Asbestos Liabilities – The Continuing Saga
Casualty Actuarial Society
The 2004 Seminar on Ratemaking
March 11, 2004
Jennifer L. Biggs, FCAS, MAAA
Towers Perrin
Tillinghast
Why So Much Litigation?
 Large percentage of population
exposed
 Signature diseases
 Potential for large jury awards
 Economies of scale for plaintiff
attorneys
 Insurance recoverables
2
The Asbestos Litigation Environment Has
Changed
 Increasing costs to defendants...
 Surge in claim filings
 Elevated settlement demands against individual
defendants
 Bankruptcies
 ...and increasing costs to insurers and reinsurers
 Higher costs for existing defendants
 Additional costs for new defendants
 Additional coverage accessed
3
Surge in Claim Filings
Manville Trust - Injury by Year Filed
120,000
(Denied) or Unknow n
Non-Malignant
100,000
Cancer
Mesothelioma
Number of Claims
80,000
60,000
40,000
20,000
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Year Filed
4
Change in Disease Mix
Manville Trust - Injury by Year Filed
100%
90%
Percent of Claims Filed by Category
80%
Non-Malignant
70%
Cancer
75%
60%
82%
84%
85%
89%
84%
86%
89%
91%
87%
91%
93%
90%
89%
6%
7%
4%
4%
Mesothelioma
50%
40%
30%
20%
13%
12%
10%
11%
12%
10%
9%
7%
8%
6%
6%
6%
0%
9%
7%
5%
4%
5%
4%
3%
1990 1991 1992 1993 1994 1995 1996
5%
4%
5%
3%
4%
2%
1997 1998 1999 2000 2001 2002 2003
Year Filed
5
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)
2001
Two-thirds of claims show no evidence of impairment
(Babcock & Wilcox)
Vast majority of claims provide no evidence of impairment
(W.R. Grace)
Source: RAND
6
Other Trends in Claim Filing Activities
Fi l i n g s M o ved f r o m Fed er al
t o St at e Co u r t s
50
Percent
of filings
in federal
courts
40
30
20
10
0
Pre-1988
1988–1993
1994–1997
1998–2000
Source: RAND, January 2003
7
Other Trends in Claim Filing Activities
…and from some states to others
100
MD
Other
states
80
TX
60
Percent
IL
40
NJ
OH
MS
PA
WV
20
NY
CA
0
1970–1987
1988–1993
Source: RAND, January 2003
1994–1997
1998–2000
8
$ U . S.
Observations –
Average Settlements by State
1
2
3
4
5
6
7
8
9
10
11
CW
St at es
9
%
Observations –
Disease Mix by State
1
2
3
4
5
6
7
8
9
10
11
CW
St at es
M eso t h el i o m a
Can cer
N o n -M al i g n an t
10
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
11
Frictional Costs in the System are High
 According to RAND, transaction costs have consumed
more than half of total spending
100
Plaintiff
Compensation
80
60
Percent
Plaintiff Expenses
40
20
Defense Expenses
0
1980s
Litigation
1990s
Litigation
 And they are likely to go back up in next decade
12
Bankruptcy of Defendants
 Currently approximately 72 bankruptcies of companies with
asbestos-related problems, based on comparison of lists
maintained by RAND, the American Academy of Actuaries and
the Asbestos Alliance
 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
 Firms in current list of defendants span 75 of 83
possible 2-digit SIC industry codes
13
Number of Asbestos Related Bankruptcies
per Year
14
12
12
10
Number
10
8
7
6
5
4
4
3
4
3
2
2
4
2
1
2
2
2
2
1
1
1
0
1
1
0
0
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Note: Graph excludes a bankruptcy in 1976 and one bankruptcy for which no date is available.
14
Chapter 11 Bankruptcy

