Travelers 2006 Annual Report Download - page 36

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The reserves are also reviewed regularly by qualified actuaries employed by the Company. For additional
information on the process of estimatingreserves and a discussion of underlying variables andrisk factors,
see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Critical Accounting Estimates.”
The process of estimating loss reservesinvolves a high degree of judgment and requires the
consideration of a number of variables. These variables (discussed by product line in the “Critical
Accounting Estimates” section) are affected by both internal and external events, such as changes in claims
handling procedures, inflation, judicial trends and legislative changes, among others. The impact of many
of these items on ultimate costs of claims and claim adjustment expenses is difficult to estimate. Reserve
estimation difficulties also differ significantly by product line due to differences in the underlying insurance
contract (e.g., claims made versus occurrence), claim complexity, the volume of claims, the potential
severity of individual claims, determining the occurrence date for a claim, and reporting lags (the time
between the occurrence of the insured event and when it is actually reported to the insurer). Informed
judgment is applied throughout the process.
The Company derives estimates for unreported claims anddevelopment on reported claims
principally from actuarial analyses of historical patterns of loss development by accident year for each type
of exposure and business unit. Similarly, the Company derives estimates of unpaid loss adjustment
expenses principally from actuarial analyses of historical development patterns of the relationship of loss
adjustment expenses to losses for each line of business and type of exposure. For a description of the
Company’s reserving methods for asbestos andenvironmental claims, see “Item 7—Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Asbestos Claims and
Litigation,” and “—Environmental Claims and Litigation.”
Discounting
Included in the claims and claim adjustment expense reserves in the consolidated balance sheet are
certain reserves discounted to the present value of estimated futurepayments. The liabilities for losses for
some long-term disability payments under workers’ compensation insurance and workers’ compensation
excess insurance, which totaled$1.98 billion and $1.92 billion at December 31, 2006 and 2005, respectively,
were discounted using a rate of 5% at December 31, 2006 and 2005. Reserves related to certain fixed and
determinable asbestos-related settlements, where all payment amounts and their timing are known, totaled
$34 million at December 31, 2005, and were discounted using a rate o f 2.6% at that date. Therewereno
such reserves at December 31, 2006. Reserves for certain assumed reinsurance business were discounted
using a rate of 7% and a range of rates from 5% to 7.5%, at December 31, 2006 and 2005, respectively, and
totaled $37 million and $79 million at December 31, 2006 and 2005, respectively.
Claims and Claim Adjustment Expense Development Table
The table on page 26 sets forth the year-end reserves from 1996 through 2006 and the subsequent
changes in thosereserves, presented on a historical basis. The original estimates, cumulative amounts paid
and reestimated reserves in the table for the years 1996 through 2003 have notbeenrestated to reflect the
acquisition of SPC in 2004. The table includes SPC reserves beginning at December 31, 2004.
The original estimates, cumulative amounts paid and reestimated reserves in the table for the years
1996 to 2000 have also not been restated to reflect the acquisition of Northland and Commercial Guaranty
Casualty. Beginning in 2001, the table includes the reserve activity of Northland and Commercial Guaranty
Casualty. The data in the table is presented in accordance with reporting requirements of the Securities
and Exchange Commission (SEC). Care must be taken to avoid misinterpretation by those unfamiliar with
this information or familiar with other data commonly reported by the insurance industry. The
accompanying data is not accident year data, but rathera display of 1996 to 2006 year-end reserves and the
subsequent changesin those reserves.