The Hartford 2013 Annual Report Download - page 93

93
Reinsurance Recoverables
Reinsurance Security
To manage reinsurer credit risk, a reinsurance security review committee evaluates the credit standing, financial performance,
management and operational quality of each potential reinsurer. Through this process, the Company maintains a centralized list of
reinsurers approved for participation in reinsurance transactions. Only reinsurers approved through this process are eligible to participate
in new reinsurance transactions. The Company's approval designations reflect the differing credit exposure associated with various
classes of business. Participation eligibility is categorized based upon the nature of the risk reinsured, including the expected liability
payout duration. In addition to defining participation eligibility, the Company regularly monitors credit risk exposure to each reinsurance
counterparty and has established limits tiered by counterparty credit rating. For further discussions on how the Company manages and
mitigates third party credit risk, refer to the Credit Risk section.
Property and Casualty Insurance Product Reinsurance Recoverable
Property and casualty insurance product reinsurance recoverables represent loss and loss adjustment expense recoverables from a
number of entities, including reinsurers and pools. The following table shows the components of the gross and net reinsurance
recoverable as of December 31, 2013 and December 31, 2012:
Reinsurance Recoverable 2013 2012
Paid loss and loss adjustment expenses $ 138 $ 170
Unpaid loss and loss adjustment expenses 2,841 2,852
Gross reinsurance recoverable 2,979 3,022
Less: allowance for uncollectible reinsurance (244) (268)
Net reinsurance recoverable $ 2,735 $ 2,754
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, 2013 and
December 31, 2012, the following table shows the portion of recoverables due from companies rated by A.M. Best:
Distribution of gross reinsurance recoverable 2013 2012
Gross reinsurance recoverable $ 2,979 $ 3,022
Less: mandatory (assigned risk) pools and structured
settlements (569) (588)
Gross reinsurance recoverable excluding mandatory
pools and structured settlements $ 2,410 $ 2,434
% of Total % of Total
Rated A- (Excellent) or better by A.M. Best [1] $ 1,558 64.6 % $ 1,691 69.5%
Other rated by A.M. Best 4 0.2% 6 0.2 %
Total rated companies 1,562 64.8 % 1,697 69.7%
Voluntary pools 96 4.0% 95 3.9%
Captives 499 20.7 % 368 15.1 %
Other not rated companies 253 10.5 % 274 11.3 %
Total $ 2,410 100.0% $ 2,434 100.0%
[1] Based on A.M. Best ratings as of December 31, 2013 and 2012, 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. As indicated in the
above table, 64.6% of the gross reinsurance recoverables due from reinsurers rated by A.M. Best were rated A- (excellent) or better as of
December 31, 2013. 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.