© 2013 Towers Watson. All rights reserved.
Concurrent Session LOB-2: Current Issues In Managing Asbestos Liabilities
2013 Casualty Loss Reserve Seminar
Steven C. Lin, FCAS, MAAA September 16, 2013
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Agenda
Asbestos claim statistics
U.S. P&C insurers’ asbestos loss experience
Key considerations in evaluating asbestos liabilities
2
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Asbestos claim filings over the years
Rate of new claim filings is down sharply from peak, but composition of claims has changed
Currently 50% of new claims are for malignant diseases, compared to less than 10% in 2000-2003
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Filing Year
Towers Watson Benchmark Claim Filings
TW Benchmark Malignant %
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Asbestos claim filing trends vary by disease
Mesothelioma Lung and Other Misc. Cancers
Nonmalignant Total 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Co un ts Year TW Benchmark 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Co un ts Year TW Benchmark 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Co un ts Year TW Benchmark 0 500 1,000 1,500 2,000 2,500 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Co un ts Year TW Benchmark
Mesothelioma claims are the driver of future litigation
costs
Mesothelioma 91%
Lung & Other Cancer 8%
Nonm alignant 1%
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Mesothelioma incidence and claim counts
Annual incidence (= diagnosis) counts show only slight changes over last decade Annual claim filing counts have fluctuated around 2,000 since 2000
Variation due to non-epidemiological factors
0 500 1,000 1,500 2,000 2,500 3,000 3,500 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 C oun ts Year
TW Benchmark USCS Diag - Males USCS Diag - Females USCS Diag - Total
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Projected future asbestos claim filings
Nearly 30,000 new mesothelioma claims in 2012 & subsequent More than half of the new mesothelioma claims are expected in first 10 years
0% 20% 40% 60% 80% 100% 120% 0.0 0.2 0.4 0.6 0.8 1.0 1.2 2012 2017 2022 2027 2032 2037 2042 2047 2008-2011 A v g = 1. 0 Filing Year
Estimated 2012+ Filings Relative to 2008-2011 Level
Mesothelioma Lung and Other Cancers Nonmalignant Malignant %
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Asbestos: U.S. P&C insurers
Cumulative net incurred loss & expense
Cumulative incurred loss and expense reached $75 billion at year end 2012 — Source: Towers Watson analysis of financial statement data compiled by A.M. Best and other sources — Grossed up for estimated amounts ceded by Fireman’s Fund, Munich Re America and Swiss Re America to
respective non-U.S. parents, but distortions remain (in particular, for Swiss Re and Berkshire) 0 10 20 30 40 50 60 70 80 90 0 10 20 30 40 50 60 70 80 90 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 $ B il li ons
Cumulative Paid ($52 billion) Case & IBNR Reserves ($23 billion) A.M. Best Ultimate ($85 billion)
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Asbestos: U.S. P&C insurers
Annual net incurred and payments
Annual incurred peaked at over $8 billion in 2002, and has averaged $2.1 billion since 2006
Annual payments appear to be slowly declining in last few years 0 1 2 3 4 5 6 7 8 9 19961997 19981999 20002001 20022003 20042005 20062007 20082009 20102011 2012 $ B illi o n s
Calendar Year Incurred Calendar Year Payments
Asbestos: U.S. P&C insurers
Patterns of reserve strengthening
-1 0 1 2 3 4 5 6 7 8 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 $ B ill io n s Calendar Year
Top 12 A&E Insurers
Change in Recognized Asbestos Net Ultimate Losses 2003-2012
Allianz Allstate AIG Berkshire Hathaway CNA Fairfax Financial Hartford Liberty Mutual Munich Re Nationwide Swiss Re Travelers All Other
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Asbestos: U.S. P&C insurers
Reasons for reserve strengthening in 2011-12
Very limited public discussion
Mixed signals as to whether reserve increases are in response to new changes in litigation environment or catch-up recognition of prior deficiencies
Liberty Mutual $475 Fairfax $386 Travelers $340 Hartford $326 Munich Re US $304 CNA $244 Alleghany Nationw ide ACE INA Farmers AIG Allianz US White Mountains Zurich Tokio Marine US All Other$487
Asbestos Reserve Strengthening During 2011-12 ($M) Publicly Disclosed Reasons
High level of litigation involving individuals alleging serious illness; as a result, increase in severity and moderately higher payments than previously anticipated; Also higher projected paym ents on assumed reinsurance accounts; However, Com pany’s overall view of underlying asbestos environm ent essentially unchanged Higher legal costs
Higher frequency and severity of mesothelioma claims, particularly against certain smaller, more peripheral insureds Industry reports suggested continued pressure brought about by number of mesothelioma-related deaths, new source of claimants and increase to non-products claims filings; However, reported claim activity for the com pany remained low Accretion of discount and
"other changes"
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Asbestos: U.S. P&C insurers
Reserve development in last 5 years
Few insurers have released asbestos reserves, and only by small amounts
None of the insurers with large asbestos reserves have released reserves AIG Travelers Utica -50% 0% 50% 100% 150% 200% 250% 300% 350% 0 1,000 2,000 3,000 4,000 2008 -2012 r e se rv e d e ve lo p m e n t
Net reserves at year end 2007 Millions
U.S. P&C Insurers
Asbestos Reserve Development During 2008-2012
Size of 2008-2012 asbestos incurred
Asbestos: U.S. P&C insurers
Net survival ratios
Top 12 A&E Insurers* Asbestos Net Survival Ratio as of 12/31/2012 ($ in millions)
Net Asbestos Paid 3-Year Net
Reserves During Average Survival At 12/31/2012 2010-2012 Annual Paid Ratio
Allianz $1,162 $261 $87 13.3 Allstate 1,023 212 71 14.5 AIG 2,200 621 207 10.6 Berkshire Hathaway 2,022 -292 -97 -20.8 CNA 1,125 304 101 11.1 Fairfax Financial 871 243 81 10.7 Hartford 1,587 570 190 8.3 Liberty Mutual 895 646 215 4.2 Munich Re 1,302 444 148 8.8 Nationwide 1,386 414 138 10.0 Swiss Re 962 262 87 11.0 Travelers 2,366 869 290 8.2 All Other 6,098 2,546 849 7.2 P&C Industry 23,000 7,100 2,367 9.7
Source: Towers Watson analysis of financial statement data compiled by A.M. Best and SNL
Grossed up for amounts ceded by Fireman’s Fund, Munich Re America, and Swiss Re America to respective non-U.S. parents *In terms of combined net A&E reserves at 12/31/2012
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Asbestos: U.S. P&C insurers
Future payments
In illustrative scenarios above, unpaid survival ratios range from 9.7 to 14.8 Meso filing pattern (lagged for 2 years for payment lag) implies survival ratio of 15.2
Insurer payments are accelerated relative to filings because of settlements, etc.
