Asbestos Issues and Trends

Michael E. Angelina, ACAS, MAAATillinghast – Towers Perrin

Casualty Loss Reserve SeminarSeptember 23, 2002

2

Asbestos in the News (from 2000 CLRS session)

“Asbestos and Pollution Losses nearly doubled in 1999” - Best’s Review (July 2000)

“Equitas significantly increases reserves for asbestos liabilities” - The Review (August 2000)

Major Bankruptcies in last 12 months: McDermott (Babcock and Wilcox) Pittsburgh Corning

Armstrong posts $345 million charge to 1999 earnings (January 2000)

3

Recent Headlines

“Asbestos & Environmental Losses Nearly Doubled in ‘99” – BestWeek (July 10, 2000)

“Equitas significantly increases reserves for asbestos liabilities” – The Review (September 4, 2000)

“How Plaintiffs Lawyers Have Turned Asbestos Into a Court Perennial” – The Wall Street Journal (March 5, 2001)

“The Energizer Bunny of Toxic Torts” – Emphasis (First Quarter 2001)

“Asbestos Claims Surge Set to Dampen Earnings for Commercial Insurers” – A.M. Best Special Report (May 7, 2001)

“Asbestos Litigation in the US: A New Look at an Old Issue”- RAND Institute for Civil Justice (August 2001)

“The $200 Billion Miscarriage of Justice” – Fortune (March 4, 2002)

“The Asbestos Pit” – Time (March 5, 2002)

“Asbestos Reserves Pose Re Challenges” – National Underwriter (Sept 2, 2002)

4

Notable Activity Major bankruptcies

2000(6): Armstrong World Industries, Burns & Roe Enterprises, E.J. Bartells, McDermott (Babcock and Wilcox), Owens Corning Fiberglas, and Pittsburgh Corning.

2001(9): Bethlehem Steel, Eastco Industrial Safety Corporation, Federal Mogul, G-I Holdings (GAF), Skinner Engine Company, U.S. Gypsum, U.S. Mineral, W.R. Grace, and Washington Group International.

2002(8): A.P. Green, Artra (Synkoloid), Harbison Walker, Kaiser Aluminum, Plibrico, Porter Hayden, RFI/Narco, and Shook & Fletcher.

Significant charges to earnings for asbestos claims Owens Illinois – $550 million (October 2000) Crown Cork & Seal – $135 million (January 2000)

– $166 million (January 2001)– $51 million (February 2002)

Halliburton – $96 million (November 2001) + $483 million (July 2002) Est. Undisc. Liability - Pre-Insurance: $2.2 billion Insurance Recovery: $1.6 billion Estimated Net Liability (to 2017): $602 million as of July 2002

ABB/Combustion Engineering – $470 million (January 2002) Georgia Pacific – $221 million (January 2002)

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What is Asbestos?

Naturally occurring fibrous mineral with a crystalline structure containing long chains of silicon and oxygen

Six types

“Miracle Mineral”

“Protector of Human Life” ironically thought to be the protector of people

flexible strong durable

fire resistant separable into

filaments abundant quantities

actinolite amosite anthophylite

crocidolite tremolite chrysotile

6

Usage

Peaked in the early 1970s Contained in ~3,500 products in American commerce (1989 EPA

study) Still legal in the U.S. today

Ban on asbestos promulgated by the EPA in 1989 was remanded by the U.S. Fifth Circuit Court of Appeals in 1991

Only a few portions of the ban remained intact: new product uses commercial, corrugated, and specialty paper rollboard flooring felt

No effective warning label requirements Not tracked effectively

Large manufacturers report annually to Toxic Release Inventory No requirements for small manufacturers Imports (especially building materials)

7

Exposure and Disease

Exposure Early epidemiological studies estimated less than 20 million workers

experienced significant occupational exposure to asbestos Recent forecasts of the Manville Trust suggest an exposed

population in excess of 100 million Ongoing exposure

asbestos containing products asbestos in-place

Typical American breathes ~1 million fibers per year via natural and man-made sources

Disease Documented and recognized as cause of disease since 1920s

Pliny the Elder had noticed a significantly high number of lung related sicknesses in servants working with asbestos cloths and fibers

Pleural thickening, asbestosis, lung and other cancers, mesothelioma

Long latency

8

Why So Much Litigation?