Re-organization by “debtor-in-possession”
 Creditors’ committee(s) represent creditors in plan negotiation
 Can seek court approval to prosecute claims of the estate (e.g., insurance
coverage disputes)
 Goal to agree upon a plan of reorganization that pays a fair portion of prepetition claims and preserves the going concern value of the debtor
 Insurance policies may be viewed as the most important asset of the debtor’s
estate
 Automatic stay bars all actions to obtain property of the estate
 Where the debtor has a shared interest in a policy, claims against other
insureds should also be stayed
 Stay can be extended to related parties
 Unaffiliated co-defendants have generally been unsuccessful in
transferring their claims to the bankruptcy court
 Under Code 524(g) Asbestos Trusts are established to pay current and future
claimants
 Can require >50% of debtor’s equity
 Injunction channels all present and future claims to the trust for payment
 Futures representative has no right to vote on the plan, but must be
protected
 The plan must be approved by a supermajority of 75% of current claimants
Source: Mark D. Plevin/Crowell & Moring LLP
15
Differences Between Traditional and PrePackaged Bankruptcies
Traditional
Pre-Packaged

Can take years to complete1
 File petition
 Negotiate with creditors
 File reorganization plan
 File disclosure statement
 Solicit votes
 Confirmation hearing

Intended to be completed within a few
months of filing
 Negotiated and voted on before filing
 Combined hearing to confirm Plan and
Disclosure

Insurance coverage generally exhausted or
settled, or insurers included in negotiations

Insurers interests are not represented in
pre-petition negotiations

Court appoints claimant representatives


Future’s Rep involved in negotiation for
>50% equity
Plaintiff attorneys with large inventories
negotiate terms that benefit their own
clients, but do not owe a duty to all
claimants

Commonly include a pre-petition trust to pay
near full value on current claims
 Matrix agreements with various plaintiff
firms
 Significant portion of equity can be
secured (therefore not available to
bankruptcy trust)
1
Johns Manville filed bankruptcy in 1982 and
its plan was not confirmed until 1988;
Babcock & Wilcox filed bankruptcy in 2000
and its plan has not yet been confirmed.
16
Pending “Pre-Packaged” Bankruptcies
 Shook & Fletcher – 4/8/2002
 J.T. Thorpe Company – 10/1/2002
 Initially confirmed, but under appeal by two of J.T.
Thorpe’s insurers
 Combustion Engineering – 2/17/2003
 Objections filed by Century Indemnity (CIGNA) and
Stonewall
 Plan assigned rights to insurance policies to the
trust
 Congoleum Corp – 12/2003
17
Pending “Pre-Packaged” Bankruptcies

Halliburton subsidiaries – 12/16/2003
 Objections filed by several insurers including Ace, OneBeacon, Unigard, Stonewall, TIG,
Hartford, Everest Re, Federal, Allianz
 Plan caps the payments that healthy companies would make to future claimants
 Designed to boost stock price by making Halliburton “asbestos free”
 Global settlements of $4.25 B (PV)
 Significantly increases compensation (7X)
 Accelerates payment to current claimants
 Intended to secure 75% approval
 Negotiated without input from insurers, whose coverage will be called upon to
pay most of the cost
 Liberal, generous TDPs
 Inadequate exposure requirements
 Inadequate diagnostic requirements
– No S/NS distribution
 Do not require impairment for Level I-II claimants
– Would not be compensable under laws of most states or federal
common law
 Futures representative, Professor Green
 Selected by Halliburton and attorneys representing current claimants
 Paid $9,000 “per diem”
 2/11/2004 – Judge Judith Fitzgerald denied insurers standing in the case and scheduled
confirmation hearings for May 10-12, 2004
18
AC&S
 Exemplifies several issues central to asbestos litigation
today
 Coverage disputes
 Non-products claims
 Bankruptcy proceedings
 Findings of “self-dealing” plaintiff attorneys
19
AC&S
 Background
 Formed in 1958
 Installed asbestos-containing insulation in commercial and
industrial settings until 1985
 First asbestos claims received in late 1970s
 Insurance through at least 1980 did not contain asbestos
exclusions
 Primary coverage with Travelers and Aetna
 Products coverage contained aggregate limits
 Application of aggregate limits to non-products claims is
disputed
 Coverage disputes over last 20+ years
 Ongoing between AC&S and Travelers
 AC&S has settled with its other insurers
 300,000 claims valued at $3 billion remain at issue
20
AC&S
 Pre-petition activities
 During 2001, AC&S began to explore pre-packaged




bankruptcy with Travelers and a “Pre-petition Asbestos
Plaintiffs Committee”
 AC&S represented by Gilbert Heintz and Sullivan (GHR)
 Pre-petition committee chaired by Joseph Rice / Ness
Motley
Late 2001, Travelers withdrew from negotiations
December 2001, GHR also took over claim settlements
Late 2001/early 2002, AC&S attempted to settle trial-listed and
other asbestos BI claims for an assignment of insurance limits
April 2002, Travelers informed AC&S it would no longer
provide coverage for asbestos claims
21
AC&S
 Pre-petition activities
 AC&S executed pre-petition trust agreement – April 2002
 Pre-petition committee selected trustee, Dan B. Lain
 Agreed to five categories of secured claimants





