Travelers 2013 Annual Report Download - page 38

The gross and net cumulative deficiency (redundancy) by calendar year as set forth in the table
above includes the following impact of unfavorable prior year reserve development related to asbestos
and environmental claims and claim adjustment expenses, in millions:
Asbestos 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Gross ................................. $1,832 $2,103 $1,269 $1,072 $1,073 $1,003 $818 $556 $361 $190
Net.................................. $1,709 $1,922 $1,091 $ 935 $ 935 $ 865 $680 $540 $365 $190
Environmental 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Gross ................................. $ 797 $ 773 $ 756 $ 648 $ 466 $ 381 $296 $251 $171 $ 72
Net.................................. $ 745 $ 756 $ 726 $ 606 $ 421 $ 336 $266 $231 $155 $ 65
Reserves on Statutory Accounting Basis
At December 31, 2013, 2012 and 2011, claims and claim adjustment expense reserves (net of
reinsurance) shown in the preceding table, which are prepared in accordance with U.S. generally
accepted accounting principles (GAAP reserves), were $17 million higher, $22 million lower and
$20 million higher, respectively, than those reported in the Company’s respective annual reports filed
with insurance regulators, which are prepared in accordance with statutory accounting practices
(statutory reserves).
The differences between GAAP and statutory reserves are primarily due to the differences in
GAAP and statutory accounting for two items, (1) fees associated with billing of required
reimbursements under large deductible business, and (2) the accounting for retroactive reinsurance. For
large deductible business, the Company pays the deductible portion of a casualty insurance claim and
then seeks reimbursement from the insured, plus a fee. This fee is reported as fee income for GAAP
reporting, but as an offset to claim expenses paid for statutory reporting. Retroactive reinsurance
balances result from reinsurance placed to cover losses on insured events occurring prior to the
inception of a reinsurance contract. For GAAP reporting, retroactive reinsurance balances are included
in reinsurance recoverables and result in lower net reserve amounts. Statutory accounting practices
require retroactive reinsurance balances to be recorded in other liabilities as contra-liabilities rather
than in loss reserves.
Asbestos and Environmental Claims
Asbestos and environmental claims are segregated from other claims and are handled separately by
the Company’s Special Liability Group, a separate unit staffed by dedicated legal, claim, finance and
engineering professionals. For additional information on asbestos and environmental claims, see
‘‘Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Asbestos Claims and Litigation’’ and ‘‘—Environmental Claims and Litigation.’’
INTERCOMPANY REINSURANCE POOLING ARRANGEMENTS
Most of the Company’s domestic insurance subsidiaries are members of an intercompany property
and casualty reinsurance pooling arrangement. Pooling arrangements permit the participating
companies to rely on the capacity of the entire pool’s policyholders’ surplus rather than just on its own
policyholder surplus. Under such arrangements, the members share substantially all insurance business
that is written and allocate the combined premiums, losses and expenses.
RATINGS
Ratings are an important factor in assessing the Company’s competitive position in the insurance
industry. The Company receives ratings from the following major rating agencies: A.M. Best Company
(A.M. Best), Fitch Ratings (Fitch), Moody’s Investors Service (Moody’s) and Standard & Poor’s Corp.
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