Market Segment Report: No Slowdown in Asbestos and ...Environmental Claims Asbestos losses have not slowed down, with the property/casualty industry reporting an average $1.9 billion

We’re maintaining our estimate of net ultimate losses for asbestos losses but raising it for environmental losses by $4 billion, as sites are found to be more toxic than originally thought

November 28, 2018

Analytical Contacts:Brian O’Larte, Oldwick+1 (908) 439-2200 Ext. 5138Brian.O’[email protected]

Samiksha Gupta, Oldwick+1 (908) 439-2200 Ext. [email protected]

Contributor:Sam Hanig, Oldwick

2018-167

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BEST’S MARKET SEGMENT REPORT

No Slowdown in Asbestos and Environmental ClaimsAsbestos losses have not slowed down, with the property/casualty industry reporting an average $1.9 billion in additional losses per year over the past five years (2013-2017). Quantifying the industry’s ultimate loss exposure is difficult, given the significant advancements in medical effectiveness, as well as developing litigation strategies.

Environmental losses also show no sign of slowing down, with the industry reporting approximately $800 million in additional losses per year. The industry’s ultimate loss exposure continues to grow, and, as a result, A.M. Best has raised its estimate of the ultimate net environmental losses for the industry to $46 billion, which also required adjusting the environmental ratio benchmark to 12 times from the previous benchmark of 10 times.

A.M Best will continue to monitor both asbestos litigation and losses as well as environmental losses, and will periodically revisit this benchmark, as needed.

Net Ultimate Environmental Loss Estimate up $4 BillionA.M. Best has raised its estimate of net ultimate environmental losses for the US P/C industry to $46 billion, up $4 billion over its previous estimate. The increase is due to the continued development on original sites that have been found to be more toxic than originally thought, and the associated increase in cleanup and defense costs.

The increase in the environmental estimate reflects the fact that the industry continues to incur losses of approximately $750 million per year, while paying out $760 million. Previous expectations factored in a reduction in these patterns, but the pace has not yet declined in a meaningful way. The industry’s environmental losses have reached $46 billion, and the environmental issue will be here for years to come.

Our estimated net ultimate asbestos loss of $100 billion remains the same. Accordingly, our estimate of the ultimate industry losses for asbestos and environmental (A&E) is now $146 billion. As of year-end 2017, the industry had funded approximately $130 billion or 89% of A&E exposure through a combination of paid losses and loss reserves.

Losses incurred have been relatively steady over the past five years, as have A&E loss payments. From 2013 to 2017, the industry paid out more every year than it incurred, with payments of $17.8 billion for A&E claims and $13.3 billion in incurred losses. Asbestos incurred losses came to approximately $10 billion, and payments, $14 billion, while environmental losses came to $3.7 billion, and payments, $3.8 billion. At year-end 2017, asbestos reserves had decreased nearly 4% to $19.1 billion, and environmental reserves, by 3.0% to $5.2 billion. The industry’s paid A&E losses remain concentrated, with the Top 30 insurer groups generating nearly 95% of the total. As in the past, the Top 30 insurer groups accounted for 94% of the industry’s total A&E reserves.

The information in this report is based on A.M. Best’s review of the statutory annual statement footnote 33 data for year-end 2017 (Exhibit 1), including footnotes dating back to 1991, the

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Market Segment Report Asbestos and Environmental

earliest available year with the National Association of Insurance Commissioners (NAIC) annual statement and augmented by A.M. Best proprietary data. All figures in this report are net of reinsurance and adjusted to include the A&E liabilities loss portfolio transfers (LPT) by Fireman’s Fund Insurance Companies (2002) to its German parent, Allianz SE; Munich Reinsurance America Corp. (2005) to its German parent, Munich Re; and A.M Best’s estimate of the Swiss Reinsurance Group (2008) to its Swiss parent, Swiss Re. The data prior to 2009 reflects Swiss Re’s actual net US losses prior to the LPT, as reported in those years. Swiss Re’s published parent financials provide total A&E data but do not break down the asbestos and environmental totals. Based on the gross figures, Exhibit 1 recaps the industry’s net A&E over the current five-year period, adjusted for the three LPTs. All exhibits in this report are on an adjusted basis and reflect group organizational structures in place as of year-end 2017.

Asbestos under Trump’s Environmental Protection Agency Mining asbestos in the United States is currently illegal, but the material is still imported in large quantities, generally for use in the manufacture of chlorine—the historical spike in asbestos imports in 2016 is attributable overwhelmingly to this industry. Furthermore, although the 2016 Frank R. Lautenberg Chemical Safety for the 21st Century Act granted the EPA broader authority to restrict and even comprehensively ban the use of asbestos, subsequent developments in the EPA’s leadership and focus under Donald J. Trump’s

Exhibit 1US Asbestos & Environmental – Key StatisticsRecap from Footnote 33, adjusted for three large loss portfolio transfers1

($ billions)

2013 2014 2015 2016 2017(%) YoY Chg.

