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

Asbestos in the News n “Asbestos and Pollution Losses nearly doubled in 1999” - Best’s Review (July 2000) n “Equitas significantly increases reserves for asbestos liabilities” - The Review (August 2000) n Major Bankruptcies in last 12 months: l McDermott (Babcock and Wilcox) l Pittsburgh Corning n Armstrong posts $345 million charge to 1999 earnings (January 2000)

Agenda n Background Information l popularity, diseases, prior litigation n Current Status l Where we were l Where we are now n Modeling Process n Pricing Issues with Finite Covers n Tobacco n Questions / Comments

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

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

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

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

Prior Activity - Filings

Prior Activity - Settlements by Disease

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

Example of Coverage Chart

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

US Asbestos Reported Net Ultimate Losses (Note 27)

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

Current Activity - Non CCR Filings

Current Activity - CCR Filings

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

Current Activity - Average Annual Filings

Current Status- Reclassification of Filings n 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. l Reinstates exhausted coverage under products l Allows for more coverage under Prem/Ops  No Aggregates under prem/ops –unless Wellington Signatory

Current Status Recap n Significant deterioration in liabilities at all levels l defendants, insurers, and reinsurers n Generated by filing activities l mitigated by shift in disease mix to claims with lower settlement values n Continue to see more bankruptcies or finite deals n May see increased attention to what the defendants are carrying on their balance sheets l current focus has been from financial analysts, not auditors.

Current Status Recap (con’t) n 25 years after peak usage, we still see significant activity on the claims side. n It’s the “energizer bunny” of toxic torts l it just keeps going and going and going …