0 500 1,000 1,500 2,000 2,500 3,000 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2007 2012 2017 2022 2027 2032 2037 2042 2047 Me so th e lio m a F ili n g C o u n t A nnua l P a y m e n ts ( $ B ) Year
U.S. P&C Insurance Industry Illustrative Future Asbestos Payments
Future paid = reserves Future paid = reserves + $4B
Future paid = reserves + $8B Future paid = reserves + $12B
Mesothelioma filings lagged 2 years
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Asbestos: U.S. P&C insurers
Future incurred
Illustrative scenarios above are equivalent to 0 to 5.5 years of reserve strengthening at constant 2012 rate (= “survival ratio for incurred losses”)
(1.0) (0.5) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 2007 2012 2017 2022 2027+ A n n u a l In c u rr e d ( $ B ) Year
U.S. P&C Insurance Industry Illustrative Future Asbestos Incurred
Future incurred = $12B Future incurred = $8B Future incurred = $4B Future incurred = $0B
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Key considerations in evaluating asbestos liabilities
Disease incidence and claiming rates
Asbestos bankruptcies and trusts
Other legal issues
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Over 90 asbestos-related bankruptcies through 2013
The rate of annual bankruptcy filings slowed after 2002 3 111 4 3 0 3 22 1 2 0 11 0 33 77 13 5 4 3 2 1 3 2 5 3 22 0 2 4 6 8 10 12 14 Nu m b e r
Number Of Asbestos Related Bankruptcies
Many bankruptcy trusts have begun paying claims;
more money to come
Established trusts paid at least $17.5 billion through 2010 (GAO), with another $2 billion paid in 2011 and $18 billion in remaining assets at year end 2011 (Bates White)
Source: Reprinted with permission by the RAND Corporation (www.rand.org); Figures S.1 and 4.2 from “Asbestos Bankruptcy Trusts” published 2010
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Battle over bankruptcy trusts and claimant information
After major defendants go bankrupt, peripheral defendants pay more
Theoretical mechanisms to ensure that defendants pay only their fair share
—Several liability, offsets, indirect claims, trust payment caps But mechanisms generally require information or action from others
Defendants believe “transparency” of trust claimant information is key
Exposure and compensation data
Bankruptcy trusts resist demands for data
—Privacy, cost, fairness concerns
Transparency unlikely to be attained in key jurisdictions in near term
Bills introduced in LA, OH, OK, PA, TX, WI, WV, passed in OH
—Little movement in CA, IL, NY
Federal legislative initiatives face uphill battle
Judicial rules have had little or only limited success
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Other recent legal developments
Components parts liability
NY trial court judge upholds jury verdict against Crane (August 2012)
CA Supreme Court limits liabilities against equipment makers (January 2012)
Second hand exposure
MD’s highest court rules no duty to warn employee’s family (July 2013)
Oakland, CA jury awards $27M to wife for second hand exposure (June 2013)
—But appellate court in So. CA holds no duty of care to employee’s family (May 2012)
Causation
PA High Court rejects “Any Fiber Theory” (May 2012)
Nonproducts
CA trial court effectively adopts Wallace & Gale (January 2013) Case management and docket control
Budget cuts in CA court system
Changes in Madison County, IL, Philadelphia, PA and NJ
—IL Supreme Court rejects forum shopping (December 2012)
Asbestos: Industry outlook
Some key legal issues still being litigated
Claim litigation and coverage litigation
Mesothelioma claims will remain the cost driver
Gradual decline in new claims and high settlement values
—Settlement values in last few years have been volatile with no clear trend, though CWP % appears to have declined
Increase in lung cancer claims since 2011
Legal expenditures are higher than a few years ago
Increase seems to have leveled off
Insurance industry overall will continue to add to its reserves for several
years
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