2016-2017 Beginning Net Reserves 23.6 23.4 22.6 21.6 19.8 -8.3 Add: Net Incurred Losses 2.4 1.9 2.0 1.5 1.8 20.0 Less: Net Paid Loss & LAE 2.6 2.7 3.0 3.2 2.5 -21.9 Ending Net Reserves 23.4 22.6 21.6 19.8 19.1 -3.5 3-Year Survival Ratio2 10.0 9.0 7.8 6.7 6.6 N/A 1-Year Combined Ratio3 0.5 0.4 0.4 -0.3 0.3 N/A Beginning Net Reserves 5.3 5.2 5.2 5.2 5.3 2.2 Add: Net Incurred Losses 0.8 0.6 0.8 0.8 0.7 15.0 Less: Net Paid Loss & LAE 0.9 0.6 0.8 0.7 0.8 25.0 Ending Net Reserves 5.2 5.2 5.2 5.3 5.2 -3.0 3-Year Survival Ratio2 6.2 6.9 7.0 8.0 6.8 N/A 1-Year Combined Ratio3 0.2 0.1 0.2 0.2 0.1 N/A Beginning Net Reserves 28.9 28.6 27.8 26.8 25.1 -6.1 Add: Net Incurred Losses 3.2 2.5 2.8 2.3 2.5 7.9 Less: Net Paid Loss & LAE 3.5 3.3 3.8 3.9 3.3 -14.5 Ending Net Reserves 28.6 27.8 26.8 25.1 24.3 -3.5 3-Year Survival Ratio2 8.9 8.4 7.5 6.9 6.9 N/A 1-Year Combined Ratio3 0.7 0.5 0.6 0.5 0.5 N/A

Asbe

stos

Envi

ronm

enta

lTo

tal A

&E

1 Grossed up for loss portfo lio transfers of Fireman's Fund, M unich Re America Corp., and Swiss Re America's A&E reserves to their European parents in 2002, 2005, and 2008, respectively. The split between Swiss Re's A&E is estimated based on the histo ric split o f its gross A&E reserves as reported in its US statutory annual statements.

Source: A.M . Best data and research.For information on full Note 33 data dating back to 1 991 for all companies and groups, please call A.M . Best Product Support Services at (908) 439-2200, ext. 5383.

2 Ending net reserves divided by three-year average of net payments. 3 Net point impact to combined ratio .

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administration make it unclear whether the agency has any intention of exercising such authority. The current administration, after heavy lobbying by the chemical industry, is scaling back the way the federal government determines health and safety risks associated with the most dangerous chemicals on the market.

The EPA is planning to modify regulations on asbestos, which may allow use of the substance in manufacturing in the US again. In June 2018, the EPA proposed a significant new rule for certain uses of asbestos (including asbestos-containing goods) that would require manufacturers and importers to receive EPA approval before starting or resuming manufacturing, or importing or processing of asbestos. This review process would require that the EPA evaluate the intended use of asbestos and, when necessary, take action to prohibit or limit such use. This proposed SNUR (Significant New Use Rule) has loosened the EPA’s 1989 restrictions on asbestos products and could allow companies to use asbestos in products such as adhesives, sealants, and pipeline wrap if they are approved by the EPA.

The impact of these actions is somewhat uncertain. There’s reason to believe, though, they will change little for the average American. The most likely outcome of the changes will be that the agency finds lower levels of risks associated with many other chemicals, and as a result, imposes fewer new restrictions or prohibitions.

A&E Key Findings – Note 33A&E incurred losses have fluctuated from a high of $3.2 billion in 2013, to a low of $2.3 billion in 2016, with a slight increase in 2017 to $2.5 billion. Asbestos incurred losses have declined considerably from 2013, whereas environmental losses have been relatively stable and in the historical average range. In 2017, asbestos incurred losses increased by 20% ($300 million), following a significant decline in 2016 drive largely by several large groups—such as AIG, Swiss Reinsurance Group, and Allianz of America—reporting considerable lower than average asbestos losses. On the environmental side, the incurred losses have been relatively flat with minimal movement (Exhibit 2a).

A&E payment levels fluctuated modestly during the period, and they remain in line with the industry historical average. At the current payout levels, A&E reserves will be exhausted in seven years—assuming no additional reserve strengthening. Asbestos paid declined by more than 20% to $2.5 billion, similar to the long-term average. The decline from 2016 to 2017 was driven by a lack of the large settlement payments that occurred in 2016. In 2016, there were two large claims settlement from Travelers ($500 million) and Hartford ($300 million) for the PPG Industries Inc. claim. However, on the environmental side, paid losses have been relatively steady over the last nine years and remain below their long-term average of $1.1 billion (Exhibit 2b).

Below, we list additional key findings from our analysis of footnote 33 for the year-end 2017:

• Five groups recorded net incurred A&E losses of $100 million or more in 2017. Of these, five recorded losses exceeding $100 million each for asbestos, and two recorded losses exceeding $100 million for environmental.

• A&E payouts in 2017 declined by nearly 15% due largely to a number of large payouts in 2016: $767 million by Travelers, $507 million by Hartford, and $349 million by Chubb INA.

