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Commitments and Contingencies | 12 Months Ended
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Dec. 31, 2011
Commitments and Contingencies [Abstract] |
Commitments and Contingencies | NOTE 20 Commitments and Contingencies NOTE 20 Commitments and Contingencies From time to time we are involved in legal proceedings that are incidental to the operation of our businesses. Some of these proceedings allege damages relating to asbestos liabilities, environmental liabilities, intellectual property matters, copyright infringement, personal injury claims, employment and pension matters and commercial or contractual disputes, sometimes related to acquisitions or divestitures. We will continue to defend vigorously against all claims. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information including our assessment of the merits of the particular claim, as well as our current reserves and insurance coverage, we do not expect that such legal proceedings will have any material adverse impact on our cash flow, results of operations, or financial position on a consolidated basis, unless otherwise noted below. Asbestos Matters Background ITT, including its subsidiary Goulds Pumps, Inc., has been joined as a defendant with numerous other companies in product liability lawsuits alleging personal injury due to asbestos exposure. These claims allege that certain products sold by us or our subsidiaries prior to 1985 contained a part manufactured by a third party (e.g., a gasket) which contained asbestos. To the extent these third-party parts may have contained asbestos, it was encapsulated in the gasket (or other) material and was non-friable. In certain other cases, it is alleged that former ITT companies were distributors for other manufacturers’ products that may have contained asbestos. As of December 31, 2011, there were 105,486 open claims against ITT filed in various state and federal courts alleging injury as a result of exposure to asbestos. Activity related to these asserted asbestos claims during the period was as follows:
|  | 2011 |  | 2010(b) |  | 2009
Pending claims(a) – January 1 |  |  |  | 103,575 |  |  |  |  | 104,679 |  |  |  |  | 103,006 |
New claims |  |  |  | 5,691 |  |  |  |  | 5,865 |  |  |  |  | 4,274 |
Settlements |  |  |  | (1,426 | ) |  |  |  | (991 | ) |  |  |  | (1081 | )
Dismissals |  |  |  | (2,354 | ) |  |  |  | (6,469 | ) |  |  |  | (4,728 | )
Adjustment(c) |  |  |  | – |  |  |  |  | 491 |  |  |  |  | 3,208 |
Pending claims(a) – December 31 |  |  |  | 105,486 |  |  |  |  | 103,575 |  |  |  |  | 104,679 |
(a) | Excludes 34,869 claims related to maritime actions, almost all of which were filed in the United States District Court for the Northern District of Ohio, because the Company believed they would not be litigated. In August 2010, these cases were dismissed.
(b) | In September 2010, ITT executed an amended cost-sharing agreement related to a business we disposed of a number of years ago. The cost sharing agreement provides that responsibility for costs associated with claims resolved gradually transitions away from ITT, such that ITT will have no responsibility for claims resolved beginning no later than July 1, 2022. The table above excludes claim activity associated with the amended cost-sharing agreement for claims that were not filed against ITT.
(c) | Reflects an adjustment to increase the number of open claims as a result of transitioning claims data from our primary insurance carriers to a third party claims administrator.
At December 31, 2011, the jurisdictions with highest pending claims counts against ITT include Mississippi (approximately 40,000 claims), New York (approximately 30,000 claims), and Florida (approximately 7,000 claims). Frequently, plaintiffs are unable to identify any ITT or Goulds Pumps product as a source of asbestos exposure. In addition, in a large majority of claims pending against the Company, plaintiffs are unable to demonstrate any injury. Many of those claims have been placed on inactive dockets (including 39,604 claims in Mississippi). Our experience to date is that a substantial portion of resolved claims have been dismissed without payment by the Company. As a result, management believes that a large majority of the pending claims have little or no value. The average cost per claim, including indemnity and defense costs, resolved in 2011 and 2010 was $19 thousand and $7 thousand, respectively. Because claims are sometimes dismissed in large groups, the average cost per resolved claim can fluctuate significantly from period to period. The Company records an asbestos liability, including legal fees, for costs that the Company is estimated to incur to resolve all pending claims, as well as unasserted claims estimated to be filed over the next 10 years. The asbestos liability has not been discounted to present value due to the inability to reliably forecast the timing of future cash flows. The methodology used to estimate our liability for pending and asbestos claims estimated to be filed over the next 10 years relies on and includes the following:
| n |  | interpretation of a widely accepted forecast of the population likely to have been occupationally exposed to asbestos;
| n |  | widely accepted epidemiological studies estimating the number of people likely to develop mesothelioma and lung cancer from exposure to asbestos;
| n |  | the Company’s historical experience with the filing of non-malignant claims against it and the historical relationship between non-malignant and malignant claims filed against the Company;
| n |  | analysis of the number of likely asbestos personal injury claims to be filed against the Company based on such epidemiological and historical data and the Company’s recent claims experience;
| n |  | analysis of the Company’s pending cases, by disease type;
| n |  | analysis of the Company’s recent experience to determine the average settlement value of claims, by disease type;
| n |  | analysis of the Company’s defense costs in relation to its indemnity costs and resolved claims;
| n |  | adjustment for inflation in the future average settlement value of claims and defense costs; and
| n |  | analysis of the Company’s recent experience with regard to the length of time to resolve asbestos claims.
