1. NEW CLASSES OF CLAIMS / MEGATORT UPDATE Moderator / Panelist: Jennifer L. Biggs, FCAS, MAAA Consulting Actuary Tillinghast – Towers Perrin Casualty Actuarial Society Annual Meeting – Concurrent Session November 13, 2000

2. 2 Introduction Panelists Jenni Biggs — Consulting Actuary / Tillinghast– Towers Perrin Phil Miller — Consulting Actuary / Tillinghast– Towers Perrin Barbara Murray — Assistant Vice President / Argonaut Insurance Company

3. 3 Agenda Discussion of the status of specific torts Asbestos Pollution Tobacco Other Megatorts Determining the coverage chart and financial exposure.

4. 4 Asbestos: 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)

5. 5 Asbestos: Notable Defendant Activity Three major bankruptcies during 2000 McDermott (Babcock and Wilcox) – February 2000 Pittsburgh Corning – April 2000 Owens Corning Fibreglas – October 2000 Significant charges to earnings for asbestos claims Owens Corning Fibreglas – $1.42 billion (1998) Armstrong – $345 million (January 2000) Owens Illinois – $550 million (October 2000)

6. 6 Asbestos: Background “Miracle Mineral” Usage Usage peaked in early 1970s; virtually eliminated in the early 1980s. Exposure and use limits not established in the U.S. until 1970s EPA ban on most forms of asbestos in 1989 Asbestos still used today in the U.S. in several products flexible strong durable fire resistant separable into filaments abundant quantities

7. 7 Asbestos: Background (cont’d) Exposure By 1980, 14 million living U.S. workers had experienced significant occupational exposure Ongoing exposure to 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 Long latency Pleural thickening, asbestosis, lung and other cancers, mesothelioma

8. 8 Asbestos: Background (cont’d) Why so much litigation? Signature disease Large percentage of population exposed Potential for large jury awards Economies of scale for plaintiff attorneys Insurance recoverables

9. 9 Asbestos: Current Status Increased cost to defendants, their insurers, and reinsurers Surge in claim filings Bankruptcies Increase in settlement amounts Increase in number of defendants Roll-forward of initial blocks Rescission of previous settlement agreements Products reclassification

10. 10 Asbestos: Claim Filings Appeared Fairly Stable in Early 1990s (Thousands)

11. 11 Asbestos: 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 some upward trend on settlement amounts Outside legal defense costs as a percentage of indemnity have decreased relative to prior levels

12. 12 Asbestos: Settlements by Disease

13. 13 Asbestos: CCR Claims Filings Increased in Late 1990s

14. 14 Asbestos: Non-CCR Claim Filings Also Increased (Thousands) 0.0 10.0 20.0 30.0 40.0 50.0 199119921993199419951996199719981999 Avg 91-94Non-CCR 1Non-CCR 2

15. 15 Asbestos: Average Annual Claim Filings (Thousands)

16. 16 Asbestos: 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

17. 17 Asbestos: Change in Disease Mix Distribution of Filings by disease (1998) MesoLung CancerNon Malignant

18. 18 Asbestos: Bankruptcy of Defendants Currently 25 bankruptcies of companies with asbestos-related problems Began in early 1980s (Johns Manville – 1982) Approximately 20 by early 1990s (National Gypsum – 1992) Virtually no activity from 1992 – 1999 Three bankruptcies in 2000 (Babcock & Wilcox, Pittsburgh Corning, Owens Corning Fibreglas) Defendants cited higher settlement demands as a cause of bankruptcy New bankruptcies may Increase costs for remaining defendants Cause need for additional defendants

19. 19 Asbestos: Expansion of Defendant List Approximately 300 asbestos defendants in 1980s; several 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

20. 20 Asbestos: The Cry for Solutions Dismissal of Fibreboard settlement places new restrictions on limited fund class actions cries for legislative solution HR1283 / S758 to establish Asbestos Resolution Corp. Bankruptcy cited as a “legislative solution” by Babcock & Wilcox Expect more bankruptcies Late 2000 – tried to insert an asbestos bailout plan into final tax bill Coalition for Asbestos Justice Also expect more finite deals May see increased scrutiny of financials

21. 21 Asbestos: Defendants Seek Additional Coverage Roll-forward of initial coverage blocks Rescission of previous settlement agreements Products reclassification

22. 22 Asbestos: 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 premises/operations.

