Travelers 2010 Annual Report Download - page 60

willingness to manage our catastrophe exposure by raising prices, modifying underwriting terms or
reducing exposure to certain geographies may be limited due to considerations of public policy, the
evolving political environment, changes in the general economic climate and/or social responsibilities.
We also may choose to write business in catastrophe-prone areas that we might not otherwise write for
strategic purposes, such as improving our access to other underwriting activities.
There are also risks that impact the estimation of ultimate costs for catastrophes. For example, the
estimation of reserves related to hurricanes can be affected by the inability 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 by flooding versus wind;
evaluating general liability and pollution exposures; estimating additional living expenses; the impact of
demand surge; infrastructure disruption; fraud; the effect of mold damage; business interruption costs;
and reinsurance collectability. The timing of a catastrophe’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 and additional
information becomes available.
Exposure to catastrophe losses or actual losses following a catastrophe 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, as a result of our exposure to catastrophe losses or actual losses following a
catastrophe, rating agencies may further increase capital requirements, which may require us to raise
capital to maintain our ratings or adversely affect our ratings. A ratings downgrade could hurt our
ability to compete effectively or attract new business. In addition, catastrophic events could cause us to
exhaust our available reinsurance limits and could adversely impact the cost and availability of
reinsurance. Such events can also impact the credit of our reinsurers. For a discussion of our
catastrophe reinsurance coverage, see ‘‘Item 1—Business—Reinsurance—Catastrophe Reinsurance.’’
Catastrophic events could also adversely impact the credit of the issuers of securities, such as states or
municipalities, in whom we have invested.
In addition, coverage in our reinsurance program for terrorism is limited. Although the Terrorism
Risk Insurance Program Reauthorization Act of 2007 (the Act) provides benefits in the event of certain
acts of terrorism, those benefits are subject to a deductible and other limitations. Under this law, once
our losses exceed 20% of our commercial property and casualty insurance premium for the preceding
calendar year, the federal government will reimburse us for 85% of our losses attributable to certain
acts of terrorism which exceed this deductible up to a total industry program cap of $100 billion. Our
estimated deductible under the program is $2.08 billion for 2011. In addition, because the
interpretation of this law is untested, there is substantial uncertainty as to how it will be applied to
specific circumstances. It is also possible that future legislative action could change the Act.
Because of the risks set forth above, catastrophes such as those caused by various natural events or
man-made events such as a terrorist attack, including ‘‘unconventional’’ acts of terrorism involving
nuclear, biological, chemical or radiological events, could materially and adversely affect our results of
operations, financial position and/or liquidity. Further, while we seek to manage our exposure to
man-made catastrophic events involving conventional means, there can be no assurance that we would
have sufficient resources to respond to claims arising out of one or more man-made catastrophic events
involving so-called weapons of mass destruction, including nuclear, biological, chemical or radiological
means.
During or following a period of financial market disruption or economic downturn, our business
could be materially and adversely affected. Over the past three years, worldwide financial markets
have experienced significant disruptions and the United States and many other economies experienced
a prolonged economic downturn, resulting in heightened credit risk, reduced valuation of investments
48