The forecast period used to estimate our potential exposure to pending and projected asbestos claims is a judgment based on a number of factors, including the number and type of claims filed, recent experience with pending claims activity and whether that experience will continue into the future, the jurisdictions where claims are filed, the effect of any legislative or judicial developments, and the likelihood of any comprehensive asbestos legislation at the federal level. These factors have both positive and negative effects on the dynamics of asbestos litigation in the tort system and, accordingly, our estimate of the asbestos exposure. Developments related to asbestos tend to be long-cycle, changing over multi-year periods. Accordingly, we monitor these and other factors and periodically assess whether an alternative forecast period is appropriate. The Company retains a consulting firm to assist management in estimating the potential liability for pending asbestos claims and for claims estimated to be filed over the next 10 years based on the methodology described above. Our methodology determines a point estimate based on our assessment of the value of each underlying assumption, rather than a range of reasonably possible outcomes. Projecting future asbestos costs is subject to numerous variables and uncertainties that are inherently difficult to predict. In addition to the uncertainties surrounding the key assumptions discussed above, additional uncertainty related to asbestos claims and estimated costs arises from the long latency period prior to the manifestation of an asbestos-related disease, changes in available medical treatments and changes in medical costs, changes in plaintiff behavior resulting from bankruptcies of other companies that are potential or co-defendants, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential legislative or judicial changes. We record a corresponding asbestos-related asset that represents our best estimate of probable recoveries from insurers and other responsible parties for the estimated asbestos liabilities. In developing this estimate, the Company considers coverage-in-place and other settlement agreements with its insurers and contractual agreements with other responsible parties, as well as a number of additional factors. These additional factors reviewed include current levels of future cost recovery, the financial viability of the insurance companies or other responsible parties, the method by which losses will be allocated to the various insurance policies and the years covered by those policies, the extent to which settlement and defense costs will be reimbursed by the insurance policies, and interpretation of the various policy and contract terms and limits and their interrelationships. The timing and amount of reimbursements will vary due to the lag between when ITT pays an amount to defend or settle a claim and when a reimbursement is received, differing policy terms, and certain gaps in our insurance coverage as a result of uninsured periods, insurer insolvencies, and prior insurance settlements. In addition, the Company retains an insurance consulting firm to assist management in estimating probable recoveries for pending asbestos claims and for claims estimated to be filed over the next 10 years based on the analysis of policy terms, the likelihood of recovery provided by external legal counsel assuming the continued viability of those insurance carriers and other responsible parties that are currently solvent, and incorporating risk mitigation judgments where policy terms or other factors are not certain, and allocating asbestos settlement and defense costs between our insurers and other responsible parties. The Company has negotiated with certain of its insurers and other responsible parties to reimburse the Company for a portion of its settlement and/or defense costs as incurred through “coverage-in-place” agreements, policy buyout and settlement agreements and a cost sharing agreement which provides that responsibility for costs associated with claims resolved gradually transitions away from ITT, such that ITT will have no responsibility for claims resolved beginning no later than July 1, 2022. These agreements, in the aggregate, represent approximately 60% of the recorded asbestos-related asset. Estimating our exposure to pending asbestos claims and those that may be filed in the future is subject to significant uncertainty and risk as there are multiple variables that can affect the timing, severity, quality, quantity and resolution of claims. Any predictions with respect to the variables impacting the estimate of the asbestos liability and related asset are subject to even greater uncertainty as the projection period lengthens. In light of the uncertainties and variables inherent in the long-term