Travelers 2007 Annual Report Download - page 99

to significant new business volume, renewal price increases and continued strong business retention
rates over the prior twelve months. Earned premiums in 2005 were reduced by $21 million of
catastrophe-related reinstatement premiums.
Net Investment Income
Refer to the ‘‘Net Investment Income’’ section of the ‘‘Consolidated Results of Operations’’
discussion herein for a description of the factors contributing to the increase in the Company’s net
investment income in 2007 and 2006.
Claims and Expenses
Claims and claim adjustment expenses in 2007 totaled $3.99 billion, an increase of $390 million, or
11%, over 2006, primarily reflecting a decline in net favorable prior year reserve development, an
increase in catastrophe losses and higher business volume, partially offset by the impact of the sale of
Mendota.
Net favorable prior year reserve development in 2007 totaled $152 million, compared with
$359 million in 2006. The 2007 total was driven by better than expected automobile loss experience due
in part to claim initiatives and fewer than expected late reported homeowners’ claims related to
non-catastrophe weather events that occurred in the fourth quarter of 2006. In addition, a portion of
net favorable prior year reserve development in the Homeowners and Other line of business in 2007
was attributable to a decrease in the number of claims due to changes in the marketplace, including
higher deductibles and fewer small-dollar claims. The net favorable prior year reserve development in
2006 was driven by better than expected loss experience in the auto bodily injury and non-catastrophe
related Homeowners and Other lines of business, and a reduction in loss estimates for the 2005
hurricanes. In the Automobile line of business, the improvement in 2006 was partially driven by better
than expected results from changes in claim handling practices. These changes included practices which
have allowed case reserves to be established more accurately earlier in the claim settlement process,
thereby changing historical loss development patterns. In addition, industry and Company initiatives to
fight fraud in several states led to a decrease in the total number of claims and a change in historical
loss development patterns. In the Homeowners and Other line of business, favorable prior year reserve
development in 2006 was partially driven by a significant decrease in the number of claims, attributable
to changes in the marketplace, including higher deductibles and fewer small-dollar claims. These
changes also resulted in a change in historical loss development patterns. In addition, for 2006,
non-catastrophe related Homeowners and Other loss experience was favorable due to continued
evidence of a less than expected impact from ‘‘demand surge,’’ which refers to significant short-term
increases in building material and labor costs due to a sharp increase in demand for those materials
and services. Approximately $100 million of net favorable prior year reserve development in 2006
resulted from a reduction in loss estimates for catastrophes incurred in 2005, primarily due to lower
than expected additional living expense losses related to Hurricane Katrina.
Catastrophe losses in 2007 totaled $163 million, $60 million higher than the 2006 total of
$103 million. Catastrophe losses in 2007 were primarily the result of wildfires in California and several
storms throughout the United States, whereas the 2006 total was driven by several wind, rain, hail and
snow storms throughout the year in the United States.
Claims and claim adjustment expenses in 2006 totaled $3.60 billion, a decline of $154 million from
the 2005 total of $3.75 billion, primarily reflecting a reduction in catastrophe losses, which was partially
offset by the impact of higher business volume in 2006. Catastrophe losses of $103 million in 2006
declined significantly from the 2005 total of $547 million. The 2005 catastrophe losses were primarily
the result of Hurricanes Katrina, Rita and Wilma.
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