A – paid prior to bankruptcy filing
Bx – partial payments; fully secured
By – partial payments; fully secured
C – fully secured
D – 75% secured; entitled to 50% of insurance proceeds
 Remaining and future claimants unsecured; entitled to 50% of
insurance proceeds
 Without victory in Travelers coverage dispute, unsecured category
unlikely to receive any compensation
 Note: Per Judge Newsome’s brief, “…, no cogent explanation or
rationale has ever been given for these categories or how claims held
in certain law firms “inventories” were categorized. Notably, members
of the pre-petition committee appear prominently in all of the secured
categories.”
22
Independence vs. Conflicts of Interest?
 AC&S’ counsel for pre-packaged
AC&S
bankruptcy
GHR
 Also negotiating AC&S claim
settlements
Joseph Rice/Ness Motley
Pre-petition Committee
70% Ownership
 “Independent” claim reviewer
Pre-petition
Trust
– Categories A, Bx, By, C, D
 Paid $3M to review documentation
Kenesis
of 250,000 Category D claimants
 Purchased Clearing House in June
2003
 Paid $2M as subcontractor of
Clearing
House
Kenesis
 Sole proprietor, J. Benee Wallace,
paralegal of Ness Motley

From appointment of Kenesis (5/2002) until pre-package bankruptcy filed (9/16/2003), AC&S
settled more than $2 billion of claims
 Settlements over prior 20 years totaled $600 million

Pre-packaged plan stipulated that these settlements could not be challenged by the asbestos
trust or AC&S
23
AC&S Plan Denied Confirmation
 Travelers filed an objection to the AC&S plan on 11/26/2003
 Presented objections at a contentions 12/15/2003 confirmation
hearing
 On 1/23/04 Judge Newsome (Delaware federal bankruptcy court) denied
confirmation of the AC&S pre-packaged bankruptcy plan, finding that the
plan
 Was not proposed in good faith
 Unjustly prejudiced by plaintiff attorneys
 Largely drafted by and for the benefit of the pre-petition committee
through various pre-petition settlements
 Unfairly favors one plaintiff over another
 Fundamentally unfair that one claimant with non-symptomatic
pleural plaques will be paid in full, while someone with
mesothelioma runs the substantial risk of receiving nothing
 Both should be compensated based on the nature of their injuries,
not based on the influence and cunning of their lawyers
“The court is informed that other judges have confirmed
plans with such discriminatory classifications. This judge
cannot do so in good conscience.”
24
Problems with Pre-Packaged Bankruptcies
 Negotiated in secret by a select group of lawyers,
whose clients receive preferential treatment relative to
other claimants with similar disease
 Future’s Representative bound by pre-petition
settlements
 Debtor is negotiating with insurers’ money
 Conflicts of interest are abundant
Source: Mark D. Plevin/Crowell & Moring LLP
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 as of 12/31/2001
and 11.6 as of 12/31/2002 (excluding Fibreboard)
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
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:
Top-Down
 Focused on total
awards to plaintiffs
 Estimated # future
filings by disease
 Estimated indemnity
cost and trended by
disease
 Loaded for expense
 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
29
Allocate Ultimate Loss and Expense
Among Multiple Payers
Defendant
Cost
Retained
Insured
Direct –
U.S.
Retained –
U.S.
U.S.
Direct –
London
Retained –
London
Ceded
London
Other
U.S.
Ceded
London
Other
30
Portion of $200 billion Ultimate Loss and Expense
– Retained, Net Insured U.S., Net Non-U.S.**
Net NonU.S. Insured
Retained by
31%
Defendants
39%
Net U.S.
Insured
30%*
*$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.
31
$ Billions
Paid and Reported Loss and Expense Compared to
Estimates of Net U.S. Ultimate Liability
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
Tillinghast 2001 Ultimate ($55-65 billion)
Cumulative Paid ($26.0 billion at 2002)
Outstanding Case & IBNR ($19.0 billion at 2002)
Estimated Reported ($52.0 billion at 2003)
2003
32
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 (8/3/2001)
 ECRA – $1 billion pre-tax estimated by A.M. Best
(Feb. 2002)
 The Hartford – reallocation of $540 million “all other”
run-off reserves to asbestos (July 2002)
 Chubb – $590 million by 12/31/2002
 St. Paul – $987.5 million settlement with Western
MacArthur
33
Recent Insurer Disclosures
 And the trend continues in 2003:
 Travelers increased asbestos reserves (1/14/2003)