projection of the Company’s asbestos exposures, although it is probable that the Company will incur additional costs for asbestos claims filed beyond the next 10 years which could be material, we do not believe there is a reasonable basis for estimating those costs at this time. Income Statement Charges In the third quarter, we conduct an annual study with the assistance of outside consultants to review and update the underlying assumptions used in our asbestos liability and related asset estimates. During this study, the underlying assumptions are updated based on our actual experience since our last annual study, a reassessment of the appropriate reference period of years of experience used in determining each assumption and our expectations regarding future conditions, including inflation. Based on the results of this study, we adjusted our estimated undiscounted asbestos liability, including legal fees, by ($44), $691 and $708, in 2011, 2010 and 2009, respectively. These charges reflect costs that the Company is estimated to incur to resolve all pending claims, as well as unasserted claims estimated to be filed over the next 10 years. The increase in our estimated liability in the third quarter of 2011 was a result of several developments, including a reduction in the assumed rate of increase in future average settlement costs and an expectation of lower defense costs relative to indemnities paid. These favorable factors were offset in part by increased activity in several higher-cost jurisdictions, increasing the number of cases expected to be adjudicated. The increase in our estimated liability in the third quarter of 2010 was a result of several developments, including higher settlement costs and significantly increased activity in several higher-cost jurisdictions, increasing the number of cases to be adjudicated and the expected legal costs. The increase in our estimated liability in the third quarter of 2009 was a result of recording an estimated liability to claims estimated to be filed. Prior to 2009, the Company only recorded a liability for pending asbestos claims due to the inability to estimate the potential exposure. Further, in the third quarter of 2011 the Company recorded a $76 reduction in its asbestos-related assets based on the results of the annual studies, whereas in the third quarter 2010 and 2009 the Company increased its asbestos-related asset by $371 and $485, respectively. These assets comprise an insurance asset, as well as receivables from other responsible parties. See discontinued operations discussion below for further information about receivables from parties other than insurers. In addition to charges associated with the annual reassessment, beginning in the fourth quarter of 2009, the Company also records a net asbestos charge each quarter to maintain a rolling 10 year forecast period. For the years ended December 31, 2011, 2010 and 2009, the income statement effects of asbestos charges consisted of the following:
For the Year Ended |  | Continuing Operations |  | Discontinued Operations |  |
December 31, 2011 |  | Liability |  | Asset |  | Net |  | Liability |  | Asset |  | Net |  | Total
Provision |  |  | $ | 85 |  |  |  | $ | 26 |  |  |  | $ | 59 |  |  |  | $ | 24 |  |  |  | $ | 21 |  |  |  | $ | 3 |  |  |  | $ | 62 |
Remeasurement |  |  |  | 38 |  |  |  |  | (3 | ) |  |  |  | 41 |  |  |  |  | (82 | ) |  |  |  | (73 | ) |  |  |  | (9 | ) |  |  |  | 32 |
Asbestos-related costs before tax |  |  | $ | 123 |  |  |  | $ | 23 |  |  |  |  | 100 |  |  |  | $ | (58 | ) |  |  | $ | (52 | ) |  |  |  | (6 | ) |  |  |  | 94 |
Tax benefit |  |  |  |  |  |  |  |  |  |  |  |  |  | (37 | ) |  |  |  |  |  |  |  |  |  |  |  |  |  | 2 |  |  |  |  | (35 | )
Asbestos-related costs, net of tax |  |  |  |  |  |  |  |  |  |  |  |  | $ | 63 |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | (4 | ) |  |  | $ | 59 |
For the Year Ended |  | Continuing Operations |  | Discontinued Operations |  |
December 31, 2010 |  | Liability |  | Asset |  | Net |  | Liability |  | Asset |  | Net |  | Total
Provision |  |  | $ | 67 |  |  |  | $ | 12 |  |  |  | $ | 55 |  |  |  | $ | 50 |  |  |  | $ | 50 |  |  |  | $ | – |  |  |  | $ | 55 |
Remeasurement |  |  |  | 524 |  |  |  |  | 194 |  |  |  |  | 330 |  |  |  |  | 167 |  |  |  |  | 177 |  |  |  |  | (10 | ) |  |  |  | 320 |
Asbestos-related costs before tax |  |  | $ | 591 |  |  |  | $ | 206 |  |  |  |  | 385 |  |  |  | $ | 217 |  |  |  | $ | 227 |  |  |  |  | (10 | ) |  |  |  | 375 |
Tax benefit |  |  |  |  |  |  |  |  |  |  |  |  |  | (144 | ) |  |  |  |  |  |  |  |  |  |  |  |  |  | 4 |  |  |  |  | (140 | )
Asbestos-related costs, net of tax |  |  |  |  |  |  |  |  |  |  |  |  | $ | 241 |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | (6 | ) |  |  | $ | 235 |
For the Year Ended |  | Continuing Operations |  | Discontinued Operations |  |
