Travelers 2012 Annual Report Download - page 31

Company would be required to make such payments, if and to the extent the purchased annuities are
not covered by state guaranty associations.
Catastrophe Reinsurance
Catastrophes can be caused by a variety of events, including, among others, hurricanes, tornadoes
and other windstorms, earthquakes, hail, wildfires, severe winter weather, floods, tsunamis and volcanic
eruptions. Catastrophes can also result from a terrorist attack (including those involving nuclear,
biological, chemical or radiological events), explosions, infrastructure failures or as a consequence of
political instability. The incidence and severity of catastrophes are inherently unpredictable. 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. Most catastrophes are restricted to small geographic
areas; however, hurricanes and earthquakes may produce significant damage in larger areas, especially
those areas that are heavily populated. The Company generally seeks to manage its exposure to
catastrophes through individual risk selection and the purchase of catastrophe reinsurance. The
Company utilizes a general catastrophe reinsurance treaty with unaffiliated reinsurers to manage its
exposure to losses resulting from catastrophes. In addition to the coverage provided under this treaty,
the Company also utilizes a catastrophe bond program, as well as a Northeast catastrophe reinsurance
treaty, to protect against certain losses resulting from catastrophes in the Northeastern United States.
In addition, the Company also has a general catastrophe aggregate excess-of-loss reinsurance treaty, an
earthquake excess-of-loss reinsurance treaty and several reinsurance treaties specific to its international
operations.
General Catastrophe Reinsurance Treaty. The general catastrophe reinsurance treaty covers the
accumulation of net property losses arising out of one occurrence. The treaty covers all of the
Company’s exposures in the United States and Canada and their possessions, and waters contiguous
thereto, the Caribbean and Mexico. The treaty only provides coverage for terrorism events in limited
circumstances and excludes entirely losses arising from nuclear, biological, chemical or radiological
attacks.
The following table summarizes the Company’s coverage under its General Catastrophe
Reinsurance Treaty, effective for the period July 1, 2012 through June 30, 2013, as well as certain other
catastrophe-related coverages:
Layer of Loss Reinsurance Coverage In-Force
$0 - $1.5 billion ............ Loss 100% retained by the Company, except for certain
losses covered by the Earthquake Excess-of-Loss Treaty as
described below.
$1.5 billion - $2.25 billion ..... 53.3% ($400 million) of loss covered by treaty; 46.7%
($350 million) of loss retained by the Company.
Additionally, certain losses incurred in the Northeastern
United States are covered by the Catastrophe Bond
Program as described below.
Greater than $2.25 billion ..... 100% of loss retained by the Company, except for certain
losses incurred in the Northeastern United States, which
are covered by the Catastrophe Bond Program and
Northeast Catastrophe Treaty as described below.
In addition to the general catastrophe reinsurance treaty described above, the Company also
maintains a General Catastrophe Aggregate Excess-of-Loss Treaty, the coverage terms of which are
described below.
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