• Yearly asbestos loss payments have reached $2 billion or more for 15 years straight.• Since 2009, the P/C industry’s environmental paid losses have been less than $1.0 billion.• The P/C insurance industry’s A&E reserve has declined steadily since 2005.

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Industry Funding Levels Falling ShortP/C industry funding of A&E exposures of $146 billion has reached approximately $130 billion, made up of $106 billion in cumulative paid-to-date losses and $24 billion in reserves set aside for future payments, which translates into a funding rate of nearly 89% of ultimate A&E exposures.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

($ B

illion

s)

Net Asbestos Paids Net Environmental PaidsAVG Asbestos Paids Avg Environmental Paids

US Asbestos & Environmental – Normalized Net Paid Losses

* 2003-2004 exclude USD1.3 billion in Western MacArthur asbestos payouts from two insurers.** Excludes USD500 million in 2015 for John Mansville payout and $800 million in 2016 for PPG Ind Payout. Source: A.M. Best data and research

Exhibit 2b

0

1

2

3

4

5

6

7

($ b

illion

s)

Net Asbestos Incurred Net Environmental Incurred

Exhibit 2aUS Asbestos & Environmental – Net Incurred Losses

Source: A.M. Best data and research

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New Potential ExposureAs the experience with asbestos has shown, today’s wonderful material could easily lead to tomorrow’s public health crisis. For example, although too early to determine conclusively, concerns are growing that long-term exposure to the chemical Glyphosate may be carcinogenic to humans and could represent the next asbestos-level threat to public health if not proactively managed safely and effectively.

Introduced to the American market in 1974, glyphosate is a herbicide that can kill both broadleaf plants and grasses. Glyphosate products are used on farms, industrial areas, public parks, residential lawns, and gardens, and aquatic systems for agricultural and forestry purposes. What isn’t so well known is that farmers also use glyphosate on wheat, oats, edible beans, and other crops right before harvest, raising concerns that the herbicide could get into food products.

Studies have shown that dozens of oat-based foods such as oat cereals, oatmeal, granola and snack bars, which are sold across the country, have levels of glyphosate at or higher than the benchmark considered safe for children’s health, and its consumption could be harmful to human health. A few cases have been brought by farm workers and others who allege that they developed cancer from years of exposure to glyphosate.

The practice of spraying glyphosate on wheat prior to harvest (known as desiccating) began in Scotland in the 1980s. Farmers there often had trouble getting wheat and barley to dry evenly so they could start harvesting. They came up with the idea to kill the crop (with glyphosate) one to two weeks before harvest to accelerate the drying process, which allows farmers to harvest crops as much as two weeks earlier than they normally would, an advantage in northern, colder regions.

The practice spread to the wheat-growing areas in the upper Midwest in the US and in Saskatchewan and Manitoba in Canada. Desiccation is done primarily in years when conditions are wet and the crop is slow to dry down, and has been useful for farmers. Over the past 15 years, the practice has increased in North Dakota, which is the leading wheat-producing state in the US, due to wetter weather.

Studies have also discussed the escalating use of glyphosate over the years: 18.9 billion pounds have been used globally since its introduction in 1974, making it the most widely and heavily applied weed-killer in the history of chemical agriculture. Significantly, 74% of all glyphosate sprayed on crops since the mid-1970s has been applied in just the last 10 years, as cultivation of GMO corn and soybeans expanded in the US and globally.

The concern about glyphosate is for long-term exposure. As most health agencies would say, a single portion would not cause deleterious effects. But daily exposure from eating popular foods such as oatmeal every day or almost every day, for example—that’s when, according to scientific assessments, such amounts of glyphosate could pose health harm. Currently, approximately 580 lawsuits are pending against Monsanto Co. in Federal court (San Francisco), filed by people alleging that exposure to Roundup (Glyphosate) resulting in their developing non-Hodgkin’ lymphoma and that Monsanto covered up the risks. The first trial in federal court is scheduled for February 25, 2019. An estimated 8,000 plaintiffs have made similar claims in the state courts. The first Monsanto trial started June 18, 2018, in the Superior Court of San Francisco and concluded on August 10, 2018, with a jury ordering Monsanto to pay nearly $290 million in damages, including $250 million in punitive damages, to the plaintiff. However, the judge in the case reduced the punitive damages to $39 million on October 22, 2018.

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These figures break down to approximately $89 billion of asbestos funding (89% funded) and $41 billion of environmental funding (90% funded) as Exhibits 3, 4, and 5 indicate, resulting in funding shortfalls of $11 billion for asbestos and $5 billion for environmental.

The industry funded approximately $37 billion of its A&E liabilities between 1991 and 1997, including $10 billion in 1995 (nearly 70% environmental losses). In 1998-2002, roughly $21 billion in losses were generated, of which 42% was incurred in 2002 (majority of which losses were asbestos). From 2003-2007, the industry generated approximately $24 billion in losses, with asbestos generating more than 80% of the A&E losses. The 2008-2012 period saw a slowdown in A&E incurred, with approximately $13 billion in losses, of which asbestos accounted for about 85%. In the most recent five-year period, 2013-2017, the industry reported another $13 billion in A&E losses, which were spread evenly throughout the period. The majority of these losses were for asbestos, 75%.

