The Hartford 2007 Annual Report Download - page 97

97
In the fourth quarter of 2005, the Company accrued an estimated $46 for regular assessments based on estimates of the deficits in each
account at the time. In the second quarter of 2006, the Florida legislature approved the use of $715 of state tax revenues to partially
offset the deficits in Citizens' High Risk, Commercial Lines and Personal Lines accounts. During the second quarter of 2006, Citizens'
management also finalized its estimate of the 2004 and 2005 hurricane losses that would be used in calculating the deficits in each
account. In the third quarter of 2006, the Board of Governors of Citizens approved a final assessment for the 2005 account year and the
Company received the assessment notice during the fourth quarter of 2006. The estimates of the deficits in the Personal Lines account
and Commercial Lines account were lower than previously anticipated by the Company. As a result of these changes in estimates,
during 2006, the Company reduced its accrual for Citizens’ assessments by $41, from $46 to $5. The reduction in the amount of the
estimated regular assessment also reduces the amount of surcharges that will be billed to policyholders to recoup the assessments in the
future.
Servicing of flood insurance
The Company does not provide residential flood insurance under its insurance policies. However, the Company acts as an administrator
for the Write Your Own flood program on behalf of the National Flood Insurance Program under FEMA, for which it earns a fee for
collecting premiums and processing claims. Under the program, the Company services both personal lines and commercial lines flood
insurance policies and does not assume any underwriting risk.
Reinsurance Recoverables
The following table shows the components of the gross and net reinsurance recoverable as of December 31, 2007 and 2006:
Reinsurance Recoverable December 31, 2007 December 31, 2006
Paid loss and loss adjustment expenses $ 347 $ 460
Unpaid loss and loss adjustment expenses 3,788 4,417
Gross reinsurance recoverable 4,135 4,877
Less: allowance for uncollectible reinsurance (404) (412)
Net reinsurance recoverable $ 3,731 $ 4,465
Reinsurance recoverables represent loss and loss adjustment expenses recoverable from a number of entities, including reinsurers and
pools. As shown in the following table, a portion of the total gross reinsurance recoverable relates to the Company’ s mandatory
participation in various involuntary assigned risk pools and the value of annuity contracts held under structured settlement agreements.
Reinsurance recoverables due from mandatory pools are backed by the financial strength of the property and casualty insurance
industry. Annuities purchased from third party life insurers under structured settlements are recognized as reinsurance recoverables in
cases where the Company has not obtained a release from the claimant. Of the remaining gross reinsurance recoverable as of December
31, 2007 and 2006, the following table shows the portion of recoverables due from companies rated by A.M. Best.
Distribution of gross reinsurance recoverable December 31, 2007 December 31, 2006
Gross reinsurance recoverable $ 4,135 $ 4,877
Less: mandatory (assigned risk) pools and
structured settlements (635) (673)
Gross reinsurance recoverable excluding mandatory
pools and structured settlements $ 3,500 $ 4,204
% of Total % of Total
Rated A- (Excellent) or better by A.M. Best [1] $ 2,614 74.7% $ 3,050 72.5%
Other rated by A.M. Best 90 2.6% 162 3.9%
Total rated companies 2,704 77.3% 3,212 76.4%
Voluntary pools 195 5.6% 223 5.3%
Captives 231 6.6% 197 4.7%
Other not rated companies 370 10.5% 572 13.6%
Total $ 3,500 100.0% $ 4,204 100.0%
[1] Based on A.M. Best ratings as of December 31, 2007 and 2006, respectively.
Where its contracts permit, the Company secures future claim obligations with various forms of collateral, including irrevocable letters
of credit, secured trusts, funds held accounts and group wide offsets. As part of its reinsurance recoverable review, the Company
analyzes recent developments in commutation activity between reinsurers and cedants, recent trends in arbitration and litigation
outcomes in disputes between cedants and reinsurers and the overall credit quality of the Company’ s reinsurers. Due to the inherent
uncertainties as to collection and the length of time before such amounts will be due, it is possible that future adjustments to the
Company’ s reinsurance recoverables, net of the allowance, could be required, which could have a material adverse effect on the
Company’s consolidated results of operations or cash flows in a particular quarterly or annual period.
Annually, the Company completes an evaluation of the reinsurance recoverable asset associated with older, long-term casualty liabilities
reported in the Other Operations segment. As a result of this evaluation, the Company reduced its net reinsurance recoverable by $243
in 2006. See the “Other Operations” section of the MD&A for further discussion.