Large percentage of populationexposed

Signature diseases

Potential for large jury awards

Economies of scale for plaintiffattorneys

Insurance recoverables

9

How to Quantify Asbestos Liabilities?

Actuaries typically like to use past experience to predict the future

However, for asbestos we can’t use traditional actuarial methods (e.g., accident year loss development projections) Long latency from exposure to disease

manifestation Potential involvement of multiple policy

periods for individual claims

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How to Quantify Asbestos Liabilities?

Many use benchmarks or rules of thumb Market share techniques

For example, 5% of GL premium volume for affected years translates to 5% share of ultimate liabilities

Survival ratio techniques equals ratio of total reserves divided by average annual

payments U.S. net asbestos survival ratio was 7.6 (excluding Fibreboard)

as of 12/31/2000 A.M. Best now using a discounted survival ratio of 18 - 20.

Comparisons to peer companies (e.g., significant reserve additions) $5 - $10 billion in U.S. insurer reserve additions during 2001

estimated by Standard & Poors Actual increase of $4.0 billion

Aggregate development multiples of paid losses, case reserves, or reported losses

11

How to Quantify Asbestos Liabilities?

Exposure-based modeling will improve understanding of ultimate A&E liabilities

For an insurer or reinsurer, it considers Mix of insureds Types of coverage

Policy wording Attachment points and limits Years of coverage Claims handling and settlement activities

Greater understanding equips the defendant, insurer, or reinsurer to deal strategically with its exposure

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Estimates of the “Universe”

Source

Tillinghast

Net U.S. Insurer/ReinsurerUltimate Loss & ALAE

$38 – $43 billion

Comments

Tillinghast 12/96 Estimate

A.M. Best $40 billion From 1997 A&E Study

A.M. Best $65 billion From May 7, 2001 Special Report

Tillinghast $55 - $65 billion Released May 30, 2001

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Paid and Reported Loss and Expense Compared to Estimates of Net U.S. Ultimate Liability

0

10

20

30

40

50

60

70

80

1994 1995 1996 1997 1998 1999 2000 2001

$ B

illi

on

s

0

10

20

30

40

50

60

70

80

Tillinghast 12/1996 Ultimate ($38-43 billion) Tillinghast 2001 Ultimate ($55-65 billion)

A.M. Best 1997 Ultimate ($40 billion) A.M. Best 2001 Ultimate ($65 billion)

Cumulative Paid ($23.5 billion) Outstanding Case & IBNR ($13.0 billion)

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Recent Increases in Recognized Liabilities

In the U.S.: Allmerica – $33 million pre-tax per A.M. Best

(February 2002) American Financial – $136 million pre-tax per A.M. Best;

$81.3 million after tax to cover asbestos, pollution and September 11 losses

CNA – $1 billion pre-tax per A.M. Best; $750 million after tax (August 3, 2001)

ECRA – $1 billion pre-tax estimated by A.M. Best (February 2002)

GE Global – $99 million pre-tax per A.M. Best(February 2002)

Safeco – $70 million pre-tax per A.M. Best(February 2002)

The Hartford – $540 million pre-tax (July 2002)

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Recent Increases in Recognized Liabilities

And around the world: Chester Street

placed in provisional liquidation (January 2001) entered a “Scheme of Arrangement”

(March 5, 2001) Equitas

£1.5 billion as initially undisclosed portion of total strengthening as of March 31, 2000

£1.7 billion ($2.4 million) as of March 31, 2001 (announced July 2001)

No change as of March 31, 2002 (announced July 2002) Royal & Sun Alliance – $538 million for U.S. and U.K.

(February 2002) U.S. pre-tax charge of $241 million estimated by A.M. Best

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Recent Estimates of Ultimate Liability

Tillinghast estimates ultimate loss & ALAE relating to U.S. exposure will be $200 billion

Two approaches:

Focused on total awards to plaintiffs

Estimated # future filings by disease

Estimated indemnity cost and trended by disease

Loaded for expense

Top-Down Focused on amounts paid by defendants

Assigned defendants to tier

Estimated # future filings, indemnity, and expense by tier

Allocated ultimates to year and compared to insurance coverage

Bottom-Up

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Estimation of Ultimate Loss and Expense –Top Down

Estimate total awards to plaintiffs ~$200 billion Estimate number of personal injury filings by disease by calendar

year Estimate average indemnity by disease

Trend to future years Multiply future filings by trended severities Load for expenseF = # Claims S = Avg. Indemnity

Year Meso LC NM Meso LC NMTotal Cost Incl.