December 31, 2009 |  | Liability |  | Asset |  | Net |  | Liability |  | Asset |  | Net |  | Total
Provision |  |  | $ | 56 |  |  |  | $ | 28 |  |  |  | $ | 28 |  |  |  | $ | 2 |  |  |  | $ | 6 |  |  |  | $ | (4 | ) |  |  | $ | 24 |
Remeasurement |  |  |  | 644 |  |  |  |  | 434 |  |  |  |  | 210 |  |  |  |  | 64 |  |  |  |  | 51 |  |  |  |  | 13 |  |  |  |  | 223 |
Asbestos-related costs before tax |  |  | $ | 700 |  |  |  | $ | 462 |  |  |  |  | 238 |  |  |  | $ | 66 |  |  |  | $ | 57 |  |  |  |  | 9 |  |  |  |  | 247 |
Tax benefit |  |  |  |  |  |  |  |  |  |  |  |  |  | (95 | ) |  |  |  |  |  |  |  |  |  |  |  |  |  | (3 | ) |  |  |  | (98 | )
Asbestos-related costs, net of tax |  |  |  |  |  |  |  |  |  |  |  |  | $ | 143 |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 6 |  |  |  | $ | 149 |
Changes in Financial Position: The Company’s estimated asbestos exposure, net of expected recoveries from insurers and other responsible parties, for the resolution of all pending claims and claims estimated to be filed in the next 10 years was $714 and $641 as of December 31, 2011 and 2010, respectively. The following table provides a rollforward of the estimated total asbestos liability and related assets for the years ended December 31, 2011 and 2010, respectively.
|  | 2011 |  | 2010
|  | Liability |  | Asset |  | Net |  | Liability |  | Asset |  | Net
Balance as of January 1 |  |  | $ | 1,676 |  |  |  | $ | 1,035 |  |  |  | $ | 641 |  |  |  | $ | 933 |  |  |  | $ | 667 |  |  |  | $ | 266 |
Changes in estimate during the period: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Continuing operations |  |  |  | 123 |  |  |  |  | 23 |  |  |  |  | 100 |  |  |  |  | 591 |  |  |  |  | 206 |  |  |  |  | 385 |
Discontinued operations |  |  |  | (58 | ) |  |  |  | (52 | ) |  |  |  | (6 | ) |  |  |  | 217 |  |  |  |  | 227 |  |  |  |  | (10 | )
Cash activity |  |  |  | (73 | ) |  |  |  | (52 | ) |  |  |  | (21 | ) |  |  |  | (54 | ) |  |  |  | (54 | ) |  |  |  | – |
Other adjustments |  |  |  | – |  |  |  |  | – |  |  |  |  | – |  |  |  |  | (11 | ) |  |  |  | (11 | ) |  |  |  | – |
Balance as of December 31 |  |  | $ | 1,668 |  |  |  | $ | 954 |  |  |  | $ | 714 |  |  |  | $ | 1,676 |  |  |  | $ | 1,035 |  |  |  | $ | 641 |
Current portion |  |  |  | 139 |  |  |  |  | 133 |  |  |  |  | 6 |  |  |  |  | 117 |  |  |  |  | 105 |  |  |  |  | 12 |
Noncurrent portion |  |  |  | 1,529 |  |  |  |  | 821 |  |  |  |  | 708 |  |  |  |  | 1,559 |  |  |  |  | 930 |  |  |  |  | 629 |
The asbestos liability and related receivables are based management’s best estimate of future events. However, future events affecting the key factors and other variables for either the asbestos liability or the related receivables could cause actual costs and recoveries to be materially higher or lower than currently estimated. Due to these uncertainties, as well as our inability to reasonably estimate any additional asbestos liability for claims which may be filed beyond the next 10 years, it is not possible to predict the ultimate outcome of the cost of resolving all pending and estimated unasserted asbestos claims. We believe it is possible that future events affecting the key factors and other variables within the next 10 years, as well as the cost of asbestos claims filed beyond the next 10 years, net of expected recoveries, could have a material adverse effect on our financial position, results of operations and cash flows. Discontinued Operations: At December 31, 2011 and 2010, $234 and $292 of the asbestos liability and $233 and $285 of the related asset, respectively, related to a business which we disposed of a number of years ago that is reported as a discontinued operation. The liability and asset is subject to an amended cost-sharing agreement that was executed in September 2010 with the entity that acquired the disposed business. The amended agreement provides for a sharing of the claims settled between 2010 and 2019 naming ITT or the entity which acquired the disposed business. In future years, the liability for sharing the claims gradually transitions away from ITT, such that ITT will have no responsibility for claims resolved beginning no later than July 1, 2022. The amended cost-sharing agreement also provides for the sharing of certain insurance policies. Prior to executing the amended cost-sharing agreement in September 2010, we recorded a liability for this discontinued operation based on pending claims and unasserted claims estimated to be filed over the next 10 years against ITT. As part of amending the cost-sharing agreement, ITT was provided with the key data necessary to estimate the exposure related to the shared pending and estimated future claims. The estimate of the additional liability and asset recorded as a result of the amended