ASBESTOS – FROM BAD TO WORSE

1. ASBESTOS – FROM BAD TO WORSE CAS Seminar on ReinsuranceConcurrent Session – Latent ExposuresJuly 12, 2001 Jennifer L. Biggs, FCAS, MAAA – Consulting Actuary Tillinghast – Towers Perrin

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

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 (Thousands)

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

12. Non-CCR Claim Filings Have Increased

13. CCR Claim Filings Increased After Georgine’s Reversal

14. Average Annual Claim 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

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 …”

24. 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

25. Estimates of the “Universe” Net U.S. Insurer/ReinsurerUltimate Loss & ALAE Comments Source Tillinghast Tillinghast 12/96 Estimate $38 – $43 billion From 1997 A&E Study $40 billion A.M. Best From May 7, 2001 Special Report A.M. Best $65 billion Tillinghast Released May 30, 2001 $55 - $65 billion

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

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

29. Estimation of the “Universe” – Costs

30. Allocate “Universe” Among Multiple Payers Defendant Cost Retained Insured Direct – U.S. Direct – London Retained – U.S. Retained – London Ceded Ceded Other Other London London U.S. U.S.

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. *$60 billion mid-point of $55 – $65 billion range.

33. 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.

36. 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 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.