$3.22 billion gross, $2.55 billion net (exhausting
remainder of Citigroup indemnification agreement)
 disclosed major results of the study (policyholders
with settlements, other policyholders, assumed
reinsurance, unallocated IBNR)
 ACE USA increased A&E reserves (1/27/2003)
 $2.18 billion gross; $1.86 billion ceded
 $354 million after-tax charge
 Argonaut increased asbestos reserves by $52.8 million
(March 2003)
34
Recent Insurer Disclosures
 The Hartford increased asbestos reserves by $4.0





billion gross, $2.6 billion net ($1.7 billion after-tax)
(5/12/2003)
Allstate: Q2&Q3 2003 net increase of $514M
Liberty Mutual: Q3 2003 increase of $405M gross,
$331M net
CNA: Q3 2003 net increase of $517M for A&E and
mass torts
AIG: Q4 2003 net increase of $440 - $450M
Chubb: Q4 2003 net increase of $250M
 Increased pressure on peer companies to make similar
disclosures
35
Recent Increases in Recognized Liabilities
And around the world:
 Chester Street
 placed in provisional liquidation (Jan. 2001)
 entered a “Scheme of Arrangement” (3/5/2001)
 Equitas
 £1.5 billion (gross-undiscounted) as initially undisclosed
portion of total strengthening as of Q1 2000
 £1.7 billion (gross-undiscounted) as of Q1 2001 (July 2001)
 No change as of Q1 2002 (July 2002)
 £ 0.4 billion (gross-discounted) as of Q1 2003 (June 2003)
 Royal & Sun Alliance
 $538 million for U.S. and U.K. (Feb. 2002)
 £150 million for U.S. and U.K. (Sept. 2003)
36
Rating Agency View
A.M. Best
Standard & Poors
Fitch
Estimate of US P/C
Ultimate Asbestos
Liabilities
$65B
Standard & Poors believes the
insurance industry’s incremental
reserve needs are at the lower
end of the range (on a PV basis)
Range: $49B – $62B – $74B
Methods to
Evaluate Individual
Insurer Potential
Liabilities
Formula Approach
• A.M. Best Indications
• Exposure Based Reviews
One-on-One Approach
• Review methodology
• Review historical data
Step 1:
• SR Target based on a riskadjusted rate (3%)
• 16 x industry aggregate
• Unique targets at
company level
Step 2:
• Interpretation/discuss
internal methodology
Discounting
20 years for BCAR
• longer than other LOB
Prognosis
• Generally not a solvency
issue
• Downward pressure on
ratings
Use risk-adjusted rate for
highly uncertain payments
• Expects modest number of
downgrades
• Asbestos not a catastrophicloss event for the industry, but
another example of why tort
reform is needed
• Credibility issue; how do
CEOs/CFOs sign off?
• Moderately negative impact
on ratings
• Downgrades for shock
losses weakening capital or
unchecked growing
deficiencies/earnings drag
• Increasingly prospective
view
37
A.M. Best – Evaluation of Insurers’ Potential
Asbestos Liabilities
Unfunded Liabilities determined by
 Market share indications
 premium share or paid loss share (5 yr, 10 yr)
 Indicated deficiency = Share x $65B – Cumulative Reported Losses
 Cumulative Reported Losses = Cumulative Paid Losses (estimated
pre-1992 + Note 29 1992 – 2002) + year-end 2002 Note 29 reserve
 Three year survival ratio
 Indicated Deficiency = (Target S.R. (20) – Actual S.R.) / Actual S.R. x
net reserve
 Final A.M. Best indication is judgmentally selected
 If insurer has conducted a credible ground-up exposure based analysis
 20% weight to A.M. Best indication
 80% to high end of range from exposure-based review
 Details of calculations available to individual insurers
38
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
39
And the costs extend to the overall economy…
 “The Secondary Impacts of Asbestos Liabilities,” NERA, 2002
 $2 billion of secondary impacts on the economy
 For every 10 jobs lost due to an asbestos bankruptcy, the
surrounding community will lose an additional 8 jobs
 “Reducing the Asbestos Litigation Penalty: An Economic Benefit
of Asbestos Reform Legislation,” Navigant Consulting Group,
2003
 Asbestos defendants pay an “asbestos litigation penalty,”
increasing their borrowing costs and making it
difficult/impossible for some firms to raise capital
 Failure to enact legislation could reduce economic growth by
$2.4 billion per year, costing 30,770 jobs annually
 Extended over the 27 year timeframe contemplated by S1125
could mean 830,000 jobs will not be created and $64.8 billion
in economic growth will be lost
40
Possible Federal Legislation
 The Fairness in Compensation Act (H.R. 1283/S758) did
not advance (1999–2000)
 Would have established the Asbestos Resolution Corp.
 Was opposed by President Clinton and the plaintiff’s bar
 Likely prospective proposals supported by the Asbestos
Alliance (led by the American Insurance Association and the
National Association of Manufacturers) will focus legislation
on four areas
 Establishing objective medical criteria of asbestosrelated impairment
 Liberalizing statues of limitations
 Eliminating consolidations
 Eliminating forum shopping
41
Asbestos-Related Bills Introduced into the
108th Congress
 5 relating to asbestos reform
 HR1114 – Kirk (R-IL) – office of Asb. Comp./court
 HR1586 – Cannon (R-UT) – court
 HR1737 – Dooley (D-CA) – court
 S413 – Nickels (R-OK) – court
 S1125 – Hatch (R-UT) – trust
 2 to ban the use of asbestos
 HR2277 – Waxman (D-CA)
 S1115 – Murray (D-WA)
 1 to change the tax code, such that asbestos-related
settlement funds would be exempt from tax
 HR2503 – Collins (R-GA)
42
Senate Bill 1125
 Preliminary negotiations involved insurers, defendants, and
labor
 Initially called for a privately funded trust totaling $108 billion
comprised of:
 Insurers - $45B
 Defendant companies - $45B
 Current bankruptcy - $4B
 Voluntary contributions - $14B
 Funding contribution
 Insurers still negotiating; subject to insurer commission
 Defendants grouped to tiers based on historical payments

