Travelers 2007 Annual Report Download - page 204

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. INSURANCE CLAIM RESERVES (Continued)
accept risk-based site analyses and more efficient clean-up technologies. However, the Company has
experienced higher than expected defense and settlement costs driven in part by coverage disputes with
its policyholders and adverse judicial developments in certain states regarding the availability of
coverage for environmental claims. In addition, while the Company continues to experience a decline in
both the number of new policyholders tendering claims for the first time and the number of pending
lawsuits between the Company and its policyholders pertaining to coverage for environmental claims,
the Company has seen a moderation in the rate of this decline. As a result of these factors, the
Company increased its environmental reserve by $185 million in 2007 and $120 million in 2006. In
2005, the Company increased its environmental reserves by $30 million, primarily for declaratory
judgment litigation costs.
Asbestos and Environmental Reserves. As a result of the processes and procedures described
above, management believes that the reserves carried for asbestos and environmental claims at
December 31, 2007 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 the bankruptcy protection sought
by various 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. The Company’s asbestos-related claims and claim adjustment expense experience
has been impacted by the unavailability of other insurance sources potentially available to
policyholders, whether through exhaustion of policy limits or insolvency. In addition, uncertainties arise
from the insolvency or bankruptcy of other defendants, although the Company has noted a decrease in
the number and volatility of asbestos-related bankruptcies. It is also not possible to predict changes in
the legal, regulatory and legislative environment and their impact on the future development of
asbestos and environmental claims. This development will be affected by future court and regulatory
decisions and interpretations, as well as changes in applicable legislation. It is also difficult to predict
the ultimate outcome of complex coverage disputes until settlement negotiations near completion and
significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is
particularly the case with policyholders in bankruptcy where negotiations often involve a large number
of claimants and other parties and require court approval to be effective. As part of its continuing
analysis of asbestos and environmental reserves, the Company continues to study the implications of
these and other developments. (Also, see ‘‘Part I—Item 3, Legal Proceedings’’).
Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess
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 estimates, or a range of either, cannot
now be reasonably estimated and could result in income statement charges that could be material to
the Company’s operating results in future periods.
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