Travelers 2006 Annual Report Download - page 58

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Item 1A. RISK FACTORS
You should carefully consider the following risks and all of the other information set forth in this
report, including our consolidated financial statements and the notes thereto.
Catastrophe losses could materially reduce our profitability and adversely impact our ratings, our
ability to raise capital and the availability and costof reinsurance. Our property and casualty insurance
operations expose us to claims arising out of catastrophes. Catastrophes can be caused by various natural
events, including hurricanes, windstorms, earthquakes, hail, severe winter weather and fires. Catastrophes
can also be man-made, such as a terrorist attack (including those involving nuclear, biological, chemical or
radiological events) or a consequence of waror political instability. The geographic distribution of our
business subjects us to catastrophe exposure from hurricanes in the Northeast, Florida, Gulf Coast and
Mid-Atlantic regions, as well as catastrophe exposure from earthquakes in California and the New Madrid
and Pacific Northwest regions. The incidence and severity of catastrophes are inherently unpredictable.
Over the last several years, changing climate conditions have added to the unpredictability and frequency
of natural disasters in certain parts of the world and created additional uncertainty as to future trends and
exposures. It is possible that both the frequenc y and severity of natural and man-made catastrophic events
will increase. Inparticular, we expect that the trend of increased severity and frequency of storms
experienced in 2005 and 2004, although not evident in 2006, may continue in the foreseeable future.
The extent of losses from a catastrophe is a function of both the total amount of insured exposure in
the area affected by the event and the severity of the event. States have from time to time passed
legislation that has the effect of limiting the ability of insurers to manage catastrophe risk, such as
legislation prohibiting insurers from withdrawingfrom catastrophe-prone areas. In addition, following
catastrophes, there are sometimes legislative initiatives and court decisions which seek to expand insurance
coverage for catastrophe claims beyond the original intent of thepolicies. Also, our ability to increase
pricing to the extent necessary to offset rising costs of catastrophes, particularly in the Personal Insurance
segment, requires approval of regulatory authorities of certain states. Our ability or our willingness to raise
pricing, modify underwriting terms or reduce exposure to certain geographies may be limited due to
considerations of public policy, the evolving political environment and/or social responsibilities. We also
may choose to write business we might not otherwise write for strategic purposes, such as improving our
access to other underwriting opportunities.
There are also risks which impact the estimation of ultimate costs for catastrophes. For example, the
estimation of reserves related to hurricanes can be affected by the inability by us and our insureds to access
portions of the impacted areas, the complexity of factors contributing to the losses, the legal and regulatory
uncertainties and the nature of the information available to establish the reserves. Complex factors
include, but are not limited to: determining whether damage was caused byflooding versus wind;
evaluating general liability and pollution exposures; estimating additional living expenses; the impact of
demand surge; infrastructuredisruption; fraud; the effect of mold damage and business interruption costs;
and reinsurance collectibility. The timing of acatastrophe’s occurrence, such as at or near the end of a
reporting period, can also affect the information available to us in estimating reserves for that reporting
period. The estimates related to catastrophes are adjusted as actual claims emerge.
Catastrophe losses could materially and adversely affect our results of operations for any fiscal quarter
or year and may materially harm our financial condition, which in turn could adversely affect our financial
strength and claims-paying ratings and could impair our ability to raise capital on acceptable terms or at
all. Also, rating agencies may further increase their capital requirements, which may require us to raise
capital to maintain our ratings or adversely affect our ratings. In addition, catastrophic events could cause
us to exhaust our available reinsurance limits and could adversely impact the cost and availability of
reinsurance.
For our exposure to catastrophe losses from acts of terrorism, we have limited terrorism coverage in
our reinsurance program, and although the Terrorism Risk Insurance Extension Act of 2005 provides