Travelers 2008 Annual Report Download - page 62

We may not be able to collect all amounts due to us from reinsurers, and reinsurance coverage
may not be available to us in the future at commercially reasonable rates or at all. The availability
and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available
capacity, which can affect our business volume and profitability. The availability of reinsurance capacity
can be impacted by general economic conditions and conditions in the reinsurance market, such as the
occurrence of significant reinsured events. In particular in 2009, we expect there may be a significant
capacity shortage with regard to catastrophe reinsurance, which could adversely impact the cost and
availability of reinsurance to us.
Although the reinsurer is liable to us to the extent of the ceded reinsurance, we remain liable as
the direct insurer on all risks reinsured. As a result, ceded reinsurance arrangements do not eliminate
our obligation to pay claims. Accordingly, we are subject to credit risk with respect to our ability to
recover amounts due from reinsurers.
In the past, certain reinsurers have ceased writing business and entered into runoff. Some of our
reinsurance claims may be disputed by the reinsurers, and we may ultimately receive partial or no
payment. This is a particular risk in the case of claims that relate to insurance policies written many
years ago, including those relating to asbestos and environmental claims. 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 ability of reinsurers to transfer their risks to other, less creditworthy
reinsurers may adversely impact our ability to collect amounts due to us.
Included in reinsurance recoverables are certain amounts related to structured settlements.
Structured settlements comprise annuities purchased from various life insurance companies to settle
certain personal physical injury claims, of which workers’ compensation claims comprise a significant
portion. In cases where we did not receive a release from the claimant, the structured settlement is
included in reinsurance recoverables as we retain the contingent liability to the claimant. In the event
that the life insurance company fails to make the required annuity payments, we would be required to
make such payments.
Many reinsurance companies and life insurance companies have been negatively impacted by
deteriorating financial and economic conditions, including unprecedented financial market disruption. A
number of these companies, including those with which we conduct business, have been downgraded
and/or have been placed on negative outlook by various rating agencies.
Because of the risks set forth above, we may not be able to collect all amounts due to us from
reinsurers, and reinsurance coverage may not be available to us in the future at commercially
reasonable rates or at all, and/or life insurance companies may fail to make required annuity payments,
and thus our results of operations and financial condition could be materially and adversely affected.
We are exposed to credit risk in certain of our business operations. In addition to exposure to
credit risk related to our investment portfolio and reinsurance recoverables discussed above, we are
exposed to credit risk in several other areas of our business operations, including credit risk relating to
policyholders, independent agents and brokers.
We are exposed to credit risk in our surety insurance operations, where we guarantee to a third
party that our customer will satisfy certain performance obligations (e.g., a construction contract) or
certain financial obligations. If our customer defaults, we may suffer losses and be unable to be
reimbursed by our customer.
In addition, a portion of our business is written with large deductible insurance policies. Under
workers’ compensation insurance contracts with deductible features, we are obligated to pay the
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