Travelers 2010 Annual Report Download - page 123

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 $11.52 billion at December 31, 2010, a decline of
$1.30 billion from year-end 2009, primarily reflecting cash collections and the impact of net favorable
prior year reserve development, partially offset by a reduction in the allowance for uncollectible
reinsurance resulting from a recent favorable ruling relating to a reinsurance dispute.
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, 2010 (in millions). Also included is the A.M. Best rating of each reinsurer group at
February 17, 2011:
Reinsurance
Reinsurer Group Recoverable A.M. Best Rating of Group’s Predominant Reinsurer
Munich Re Group .................... $744 A+ second highest of 16 ratings
Swiss Re Group ...................... 707 A third highest of 16 ratings
Transatlantic Holdings, Inc. ............. 385 A third highest of 16 ratings
XL Capital Group .................... 320 A third highest of 16 ratings
Berkshire Hathaway Group ............. 319 A++ highest of 16 ratings
At December 31, 2010, the Company held $2.1 billion of collateral in the form of letters of credit,
trust agreements and funds held to fully or partially collateralize certain reinsurance recoverables.
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. In the third quarter of 2010, Old Mutual plc, the
parent of a U.S. life insurance company that is one of the largest issuers of structured settlements
included in the Company’s reinsurance recoverables, agreed to sell its U.S. life insurance business to a
hedge fund buyer, pending regulatory approval. The Company currently cannot predict the impact of
the transaction, if approved, on the long-term creditworthiness of the annuity issuer. The following
table presents the Company’s top five groups by structured settlements at December 31, 2010 (in
111