Travelers 2009 Annual Report Download - page 69

Many reinsurance companies and life insurance companies have been negatively impacted by
financial markets disruption and the economic downturn in 2008 and 2009. A number of these
companies, including certain of those with which we conduct business, were downgraded by various
rating agencies during this time period.
The availability and cost of reinsurance are subject to prevailing market conditions, both in terms
of price and available capacity. 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. The availability and cost of reinsurance could affect our business volume and
profitability.
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 position 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, it is customary practice in the surety business for multiple
insurers to participate as co-sureties on large surety bonds. Under these arrangements, the co-surety
obligations are typically joint and several, in which case we are also exposed to credit risk with respect
to our co-sureties.
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
claimant the full amount of the claim. We are subsequently reimbursed by the contractholder for the
deductible amount and, as a result, we are exposed to credit risk to the policyholder. Moreover, certain
policyholders purchase retrospectively rated workers’ compensation policies (i.e., policies in which
premiums are adjusted after the policy period based on the actual loss experience of the policyholder
during the policy period). Retrospectively rated policies expose us to additional credit risk to the extent
that the adjusted premium is greater than the original premium.
Our efforts to mitigate the credit risk that we have to our insureds may not be successful. To
mitigate such credit risk, we require certain insureds to post collateral, which often is in the form of
pledged securities, such as money market funds, or letters of credit provided by banks. In cases where
we receive pledged securities and the insureds are unable to honor their obligations, we may be
exposed to credit risk on the securities pledged and/or the risk that our access to that collateral may be
stayed during an insured’s bankruptcy. In cases where we receive letters of credit from banks and the
insureds are unable to honor their obligations, we are exposed to the credit risk of the banks that
issued the letters of credit.
In accordance with industry practice, when policyholders purchase insurance policies from us
through independent agents and brokers, the premiums relating to those policies are often paid to the
agents and brokers for payment to us. In most jurisdictions, the premiums will be deemed to have been
paid to us whether or not they are actually received by us. Consequently, we assume a degree of credit
risk associated with amounts due from independent agents and brokers.
To a large degree, the credit risk we face is a function of the economy; accordingly, we face a
greater risk in an economic downturn. While we attempt to manage the risks discussed above through
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