Travelers 2012 Annual Report Download - page 160

Unanticipated changes in risk factors can affect reserves. As an indicator of the causal effect that a
change in one or more risk factors could have on reserves for International and other (excluding
asbestos and environmental), a 1% increase (decrease) in incremental paid loss development for each
future calendar year could result in a 1.2% increase (decrease) in claims and claim adjustment expense
reserves. International and other reserves (excluding asbestos and environmental) represent
approximately 7% of the Company’s total claims and claim adjustment expense reserves.
International and other represents a combination of different product lines, some of which are in
runoff. Comparative historical information is not available for international product lines as insurers
domiciled outside of the U.S. do not file U.S. statutory reports. Comparative historical information on
runoff business is not indicative of reasonably possible one-year changes in the reserve estimate for this
mix of runoff business. Accordingly, the Company has not included comparative analyses for
International and other.
Reinsurance Recoverables
The following table summarizes the composition of the Company’s reinsurance recoverables:
(at December 31, in millions) 2012 2011
Gross reinsurance recoverables on paid and unpaid claims and
claim adjustment expenses ........................... $ 5,256 $ 6,255
Allowance for uncollectible reinsurance ................... (258) (345)
Net reinsurance recoverables .......................... 4,998 5,910
Mandatory pools and associations ....................... 2,549 2,020
Structured settlements ............................... 3,165 3,225
Total reinsurance recoverables ......................... $10,712 $11,155
The $912 million decline in net reinsurance recoverables since December 31, 2011 primarily
reflected the impact of cash collections, including commutation agreements, 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.
Some of the reinsurance agreements that the Company entered into as part of its catastrophe bond
programs are dual trigger contracts. All of these contracts 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
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