Asbestos Issues and Trends

1. Asbestos Issues and Trends Casualty Loss Reserve SeminarSeptember 8, 2003 Michael E. Angelina, ACAS, MAAA Tillinghast – Towers Perrin

2. 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 • actinolite • amosite • anthophylite • crocidolite • tremolite • chrysotile • flexible • strong • durable • fire resistant • separable into filaments • abundant quantities

3. Asbestos Usage • Peaked in the early 1970s • Contained in ~3,500 products (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; rollboard; flooring felt; and commercial, corrugated, and specialty paper • 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)

4. Exposure and Disease • Exposure • Early epidemiological studies estimated ~27 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

5. Why So Much Litigation? • Large percentage of populationexposed • Signature diseases • Potential for large jury awards • Economies of scale for plaintiffattorneys • Insurance recoverables

6. Surge in Claim Filings

7. Change in Disease Mix

8. Increasing Numbers of Claimants Are Unimpaired 1982 4% of claims showed no manifest asbestos-related injury(RAND) 1993 Up to one-half of all asbestos claims have little or no physical impairment (Harvard Journal of Legislation) 1998 No evidence of disease in 57% of asbestos claims(Manville Trust) 74% of pending claims are unimpaired(confidential report prepared for a defendant) Two-thirds of claims show no evidence of impairment(Babcock & Wilcox) Vast majority of claims provide no evidence of impairment(W.R. Grace) 2001 Source: RAND

9. Observations –Average Settlements by State

10. Observations – Disease Mix by State

11. Observations – Average Settlements by Disease $U.S.

12. Bankruptcy of Defendants • Currently at least 67 bankruptcies of companies with asbestos-related problems according to testimony prepared by the American Academy of Actuaries (www.actuary.org) • Bankruptcy cited as “legislative solution” by Babcock & Wilcox • New bankruptcies may: • Increase costs for remaining defendants • Several defendants cited higher settlement demands as a cause of bankruptcy • Cause need for additional defendants • Approximately 300 asbestos defendants in early 1980s • Estimates of ~2,000 published a few years ago • RAND estimates over 8,400 today

13. Number of Asbestos Related Bankruptciesper Year Note: Excludes two bankruptcies for which no date is available.

14. Expansion of Defendant List • 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 • According to RAND Study • Firms in current list of defendants span 75 of 83 possible 2-digit SIC codes/industries • Over 60% of expenditures are now from non-traditional defendants

15. Costs through 2000 were substantial, but tell only part of the story • According to RAND, estimated total costs of resolving asbestos claims through 2000: $54 B • U.S. insurers $22 B • Insurers outside U.S. $8–$12 B • Defendants $20–$24 B • At least 5 major companies have each spent more than $1 B on asbestos litigation Source: RAND, January 2003

16. 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

17. 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 8.8 (excluding Fibreboard) as of 12/31/2001 • A.M. Best now using an undiscounted survival ratio of 18 - 20. • Aggregate development • multiples of paid losses, case reserves, or reported losses • Comparisons to peer companies (e.g., significant reserve additions)

18. 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

19. 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 Tillinghast – Towers Perrin Estimates of Ultimate Personal Injury Claim Costs • Tillinghast estimates ultimate loss & expense relating to U.S. exposure will be $200 billion • Two approaches:

20. 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 expense

21. Estimation of Ultimate Personal Injury Claim Filings

22. Estimation of Ultimate Loss and Expense

23. Estimation of Ultimate Loss and Expense – Bottom Up • Estimate total cost to defendants ~$200 billion • Develop database of defendant experience • Number of filings against defendants • Average indemnity (defendant’s share) • Expense-to-indemnity ratios • Resulting distributions vary by tier

24. 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) • Allocate ground-up ultimate indemnity and expense to year • Compare to average defendant coverage profiles

25. Defendant Cost Retained Insured Direct – U.S. Direct – London Retained – U.S. Retained – London Ceded Ceded Other Other London London U.S. U.S. Allocate Ultimate Loss and ExpenseAmong Multiple Payers

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

27. And the costs extend beyond personal injury claims costs paid by defendants and their insurers... • “The Impact of Asbestos Liabilities on Workers in Bankrupt Firms” by Joseph E. Stiglitz, Jonathan M. Orszag, Detr R. Orszag – December 2002 • Bankruptcies across the nation • headquarters in 19 states • facilities in 47 states • Pre-bankruptcy, 200,000 workers employed by bankrupt firms • Loss of 52,000 – 60,000 jobs with each displaced worker losing an average of $25,000 – $50,000 in wages • Average 25% reduction to their 401(K) account (approx. $8,300 each) • Direct cost of bankruptcy: $850M – $1.7B • NERA – $2 Billion Secondary Impacts on the Economy

