Travelers 2010 Annual Report Download - page 59

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 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. Our property and casualty insurance operations expose us to
claims arising out of catastrophes. Catastrophes can be caused by various natural events, including,
among others, hurricanes and other windstorms, earthquakes, hail, wildfires, severe winter weather,
floods and volcanic eruptions. Catastrophes can also be man-made, such as a terrorist attack (including
those involving nuclear, biological, chemical or radiological events), explosions, infrastructure failures or
a consequence of political instability. The geographic distribution of our business subjects us to
catastrophe exposures in the United States, which include, but are not limited to: hurricanes from
Maine through Texas; tornadoes throughout the Central and Southeast United States; earthquakes in
California, the New Madrid region and the Pacific Northwest region of the United States; wildfires,
particularly in the Southwest; and terrorism in major cities in the United States. In addition, our
international operations subject us to catastrophe exposures in the United Kingdom, Canada and the
Republic of Ireland, as well as to a variety of world-wide catastrophe exposures through our Lloyd’s
operations.
The incidence and severity of catastrophes are inherently unpredictable, and it is possible that both
the frequency and severity of natural and man-made catastrophic events could increase. Some scientists
believe that in recent years changing climate conditions have added to the unpredictability and
frequency of natural disasters (including, but not limited to, hurricanes, tornadoes, other storms and
fires) in certain parts of the world and created additional uncertainty as to future trends and exposures.
For example, in recent years hurricane activity has impacted areas further inland than previously
experienced, thus expanding our overall hurricane exposure. The catastrophe modeling tools that we
use, or that we rely on from outside parties, to help manage certain of our catastrophe exposures are
based on assumptions and judgments that are subject to error and mis-estimation and may produce
estimates that are materially different than actual results. In addition, our increased presence in certain
geographic areas, such as in the Midwest and Western regions of the United States, and any changes in
climate conditions could cause our data to be more limited and our catastrophe models to be even less
predictive, thus limiting our ability to effectively evaluate and manage such exposures. See ‘‘Item 7—
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Catastrophe
Modeling’’ and ‘‘—Changing Climate Conditions.’’
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. Increases in the value and geographic
concentration of insured property and the effects of inflation could increase the severity of claims from
catastrophic events in the future. In addition, states have from time to time passed legislation, and
regulators have taken action, that has the effect of limiting the ability of insurers to manage
catastrophe risk, such as legislation prohibiting insurers from reducing exposures or withdrawing from
catastrophe-prone areas or mandating that insurers participate in residual markets. Participation in
residual market mechanisms has resulted in, and may continue to result in, significant losses or
assessments to insurers, including us, and, in certain states, those losses or assessments may not be
commensurate with our direct catastrophe exposure in those states. If our competitors leave those
states having residual market mechanisms, remaining insurers, including us, may be subject to
significant increases in losses or assessments following a catastrophe. 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 the policies. 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
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