Industry Survival Ratio for Asbestos Declining SteadilyThe three-year survival ratio is an estimate of the number of years that current reserve levels can support recent payout patterns. The ratio of reserves to the average of the three most current annual payouts is normalized to exclude unusually large payouts. For individual insurers, a number of factors could distort this ratio, among them, differences in settlement practices, primary layer versus excess layer policies, commutations with reinsurers, and the use of structured settlements. As a result, this ratio should be used cautiously in drawing conclusions regarding A&E reserve adequacy.

Exhibit 6 shows key net A&E figures and industry survival ratios for the three insurance segments; commercial, personal, and reinsurance lines. The commercial lines segment has more than 61% of the industry A&E reserves, and the reinsurance segment, a little more than 26%. The industry’s three-year asbestos survival ratio has declined steadily since 2013, from 10.0 times, to 6.6 times in 2017, while the environmental survival ratio has fluctuated over the past five years, with a high of 8.0 times in 2016, to 6.8 times in 2017. The commercial lines

($ millions)

Year

Cumulative Paids-to-Date at

Year-End

Carried Net Reserves at

Year-End

Funded Liabilities as %

of Ultimate Liabilities

1994 19,928 18,325 33.0

1995 23,084 25,984 34.0

1996 27,277 27,567 37.0

1997 29,956 26,843 37.0

1998 33,470 26,057 38.0

1999 38,677 23,652 42.0

2000 41,763 22,252 48.0

2001 44,745 22,708 52.0

2002 48,641 28,459 55.0

2003 53,197 30,816 60.0

2004 58,644 32,019 63.0

2005 62,440 34,443 65.0

2006 66,356 33,213 66.0

2007 70,128 32,599 68.0

2008 74,194 30,589 71.0

2009 77,630 29,739 73.0

2010 81,540 29,440 75.0

2011 84,549 28,721 77.0

2012 87,626 28,506 79.0

2013 91,084 28,196 80.0

2014 94,366 27,270 82.0

2015 98,118 26,332 85.0

2016 102,011 25,146 88.0

2017 105,337 24,262 89.0


US Asbestos & Environmental – Estimated Industry Liabilities as a % of Ultimate

Exhibit 3Exhibit 3

7


0

20

40

60

80

100

120

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20

40

60

80

100

120

(%)

Cumulative Paids-to-Date at Year-End ($ billions) Carried Net Reserves at Year-End ($ billions)

Funded Liabilities as % of Ultimate Liabs

Exhibit 4US Asbestos – Estimated Industry Liabilities as a % of Ultimate

Source: A.M. Best data & research

($billions)

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40

60

80

100

120

0

20

40

60

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100

120

(%)

Cumulative Paids-to-Date at Year-End ($ billions) Carried Net Reserves at Year-End ($ billions)

Funded Liabilities as % of Ultimate Liabs

Exhibit 5US Environmental – Estimated Industry Liabilities as a % of Ultimate

Source: A.M. Best data & research

($billions)

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segment’s asbestos survival ratio has generally declined over the past five years, ranging from a high of 9.6 times in 2013 and settling to 6.8 times in 2017. The three-year survival ratio for asbestos has declined over the past five years primarily on a number of large loss settlement payments in the past three years. This trend for the reinsurance segment is similar, with the survival ratio declining from a high of 16.7 times in 2014, to 6.7 times in 2017.

Top 30 A&E Insurer Groups Hold Vast Majority of Net A&E ReservesFor more than 15 years, the Top 30 groups have held approximately 95% of the industry’s total net A&E reserves (Exhibit 7), with the Top 10 groups alone holding approximately 65% of total net A&E reserves, and the Top five, 40%. Asbestos reserves make up about 80% of total A&E reserves, reflecting the more aggressive funding approach of asbestos liabilities versus environmental. Over the past ten years, the industry’s asbestos loss payments have held relatively steady, at approximately 75% of total A&E loss payments, except for 2016, when Travelers and Hartford made large asbestos payments of $500 million and $300 million, respectively.

Exhibit 6US Asbestos & Environmental – Reserves & Losses by Segment($ billions)

YearNet

Reserve Net

Incurred Net Paid

3-Year Survival

Ratio YearNet

ReserveNet

Incurred Net Paid

3-Year Survival

Ratio2013 15.3 1.6 1.6 9.6x 2013 3.0 0.6 0.6 5.1x2014 14.5 1.3 2.0 8.1x 2014 3.0 0.5 0.5 5.1x2015 13.5 0.8 1.8 7.8x 2015 2.8 0.4 0.6 5.0x2016 12.2 1.1 2.4 6.0x 2016 3.2 0.7 0.4 6.6x2017 12.0 1.2 1.4 6.4x 2017 3.0 0.4 0.6 6.0x

