Travelers 2014 Annual Report Download - page 64

Table of Contents
Many life insurance companies were negatively impacted by the financial markets disruption and the economic downturn beginning in 2008. A
number of these companies, including certain of those with which we conduct business or to which we otherwise have credit exposure, 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 and investment operations including reinsurance or structured settlements.
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, including exposure to large customers who may have
obligations to multiple third parties. If our customer defaults, we may suffer losses and not be reimbursed by that 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 are typically joint and several, in which case we are also exposed to credit risk with respect to our co - sureties.
In addition, a portion of our business is written with large deductible insurance policies. Under casualty insurance contracts with deductible
features, we are obligated to pay the claimant the full amount of the claim. We are subsequently reimbursed by the contractholder for the
deductible amount, and, as a result, we are exposed to credit risk to the policyholder. Moreover, certain policyholders purchase retrospectively
rated workers' compensation policies (i.e., policies in which premiums are adjusted after the policy period based on the actual loss experience of the
policyholder during the policy period). Retrospectively rated policies expose us to additional credit risk to the extent that the adjusted premium is
greater than the original premium.
Our efforts to mitigate the credit risk that we have to our insureds may not be successful. To reduce such credit risk, we require certain
insureds to post collateral for some or all of these obligations, often in the form of pledged securities such as money market funds or letters of
credit provided by banks, surety bonds or cash. In cases where we receive pledged securities and the insureds are unable to honor their
obligations, we may be exposed to credit risk on the securities pledged and/or the risk that our access to that collateral may be stayed during an
insured's bankruptcy. In cases where we receive letters of credit from banks and the insureds are unable to honor their obligations, we are exposed
to the credit risk of the banks that issued the letters of credit.
In accordance with industry practice, when policyholders purchase insurance policies from us through independent agents and brokers, the
premiums relating to those policies are often paid to the agents and brokers for payment to us. In most jurisdictions, the premiums will be deemed
to have been
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