Expense20002001200220032004

...2010

...

2020...

2030...

2040...

Reflects exposure latency disease incidence, and propensity to sue

Trended(F X S)

x (1 + expense)

~1 million ~$200 B

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Estimation of Ultimate Personal Injury Claim Filings

Tillinghast Projection of Asbestos Related Filings

1995

- 19

99

2000

- 20

04

2005

- 20

09

2010

- 20

14

2015

- 20

19

2020

- 20

24

2025

- 20

29

2030

- 20

34

2035

- 20

39

2040

- 20

44

2045

- 20

49

Calendar Year

Nu

mb

er o

f F

ilin

gs

Meso Lung Cancer Non-Malignant

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Estimation of Ultimate Loss and Expense

Tillinghast Projection of Asbestos Related Ultimate Losses

1995

- 19

99

2000

- 20

04

2005

- 20

09

2010

- 20

14

2015

- 20

19

2020

- 20

24

2025

- 20

29

2030

- 20

34

2035

- 20

39

2040

- 20

44

2045

- 20

49

Filed Year

$ E

xpec

ted

Lo

ss

Meso Lung Cancer Non-Malignant

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Allocate Ultimate Loss and ExpenseAmong Multiple Payers

Defendant Cost

Retained

Insured

Direct – U.S.

Retained – U.S. Ceded

U.S. London Other U.S. London Other

Direct – London

Retained – London Ceded

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Portion of $200 billion Ultimate Loss and Expense – Retained, Net Insured U.S., Net Non-U.S.**

Net U.S. Insured30%*

Retained by

Defendants39%

Net Non-U.S.

Insured31%

*$60 billion mid-point of $55 – $65 billion range of the “Universe” of net liabilities to the U.S. P/C market.**Additional details available in Emphasis 2001/3, “Sizing Up Asbestos Exposure,” a publication of Tillinghast – Towers Perrin, at www.towers.com.

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Estimation of Ultimate Loss and Expense – Bottom Up

Estimate total cost to defendants ~$200 billion Develop database of defendant experience to year-end 2000

Number of filings against defendants Average indemnity (defendant’s share) Expense-to-indemnity ratios

Resulting distributions vary by tier

The Types of Asbestos Defendants

Tier 1: Manufacturer/producers in litigationsince inception Will use all available insurance

coverage

Tier 2: Became involved shortly after Tier 1companies Some will exhaust all insurance

coverage Others will not hit highest layers

due to smaller share of industry

Tier 3: Manufacturers, distributors andinstallers brought into litigation dueto Tier 1 and Tier 2 bankruptcies Lesser exposure due to

encapsulated products or limiteddistribution

Tier 4: Owned/operated facilities whereasbestos used and third partiesexposed on premises

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Estimation of Ultimate Loss and Expense – Bottom Up

Project future filings for each defendant implies ~60 defendants per plaintiff case

Project future severities by defendant implies average ultimate severities of $1,873 to $5,550 –

vary by tier.

Project future expenses (defense costs) by defendant Implies average ultimate expense loads of 20% to 116% –

vary by tier. Reflects a reduction in expenses for Tier 3-Low defendants

over a five year period.

Ground-up ultimate loss and expense for each defendant= Filings x Trended Indemnity Severities x (1 + expense)

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Where Do We Go From Here?Recent Changes in Claims Handling

Asbestos claims handled differently than other torts volume/docket pressure bundling

Center for Claims Resolution (CCR) changes its procedures abandons practice of routinely settling cases on a

group basis and requiring members to share settlement costs (February 2001)

stops settling new asbestos claims for remaining 14 members effective August 1, 2001; in run-off

Equitas leads London insurers, requiring evidence of injury and product identification effective June 1, 2001

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The Coalition for Asbestos Justice

Formed in 2000 as a nonprofit association to address and improve the asbestos litigation environment

Currently has eight members: Ace, Argonaut, Chubb, CNA, Fireman’s Fund, The Hartford, Liberty Mutual, and St. Paul

Mission: To encourage fair and prompt compensation to deserving current and future asbestos litigants by seeking to reduce or eliminate the abuses and inequities that exist under the current civil justice system

Coalition is not involved with insurance coverage issues

Working to effect change through public education (including the judiciary), amicus briefs, and jurisdictional litigation efforts

