Travelers 2009 Annual Report Download - page 37

In addition, the original estimates, cumulative amounts paid and re-estimated reserves in the table
for the years 1999 to 2000 have not been restated to reflect the acquisition of Northland and
Commercial Guaranty Casualty. Beginning in 2001, the table includes the reserve activity of Northland
and Commercial Guaranty Casualty. The data in the table is presented in accordance with reporting
requirements of the Securities and Exchange Commission (SEC). Care must be taken to avoid
misinterpretation by those unfamiliar with this information or familiar with other data commonly
reported by the insurance industry. The data in the table is not accident year data, but rather a display
of 1999 to 2009 year-end reserves and the subsequent changes in those reserves.
For instance, the ‘‘cumulative deficiency (redundancy)’’ shown in the table for each year represents
the aggregate amount by which original estimates of reserves as of that year-end have changed in
subsequent years. Accordingly, the cumulative deficiency for a year relates only to reserves at that
year-end and those amounts are not additive. Expressed another way, if the original reserves at the end
of 1999 included $4 million for a loss that is finally paid in 2005 for $5 million, the $1 million
deficiency (the excess of the actual payment of $5 million over the original estimate of $4 million)
would be included in the cumulative deficiencies in each of the years 1999 to 2004 shown in the
accompanying table.
Various factors may distort the re-estimated reserves and cumulative deficiency or redundancy
shown in the table. For example, a substantial portion of the cumulative deficiencies shown in the table
arise from claims on policies written prior to the mid-1980s involving liability exposures such as
asbestos and environmental claims. In the post-1984 period, the Company has developed more stringent
underwriting standards and policy exclusions and has significantly contracted or terminated the writing
of these risks. See ‘‘Item 7—Management’s Discussion and Analysis of Financial Condition and Results
of Operations—Asbestos Claims and Litigation,’’ and ‘‘—Environmental Claims and Litigation.’’
General conditions and trends that have affected the development of these liabilities in the past will
not necessarily recur in the future.
Other factors that affect the data in the table include the discounting of certain reserves (as
discussed above) and the use of retrospectively rated insurance policies. For example, reserves for
long-term disability payments under workers’ compensation insurance and workers’ compensation
excess insurance (tabular reserves) are discounted to reflect the time value of money. Apparent
deficiencies will continue to occur as the discount on these workers’ compensation reserves is accreted
at the appropriate interest rates. Also, a portion of National Accounts business is underwritten with
retrospectively rated insurance policies in which the ultimate loss experience is primarily borne by the
insured. For this business, increases in loss experience result in an increase in reserves and an offsetting
increase in amounts recoverable from insureds. Likewise, decreases in loss experience result in a
decrease in reserves and an offsetting decrease in amounts recoverable from these insureds. The
amounts recoverable on these retrospectively rated policies mitigate the impact of the cumulative
deficiencies or redundancies on the Company’s earnings but are not reflected in the table.
Because of these and other factors, it is difficult to develop a meaningful extrapolation of
estimated future redundancies or deficiencies in loss reserves from the data in the table.
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