cost-sharing agreement in 2010 was calculated in a manner consistent with the approach used to estimate ITT’s stand-alone asbestos liabilities and assets. Future Cash Flows: Using the estimated liability as of December 31, 2011 (for claims filed or estimated to be filed through 2021), we have estimated that we will be able to recover 57% of the asbestos indemnity and defense costs for pending claims as well as unasserted claims estimated to be filed over the next 10 years from our insurers or other responsible parties. However, there is uncertainty in estimating when cash payments related to the recorded asbestos liability will be fully expended and such cash payments will continue for a number of years past 2021 due to the significant proportion of future claims included in the estimated asbestos liability and the lag time between the date a claim is filed and when it is resolved. In addition, because there are gaps in our insurance coverage, reflecting uninsured periods, the insolvency of certain insurers and prior insurance settlements, and our expectation that certain policies from some of our primary insurers will exhaust within the next 10 years, actual insurance reimbursements vary from period to period and the anticipated recovery rate is expected to decline over time. Future recoverability rates may be impacted by other factors, such as future insurance settlements, insolvencies and judicial determinations relevant to our coverage program, which are difficult to predict and subject to a high degree of uncertainty. Subject to these inherent uncertainties, it is expected that future annual cash payments, net of recoveries related to pending claims and unasserted claims to be filed within the next 10 years, will extend through approximately 2026 due to the length of time between the filing of a claim and its resolution. Certain of our primary coverage in place agreements are expected to exhaust in the next twelve months, which will result in higher net cash outflows for the short-term. These annual net cash outflows are projected to average $10 to $20, net of tax benefits over the next five years, as compared to an average of approximately $6, net of tax benefits in the past three years, and increase to an average of approximately $35 to $45, net of tax over the remainder of the projection period. Recovery rates for the tenth year of our model are currently projected to be approximately 27% of cash spent on settlements and defense costs. Environmental In the ordinary course of business, we are subject to federal, state, local, and foreign environmental laws and regulations. We are responsible, or are alleged to be responsible, for ongoing environmental investigation and remediation of sites in various countries. These sites are in various stages of investigation and/or remediation and in many of these proceedings our liability is considered de minimis. We have received notification from the U.S. Environmental Protection Agency, and from similar state and foreign environmental agencies, that a number of sites formerly or currently owned and/or operated by ITT, and other properties or water supplies that may be or have been impacted from those operations, contain disposed or recycled materials or wastes and require environmental investigation and/or remediation. These sites include instances where we have been identified as a potentially responsible party under federal and state environmental laws and regulations. Accruals for environmental matters are recorded on a site by site basis when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. Our accrued liabilities for environmental matters represent management’s estimate of undiscounted costs to be incurred related to environmental assessment or remediation efforts, as well as related legal fees. These estimates, and related accruals, are reviewed quarterly and adjusted for progress of investigation and remediation efforts as additional technical or legal information become available. Environmental remediation reserves are subject to numerous inherent uncertainties that affect our ability to estimate our share of the costs. Such uncertainties involve incomplete information regarding particular sites and other potentially responsible parties, uncertainty regarding the nature and extent of contamination at each site, the extent of remediation required under existing regulations, our share, if any, of any remediation liability, widely varying cost estimates associated with potential alternative remedial approaches, the length of time required to remediate a particular site, the potential effects of continuing improvements in remediation technology, and changes in environmental standards and regulatory requirements. The following table illustrates the activity related to our accrued liabilities for environmental matters.