YearNet

Reserve Net

Incurred Net Paid

3-Year Survival

Ratio YearNet

ReserveNet

Incurred Net Paid

3-Year Survival


YearNet

Reserve Net

Incurred Net Paid

3-Year Survival

Ratio YearNet

ReserveNet

Incurred Net Paid

3-Year Survival


YearNet

Reserve Net

Incurred Net Paid

3-Year Survival

Ratio YearNet

ReserveNet

Incurred Net Paid

3-Year Survival



Environmental

Rei

nsur

ance

Pers

onal

Lin

esTo

tal I

ndus

tryC

omm

erci

al L

ines

Asbestos

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Exhibit 7US Asbestos & Environmental - 2017 Key Benchmarks for Top Property/Casualty WritersRanked by Total A&E Reserves

Group

Normalized Net A&E Paid

Share (%)

Net A&E Reserve

Share (%)

Net A&E Loss Reserves ($

Millions)

Net A&E Reserve

Change (%)Asbestos

Mix (%)

Environ-mental Mix

(%)

Net A&E Paid Loss ($

Millions) Asbestos Mix

(%)

Environ-mental Mix

(%)

3-Year Survival

Ratio 1-Year 3-Year

Berkshire Hathaway Ins Grp 2.6 9.6 2,330 5 77 23 -8 499 -399 23.5 0.2 0.4

American International Grp1 5.4 9.3 2,247 -4 81 19 159 50 50 12.9 0.5 1.5

Swiss Reinsurance Grp2 4.7 7.5 1,830 -7 82 18 192 80 20 12.1 2.0 3.3

Hartford Insurance Grp3 5.0 7.2 1,736 5 80 20 203 73 27 5.6 2.7 2.5

Travelers Grp3 13.4 6.7 1,623 -4 78 22 353 76 24 2.5 1.2 1.3

Nationwide Grp 6.0 6.3 1,538 -7 87 13 164 74 26 9.3 0.3 0.6

Chubb INA Grp 8.8 5.7 1,390 -6 66 34 325 58 42 4.2 2.0 1.7

CNA Insurance Cos4 6.5 5.3 1,287 -10 85 15 195 81 19 6.1 0.8 2.3

Munich-American Holding Corp2 3.9 4.3 1,040 -33 78 22 596 92 8 4.3 1.8 2.5

Allstate Insurance Grp 3.4 4.3 1,036 -3 85 15 114 79 21 8.5 0.3 0.2

Liberty Mutual Insurance Cos 7.5 3.9 955 2 71 29 115 72 28 5.5 0.5 0.3

Fairfax Financial (USA) Grp 2.5 3.8 921 -2 90 10 175 79 21 5.8 2.9 3.2

Allianz of America Cos 3.9 3.0 727 2 77 23 77 75 25 6.9 5.4 -3.3

FM Global Grp 0.8 3.0 718 3 86 14 28 86 14 22.7 1.3 1.6

Farmers Insurance Grp 1.4 1.9 465 7 83 17 14 1 99 10.1 0.3 0.1

Zurich Financial Svcs NA Grp 1.2 1.8 425 -9 59 41 48 89 11 8.3 0.1 0.8

Great American P & C Ins Grp 1.1 1.7 403 20 59 41 23 50 50 15.7 2.2 1.6

Arrowpoint Capital Grp 1.7 1.3 327 1 88 12 36 85 15 23.1 NM NM

Amour Insurance Grp 2.8 1.2 296 24 84 16 191 84 16 2.1 NM NM

Everest Re US Grp 1.1 1.1 269 -2 96 4 30 91 9 5.9 2.6 2.0

Sentry Insurance Grp 0.5 1.1 265 -3 66 34 21 73 27 15.0 0.6 0.1

Siruis America Insurance Grp 0.4 0.8 198 26 93 7 23 84 16 9.7 68.8 11.6

Randall Grp 0.4 0.8 186 -4 94 6 20 58 42 0.0 NM NM

Markel Corporation Grp 0.4 0.7 168 -7 75 25 14 91 9 10.3 0.0 0.3

Tokio Marine US PC Grp 0.2 0.4 109 9 65 35 8 82 18 8.9 0.3 0.2

AXA US Grp 0.2 0.4 96 -5 90 10 7 96 4 8.8 0.1 0.9

Amerisure Cos 0.2 0.4 92 -2 93 7 4 79 21 10.6 0.3 1.8

The Cincinnati Insurrance Cos 0.2 0.3 85 -1 30 70 8 14 86 12.4 0.2 0.2

XL Carlin America Grp 0.2 0.3 72 -6 91 9 4 98 2 10.3 0.0 0.5

Old Republic Insurance Grp 0.4 0.3 71 2 76 24 14 84 16 6.4 0.6 0.4

Total Top 30 Groups 86.8 94.4 22,905 -4 80 20 3,153 76 24 6.8 0.9 1.0

All Others 13.2 5.6 1,365 -1 65 35 173 60 40 4.4 0.0 0.0

Total P/C Industry 100.0 100.0 24,270 -4 79 21 3,326 75 25 6.6 0.4 0.5

3 Paid shares normalized for Western MacArthur payouts in 2002-2004, John Mansville payout in 2015, and PPG Industries payout in 2016..

