Travelers 2010 Annual Report Download - page 154

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.
On August 20, 2010, in a reinsurance dispute in New York state court captioned United States
Fidelity & Guaranty Company v. American Re-Insurance Company, et al., the trial court granted summary
judgment for the Company, and on October 25, 2010, entered judgment awarding the Company
$251 million plus pre-judgment interest in the amount of $169 million. The judgment, including the
award of interest, has been appealed. See note 15 of notes to the Company’s consolidated financial
statements for further discussion of this reinsurance dispute.
The following table summarizes the composition of the Company’s reinsurance recoverable assets:
(at December 31, in millions) 2010 2009
Gross reinsurance recoverables on paid and unpaid claims and
claim adjustment expenses ........................... $ 6,934 $ 8,138
Allowance for uncollectible reinsurance ................... (363) (523)
Net reinsurance recoverables .......................... 6,571 7,615
Structured settlements ............................... 3,380 3,456
Mandatory pools and associations ....................... 1,568 1,745
Total reinsurance recoverables ......................... $11,519 $12,816
The $1.04 billion decline in net reinsurance recoverables since December 31, 2009 reflected cash
collections and the impact of net favorable prior year reserve development, partially offset by a
reduction in the allowance for uncollectible reinsurance that included the impact of a $70 million
benefit resulting from the summary judgment in the reinsurance dispute referenced above. As a result,
at December 31, 2010, reinsurance recoverables included the full $251 million owed to the Company
under the terms of the related reinsurance agreement.
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