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Public Education

A primary mission of the Coalition is to foster a better understanding of the current asbestos litigation environment Research and Studies (e.g., RAND Study update

(www.rand.org))

Academic Scholarship Victor E. Schwartz & Leah Lorber, “A Letter to the

Nation’s Trial Judges: How the Focus on Efficiency Is Hurting You and Innocent Victims in Asbestos Liability Cases” 24 Am. J. Trial Advoc. 247 (2000)

Mark D. Plevin & Paul Kalish, “Where Are They Now? A History of the Companies That Have Sought Bankruptcy Protection Due to Asbestos Claims” Vol. 1, No. 1 Mealey’s Asbestos Bankr. Rep., Aug. 2001

“This is NOT your father’s asbestos defendant”

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Jurisdictional Litigation Efforts

Identifying jurisdictions that pose the biggest challenges for asbestos defendants and truly sick claimants Key states: CA, IL, LA, MD, MA, MS, NJ, NY, PA,

TX, WV

Meeting with counsel from these states to understand the current case management orders and identifying other due process issues

Advancing inactive dockets / pleural registries

Challenging consolidations and joinder rules

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Changes in the Wind?

There are a few signs in the asbestos litigation environment that business may not be as usual A split in the asbestos plaintiff’s bar between

those representing “real” cases versus those representing the non-impaired

Judge Weiner’s ruling in the Federal MDL dismissing all cases that were initiated through mass screenings

Efforts in current bankruptcies to establish medical criteria and the consolidation before U.S. District Judge Alfred M. Wolin

Hearing held by Judges Weinstein and Lifland in the Johns Manville bankruptcy proceeding

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Changes in the Wind?

There are a few signs in the asbestos litigation environment that business may not be as usual Judge Pickard’s ruling in Mississippi that he

will no longer allow out of state plaintiffs to file suit in Mississippi

Various challenges to the West Virginia mass trial scheduled for September 2002

Pennsylvania Asbestos Legislation (SB 216) dealing with asbestos-related liabilities acquired via merger or consolidation

Many more articles in the business press and from investment analysts advocating the need for an asbestos solution

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Possible Federal Legislation

The Fairness in Compensation Act (H.R. 1283/S758) did not advance would have established the Asbestos Resolution

Corp. opposed by President Clinton and the plaintiff’s bar

Likely prospective proposals supported by the Asbestos Alliance (led by the American Insurance Association and the National Association of Manufacturers) will focus legislation on four areas establishing objective medical criteria of asbestos-

related impairment liberalizing statues of limitations eliminating consolidations eliminating forum shopping

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Quotes from Clients and Colleagues “The claims are continuing.”

“We have more open accounts today then we did ten years ago. We’re seeing more claims against Main Street America – distributions, hardware, HVAC.”

“Claim filings have remained steady; we expected a decrease by now.”

“Asbestos is the energizer bunny of toxic torts; it keeps going and going and going...”

“We are seeing operations claims from new defendants (contractors, distributors)”

We’ve been approached by producers seeking finite cover. The cover might be a positive influence on financial analyst opinions … The defendants must anticipate that filings will continue … A small number of deals are being done.”

“I expect to see at least five more bankruptcies of asbestos defendants in the next 12 to 18 months.” (This was stated in September 2000; since then, numerous defendants have declared bankruptcy …)

“…endless search for a solvent bystander…”

“The life of HR1283 hinges upon the outcome of the presidential election.”

“Asbestos litigation is a profit-driven industry.”

“Don’t think of them as lawyers, think of them as venture capitalists.”

“… factories (be they lawyers) generating paper … Here’s the form, fill in the blanks … won’t end by when I die, even when my kids die …”

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Current Status Recap

Significant deterioration in liabilities at all levels Defendants, insurers, and reinsurers

Generated by filing activities Mitigated by shift in disease mix to claims with

lower settlement values

Continue to see more bankruptcies or finite deals

May see increased attention to what the defendants are carrying on their balance sheets Current focus has been from financial analysts,

not auditors

More scrutiny from insurance regulators

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Current Status Recap (cont’d)

More than 25 years after peak usage, we still see significant activity on the claims side

It’s the “Energizer Bunny” of toxic torts It just keeps going and going and going ...