NM - Not meaningful.Source: A.M. Best data and research

Earnings Drag (Points)

2 Grossed up for the loss portfolio transfers (LPT) of Fireman's Fund, Munich Re America Corp., and Swiss Re America's A&E reserves to their European parents in 2002, 2005, and 2008, respectively. The split between Swiss Re's asbestos and environmental is estimated based on the historic split of its gross A&E reserves as reported in its US statutory annual statements.

2017 Net A&E Paid Losses

4 Paid shares normalized for Fibreboard payouts in 1996 and 1999. Net A&E reserves for CNA do not reflect the retroactive reinsurance transfer of nearly $1.5 billion in A&E reserves to National Indemnity in 2010.

1 Net asbestos losses for American International Grp and net A&E losses for Liberty Mutual do not reflect the retroactive reinsurance transfers ($2.0 billion AIG in 2011; Liberty Mutual in 2014) to National Indemnity.

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In 2017, the Top 10 remained the same, although several of the companies switched spots. Berkshire Hathaway moved into the top spot, with a 9.6% share of the industry total net A&E reserves. However, this figure is understated, as Berkshire’s National Indemnity Company (NICO) had assumed a number of very large loss portfolio transfers (LPTs) from unrelated P/C insurers, providing a way for insurers to get out from under this issue. In statutory accounting, an LPT is generally booked as retroactive reinsurance. As a result, ceded reserves remain on the ceding company’s balance sheet as part of the loss reserves and in its statutory footnote 33, but are offset by contra-liability. Recent examples of LPTs with NICO include AIG in 2017, Hartford in 2016, Liberty Mutual in 2014, Utica Mutual Insurance Company in 2012, AIG in 2011 and CNA and One Beacon Insurance Company in 2010. NICO’s statutory liability for assumed LPTs (which includes A&E) was $41.4 billion as of year-end 2017.

Top 15 Insurers Account Most of the Average Annual LossExhibit 8 lists the Top 15 insurers by average annual A&E incurred losses, led by Travelers, with approximately of 11% of the total industry average annual incurred A&E losses over the past five years. The Top 15 insurers by average annual A&E incurred losses account for 80% of

Exhibit 8US Asbestos & Environmental – Top 15 GroupsRanked by Average Incurred A&E Losses, 2013-2017

Rank Groups

5-Year Avg Annual Asbestos

Loss ($ 000s)

5-Year Avg Annual Pollution

Loss ($ 000s)

Total 5-Year Avg Annual Incurred

Loss ($ 000s) % Total1 Travelers Group 221,800 74,139 295,939 11%

2 Chubb INA Group 124,320 131,842 256,162 10%3 American International Group1 134,185 94,383 228,569 8%4 Hartford Insurance Group 170,436 51,644 222,080 8%5 Swiss Reinsurance Group2 143,628 29,172 172,800 6%6 CNA Insurance Group3 131,861 19,645 151,506 6%7 Liberty Mutual Insurance Cos3 95,745 37,907 133,652 5%8 Nationwide Group 120,299 6,619 126,918 5%9 Fairfax FinancialUSA Group 88,946 18,876 107,822 4%10 Berkshire Hathaway Ins Group 70,071 33,592 103,663 4%11 Munich Re America Corp. Grp2 72,600 22,000 94,600 4%12 Allstate Insurance Group 64,950 17,985 82,935 3%13 FM Global Group 63,859 9,348 73,207 3%14 Great American P&C Ins Group 22,031 33,619 55,650 2%15 Farmers Insurance Group 41,670 12,554 54,224 2%

Top 15 1,566,401 593,325 2,159,727 80%All Other 383,401 150,362 533,762 20%Total 1,949,802 743,687 2,693,489 100%Top 15 80% 80% 80%All Other 20% 20% 20%Total 100% 100% 100%

1 Net asbestos losses for American International Group do not reflect the retroactive reinsurance transfer of $2.0 billion in asbestos reserves to National Indemnity in 2011. 2 Grossed up for the loss portfolio transfers (LPT) of Fireman's Fund, Munich Re America Corp., and Swiss Re America's A&E reserves totheir European parents in 2002, 2005, and 2008, respectively. The split between Swiss Re's asbestos and environmental is estimated based on the historic split of its gross A&E reserves as reported in its US statutory annual statements3 CNA and Liberty Mutual losses do not reflect the LPT transfer of their A&E reserves to National Indemnity in 2010 and 2014, respectively.Source: A.M. Best data and research

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total A&E average incurred losses. The rankings of the Top 15 have not changed from the 2016 report, although the positions of a number of companies shifted slightly.

Slight Drag on Combined Ratios for the Most PartExhibit 9 lists 26 of the top 30 groups according to their aggressiveness in funding A&E exposures, as measured by the impact of A&E losses on their combined ratios over the past five years. Excluded from the exhibit are four groups whose ratios would not be meaningful because they are in run-off.

