Travelers 2006 Annual Report Download - page 90

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The Company also commuted certain reinsurance agreements with a major reinsurer in 2004 resulting
in a $113 million prior year reserve charge (in addition to a current year loss of $40 million).
Commutations are a complete and final settlement with a reinsurer that results in a discharge of all
obligations of the parties to the terminated reinsurance agreement.
Cost ofCatastrophes.In 2006, the cost of catastrophes totaled $103 million (net of reinsurance), all
of which was incurred in the Personal Insurance segment and resulted from several wind, rain, hail and
snow storms in the United States throughout the year. In2005, the Company’s cost of catastrophes, net of
reinsurance and including reinstatement premiums of $121 million and state assessments of $43 million,
totaled $2.19 billion, primarily resulting from Hurricanes Katrina, Rita and Wilma. Reinstatement
premiums represent additional premiums payable to reinsurers to restore coverage limits that have been
exhausted as a result of reinsured losses under certain excess-of-loss reinsurance treaties and are recorded
as a reduction of net written and earned premiums. The majority of catastrophe costs in 2005 were
incurred in the Business Insurance segment ($1.41 billion) and in the Personal Insurance segment ($593
million) In 2004, the cost of catastrophes, net of reinsurance, totaled $772 million, all of which resulted
from four hurricanes—Charley, Frances, Ivan and Jeanne—that also made landfall in the southeastern
United States.
General and Administrative Expenses
General and administrative expenses totaled$3.46 billion in 2006, an increase of $229 million, or 7%,
over the comparable 2005 total of $3.23 billion. The increase in 2006 was driven by investments made
throughout the Company to support business growth and product development, costs related to the
Company’s national advertising campaign and legal expenses related to investigations of various business
practices by certain governmental agencies (see “Item 3—Legal Proceedings”). These factors were
partially offset by the impact of the favorable resolution of certain prior-year state tax matters, certain tax
benefits, the absence of catastrophe-related state assessments and lower premium tax-related expenses.
The $284 million increase in general and administrative expenses in 2005 compared with 2004
primarily reflected the impact of the merger. In addition, the 2005 total included $43 million of state
assessments related to catastrophe losses, and also reflected investments made for process re-engineering
and to support business growth and product development, primarily in the Personal Insurance segment.
These factors were partially offset by the benefit of expense efficiencies achieved since the completion of
the merger. Included in the 2005 and 2004 totals were $112 million and $92 million, respectively, of
amortization expense related to finite-lived intangible assets acquired in the merger, and a benefit of $12
million and $58 million, respectively, associated with the accretion of the fair value adjustment to claims
and claim adjustment expenses and reinsurance recoverables. The 2004 total included a $6 2 million
increase in the allowance for uncollectible amounts due from policyholders for loss-sensitive business
(primarily high-deductible business). This increase resulted from applying the Company’s credit-based
methodology for determining uncollectible amounts to the recoverables acquired in the merger. General
and administrative expenses in 2004 also included$29 million of restructuring charges related to the
merger.
Other 2004 Claims and Expenses. Other items increasing the 2004 claims and expenses included $296
million of charges to increase the allowances for estimated uncollectible amounts due from reinsurance
recoverables, policyholders receivables, and co-surety participations on a specific construction contractor
claim. The increase in the allowance for uncollectible reinsurance recoverables recognized a change in
estimated disputes with reinsurers and is based upon the Company’s reinsurance strategy of reduced
reinsurance utilization, including the cessation of ongoing business relationships w ith certain of SPC’s
reinsurers, and aggressive collection of reinsurance recoverables. A charge was also recorded to increase
the estimated uncollectible amounts due from policyholders for loss sensitive business (primarily high
deductible business). Thisincrease recognized a change in estimated uncollectible amounts dueand
resulted from applying the Company’s credit based methodology for determining uncollectible amounts to
the recoverables acquired in the merger. Because reinsurance recoverables and amounts due from