Travelers 2010 Annual Report Download - page 121

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 gains and losses,
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 most
loss adjustment expenses, which historically have been less than 10% of loss estimates. The amounts for
hurricanes reflect U.S. exposures and include property 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, 2010.
Catastrophe modeling relies upon inputs based on experience, science, engineering and history.
These inputs reflect a significant amount of judgment and are subject to changes which may result in
volatility in the modeled output. Catastrophe modeling output may also fail to account for risks that
are outside the range of normal probability or 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, such as windstorms, hail,
wildfires, severe winter weather, floods, volcanic eruptions and acts of terrorism.
There are no industry-standard methodologies or assumptions for projecting catastrophe exposure.
Accordingly, catastrophe estimates provided by different insurers may not be comparable.
For more information about the Company’s exposure to catastrophe losses, see ‘‘Item 1A—Risk
Factors—Catastrophe losses could materially and adversely affect our results of operations, our
financial position and/or liquidity, and could adversely impact our ratings, our ability to raise capital
and the availability and cost of reinsurance.’’
CHANGING CLIMATE CONDITIONS
Severe weather events over the last several years have underscored the unpredictability of future
climate trends and created uncertainty regarding insurers’ exposures to financial loss as a result of
catastrophe and other weather-related events. Some scientists believe that, in recent years, changing
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