Travelers 2010 Annual Report Download - page 68

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. Although the
reinsurer is liable to us to the extent of the ceded reinsurance, we remain liable as the direct insurer on
all risks reinsured. As a result, ceded reinsurance arrangements do not eliminate our obligation to pay
claims. Accordingly, we are subject to credit risk with respect to our ability to recover amounts due
from reinsurers.
In the past, certain reinsurers have ceased writing business and entered into runoff. Some of our
reinsurance claims may be disputed by the reinsurers and we may ultimately receive partial or no
payment. This is a particular risk in the case of claims that relate to insurance policies written many
years ago, including those relating to asbestos and environmental claims. 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 ability of reinsurers to transfer their risks to other, less creditworthy
reinsurers may adversely impact our ability to collect amounts due to us.
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 we did not receive a release from the claimant, the structured settlement is
included in reinsurance recoverables as we retain the contingent liability to the claimant. In the event
that the life insurance company fails to make the required annuity payments, we would be required to
make such payments.
Many reinsurance companies and life insurance companies were negatively impacted by the
financial markets disruption and the economic downturn over the past three years. A number of these
companies, including certain of those with which we conduct business, were downgraded by various
rating agencies during this time period. For a discussion of our top reinsurance groups by reinsurance
recoverable and the top five groups by amount of structured settlements provided, see ‘‘Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reinsurance
Recoverables.’’
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 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 not 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
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