Travelers 2012 Annual Report Download - page 123

analyses and various other factors to account for non-modeled losses to refine its proprietary view of
catastrophe risk. These proprietary models are continually updated as new information emerges.
The tables below set forth the probabilities that estimated losses from a single event occurring in a
one-year timeframe will equal or exceed the indicated loss amounts (expressed in dollars and as a
percentage of the Company’s common equity), based on the current version of the proprietary and
third-party computer models utilized by the Company at December 31, 2012. For example, on the basis
described below the tables, the Company estimates that there is a one percent chance that the
Company’s loss from a single U.S. hurricane in a one-year timeframe would equal or exceed
$1.4 billion, or 6% of the Company’s common equity at December 31, 2012.
Dollars (in billions)
Single U.S.
Single U.S. and Canadian
Likelihood of Exceedance(1) Hurricane Earthquake
2.0% (1-in-50) ................................. $1.1 $0.5
1.0% (1-in-100) ................................. $1.4 $0.7
0.4% (1-in-250) ................................. $2.4 $0.9
0.1% (1-in-1,000) ............................... $5.2 $2.0
Percentage of
Common Equity(2)
Single U.S.
Single U.S. and Canadian
Likelihood of Exceedance Hurricane Earthquake
2.0% (1-in-50) ................................. 5% 2%
1.0% (1-in-100) ................................. 6% 3%
0.4% (1-in-250) ................................. 11% 4%
0.1% (1-in-1,000) ............................... 23% 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 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, the Company’s management uses the percentage of
common equity calculated on this basis as a metric to evaluate the potential impact of a
single hurricane or single earthquake on the Company’s financial position for purposes of
making underwriting and reinsurance decisions.
The threshold loss amounts in the tables above, which are based on the Company’s in-force
portfolio at December 31, 2012 and catastrophic reinsurance program at January 1, 2013, 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 hurricane loss amounts are based on the Company’s catastrophe risk model estimates and include
losses from the hurricane hazards of wind and storm surge. The amounts for earthquakes reflect U.S.
111