The Hartford 2012 Annual Report Download - page 96

Table of Contents
As shown in the following table, a portion of the total gross reinsurance recoverable relates to the Company’s mandatory participation in various involuntary
assigned risk pools and the value of annuity contracts held under structured settlement agreements. Reinsurance recoverables due from mandatory pools are
backed by the financial strength of the property and casualty insurance industry. Annuities purchased from third-party life insurers under structured
settlements are recognized as reinsurance recoverables in cases where the Company has not obtained a release from the claimant. Of the remaining gross
reinsurance recoverable as of December 31, 2012 and 2011, the following table shows the portion of recoverables due from companies rated by A.M. Best:
  
Gross reinsurance recoverable $3,022 $ 3,037
Less: mandatory (assigned risk) pools and structured settlements (588) (617)

  
 
Rated A- (Excellent) or better by A.M. Best [1] $1,691 69.5%$ 1,774 73.3%
Other rated by A.M. Best 60.2%52 2.2%
Total rated companies 1,697 69.7%1,826 75.5%
Voluntary pools 95 3.9%100 4.1%
Captives 368 15.1%242 10.0%
Other not rated companies 274 11.3%252 10.4%
     
[1] Based on A.M. Best ratings as of December 31, 2012 and 2011, respectively.
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 along with significant catastrophe losses and European
sovereign debt concerns in 2011 and 2012, 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, 69.5% of the gross reinsurance recoverables due from reinsurers
rated by A.M. Best were rated A- (excellent) or better as of December 31, 2012. 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 evaluations of the reinsurance recoverable asset associated with older, long-term casualty liabilities reported in the Property
& Casualty Other Operations reporting segment, and the allowance for uncollectible reinsurance reported in the Property & Casualty Commercial reporting
segment. For a discussion regarding the results of these evaluations, see Property and Casualty Insurance Product Reserves, Net of Reinsurance within the
Critical Accounting Estimates section of the MD&A.

As part of its risk management strategy, the Company regularly monitors the financial wherewithal of other insurers and, in particular, activity by insurance
regulators and various state guaranty associations relations to troubled insurers. In all states, insurers licensed to transact certain classes of insurance are
required to become members of a guaranty fund. In most states, in the event of the insolvency of an insurer writing any such class of insurance in the state,
members of the funds are assessed to pay certain claims of the insolvent insurer. A particular state's fund assesses its members based on their respective
written premiums in the state for the classes of insurance in which the insolvent insurer was engaged. Assessments are generally limited for any year to one or
two percent of the premiums written per year depending on the state. The amount and timing of assessments related to past insolvencies is unpredictable.
95