Travelers 2006 Annual Report Download - page 204

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
192
6. INSURANCE CLAIM RESERVES (Continued)
The Company has continued to experience a decline in the number of policyholders tendering claims
for the first time. These policyholders generally present smaller exposures, have fewer sites and are lower
tier defendants. Further, regulatory agencies are utilizing risk-based analysis and more efficient clean-up
technologies. However, the Company has experienced higher than expected defense and settlement costs.
These increases have been driven in part by adverse judicial developments in certain states regarding the
availability of coverage for environmental claims. As a result of these trends, the Company increased
environmental reserves by $120 million in 2006. In 2005, the Company recorded apretax charge of $30
million, primarily for declaratory judgment costs. In 2004, the Company recorded a pretax charge of $290
million due to revised estimates of costs related to recent settlement initiatives. The increases in
environmental reservesineach year were net of r einsurance. Gross paid losses in 2006 and 2005 were $189
million and $248 million, respectively.
As a result of the processes and procedures described above, management believesthat the reserves
carried for asbestos and environmental claims at December 31, 2006 are appropriately established based
upon known facts, current law and management’s judgment. However, the uncertainties surrounding the
final resolution of these claims continue, and it is difficult to determine the ultimate exposure for asbestos
and environmental claims and related litigation. As a result, these reserves are subject to revision as new
information becomes available and as claims develop. The continuing uncertainties include, without
limitation, the risks and lack of predictability inherent in complex litigation, any impact from t he
bankruptcy protection soughtbyvarious asbestos producers and other asbestos defendants, a further
increase or decrease in asbestos and environmental claims beyond that which is anticipated, the role of any
umbrella or excess policies the Company has issued, the resolution or adjudication of some disputes
pertaining to the amount of available coverage for asbestos and environmental claims in a manner
inconsistent with the Company’s previous assessment of these claims, the number and outcome of direct
actions against the Company and future developments pertaining to the Company’s ability to recover
reinsurance for asbestos and environmental claims. In addition, the Company’s asbestos-related claims and
claim adjustment expense experience has been impacted by the exhaustion or unavailability due to
insolvency of other insurance sources potentially available to policyholders along with the insolvency or
bankruptcy of other defendants, although the Company has noted a recent decrease in the number and
volatility of asbestos-related bankruptcies. It is also not possible to predict changes in the legal and
legislative environment and their impact on the future development of asbestosand environmental claims.
This development will be affected by future court decisions and interpretations, as well as changes in
applicable legislation, including legislation related to asbestos reform. It is also difficult to predict the
ultimate outcome of large coverage disputes until settlement negotiations near completion and significant
legal questions are resolved or, failing settlement, until thedispute isadjudicated. This is particularly the
case with policyholders in bankruptcy wherenegotiations often involve a largenumber of claimants and
other parties and require court approval to be effective. As part of its continuing analysis of asbestos
reserves, which includes an annual ground-up review of asbestos policyholders, the Company continues to
study the implications of these and other developments. The company completed its most recent annual
ground-up review during thethird quarter of 2006. See “Part I—Item3, Legal Proceedings.”
Asbestos and Environmental Reserves.Because of the uncertainties set forth above, additional
liabilities may arise for amounts inexcess of the current related reserves. In addition, the Company’s
estimate of claims and claim adjustment expenses may change. These additional liabilities or increases in