Travelers 2007 Annual Report Download - page 105

which an estimate of the gross ultimate exposure for indemnity and related claim adjustment expense is
determined, the Company calculates, by each policy year, a ceded reinsurance projection based on any
applicable facultative and treaty reinsurance, past ceded experience and reinsurance collections.
Conventional actuarial methods are not utilized to establish asbestos reserves.
In 2007, the Home Office and Field Office categories, which account for the vast majority of
policyholders with active asbestos-related claims, continued to experience an overall reduction in new
claim filings. In addition, the number of policyholders tendering asbestos claims for the first time also
declined. However, due to the level of trial activity involving impaired individuals, defense and
indemnity costs in these categories remain at levels similar to those previously experienced by the
Company. The Company’s evaluations have not resulted in any data from which a meaningful average
asbestos defense or indemnity payment may be determined. Payments in the Assumed and
International category increased in 2007 mainly as a result of increased commutation activity.
Net asbestos losses and expenses paid in 2007 were $317 million, compared with $469 million in
2006. Gross paid losses in 2007 were lower than in 2006 primarily due to installment payments made
during 2006 on settlements reached in prior years. Additionally, net paid losses were lower due to
increased reinsurance billings in 2007. Approximately 20% in 2007 and 50% in 2006 of total net paid
losses related to policyholders with whom the Company previously entered into settlement agreements
limiting the Company’s liability.
The Company categorizes its asbestos reserves as follows:
Number of Net Asbestos
Policyholders Total Net Paid Reserves
(at and for the year ended December 31, $ in millions) 2007 2006 2007 2006 2007 2006
Policyholders with settlement agreements .......... 22 27 $62 $235 $1,152 $ 879
Home office, field office and other ............... 1,659 1,762 211 197 2,116 2,678
Assumed reinsurance and International ............ ——44 37 466 494
Total ................................... 1,681 1,789 $317 $469 $3,734 $4,051
The policyholders with settlement agreements category includes structured settlements, coverage in
place arrangements and, with respect to TPC, Wellington accounts. Reserves are based on the expected
payout for each policyholder under the applicable agreement. Structured settlements are arrangements
under which policyholders and/or plaintiffs agree to fixed financial amounts to be paid at scheduled
times. Included in this category are TPC’s settlements of the Statutory and Hawaii Actions and the
Common Law Claims (collectively, the Direct Action Settlement). One of the contingencies of the
Direct Action Settlement is affirmance by all appellate courts of the order entered by the U.S.
Bankruptcy Court with respect to the Direct Action Settlement. On February 15, 2008 the Second
Circuit issued an opinion vacating the District Court’s order, which had substantially affirmed the
bankruptcy court’s order. Unless the Second Circuit’s decision is reversed on further appeal and the
bankruptcy court’s order is reinstated and becomes final, the Direct Action Settlement will be voided,
TPC will have no obligation to pay the amounts due under the Direct Action Settlement (other than
certain administrative expenses) and the Company intends to litigate the direct action cases vigorously.
In that event, the settlement funds will be returned to TPC’s unallocated asbestos reserve. The
Company will not make an adjustment to the level of its asbestos reserves as a result of the Second
Circuit’s decision. (For a description of these matters, see ‘‘Item 3—Legal Proceedings’’). Also included
in this category is the Company’s announced settlement to resolve fully all current and future asbestos-
related coverage claims relating to ACandS. The settlement was approved by the bankruptcy court and
no appeals from that approval were taken. As a result, pursuant to the settlement, a $449 million
payment by the Company has been placed into escrow. Upon fulfillment of all remaining settlement
contingencies, which includes final approval of a plan of reorganization for ACandS, those funds will be
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