Separated into sub-tiers based on revenues
43
Potential Insurer Allocation
 Insurers include U.S. and Non-U.S. companies
 Insurer funding is net of third party reinsurance
 Gross of financial cover
 Initial discussions based on a blended approach
 Market share – premium and paid losses
 Future exposure – carried reserves
 Current discussions focused on an industry-wide
ground-up study
 Insurer funding is concentrated
 12 insurers likely to contribute 75%
 20 insurers likely to contribute 90%
44
Initial Quantification of the Economic Impact
of S 1125 – 6/4/2003 Hearing
 Is proposed Trust Fund of $108B adequate?
 Tillinghast Projections Released May 2001:
 $200B Ultimate Loss & Expense
 Less $70B paid as of 12/31/2002 (est. by RAND)
 Equals $130B of future payments
 Reduced for frictional costs
 $28B defense costs (21.5%)
 $41B plaintiff attorney fees (40%)
 $61B expected to reach claimants
 Conclusion is consistent with RAND: transaction
costs have consumed more than half of total
spending
45
Initial Quantification of the Economic Impact
of S 1125 – 6/4/2003 Hearing
 Indemnity Awards under S 1125 = estimated claim
filings x specific awards
 Future claims to be be filed from 2003 - 2049
 Pending claims to be re-filed
 Initially eight Disease Levels consistent with the
Manville 2002 TDP
 Specific awards by Disease Level
 $0 for Levels I-II to
 $750,000 for Level VIII (meso)
 Collateral Offset ($0)
 Medical Monitoring ($0.4 billion)
 Tested various scenarios - all at or below $108B
46
Senate Bill 1125 - Compromises
 S 1125 passed out Senate Judiciary Committee on July 10, 2003
(10-8) with significant compromises
 Revised medical criteria – 10 Disease Levels
 Revised awards ($20,000 for Level II to $1 million for Level X)
 Increased funding
 Demands of up to $153 billion = $135 billion from
defendants and insurers plus $18 billion from existing trusts
and other sources
 Latest offer by business group and insurers is $114 billion
 Defendant companies - $57.5B

