Asbestos Issues and Trends

1. Asbestos Issues and Trends 2003 CARE Meeting, PhiladelphiaJune 2, 2003 Michael E. Angelina, ACAS, MAAA Jennifer L. Biggs, FCAS, 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. The Asbestos Litigation Environment Has Changed • Increasing costs to defendants... • Surge in claim filings • Rescission of previous settlement agreements between plaintiffs attorneys and defendants • Bankruptcies • ...and increasing costs to insurers and reinsurers • Increased costs for existing defendants • Additional costs for new defendants • Additional coverage accessed

7. Claim Filings Appeared Fairly Stable in Early 1990s (Thousands)

8. CCR Claim Filings Increased After Georgine’s Reversal 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Avg CCR 1(91-95) CCR 1 Avg CCR 2(91-95) CCR 2

9. Non-CCR Claim Filings Also Increased

10. Surge in Personal Injury Claim Filings • Causes • “catch up” for CCR defendants post Georgine • greater propensity to sue • asbestos specialty firms, union hall screenings, Sunday sports page advertisements, Internet, doctors, new claims • acceleration of claim filings • anticipation of tort reform; bankruptcy creditor lists; statute of limitations • Effects • Increased costs to all parties!! • change in disease mix mitigates the increase • continued ability to bundle claims will drive costs

11. Surge in Claim Filings

12. Change in Disease Mix

13. 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

14. Other Trends in Claim Filing Activities Percent of filings in federal courts Source: RAND, January 2003

15. 100 MD Other states 80 TX 60 Percent IL NJ OH 40 MS PA WV 20 NY CA 0 Other Trends in Claim Filing Activities …and from some states to others Source: RAND, January 2003

16. Observations –Average Settlements by State

17. Observations – Disease Mix by State

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

19. Individual Claim Costs Also Increased • Mean verdicts to plaintiffs increased dramatically from 1998 to 2001 (RAND) • Mesothelioma: ~$2M to ~$6.5M • Other cancer: ~$1M to ~ $2.5M • Asbestosis: ~$2.5M to ~$5M • Damages paid by many individual defendants also increased dramatically, reflecting • increase in plaintiff awards • higher shares for remaining defendants

20. Frictional Costs in the System are High • According to RAND, transaction costs have consumed more than half of total spending • And they are likely to go back up in next decade 100 Plaintiff Compensation 80 60 Percent Plaintiff Expenses 40 20 Defense Expenses 0 1980s Litigation 1990s Litigation

21. 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

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

23. 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

24. 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

25. 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

26. 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)

27. 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

28. 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:

29. 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

30. Estimation of Ultimate Personal Injury Claim Filings

31. Estimation of Ultimate Loss and Expense

32. 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

33. 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

34. Estimation of Ultimate Loss and Expense – Bottom Up • Determine percentage insured, by defendant • Allocate ground-up ultimate indemnity and expense to year • Compare to average coverage profiles • Expense treatment varies by policy • Consider reinsurance cessions

35. More Detailed Coverage Descriptionof Excess 1 Layer in 1980 Excess 2 Excess 110%InsurerABC Excess 120%InsurerDEF Excess 170%InsurerGHI Primary - Insurer JKL

36. Comparison of Loss Allocated to 1980to Available Coverage of Insurer ABC • For example, if Insurer ABC wrote 10% of $5 million xs of $1 million in 1980, and ultimate losses allocated to 1980 totaled •  $1,000,000, then Insurer ABC’s gross liability would be $0 • $4,000,000, then Insurer ABC’s gross liability would be $300,000 (= 10% x ($4,000,000 – $1,000,000)) •  $6 million, then Insurer ABC’s gross liability would exhaust its limit of $500,000

37. Coverage Expansion • Roll-forward of coverage blocks • Reclassification of products claims as non-products claims by traditional products defendants with installation activities with exhausted (or nearly exhausted) products coverages • reinstates previously exhausted products coverages • opens up previously “untapped” non-products coverages • non-products coverages may not have aggregate limits

38. 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

39. 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.

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

41. Recent Insurer Disclosures • There were several sizeable reserve increases during 2001-2002: • CNA – $1 billion pre-tax per A.M. Best; $750 million after tax (August 3, 2001) • ECRA – $1 billion pre-tax estimated by A.M. Best (February 2002) • The Hartford – Reallocation of $540 million “all other” run-off reserves to asbestos (July 2002) • Chubb – $590 million by December 31, 2002 • St. Paul – $987.5 million settlement with Western MacArthur

42. Recent Insurer Disclosures • And the trend continues in 2003: • Travelers increased net asbestos reserves by $2.45 billion (January 14, 2003) • disclosed major results of the study (policyholders with settlements, other policyholders, assumed reinsurance, unallocated IBNR) • ACE USA increased A&E reserves (January 27, 2003) • $2.18 billion gross • $1.86 billion reinsurance recoverable • $354 million after-tax charge • Argonaut increased asbestos reserves by $52.8 million (March 2003) • The Hartford has announced an exposure-based study to be completed later this year

43. Recent Insurer Disclosures • Some have made statements of adequacy • CNA • AIG • Allstate • Increased pressure on peer companies to make similar disclosures

44. Recent Increases in Recognized Liabilities And around the world: • Chester Street • placed in provisional liquidation (January 2001) • entered a “Scheme of Arrangement”(March 5, 2001) • Equitas • £1.5 billion as initially undisclosed portion of total strengthening as of March 31, 2000 • £1.7 billion ($2.4 million) as of March 31, 2001 (announced July 2001) • No change as of March 31, 2002 (announced July 2002) • Royal & Sun Alliance – $538 million for U.S. and U.K. (February 2002) • U.S. pre-tax charge of $241 million estimated by A.M. Best

45. 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

46. 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

47. 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

48. 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”

49. 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

50. 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