Travelers 2008 Annual Report Download - page 154

Reinsurance Recoverables
Amounts recoverable from reinsurers are estimated in a manner consistent with the associated
claim liability. 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 becomes involved in
coverage disputes with its reinsurers. 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 aggressive strategies
to manage reinsurance collections and disputes.
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 also an inherently
uncertain process involving estimates. From time to time, as a result of the long-tailed nature of the
underlying liabilities, coverage complexities and potential for disputes, the Company considers the
commutation of reinsurance contracts. Changes in estimated reinsurance recoverables and commutation
activity could result in additional income statement charges. Total reinsurance recoverables at
December 31, 2008 declined by $1.41 billion from the same date in 2007, primarily reflecting the sale
of Unionamerica, various commutation agreements and collections on reinsurance recoverables,
including those related to prior year hurricane losses. The allowance for uncollectible reinsurance at
December 31, 2008 declined by $70 million from the same date in 2007, generally due to settlement
activity and commutations.
Recoverables attributable to structured settlements relate primarily to personal injury claims, of
which workers’ compensation claims comprise a significant portion, for which the Company has
purchased annuities and remains contingently liable in the event of a default by the companies issuing
the annuities. Recoverables attributable to mandatory pools and associations relate primarily to
workers’ compensation service business and have the obligation of the participating insurance
companies on a joint and several basis supporting these cessions.
The following table summarizes the composition of the Company’s reinsurance recoverable assets:
(at December 31, in millions) 2008 2007
Gross reinsurance recoverables on paid and unpaid claims and
claim adjustment expenses ........................... $ 9,376 $10,731
Allowance for uncollectible reinsurance ................... (618) (688)
Net reinsurance recoverables .......................... 8,758 10,043
Structured settlements ............................... 3,517 3,615
Mandatory pools and associations ....................... 1,957 1,983
Total reinsurance recoverables ......................... $14,232 $15,641
Investment Valuation and Impairments
Fair Value Measurements
The Company’s estimates of fair value for financial assets and financial liabilities are based on the
framework established in FASB Statement No. 157, Fair Value Measurements (FAS 157). The framework
is based on the inputs used in valuation and gives the highest priority to quoted prices in active
markets and requires that observable inputs be used in the valuations when available. The disclosure of
fair value estimates in the FAS 157 hierarchy is based on whether the significant inputs into the
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