Additional contingency fund - $10B
 Insurers - $46B
 Department of Labor to process claims
47
Is S 1125 a Good Deal for U.S. Insurers?
 U.S. direct insurers could be allocated $28B* –
undiscounted
 U.S. vs. other (U.S. reinsurers and non-U.S.) allocation
could change
 If paid over 25 years, NPV ~ $17B – $20B
 Indicated unpaid liabilities total $34B, implying $6B +
savings
 $34B = $60B projected ultimate less $26B paid at
12/31/2002
 Assumes all reinsurance is collectible
 Without reform, $60B estimate could increase
 Year-End 2002 carried net reserves were $19B
 Estimate ~$24B, reflecting reserve increases through
Q4 2003
*U.S. insurers originally discussed funding of $27.3B/$45B
48
Potential Savings for an Individual Insurer
 Savings results from:
 Elimination of payments to the unimpaired
 Specified awards by disease type
 Reduction in frictional costs
 Savings to individual insurers dependent on the allocation
 Industry-wide ground-up study?
 Savings would be proportional for an individual insurer if
 Individual insurer reserves based on a ground-up
exposure-based analysis
 Consistent with results of an industry-wide ground-up
study
 Savings of 18% (= 100% – 28 / 34)
 Assumes industry indicated liabilities of $34B
49
Current Status of S 1125
 Unresolved issues
 Insurer allocation
 Non-U.S. funding
 Transition issues
 Reinsurance pipeline
 Solvency / Finality
 Negotiations with labor
 Days are numbered
 Frist: Vows to bring legislation to the Senate floor

last week of March or first week of April 2004
Hatch: Proposes a 2-day negotiating session in
mid-to-late March to focus on remaining issues
50
State Reform Efforts
 Focus on medical criteria / statute of limitations
 Inactive dockets being considered / created in
several states
 Penalize frivolous lawsuits (e.g., MS, TX)
 Focus on forum shopping / consolidations
 E.g., reforms in MS, TX
 Focus on joint and several liability
 E.g., NY
51
Notable Quotes

“The claims are continuing.”

“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.” (This seemed to be a bold statement in September 2000; little did we know what was
to come …)

“…endless search for a solvent bystander…”

“Asbestos litigation is a profit-driven industry.”

“Don’t think of them as lawyers, think of them as venture capitalists.”

“… factories (be they lawyers) generating paper … Here’s the form, fill in the blanks … won’t
end by when I die, even when my kids die …”

“It borders on fraud and in some cases is fraudulent.”

“The elephantine mass of asbestos cases … defies customary judicial administration and calls
for national legislation.”

