Travelers 2005 Annual Report Download - page 179

THE ST. PAUL TRAVELERS COMPANIES, INC.AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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8. REINSURANCE (Continued)
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. Some of these disputes could result in lawsuits and arbitrations brought by or against the
reinsurers todetermine 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 inreinsurer 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 $804 million and $751 million
at December 31, 2005 and December 31, 2004, respectively.
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 $346
million and $405 million at December 31, 2005 and 2004, respectively.