Most of the companies experienced only a slight drag on their combined ratios, while six experienced a modest drag, and only one (Swiss Re) experienced a heavy drag. The losses for Munich Re America, Allianz of America (Fireman’s Fund), CNA, AIG, and Swiss Re do not reflect the LPTs to their European parents or Berkshire Hathaway’s NICO (AIG, Hartford, and CNA); conversely, Berkshire Hathaway’s losses are understated relative to its assumed LPT exposures. Nevertheless, the combined ratio impact on the commercial lines segment, where the majority of the industry A&E reserves and losses are concentrated, has not been significant. The reinsurance segment has recorded a much larger combined ratio impact owing primarily to losses reported by Munich Re America and Swiss Re.

Analytical Methodology – Reserve Adequacy and Capital StrengthA.M. Best looks at three measures when evaluating an insurer’s A&E reserve adequacy: historical premium market share, post-1990 paid loss share (1991-2017), and three-year survival ratios. If a company has conducted a recent ground-up study of its A&E reserves, we will weight the high end of the study’s range by 50% to 80%, depending on the study’s credibility, and weight our own estimate by 20% to 50%.

In estimating an insurer’s ultimate A&E exposure, we multiply the company’s historic premium market share and paid loss by our estimate of ultimate industry losses ($100 billion for asbestos, adjusted for a few very large losses for several insurers, and $42 billion for environmental exposures). The estimated A&E adequacy is then arrived at by subtracting the company’s incurred-to-date A&E losses from its ultimate exposure.

The third method takes into account a company’s unfunded reserves, by comparing its three-year survival ratio (adjusted for any large paid losses or other anomalies) to A.M. Best’s undiscounted benchmark of 15 times for asbestos, 12 times for environmental, or 14 times if blending A&E together (for the rare company that does not break down A&E separately in its footnotes), imputing the unfunded reserve from the difference.

The final estimate of A&E reserve adequacy is included in Best’s Capital Adequacy Ratio (BCAR), in which loss reserves are adjusted upward for A.M. Best’s estimate of overall reserve deficiency and then discounted to present value. Notably, a majority of insurers with material A&E exposures are well capitalized and are deemed able to absorb any A&E shortfalls.

12


Exhibit 9US Asbestos & Environmental – Combined Ratio Impact (% Points)

Insurer1 2013 2014 2015 2016 2017 5-Yr Avg.Prior

Years

Hea

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Dra

g (>

3 po

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Swiss Reinsurance Group2 14.4 13.6 5.8 2.2 2.0 7.7 6.0

CNA Insurance Companies3 5.9 0.0 2.6 3.4 0.8 2.5 4.8

FM Global Group 5.7 0.6 3.6 -0.1 1.3 2.2 2.4

Fairfax Financial (USA) Group 1.6 -0.5 2.6 4.1 2.9 2.2 2.8

Hartford Insurance Group 1.2 2.1 1.9 2.8 2.7 2.1 4.6

Everest Re US Group 0.2 4.1 1.4 2.2 2.6 2.1 2.9

Munich-American Holding Corp Cos2 2.1 0.7 3.6 2.2 1.8 2.1 5.4

Chubb INA Group 2.0 2.1 1.6 1.4 2.0 1.8 4.2

Amerisure Companies 0.8 1.9 3.1 2.2 0.3 1.7 2.1

Great American P&C Ins Group 2.1 0.8 1.8 0.9 2.2 1.5 2.3

Travelers Group 1.2 1.6 1.3 1.3 1.2 1.3 3.6

American International Group3 1.5 0.7 2.8 1.0 0.5 1.3 1.8

Zurich Financial Services NA Group 1.0 1.6 2.0 0.0 0.1 1.0 1.0

AXA U.S, Group 0.4 1.0 1.3 1.2 0.1 0.8 0.9

Nationwide Group 1.0 0.8 0.6 0.8 0.3 0.7 1.7

Markel Corporation Group 1.5 1.3 1.0 -0.1 0.0 0.7 1.7

XL Catlin America Group 0.4 0.7 1.1 0.5 0.0 0.5 1.0

Liberty Mutual Insurance Cos3, 4 1.2 0.5 0.0 0.4 0.5 0.5 1.3

Sentry Insurance Group 1.0 1.1 -0.4 0.1 0.6 0.5 1.6

Old Republic Insurance Group 0.5 0.5 0.3 0.4 0.6 0.5 0.7

Farmers Insurance Group 0.0 0.1 0.4 0.9 0.3 0.4 0.5

Berkshire Hathaway Insurance Group 0.1 0.2 0.4 0.6 0.2 0.3 1.1

Allstate Insurance Company 0.4 0.4 0.1 0.3 0.3 0.3 0.6

The Cinncinati Insurance Cos 0.4 0.2 0.1 0.2 0.2 0.2 0.5

Tokio Marine US PC Group 0.2 0.2 0.2 0.2 0.3 0.2 0.4

Allianz of America Companies2 1.0 3.3 0.8 -22.3 5.4 -0.2 5.0

Commercial 1.2 0.9 0.6 0.9 0.8 0.9

Reinsurance 2.2 1.5 .3.8 0.6 1.4 1.9

Personal 0.2 0.1 0.1 0.1 0.1 0.1

Total Industry 0.8 0.5 0.5 0.4 0.4 0.51 Four of the Top 30 groups are in run-off and therefore combined ratio impacts are not meaningful.


