ASBESTOS – FROM BAD TO WORSE

Jennifer L. Biggs, FCAS, MAAA – Consulting ActuaryTillinghast – Towers Perrin

CAS Seminar on ReinsuranceConcurrent Session – Latent ExposuresJuly 12, 2001

2

Recent Headlines

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

“Asbestos Claims Still Killing” – The Economist (August 19, 2000)

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

“Insurer Asbestos Woes Grow” – National Underwriter (October 16, 2000)

“Asbestos Claims Increasing; P/C Reserve Additions Expected” – Best’s Viewpoint (October 25, 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)

3

Notable Defendant Activity

Major bankruptcies

McDermott (Babcock and Wilcox) – February 2000

Pittsburgh Corning – April 2000

Owens Corning Fibreglas – October 2000

Armstrong World Industries – December 2000

Burns & Roe Enterprises – December 2000

G-I Holdings – January 2001

W.R. Grace – April 2001

U.S. Gypsum – June 2001

Significant charges to earnings for asbestos claims

Owens Illinois – $550 million (October 2000)

Crown Cork & Seal – $166 million (January 2001)

4

What is Asbestos?

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

Six types

“Miracle Mineral” flexible strong durable

fire resistant separable into

filaments abundant quantities

actinolite amosite anthophylite

crocidolite tremolite chrysotile

5

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)

6

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 Recognized as cause of disease since 1920s Pleural thickening, asbestosis, lung and other cancers,

mesothelioma Long latency

7

Why So Much Litigation?

Signature disease

Large percentage of populationexposed

Potential for large jury awards

Economies of scale for plaintiffattorneys

Insurance recoverables

8

Current Status

Increased cost to defendants, their insurers, and reinsurers Surge in claim filings Rescission of previous settlement agreements Bankruptcies Increase in settlement amounts Increase in number of defendants Roll-forward of initial coverage blocks Products reclassification

9

Claim Filings Appeared Fairly Stable in Early 1990s(T

housa

nds)

0.0

10.0

20.0

30.0

40.0

50.0

1991 1992 1993 1994 1995

CCR 1 CCR 2 Non-CCR 1 Non-CCR 2

10

Prior Defendant Activity

Generally level filing patterns some surges in various jurisdictions (MS, TX)

driven by mass consolidations, tort reform bouquet approach

routinely bundle severe claims (meso/cancer) with high frequency non-malignants for settlement

Settlements vary by disease and jurisdiction little variation by attorney recent upward trend on settlement amounts

Outside legal defense costs as a percentage of indemnity have decreased relative to prior levels

11

Settlements by Disease

Countrywide State 1 State 2 State 3

Mesothelioma Lung Cancer Non Malignant

12

Non-CCR Claim Filings Have Increased

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Avg 91-94 NonCCR 1 NonCCR 2

13

CCR Claim Filings Increased After Georgine’s Reversal

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Avg CCR 1(91-95) CCR 1 Avg CCR 2(91-95) CCR 2

14

Average Annual Claim Filings

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

1991-93 1994-95 1996-97 1998-99 2000

Non-CCR Filings CCR Filings

15

Surge in Filings

Causes Tort reform accelerating time frame for claim

filings implies fewer filings later on

“catch up” for CCR defendants post Georgine aggressive plaintiff attorneys

asbestos specialty firms, union hall screenings, Sunday sports page advertisements, Internet, doctors, new claims

Effects Increased costs to all parties!!

change in disease mix mitigates the increase

16

Change in Disease Mix

Source: Manville Trust

1994 Filings - 25,800

Meso3%

Lung Cancer

6%

Non Malig91%

2000 Filings - 59,200

Meso2%

Lung Cancer

4%

Non Malig94%

17

Bankruptcy of Defendants

Currently at least 28 bankruptcies of companies with asbestos-related problems Began in 1982 (Amatex, Johns Manville, UNR – 1982) Little activity among major defendants from 1994 – 1999 Five bankruptcies in 2000 (Babcock & Wilcox, Pittsburgh Corning,

Owens Corning Fiberglas, Armstrong World Industries, Burns & Roe Enterprises)

Three bankruptcies in 2001 (G-I Holdings, W.R. Grace, U.S. Gypsum)

Several defendants cited higher settlement demands as a cause of bankruptcy

New bankruptcies may Increase costs for remaining defendants Cause need for additional defendants