28. 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

29. The Coalition for Asbestos Justice • Formed in 2000 as a nonprofit association to address and improve the asbestos litigation environment • Currently has eleven members: Ace, Argonaut, Chubb, CNA, Everest Re, Fireman’s Fund, General Re, Great American, 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

30. 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”

31. 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

32. 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 • House of Delegates of the American Bar Association (ABA) voted on February 11, 2003 • to support legislation that would establish specific medical criteria that must be satisfied by those alleging non-malignant asbestos-related disease in order to file an asbestos lawsuit • proposal would also toll statute of limitations until such time as the medical criteria were met • Judge Weiner’s ruling in the Federal MDL dismissing all cases that were initiated through mass screenings • Hearing held by Judges Weinstein and Lifland in the Johns Manville bankruptcy proceeding

33. Changes in the Wind? • There are a few signs in the asbestos litigation environment that business may not be as usual • West Virginia passes SB 213 limiting the ability of non-resident plaintiffs to maintain causes of action • Mississippi passes HB 19 limiting punitive awards, reduces venue shopping, releases “innocent seller” (January 2003) • 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

34. U.S. Supreme Court Actions • Amchem v. Windsor • Overturned Georgine/CCR Futures Deal (June 27, 1997) • Ortiz v. Fibreboard • Overturned second global settlement attempt (1999) • Mobil Corp. v. Adkins • Refused to hear case regarding consolidation of case involving 8,000 plaintiffs from 35 states and 250 defendants in West Virginia • Exxon settled October 2002, leaving Union Carbide/Dow Chemical Company as the sole remaining defendant

35. U.S. Supreme Court Actions • Hopeman Brothers Inc. v. Clarence L. Acker Jr., et. al. • Denied petition to review mass consolidation of cases in Virginia (December 9, 2002) • Norfolk & Western Railway Co. v. Ayers, et. al.(March 10, 2003) • Fear of developing cancer justifies a claim under FELA • Joint & several liability: entire damages can be recovered from the railroad • Six workers with asbestosis obtained $5.8 million

36. 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

37. Possible Federal Legislation • S413 – Senator Nickles • Cases remain in court system • Establish medical criteria • Toll applicable statutes of limitation until medical criteria are met • Senate Hearings • September 25, 2002 and March 5, 2003, June 2003 • Discussion of medical criteria as well as an asbestos trust fund • Senator Hatch has called for a compromise solution • S1125 • Asbestos Trust Fund

38. Senate Bill 1125 • Preliminary negotiations involved insurers, defendants, and labor • Establishes privately funded trust totaling $108 billion comprised of: • Insurers - $45B • Defendant companies - $45B • Current bankruptcy - $4B • Voluntary contributions - $14B • Payments to claimants based on three criteria • Diagnostic - in person exam by physician • Medical - 8 categories with scheduled payments • Latency and Exposure - 10 years of exposure

39. Funding • Participation is mandatory for insurers, defendants • Defendants grouped into tiers based on historical payments • Further separated into subtiers based on revenues • Insurers will be subject to an insurer commission if allocation agreement is not reached • Current allocation discussions center on blended approach • 12 insurers likely to contribute over 75% of funding • 20 insurers likely to contribute over 90% of funding

40. Quantify the Economic Impact of S. 1125 • Is proposed Trust Fund of $108B adequate? • Tillinghast Projections Released May 2001: • $200B Ultimate Loss & Expense • Less $70B paid as of 12/31/2002 (est. by RAND) • Equals $130B of future payments • Reduced for frictional costs • $28B defense costs (21.5%) • $41B plaintiff attorney fees (40%) • $61B expected to reach claimants • Conclusion is consistent with RAND: transaction costs have consumed more than half of total spending

41. Quantify the Economic Impact of S. 1125 • Indemnity Awards under S 1125 = estimated claim filings x specific awards • Future claims to be be filed from 2003 - 2049 • Pending claims to be re-filed • Eight Disease Levels consistent with the Manville 2002 TDP • Lung Cancer One claims • Specific awards • $0 for Levels I-II to • $750,000 for Level VIII (meso) • Collateral Offset ($0) • Medical Monitoring ($0.4 billion) • Tested various scenarios - all at or below $108B

42. Insurer Contribution • Insurer definition not limited to US companies • Funding of $45 billion, discounts to $28 billion • $17 billion to US direct insurer - allocation based on three variables • $11 billion to London direct and all reinsurers • allocation based on reserves? • All funding is net of third party reinsurance • Gross of financial covers • US insurers currently hold $19.2 billion in net asbestos reserves versus $27.3 billion on nominal allocation • $17.0 billion discounted • Payment schedule has been suggested • LOC-type requirement may be needed

43. Other Issues • Agreement on insurer allocation • Non-US funding • Transition issues • Reinsurance pipeline • Significant discussion concerning the solvency of the fund • “Is $108 billion enough?” • Negotiations with labor

44. Michael E. Angelina Mr. 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

45. 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