Travelers 2011 Annual Report Download - page 160

Reinsurance Recoverables
The following table summarizes the composition of the Company’s reinsurance recoverables:
(at December 31, in millions) 2011 2010
Gross reinsurance recoverables on paid and unpaid claims and
claim adjustment expenses ........................... $ 6,216 $ 6,934
Allowance for uncollectible reinsurance ................... (345) (363)
Net reinsurance recoverables .......................... 5,871 6,571
Mandatory pools and associations(1) ..................... 2,020 2,043
Structured settlements(2) ............................. 3,291 3,380
Total reinsurance recoverables ......................... $11,182 $11,994
(1) Includes impact from certain reclassifications made to 2010 amounts to conform to 2011
presentation.
(2) Included in the Company’s reinsurance recoverables are certain structured settlements
issued by Fidelity & Guaranty Life, which was previously a subsidiary of Old Mutual U.S.
Life Holdings, Inc. prior to being sold by its U.K. parent company to Harbinger
Group Inc. and being renamed.
The $700 million decline in net reinsurance recoverables since December 31, 2010 reflected cash
collections and the impact of net favorable prior year reserve development.
Amounts recoverable from reinsurers are estimated in a manner consistent with the associated
claim liability. The Company evaluates and monitors the financial condition of its reinsurers under
voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer
insolvencies. In addition, in the ordinary course of business, the Company becomes involved in
coverage disputes with its reinsurers. Some of these disputes could result in lawsuits and arbitrations
brought by or against the reinsurers to determine the Company’s rights and obligations under the
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 ‘‘Item 1—Business—Catastrophe Reinsurance.’’
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
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