reinsurance recoverables primarily
resulted from recoverables related to hurricane losses incurred.
The fair value adjustments to the acquired claims and claim adjustment expense reserves and
reinsurance recoverables as of April 1, 2004, the merger date, are reported as intangible assets and are
being amortized over the expected payout period of the acquired reserves.
Prior Year Reserve Development
The following disclosures regarding reserve development are on a “net of reinsurance” basis.
2006.
In 2006, estimated claims and claim adjustment expenses included $429 million of net favorable
developmentfor claims arising in prior years, including $394 million of net favorable prior year reserve
developmentimpacting the Company’s results of operations which excludes $62 million of accretion of
discount.
Business Insurance. Net favorable prior year reserve development totaled $21 million in 2006,
primarily concentratedin the commercial multi-peril, general liability, property andcommercial
automobile lines of business, partially offset by increases for asbestos reserves and environmental reserves
that are discussed in moredetailin the following “Asbestos and Environmental Reserves” section, as well
as reserve strengthening for assumed reinsurance business in runoff. The commercial multi-peril and
liability lines of business experienced better than anticipated loss development that was attributable to
several factors, including improving legal and judicial environments, as well as enhanced risk control,
underwriting and claim process initiatives. The favorable prior year reserve development in the property
line of business primarily reflected less “demand surge” inflation than originally estimated for 2005
accident yearnon-catastrophe related and catastrophe losses. “Demand surge” refers to significant short-
term increases in building material and labor costs due to a sharp increase in demand for those materials
and services. The commercial automobile line of business experienced better than expected loss
development which was attributable to the improved legal and judicial environments, claim handling
initiatives focused on the automobile line of insurance and improvements in auto safety technology. The
reserve strengthening in assumed reinsurance was primarily due to changes in projected loss development
driven by an unanticipated change in the claim settlement patterns of the underlying casualty exposures.
Financial, Professional & International Insurance.Net favorable prior year development in 2006
totaled $14 million.
Personal Insurance.Net favorable prior year reserve development in 2006 totaled $359 million,
driven by better than expected auto bodily injury loss experience and a decline in non-catastrophe losses in
the Homeowners and Other line of business, and a reduction in loss estimates for the 2005 hurricanes. In
the Automobile line of business, the improvement was partially driven by better than expected results from