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Michael E. AngelinaMr. Angelina is a co-author of Tillinghast’s study regarding the asbestos “universe,” first presented on May 30, 2001 to the RAA Education Conference and the Casualty Actuaries of the Mid-Atlantic Region (CAMAR). He is a consulting actuary with Tillinghast – Towers Perrin in its Philadelphia office. He is a principal of the firm.

Mr. Angelina is a member of Tillinghast’s asbestos and environmental practice area, and currently coordinates research and development activities relating to the contingent liabilities of corporate asbestos defendants assisting clients with asbestos-related operational strategies. He has quantified reserve needs for asbestos, pollution, and other health hazards (APH) for both domestic and international insurers and reinsurers. He has also written for Emphasis on asbestos issues, and has participated on various industry forums, trade press, and meetings regarding asbestos liabilities. Mr. Angelina is also active in the firm’s placement initiative for these types of exposures.

Prior to rejoining Tillinghast in January 2000, Mr. Angelina was Vice President and Actuary with Reliance Reinsurance Corp. (RRC). He also served as the Actuarial Officer of the Finite Risk unit. His responsibilities in the financial actuarial role included: modeling outwards reinsurance transactions, providing actuarial support and guidance for areas which had problematic implications to RRC’s financial results, and identifying new opportunities for growth. In the Finite Risk unit, Mr. Angelina’s responsibilities included: performing actuarial and underwriting analyses of loss portfolio transfers; developing the financial structure of potential deals; and performing due diligence reviews of target books of business.

Incorporating his 11 years at Tillinghast prior to rejoining the firm, Mr. Angelina has been involved in a number of client assignments including: ratemaking for personal automobile business; reserve reviews for insurers, reinsurers, excess and surplus carriers, and self insured entities; valuations of insurance operations in support of mergers and acquisitions; financial modeling; quantification of asbestos and pollution liabilities; and the development of pricing systems and size of loss distributions for multinational excess insurance coverages. He is a developer of RPIL, Tillinghast’s excess of loss pricing system, and part of the Global Loss Distributions (GLD) initiative.

Mr. Angelina is a frequent speaker at the Casualty Actuarial Society seminars on pricing and reserving for US and international exposures and has written on risk financing costs for Captive Insurance Company Reports, as well as asbestos-related issues. Prior to joining Tillinghast in 1988, Mr. Angelina worked for CIGNA in the workers compensation and the actuarial research units.

Mr. Angelina is an associate of the Casualty Actuarial Society and a Member of the American Academy ofActuaries. Mr. Angelina is a graduate of Drexel University with a B.S. degree in Mathematics.

Mike.Angelina@tillinghast.com(215) 656-2345

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Jennifer L. Biggs

Ms. Biggs is a co-author of Tillinghast’s study regarding the asbestos “universe,” first presented on May 30, 2001 to the RAA Education Conference and the Casualty Actuaries of the Mid-Atlantic Region (CAMAR). She is a consulting actuary with Tillinghast – Towers Perrin in its St. Louis office. She is a principal of the firm.

Ms. Biggs is a member of Tillinghast’s asbestos and environmental practice area. She coordinates research and development activities relating to asbestos and has quantified reserve needs for asbestos, pollution, and breast implant liabilities for insurance and reinsurance companies. Ms. Biggs has also been active in the firm’s asbestos and environmental reinsurance placement initiative.

Ms. Biggs has spoken at Annual Meetings of the Casualty Actuaries in Reinsurance and the Casualty Actuarial Society regarding asbestos liabilities. Under her direction as Chairperson of the American Academy of Actuaries Mass Tort Work Group a Public Policy Monograph: Overview of Asbestos Issues and Trends was released in December 2001.

Ms. Biggs also has significant experience in the professional liability area. Her work includes analyses of funding requirements, self-insured retention limits, and allocation systems for self-insured trust funds of several hospitals. She also performs reserve evaluations, opining on year-end statutory reserve levels for physician insurers. Additionally, she has assisted insurers by analyzing rate levels and preparing filing materials for entry into new states.

Prior to relocating to Tillinghast’s St. Louis office in 1988, Ms. Biggs spent almost four years in Tillinghast’s Bermuda office. There she gained considerable experience in financial reinsurance, performing pricing analyses for loss portfolio transfers. Most other assignments were related to loss reserving for reinsurance and captive insurance companies.

Ms. Biggs is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries. Ms. Biggs graduated with college honors from Washington University in St. Louis with a B.A. in mathematics and a business minor.

Jenni.Biggs@tillinghast.com(314) 719-5843