Asbestos Wave Surges; Crest Still to Come

October 8, 2003

The U.S. property/casualty industry—principally commercial insurers, and to a lesser extent, professional reinsurers—remains significantly underfunded by nearly 40 percent with regard to reserves for ultimate, undiscounted asbestos and environmental liabilities, according to a special report released by A.M. Best Co.

With incurred-to-date losses of $45 billion (asbestos) and $31 billion (environmental), A.M. Best’s estimates of unfunded asbestos and environmental liabilities as of year-end 2002 are $20 billion and $25 billion, respectively, for a total of $45 billion, down from $53 billion at year-end 2001.

While a number of insurer groups have significantly raised their asbestos reserve levels in recent years, many more reportedly have yet to fully fund their obligations. In addition, environmental survival ratios are weakening as reserves continue to be paid down without further strengthening.

U.S. asbestos losses have surged dramatically in recent years, with incurred losses more than doubling to more than $4 billion in 2001 from the previous three-year annual average of $1.7 billion. Further underlining the industry’s move to bolster its reserves for such losses, an additional $8 billion in asbestos losses were incurred during 2002, while Hartford Insurance Group alone posted a $2.6 billion addition to asbestos reserves during the first quarter of 2003. A.M. Best fully expects additional, sizable asbestos charges to be taken during the remainder of 2003.

During 2002, insurers and U.S. asbestos producers entered a number of high-profile, asbestos-related settlements. In May, PPG Industries Inc. announced a tentative settlement of $2.7 billion, before taxes and discounting, related to its 50 percent owned, bankrupt Pittsburgh Corning subsidiary for all current and future asbestos claimants. Pittsburgh Corning’s bankruptcy court has yet to approve the proposed settlement, but more than 30 insurers are expected to fund two-thirds of this settlement. In July, St. Paul Cos. announced a $1 billion settlement with claimants suing its USF&G insured, Western MacArthur Cos. As part of the settlement, St. Paul incurred an additional $585 million in pretax losses for this insured during 2002.

Also during 2002, several large-scale reserve additions were made to recognize the trends in asbestos-related losses.

For instance, Travelers took a pretax charge of $2.9 billion for its asbestos liabilities, along with a $150 million charge for environmental losses, while Ace Ltd. boosted its asbestos reserves by $852 million and its environmental provision by $237 million, with most of this strengthening taking place in the group’s Brandywine run-off unit.

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