“If my friends on the other side of the aisle want to do something about jobs, let us get serious
about asbestos reform.” and “… this bill would do more to create jobs and solidify our economy
than any other bill we can pass this year.”
52
Current Status Recap
 Significant deterioration in liabilities at all levels
 Defendants, insurers, and reinsurers
 Generated by filing activities
 Mitigated by shift in disease mix to claims with lower
settlement values
 Continue to see more bankruptcies or finite deals
 May see increased attention to what the defendants
are carrying on their balance sheets
 Current focus has been from financial analysts, not
auditors
 Continued scrutiny from insurance regulators
53
Current Status Recap (cont’d)
 Approximately 30 years after peak usage, we still see
significant activity on the claims side
 No major legislative reform has yet been enacted
 It’s the “Energizer Bunny” of toxic torts
 It just keeps going and going and going ...
54
Michael E. Angelina
Mr. Angelina is a co-author of Tillinghast’s study regarding the asbestos “universe,” first presented on May 30, 2001 to the
RAA Education Conference and the Casualty Actuaries of the Mid-Atlantic Region (CAMAR). He is a consulting actuary
with the Tillinghast business of Towers Perrin in its Philadelphia office. He is a principal of the firm.
Mr. Angelina is a member of Tillinghast’s asbestos and environmental practice area, and currently coordinates research
and development activities relating to the contingent liabilities of corporate asbestos defendants assisting clients with
asbestos-related operational strategies. He has quantified reserve needs for asbestos, pollution, and other health hazards
(APH) for both domestic and international insurers and reinsurers. He has also written for Emphasis on asbestos issues,
and has participated on various industry forums, trade press, and meetings regarding asbestos liabilities. Mr. Angelina is
also active in the firm’s placement initiative for these types of exposures.
Prior to rejoining Tillinghast in January 2000, Mr. Angelina was Vice President and Actuary with Reliance Reinsurance
Corp. (RRC). He also served as the Actuarial Officer of the Finite Risk unit. His responsibilities in the financial actuarial
role included: modeling outwards reinsurance transactions, providing actuarial support and guidance for areas which had
problematic implications to RRC’s financial results, and identifying new opportunities for growth. In the Finite Risk unit, Mr.
Angelina’s responsibilities included: performing actuarial and underwriting analyses of loss portfolio transfers; developing
the financial structure of potential deals; and performing due diligence reviews of target books of business.
Incorporating his 11 years at Tillinghast prior to rejoining the firm, Mr. Angelina has been involved in a number of client
assignments including: ratemaking for personal automobile business; reserve reviews for insurers, reinsurers, excess and
surplus carriers, and self insured entities; valuations of insurance operations in support of mergers and acquisitions;
financial modeling; quantification of asbestos and pollution liabilities; and the development of pricing systems and size of
loss distributions for multinational excess insurance coverages. He is a developer of RPIL, Tillinghast’s excess of loss
pricing system, and part of the Global Loss Distributions (GLD) initiative.
Mr. Angelina is a frequent speaker at the Casualty Actuarial Society seminars on pricing and reserving for US and
international exposures and has written on risk financing costs for Captive Insurance Company Reports, as well as
asbestos-related issues. Prior to joining Tillinghast in 1988, Mr. Angelina worked for CIGNA in the workers compensation
and the actuarial research units.
Mr. Angelina is an associate of the Casualty Actuarial Society and a Member of the American Academy of
Actuaries. Mr. Angelina is a graduate of Drexel University with a B.S. degree in Mathematics.
mike.angelina@towersperrin.com
(215) 656-2345
55
Jennifer L. Biggs
Ms. Biggs is a co-author of Tillinghast’s study regarding the asbestos “universe,” first presented on May 30, 2001 to the
RAA Education Conference and the Casualty Actuaries of the Mid-Atlantic Region (CAMAR). She is a consulting actuary
with the Tillinghast business of Towers Perrin in its St. Louis office. She is a principal of the firm.
Ms. Biggs is a member of Tillinghast’s asbestos and environmental practice area. She coordinates research and
development activities relating to asbestos and has quantified reserve needs for asbestos, pollution, and breast implant
liabilities for insurance and reinsurance companies. Ms. Biggs has also been active in the firm’s asbestos and
environmental reinsurance placement initiative.
Under her direction as Chairperson, the American Academy of Actuaries Mass Tort Work Group created a Public Policy
Monograph: Overview of Asbestos Issues and Trends, which was released in December 2001. Ms. Biggs is a frequent
speaker and has testified before the United States Senate Committee on the Judiciary and the National Conference of
Insurance Legislators (NCOIL) regarding asbestos issues.
Ms. Biggs also has significant experience in the professional liability area. Her work includes analyses of funding
requirements, self-insured retention limits, and allocation systems for self-insured trust funds of several hospitals. She also
performs reserve evaluations, opining on year-end statutory reserve levels for physician insurers. Additionally, she has
assisted insurers by analyzing rate levels and preparing filing materials for entry into new states.
Prior to relocating to Tillinghast’s St. Louis office in 1988, Ms. Biggs spent almost four years in Tillinghast’s Bermuda office.
There she gained considerable experience in financial reinsurance, performing pricing analyses for loss portfolio transfers.
Most other assignments were related to loss reserving for reinsurance and captive insurance companies.
Ms. Biggs is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries. Ms. Biggs
graduated with college honors from Washington University in St. Louis with a B.A. in mathematics and a business minor.
jenni.biggs@towersperrin.com
(314) 719-5843
56