Travelers 2008 Annual Report Download - page 220

THE TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INSURANCE CLAIM RESERVES (Continued)
The Company recorded a $70 million pretax increase to asbestos reserves in 2008. The Company
recorded no asbestos reserve additions in 2007 and recorded a pretax asbestos reserve addition of
$155 million in 2006. The 2008 increase was driven by a change in the estimated costs associated with
litigating asbestos coverage matters and a change in estimated losses for certain individual
policyholders. The increase was not a result of a change in the Company’s assessment of the underlying
asbestos environment. Approximately half of the $155 million 2006 pretax reserve adjustment was due
to an increase in the projected defense costs for ten policyholders. The majority of the remainder of
the reserve adjustment was primarily due to continued litigation activity against smaller, peripheral
defendants.
Environmental Reserves. In establishing environmental reserves, the Company evaluates the
exposure presented by each policyholder and the anticipated cost of resolution, if any. In the course of
this analysis, the Company generally considers the probable liability, available coverage, relevant judicial
interpretations and historical value of similar exposures. In addition, the Company considers the many
variables presented, such as the nature of the alleged activities of the policyholder at each site; the
allegations of environmental harm at each site; the number of sites; the total number of potentially
responsible parties at each site; the nature of environmental harm and the corresponding remedy at
each site; the nature of government enforcement activities at each site; the ownership and general use
of each site; the overall nature of the insurance relationship between the Company and the
policyholder, including the role of any umbrella or excess insurance the Company has issued to the
policyholder; the involvement of other insurers; the potential for other available coverage, including the
number of years of coverage; the role, if any, of non-environmental claims or potential
non-environmental claims in any resolution process; and the applicable law in each jurisdiction.
Conventional actuarial techniques are not used to estimate these reserves.
The Company continues to receive notices from policyholders tendering claims for the first time.
These policyholders generally present smaller exposures, have fewer sites and are lower tier defendants.
Further, in many instances clean-up costs have been reduced because regulatory agencies are willing to
accept risk-based site analyses and more efficient clean-up technologies. However, the Company has
experienced upward development in the anticipated defense and settlement costs for certain of its
pending policyholders. As a result of this development, the Company increased its environmental
reserve by $85 million in the second quarter of 2008. 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;
however, the Company has experienced a moderation in the rate of that decline in recent years. The
Company increased its environmental reserve by $185 million in 2007 primarily in response to this
development. In 2006, the Company increased environmental reserves by $120 million primarily as a
result of higher than expected defense and settlement costs driven in part by adverse judicial
developments in certain states regarding the availability of coverage for environmental claims.
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, 2008 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
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