Travelers 2009 Annual Report Download - page 124

Percentage of
Common Equity(2)
Single Single
Likelihood of Exceedance Hurricane Earthquake
2.0% (1-in-50) ................................ 4% 2%
1.0% (1-in-100) ............................... 4% 2%
0.4% (1-in-250) ............................... 8% 4%
0.1% (1-in-1,000) .............................. 18% 9%
(1) An event that has, for example, a 2% likelihood of exceedance is sometimes described as
a ‘‘1-in-50 year event.’’ As noted above, however, the probabilities in the table represent
the likelihood of losses from a single event equaling or exceeding the indicated threshold
loss amount in a one-year timeframe, not over a multi-year timeframe. Also, because the
probabilities relate to a single event, the probabilities do not address the likelihood of
more than one event occurring in a particular period, and, therefore, the amounts do not
address potential aggregate catastrophe losses occurring in a one-year timeframe.
(2) The percentage of common equity is calculated by dividing (a) indicated loss amounts in
dollars by (b) total common equity excluding net unrealized investment gain (loss) on
investments, net of taxes. Net unrealized investment gains and losses can be significantly
impacted by both discretionary and other economic factors and are not necessarily
indicative of operating trends. Accordingly, in the opinion of the Company’s management,
the percentage of common equity calculated on this basis provides a useful metric for
investors to understand the potential impact of a single hurricane or single earthquake on
the Company’s financial position.
The threshold loss amounts in the tables above are net of reinsurance, after-tax and exclude loss
adjustment expense, which historically has been less than 10% of loss estimates. The above threshold
loss amounts reflect the most recent version of the modeling software. The amounts for hurricanes
reflect U.S. exposures and include property exposures (other than offshore energy and marine
exposures), property residual market exposures and an adjustment for certain non-property exposures.
The amounts for earthquakes reflect U.S. and Canadian exposures and include property exposures and
workers’ compensation exposures. The Company does not believe that the inclusion of hurricane or
earthquake losses arising from other geographical areas or other exposures would materially change the
estimated threshold loss amounts. This information in the tables is based on the Company’s in-force
portfolio and catastrophic reinsurance program as of December 31, 2009.
Catastrophe modeling requires a significant amount of judgment and a number of assumptions and
relies upon inputs based on experience, science, engineering and history. As a result, such models may
fail to account for risks that are outside the range of normal probability or that are otherwise
unforeseeable. Catastrophe modeling assumptions include, among others, the portion of purchased
reinsurance that is collectible after a catastrophic event, which may prove to be materially incorrect.
Consequently, catastrophe modeling estimates are subject to significant uncertainty. In the tables above,
the uncertainty associated with the estimated threshold loss amounts increases significantly as the
likelihood of exceedance decreases. In other words, in the case of a relatively more remote event
(e.g., 1-in-1,000), the estimated threshold loss amount is relatively less reliable. Actual losses from an
event could materially exceed the indicated threshold loss amount. In addition, more than one such
event could occur in any period.
Moreover, the Company is exposed to the risk of material losses from other than property and
workers’ compensation coverages arising out of hurricanes and earthquakes, and it is exposed to
catastrophe losses from perils other than hurricanes and earthquakes, for example, floods, tornadoes
and acts of terrorism.
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