Travelers 2009 Annual Report Download - page 159

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 reinsurance agreements that the Company entered into as part of its catastrophe bond
programs are dual trigger contracts and meet the requirements to be accounted for as reinsurance in
accordance with guidance for accounting for reinsurance contracts. The Company’s catastrophe bond
programs are described in more detail in the ‘‘Catastrophe Reinsurance Coverage’’ section herein.
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.
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. These recoverables are supported by the participating
insurance companies’ obligation to pay a pro rata share based on each company’s voluntary market
share of written premium in each state in which it is a pool participant. In the event a member of a
mandatory pool or association defaults on its share of the pool’s or association’s obligations, the other
members’ share of such obligation increases proportionally.
The following table summarizes the composition of the Company’s reinsurance recoverable assets:
(at December 31, in millions) 2009 2008
Gross reinsurance recoverables on paid and unpaid claims and
claim adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,138 $ 9,376
Allowance for uncollectible reinsurance . . . . . . . . . . . . . . . . . . . (523) (618)
Net reinsurance recoverables .......................... 7,615 8,758
Structured settlements ............................... 3,456 3,517
Mandatory pools and associations . . . . . . . . . . . . . . . . . . . . . . . 1,745 1,957
Total reinsurance recoverables ......................... $12,816 $14,232
The $1.14 billion decline in net reinsurance recoverables since year-end 2008 reflected cash
collections, several commutation agreements and the impact of net favorable prior year reserve
development.
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