18

Expansion of Defendant List

Approximately 300 asbestos defendants in 1980s; a few thousand today

Defendant list continues to expand since asbestos was used historically in a wide variety of products, including: yarn, thread, felt, rope packing, flame resistant cloth steam gaskets and packings, plain and corrugated paper,

rollboard, millboard, high temperature insulation, movie props World War II Ship Building molded brake linings, brake blocks, filler in plastics, flooring,

pottery, insulated wire, pipe covering brake shoes, clutch facings, cement, plaster, stucco, shingles,

siding, tile, sewer pipes, blocks corrugated roofing, roof sheathing, roofing cement boiler insulation; insulation of walls, floors, mattresses paints, varnishes, filter fibers, filter pads

19

Defendants Seek Additional Coverage

Roll-forward of initial coverage blocks

Products reclassification

20

Products Reclassification

Asbestos claims have traditionally been filed under the products coverage of CGL policies

Two courts have ruled that non-products unaggregated GL coverage applies to claims against insulation contractors

Now, traditional products defendants with insulation activities with exhausted (or nearly exhausted) products coverage are attempting to obtain additional insurance coverage by reclassifying claims that were previously paid under products limits as operations claims.

21

Premises / Operations Coverage

If reclassification successful Reinstates portion of previously exhausted

products limits Provides additional limits under premises/

operations coverage

Limits on premises/operations coverage? Generally doesn’t have aggregate limit May reflect aggregate limit if subject to

Wellington

22

The Cry for Solutions

Dismissal of the Georgine and Fibreboard settlements

Georgine restricts the application of Rule 23 – asbestos “class” too diverse

Fibreboard places new restrictions on limited fund class actions

In both cases, the Supreme Court cries for a legislative solution

Attempts to establish the Asbestos Resolution Corp. – 2000 bills (HR1283 / S758) make little progress

Bankruptcy cited as a “legislative solution” by B&W

Expect more bankruptcies

Tax Relief (2001: HR1412)

Coalition for Asbestos Justice

Finite reinsurance deals

23

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 six defendants have declared bankruptcy …)

“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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Changes on the Horizon

Asbestos defendants fight back G-I Holdings files civil racketeering suit against three plaintiff law

firms (January 2001) 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

Asbestos defendants file suits against several tobacco firms Manville Trust “Falise” mistrial (January 2001); suit dropped (June

2001) Mississippi case dismissed – Owens Corning to appeal (May 2001)

Insurers also fight Connecticut Supreme Court rules for insurers and against Met Life

(January 2001) Equitas leads London insurers, requiring evidence of injury and

product identification effective June 1, 2001

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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

$ B

illio

ns

0

10

20

30

40

50

60

70

80

Tillinghast 12/1996 Ultimate ($38.0-43.0 billion) Tillinghast 2001 Ultimate ($55.0-65.0 billion)

A.M. Best 1997 Ultimate ($40.0 billion) A.M. Best 2001 Ultimate ($65.0 billion)

Cumulative Paid Outstanding (Case & IBNR)

27

Estimation of the “Universe” – Top Down

Estimate total defendant cost ~$200 billion Estimate number of plaintiff filings by disease by

calendar year Estimate average indemnity by disease Estimate future trends by disease Multiply future filings by trended severities Load for expense

Allocate among multiple payers Insured vs. Retained Of Insured: Direct U.S. vs. London Of Direct: Retained vs. Ceded Of Ceded: U.S. vs. London vs. Other

28

Estimation of the “Universe” – Filings

Number 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

of

Fil

ing

s

Meso Lung Cancer Non-Malignant

29

Estimation of the “Universe” – Costs

Asbestos Related Expected Losses19

95 -

1999

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

$ E

xp

ect

ed

Lo

ss

Meso Lung Cancer Non-Malignant

30

Allocate “Universe” Among 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

31

Estimation of the “Universe” – Bottom Up

Estimate total defendant cost ~$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

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 by defendant

implies average ultimate expense loads of 20% to 116% – vary by tier.

Determine percentage insured Allocate indemnity and expense to year Compare to average coverage profiles

Consider reinsurance cessions

32

Percentage of $200 billion Universe –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.

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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

34

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 ...

35

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.

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. She recently assumed the role of Chairperson of the American Academy of Actuaries Mass Tort Work Group which plans to create a primer on asbestos issues for policy-makers for summer release.

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.

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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 Conference and the Casualty Actuaries of the Mid-Atlantic Region (CAMAR). He is a consulting actuary with Tillinghast – Towers Perrin in its Philadelphia office.

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 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. He is also active in the firm’s placement initiative for these exposures.

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. 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.