23. 23 Asbestos: 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

24. 24 Asbestos: 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.” “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.”

25. 25 Asbestos: Estimates of the “Universe” Source Tillinghast Net U.S. Ultimate Loss & ALAE $38 – $43 billion Comments Tillinghast 12/96 Estimate. Currently under review. Source A.M. Best Net U.S. Ultimate Loss & ALAE $40 billion Comments From 1997 A&E Study. A.M. Best speculates that its $40 billion estimate might be understated by 25% to 50%.

26. 26 Asbestos: Paid and Reported Loss and Expense Compared to Estimates of Net U.S. Ultimate Liability 70 Tillinghast Ultimate ($38.0-43.0 billion) A.M. Best Ultimate ($40.0 billion) A.M. Best Updated Ultimate ($50.0-60.0 billion) Cumulative Paid Outstanding (Case & IBNR)

27. 27 Asbestos: Around the World Largest Producers, 1996 (in metric tons) Largest Consumers, 1994 (in metric tons)

28. 28 Asbestos: Around the World World production has declined significantly since 1973 1973 approximately 5.1 million metric tons 1996 approximately 2.3 million metric tons In past two decades, consumption has increased dramatically in many developing countries Consumption (in metric tons) 1970 1994 Growth Thailand21,000164,000781% India51,000123,000241%

29. 29 Asbestos: In Developing Countries Consumption has increased but safety precautions have not been implemented. Why the increase? low cost high quality immediate health benefits for the consumer suited to the economics of poor countries Why the lack of safety precautions? Lack of awareness apathetic governments Implications: According to epidemiologist Julian Peto, the surge in use “will result in several million cancer deaths over the next 30 years” By comparison, over past 30 years USA has had 171,500 premature asbestos-related cancer deaths

30. 30 Asbestos: In Europe European Union banned amphibole types of asbestos in 1991. Chrysotile banned 9/27/99; to be fully implemented by 1/1/2005. Belgium — claims filed under workers compensation system France — asbestos use prohibited effective 1/1/1997 Italy — asbestos use prohibited in 1992 claims to be paid by The Italian National Security (INAIL), employers (compulsory EL coverage), and insurers Netherlands — 1997/1998 creation of the Institute for Asbestosis

31. 31 Pollution: Headlines A.M. Best: Environmental losses are tracking as expected Stable claim trends Lower than expected site clean-up costs Absence of new sites on the National Priorities List

32. 32 Pollution: What Underlies the Stable Trends Very slow growth in the number of sites on the National Priorities List No dramatic changes in the coverage case precedents, thereby encouraging settlements Ongoing settlement activity has stabilized payment levels Risk based corrective action Greater PRP participation in site remediation – incentive to reduce / control costs

33. 33 Pollution: Estimates of the “Universe” Source Tillinghast Net U.S. Ultimate Loss & ALAE $30 – $40 billion Comments Current Estimate Source A.M. Best Net U.S. Ultimate Loss & ALAE $56 billion Comments From 1997 A&E Study. A.M. Best believes that its environmental estimate is still reasonably accurate, if not somewhat on the conservative side.

34. 34 Pollution: Paid and Reported Loss and Expense Compared to Estimates of Net U.S. Ultimate Liability 60 70 199419951996199719981999 $ Billions 0 10 20 30 40 50 60 70 Tillinghast Ultimate ($30.0-40.0 billion)A.M. Best Ultimate ($56.0 billion)Cumulative PaidOutstanding (Case & IBNR)