|  | 2011 |  | 2010
Environmental liability – January 1 |  |  | $ | 100 |  |  |  | $ | 101 |
Accruals added during the period |  |  |  | – |  |  |  |  | – |
Change in estimates for pre-existing accruals |  |  |  | 13 |  |  |  |  | 10 |
Payments |  |  |  | (11 | ) |  |  |  | (11 | )
Environmental liability – December 31 |  |  | $ | 102 |  |  |  | $ | 100 |
The following table illustrates the reasonably possible low- and high end range of estimated liability, and number of active sites for environmental matters.
|  | 2011 |  | 2010
Low-end range |  |  | $ | 81 |  |  |  | $ | 82 |
High end range |  |  | $ | 175 |  |  |  | $ | 180 |
Number of active environmental investigation and remediation sites |  |  |  | 64 |  |  |  |  | 65 |
While actual costs to be incurred at identified sites in future periods may vary from our current estimates given the inherent uncertainties in evaluating environmental exposures, we do not anticipate changes in our estimated liabilities for identified sites will have a material adverse effect on our consolidated financial position, results of operations or cash flows. Other Matters The Company is involved in coverage litigation with various insurers seeking recovery of costs incurred in connection with certain environmental and product liabilities. In a suit filed in 1991, ITT Corporation, et al. v. Pacific Indemnity Corporation et al, Sup. Ct., Los Angeles County, we are seeking recovery of costs related to environmental losses. Discovery, procedural matters, changes in California law, and various appeals have prolonged this case. For several years, the case was on appeal before the California Court of Appeals from a decision by the California Superior Court dismissing certain claims made by ITT. In 2011, ITT filed a Motion for Summary Judgment on PEIC’s obligation to pay defense costs. That motion is currently pending before the court. Mandatory settlement conferences are anticipated to be held later this year. On February 13, 2003, we commenced an action, Cannon Electric, Inc. v. Affiliated FM Ins. Co., Sup. Ct., Los Angeles County, seeking recovery of costs related to asbestos product liability losses described above. During this coverage litigation, we entered into coverage-in-place settlement agreements with ACE, Wausau and Utica Mutual dated April 2004, September 2004, and February 2007, respectively. These agreements provide specific coverage for the Company’s legacy asbestos liabilities. In December 2011, Goulds Pumps reached an agreement in principle to resolve its claims against Fireman’s Fund and, in January 2012, we reached an agreement in principle with another insurer. In early January 2012, ITT and Goulds Pumps filed a putative class action against Travelers Casualty and Surety Company alleging that Travelers is unilaterally reinterpreting language contained in older Aetna policies so as to avoid paying on asbestos claims. ITT Corporation and Goulds Pumps, Inc., v. Travelers Casualty and Surety Company (f/k/a Aetna Casualty and Surety Company,) U.S.D.C. CT. CA No. 3:12-CU 00038. We continue to negotiate settlement agreements with other insurers, where appropriate. On December 20, 2011, the Ad Hoc Committee of ITT Bondholders filed a Complaint in New York State court alleging that ITT breached the early redemption provisions of certain bonds issued in 2009. In 2009, ITT issued $500 in bonds maturing in 2019 at an interest rate of 6.125%. The documents governing the bonds contained certain provisions governing early redemptions. On September 20, 2011, ITT notified the holders of the debt that it intended to redeem the bonds on October 20, 2011 in accordance with the terms of the governing documents. On October 18, 2011, the redemption price was disclosed. The Plaintiffs contend that ITT used an improper discount rate in calculating the redemption price and otherwise failed to comply with required redemption procedures. If the Plaintiffs’ claims are sustained, ITT could be required to pay up to $15 in additional redemption fees and interest to all holders of the bonds; however, the costs associated with this matter, if any, will be shared with Exelis and Xylem in accordance with the Distribution Agreement. See Note 4, “Discontinued Operations,” for further information about the Distribution Agreement and shared liabilities. As of December 31, 2011, no amounts were accrued for this matter as the company is in the early stages of evaluating the claim. Management believes that these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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