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4 Since 2014, Liberty Mutual has transferred its A&E reserves to National Indemnity via an LPT.

2 Grossed up for the loss portfolio transfers (LPT) of Fireman's Fund, Munich Re America Corp., and Swiss Re America's A&E reserves to their European parents in 2002, 2005, and 2008, respectively. The split between Swiss Re's asbestos and environmental is estimated based on the historic split of its gross A&E reserves as reported in its US statutory annual statements.3 Combined ratio impact for CNA, White Mountains (OneBeacon), American International Group, and Liberty Mutual do not reflect the LPT transfer of their A&E reserves (asbestos only for AIG) to National Indemnity in 2010, 2001, 2011 and 2014, respectively.

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Market Segment Report

Published by A.M. Best

MARKET SEGMENT REPORTA.M. Best Company, Inc.

Oldwick, NJCHAIRMAN & PRESIDENT Arthur Snyder III

SENIOR VICE PRESIDENTS Alessandra L. Czarnecki, Thomas J. Plummer

A.M. Best Rating Services, Inc.Oldwick, NJ

CHAIRMAN & PRESIDENT Larry G. MayewskiEXECUTIVE VICE PRESIDENT Matthew C. Mosher

SENIOR MANAGING DIRECTORS Douglas A. Collett, Edward H. Easop, Stefan W. Holzberger, Andrea Keenan, James F. Snee

WORLD HEADQUARTERS1 Ambest Road, Oldwick, NJ 08858

Phone: +1 908 439 2200

NEWS BUREAU – WASHINGTON, DC OFFICE830 National Press Building, 529 14th Street N.W., Washington, DC 20045

Phone: +1 202 347 3090

LATAM REGION – MEXICO CITY OFFICEPaseo de la Reforma 412, Piso 23, Mexico City, Mexico

Phone: +52 55 1102 2720

EMEA REGION – LONDON OFFICE12 Arthur Street, 6th Floor, London, UK EC4R 9AB

Phone: +44 20 7626 6264

MENA REGION – DUBAI OFFICE*Office 102, Tower 2, Currency House, DIFC

P.O. Box 506617, Dubai, UAEPhone: +971 4375 2780

*Regulated by the DFSA as a Representative Office

APAC REGION – HONG KONG OFFICEUnit 4004 Central Plaza, 18 Harbour Road, Wanchai, Hong Kong

Phone: +852 2827 3400

APAC REGION – SINGAPORE OFFICE6 Battery Road, #39-04, Singapore

Phone: +65 6303 5000

Best’s Financial Strength Rating (FSR): an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations. An FSR is not assigned to specific insurance policies or contracts.

Best’s Issuer Credit Rating (ICR): an independent opinion of an entity’s ability to meet its ongoing financial obligations and can be issued on either a long- or short-term basis.

Best’s Issue Credit Rating (IR): an independent opinion of credit quality assigned to issues that gauges the ability to meet the terms of the obligation and can be issued on a long- or short-term basis (obligations with original maturities generally less than one year).

Rating Disclosure: Use and LimitationsA Best’s Credit Rating (BCR) is a forward-looking independent and objective opinion regarding an insurer’s, issuer’s or financial obligation’s relative creditworthiness. The opinion represents a comprehensive analysis consisting of a quantitative and qualitative evaluation of balance sheet strength, operating performance, business profile, and enterprise risk management or, where appropriate, the specific nature and details of a security. Because a BCR is a forward-looking opinion as of the date it is released, it cannot be considered as a fact or guarantee of future credit quality and therefore cannot be described as accurate or inaccurate. A BCR is a relative measure of risk that implies credit quality and is assigned using a scale with a defined population of categories and notches. Entities or obligations assigned the same BCR symbol developed using the same scale, should not be viewed as completely identical in terms of credit quality. Alternatively, they are alike in category (or notches within a category), but given there is a prescribed progression of categories (and notches) used in assigning the ratings of a much larger population of entities or obligations, the categories (notches) cannot mirror the precise subtleties of risk that are inherent within similarly rated entities or obligations. While a BCR reflects the opinion of A.M. Best Rating Services, Inc. (A.M. Best) of relative creditworthiness, it is not an indicator or predictor of defined impairment or default probability with respect to any specific insurer, issuer or financial obligation. A BCR is not investment advice, nor should it be construed as a consulting or advisory service, as such; it is not intended to be utilized as a recommendation to purchase, hold or terminate any insurance policy, contract, security or any other financial obligation, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. Users of a BCR should not rely on it in making any investment decision; however, if used, the BCR must be considered as only one factor. Users must make their own evaluation of each investment decision. A BCR opinion is provided on an “as is” basis without any expressed or implied warranty. In addition, a BCR may be changed, suspended or withdrawn at any time for any reason at the sole discretion of A.M. Best. Version 021518

Documents

Market Segment Report: No Slowdown in Asbestos and ...Environmental Claims Asbestos losses have not slowed down, with the property/casualty industry reporting an average $1.9 billion