Travelers 2011 Annual Report Download - page 137

(5) Includes commitments to vendors entered into in the ordinary course of business for goods and
services including property, plant and equipment, office supplies, archival services, etc.
(6) Represents estimated timing for fulfilling unfunded commitments for private equity limited
partnerships and real estate partnerships.
(7) The amounts in ‘‘Claims and claim adjustment expenses’’ in the table above represent the
estimated timing of future payments for both reported and unreported claims incurred and related
claim adjustment expenses, gross of reinsurance recoverables, excluding structured settlements
expected to be paid by annuity companies.
The Company has entered into reinsurance agreements to protect itself from potential losses in
excess of the amount it is prepared to accept as described in note 5 of notes to the Company’s
consolidated financial statements.
In order to qualify for reinsurance accounting, a reinsurance agreement must indemnify the insurer
from insurance risk, i.e., the agreement must transfer amount and timing risk. Since the timing and
amount of cash inflows from such reinsurance agreements are directly related to the underlying
payment of claims and claim adjustment expenses by the insurer, reinsurance recoverables are
recognized in a manner consistent with the liabilities (the estimated liability for claims and claim
adjustment expenses) relating to the underlying reinsured contracts. The presence of any feature
that can delay timely reimbursement of claims by a reinsurer results in the reinsurance contract
being accounted for as a deposit rather than reinsurance (see below). The assumptions used in
estimating the amount and timing of the reinsurance recoverables are consistent with those used in
estimating the amount and timing of the related liabilities.
Reinsurance agreements that do not transfer both amount and timing risk are accounted for as
deposits and included in ‘‘Reinsurance contracts accounted for as deposits’’ in the table above.
The estimated future cash inflows from the Company’s reinsurance contracts that qualify for
reinsurance accounting are as follows:
Less than After
(in millions) Total 1 Year 1-3 Years 3-5 Years 5 Years
Reinsurance recoverables .................. $7,453 $1,420 $1,770 $1,189 $3,074
The Company manages its business and evaluates its liabilities for claims and claim adjustment
expense on a net of reinsurance basis. The estimated cash flows on a net of reinsurance basis are
as follows:
Less than After
(in millions) Total 1 Year 1-3 Years 3-5 Years 5 Years
Claims and claim adjustment expenses, net ... $41,935 $9,346 $11,136 $6,208 $15,245
For business underwritten by non-U.S. operations, future cash flows related to reported and
unreported claims incurred and related claim adjustment expenses were translated at the spot rate
on December 31, 2011.
The amounts reported in the table above and in the table of reinsurance recoverables above are
presented on a nominal basis and have not been adjusted to reflect the time value of money.
Accordingly, the amounts above will differ from the Company’s balance sheet to the extent that
the liability for claims and claim adjustment expenses and the related reinsurance recoverables
have been discounted in the balance sheet. (See note 1 of notes to the Company’s consolidated
financial statements.)
(8) Workers’ compensation large deductible policies provide third party coverage in which the
Company typically is responsible for paying the entire loss under such policies and then seeks
reimbursement from the insured for the deductible amount. ‘‘Claims from large deductible
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