Travelers 2004 Annual Report Download - page 164

THE ST. PAUL TRAVELERS COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
8. REINSURANCE
The Company’s consolidated financial statements reflect the effects of assumed and ceded reinsurance
transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance
companies have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the
related written and earned premiums) the Company has underwritten to other insurance companies who agree to
share these risks. The primary purpose of ceded reinsurance is to protect the Company from potential losses in
excess of the amount it is prepared to accept. Reinsurance is placed on both a quota-share and excess of loss
basis. Ceded reinsurance arrangements do not discharge the Company as the primary insurer, except for cases
involving a novation.
The Company evaluates and monitors the financial condition of its reinsurers under voluntary reinsurance
arrangements to minimize its exposure to significant losses from reinsurer insolvencies. In addition, in the
ordinary course of business, the Company may become involved in coverage disputes with its reinsurers. In
recent years, the Company has experienced an increase in the frequency of these reinsurance coverage disputes.
Some of these disputes could result in lawsuits and arbitrations brought by or against the reinsurers to determine
the Company’s rights and obligations under the various reinsurance agreements. The Company employs
dedicated specialists and strategies to manage reinsurance collections and disputes.
The Company is also required to participate in various involuntary reinsurance arrangements through
assumed reinsurance, principally with regard to residual market mechanisms in workers’ compensation. The
Company provides services for several of these involuntary arrangements (“mandatory pools and associations”)
under which it writes such residual market business directly, then cedes 100% of this business to the mandatory
pool. Such servicing arrangements are arranged to protect the Company from any credit risk, as any ceded
balances are jointly backed by all the pool members.
The Company reports its reinsurance recoverables net of an allowance for estimated uncollectible
reinsurance recoverables. The allowance is based upon the Company’s ongoing review of amounts outstanding,
length of collection periods, changes in reinsurer credit standing, disputes, applicable coverage defenses and
other relevant factors. Accordingly, the establishment of reinsurance recoverables and the related allowance for
uncollectible reinsurance recoverables is an inherently uncertain process involving estimates. Amounts deemed
to be uncollectible, including amounts due from known insolvent reinsurers, are written off against the allowance
for estimated uncollectible reinsurance recoverables. Any subsequent collections of amounts previously written
off are reported as part of underwriting results.
The allowance for estimated uncollectible reinsurance recoverables was $751 million and $387 million at
December 31, 2004 and December 31, 2003, respectively. Of the $364 million increase in 2004, $256 million
was merger-related and $108 million resulted from the Company’s ongoing review process described above.
The Company assumed 100% of the workers’ compensation premiums previously written by the Accident
Department of its former affiliate, The Travelers Insurance Company (TIC).
Certain of the assumed reinsurance contracts that the Company has entered into with non-affiliated
companies on an excess of loss basis do not transfer insurance risk. These contracts are accounted for using
deposit accounting and are included in other liabilities in the consolidated balance sheet and totaled $405 million
and $325 million at December 31, 2004 and 2003, respectively.
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