The Hartford 2009 Annual Report Download - page 116

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Where its contracts permit, the Company secures future claim obligations with various forms of collateral, including irrevocable letters
of credit, secured trusts, funds held accounts and group wide offsets. As part of its reinsurance recoverable review, the Company
analyzes recent developments in commutation activity between reinsurers and cedants, recent trends in arbitration and litigation
outcomes in disputes between cedants and reinsurers and the overall credit quality of the Company’ s reinsurers. Due largely to
investment losses sustained by reinsurers in 2008, the financial strength ratings of some reinsurers have been downgraded and the
financial strength ratings of other reinsurers have been put on negative watch. Nevertheless, as indicated in the above table,
approximately 98% of the gross reinsurance recoverables due from reinsurers rated by A.M. Best were rated A- (excellent) or better as
of December 31, 2009. Due to the inherent uncertainties as to collection and the length of time before such amounts will be due, it is
possible that future adjustments to the Company’ s reinsurance recoverables, net of the allowance, could be required, which could have a
material adverse effect on the Company’ s consolidated results of operations or cash flows in a particular quarterly or annual period.
Annually, the Company completes an evaluation of the reinsurance recoverable asset associated with older, long-term casualty liabilities
reported in the Other Operations segment. As a result of this evaluation, the Company reduced its net reinsurance recoverable by $20 in
2009. See the “Other Operations” section of the MD&A for further discussion. In addition, the Company reviewed its allowance for
uncollectible reinsurance for Ongoing Operations in the second quarter of 2009 and reduced its allowance for Ongoing Operations by
$20 driven, in part, by a reduction in gross ceded loss recoverables. The allowance for uncollectible reinsurance for Ongoing Operations
is recorded within the Specialty Commercial segment.
Monitoring Reinsurer Security
To manage the potential credit risk resulting from the use of reinsurance, management and ERM evaluate the credit standing, financial
performance, management and operational quality of each potential reinsurer. Through that process, the Company maintains a list of
reinsurers approved for participation on all treaty and facultative reinsurance placements. The Company’ s approval designations reflect
the differing credit exposure associated with various classes of business. Participation authorizations are categorized along property,
short-tail casualty and long-tail casualty lines. In addition to defining participation eligibility, the Company regularly monitors each
active reinsurer’ s credit risk exposure in the aggregate and limits that exposure based upon independent credit rating levels.