Travelers 2008 Annual Report Download - page 121

REINSURANCE RECOVERABLES
Ceded reinsurance involves credit risk, except with regard to mandatory pools, and is generally
subject to aggregate loss limits. Although the reinsurer is liable to the Company to the extent of the
reinsurance ceded, the Company remains liable as the direct insurer on all risks reinsured. Reinsurance
recoverables are reported after reductions for known insolvencies and after allowances for uncollectible
amounts. The Company also holds collateral, including trust agreements, escrow funds and letters of
credit, under certain reinsurance agreements. The Company monitors the financial condition of
reinsurers on an ongoing basis and reviews its reinsurance arrangements periodically. Reinsurers are
selected based on their financial condition, business practices and the price of their product offerings.
After reinsurance is purchased, the Company has limited ability to manage the credit risk to a
reinsurer. In addition, in a number of jurisdictions, particularly the European Union and the United
Kingdom, a reinsurer is permitted to transfer a reinsurance arrangement to another reinsurer, which
may be less creditworthy, without a counterparty’s consent, provided that the transfer has been
approved by the applicable regulatory and/or court authority.
The Company’s reinsurance recoverables totaled $14.23 billion at December 31, 2008, a decline of
$1.41 billion from year-end 2007, primarily reflecting the sale of Unionamerica, various commutation
agreements and collections on reinsurance recoverables, including those related to prior years’
hurricane losses.
The Company has also entered into Master Security Agreements with certain reinsurers. These
agreements define conditions that require the reinsurer to provide collateral. The specific conditions
and the amounts and form of collateral to be provided by these agreements vary based on a number of
factors including, but not limited to, the reinsurers’ legal structure and trading history with the
Company. One such agreement has been reached with XL Re America, a member of XL Capital
Group. In addition, the Company is beneficiary under a trust arrangement with XL Re America which
partially covers reinsurance recoverables from XL Re America at December 31, 2008.
The following table presents the Company’s top five reinsurer groups by reinsurance recoverable at
December 31, 2008 (in millions). Also included is the A.M. Best rating of each reinsurer group at
February 19, 2009:
Reinsurance
Reinsurer Group Recoverable A.M. Best Rating of Group’s Predominant Reinsurer
Swiss Re Group ...................... $1,009 A+ second highest of 16 ratings
Munich Re Group .................... 831 A+ second highest of 16 ratings
Berkshire Hathaway Group ............. 495 A++ highest of 16 ratings
Transatlantic Holdings, Inc.(1) ........... 495 A third highest of 16 ratings
XL Capital Group .................... 465 A third highest of 16 ratings
(1) As a result of the September 29, 2008 announcement that a Special Committee of Transatlantic
Holdings, Inc.’s (TRH) independent directors is evaluating proposals received from American
International Group, Inc. (AIG) relating to the possible disposition of AIG’s 59% common stock
interest in TRH, as well as possible business combination transactions involving TRH’s outstanding
shares, the reinsurance recoverables from TRH are now being reported separately. These amounts
were previously reported combined with the reinsurance recoverables from AIG (totaling
$71 million at December 31, 2008 exclusive of TRH).
At December 31, 2008, $2.56 billion of reinsurance recoverables were collateralized by letters of
credit, trust agreements and funds held.
Included in reinsurance recoverables are certain amounts related to structured settlements.
Structured settlements comprise annuities purchased from various life insurance companies to settle
109