Current Issues and Trends with Asbestos

1. Current Issues and Trends with Asbestos Michael E. Angelina Tillinghast - Towers Perrin Casualty Loss Reserve Seminar September 19, 2000 Minneapolis, Minnesota

2. Asbestos in the News • “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. Agenda • Background Information • popularity, diseases, prior litigation • Current Status • Where we were • Where we are now • Modeling Process • Pricing Issues with Finite Covers • Tobacco • Questions / Comments

4. Background • “Miracle Mineral” • fire resistant, great insulator, flexible, strong • abundant quantities • Used everywhere • shipbuilding, construction, boilers, insulation, brakes, roofing material, Etc • Usage peaked in early 70s • virtually eliminated in the early 80s • People exposed - anyone who worked from 1930 to 1980

5. Background - Diseases • Lung Cancer • Asbestosis * • Pleural Thickening • Mesothelioma * • * Signature diseases • virtually all known cases relate to asbestos exposure.

6. Background - Litigation • Why so much litigation? • Signature disease • Large percentage of population exposed • Potential for large jury awards • Economies of scale for plaintiff attorneys • Insurance recoverables

7. Prior Defendant Activity • Generally level filing patterns • some surges in various jurisdictions (TX, MS) • driven by mass consolidations, tort reform • bouquet approach • lump meso and cancer high dollar cases with non malignants high frequency • Settlements vary by disease and jurisdiction • little variation by attorney • some upward trend on settlement amounts • Outside legal defense costs as a percentage of indemnity have decreased relative to prior levels

8. Prior Activity - Filings 1991-1995

9. Prior Activity - Settlements by Disease

10. Prior Defendant Activity • Effect on cost to insurers and reinsurers • settlements paid by defendant (insured) • defendant recovers from insurers • insurers recover from reinsurers • Insurance Recoveries • previously agreed upon allocation procedures • based on years exposed, policy periods, and coverage terms • losses capped by products aggregates • procedures known as: • “rising water” allocation and “spillage” (no coverage)

11. Example of Coverage Chart

12. Current Status • Considerable increases among US insurers in 1999 • Equitas strengthened in 2000; • more to come in US (gross of reinsurance) • Significant activity in the placement of finite products for asbestos defendants (Turner and Newall) and insurers • Increased awareness at the federal level • HR Bill 1283 (S758) - spin-off of Georgine decision • “cries for legislative solution” -Justice Ginsburg

13. US Asbestos Reported Net Ultimate Losses (Note 27)

14. US Asbestos Reported Net Ultimate Losses (Note 27)

15. Current ActivitiesPotential Causes for Increase • Surge in claim filings against defendants • began in 95 for non CCR members • hit the CCR in 98 (Georgine decision) • Bankruptcy / Coverage Exhaustion of defendants • causes need for new defendants or current defendants to make up the difference • Roll forward of initial coverage blocks • extension of previously agreed terms • Products reclassification

16. Current Activity - Non CCR Filings 1991-1999

17. Current Activity - CCR Filings 1991-1999

18. Current Status-Surge in Filings • Causes • Tort reform accelerating time frame for claim filings • implies less filings later on • “catch up” of CCR defendants post Georgine • aggressive plaintiff attorneys • union hall screenings, Sunday sports page advertisements, Internet, doctors. • Effects • Increased costs to all parties!! • change in disease mix mitigates the increase

19. Current Activity - Average Annual Filings

20. Current Activity - Average Annual Filings

21. Current Status-Reclassification of Filings • Some defendants with exhausted (or nearly exhausted) products coverage and insulation contractors are attempting to reclassify past, present and future claims from products to prem/ops claims. • Reinstates exhausted coverage under products • Allows for more coverage under Prem/Ops • No Aggregates under prem/ops • unless Wellington Signatory

22. Current StatusRecap • 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.

23. Current StatusRecap (con’t) • 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 …