Travelers 2009 Annual Report Download - page 126

The Company regularly reviews emerging issues, such as changing climate conditions, to consider
potential changes to its modeling and the use of such modeling, as well as to help determine the need
for new underwriting strategies, coverage modifications or new products. There can be no assurance
that these efforts will be successful.
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 $12.82 billion at December 31, 2009, a decline of
$1.42 billion from year-end 2008, primarily reflecting 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.
The following table presents the Company’s top five reinsurer groups by reinsurance recoverable at
December 31, 2009 (in millions). Also included is the A.M. Best rating of each reinsurer group at
February 18, 2010:
Reinsurance
Reinsurer Group Recoverable A.M. Best Rating of Group’s Predominant Reinsurer
Swiss Re Group . . . . . . . . . . . . . . . . . . . . . . $895 A third highest of 16 ratings
Munich Re Group . . . . . . . . . . . . . . . . . . . . 779 A+ second highest of 16 ratings
Transatlantic Holdings, Inc. . . . . . . . . . . . . . 485 A third highest of 16 ratings
XL Capital Group . . . . . . . . . . . . . . . . . . . . 398 A third highest of 16 ratings
Berkshire Hathaway Group . . . . . . . . . . . . . 386 A++ highest of 16 ratings
At December 31, 2009, $2.4 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
certain personal physical injury claims, of which workers’ compensation claims comprise a significant
portion. In cases where the Company did not receive a release from the claimant, the structured
settlement is included in reinsurance recoverables as the Company retains the contingent liability to the
claimant. In the event that the life insurance company fails to make the required annuity payments, the
Company would be required to make such payments. The following table presents the Company’s top
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