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Outstanding asbestos claims drag on insurance industry earnings

Litigation successes helping to cut unfunded liabilities

Outstanding asbestos claims drag on insurance industry earnings

Outstanding asbestos liabilities continue to drag on insurance industry earnings, although the liabilities are predominantly well-managed.

In addition, slow and minor positive changes in the litigation environment have further improved the situation, insurance analysts say.

In a recent report covering the insurance industry's outstanding asbestos liabilities, “U.S. Insurers Continue Funding of A&E Liabilities Despite Elusive End Game,” A.M. Best Co. Inc. puts its estimate of net asbestos losses for the U.S property/casualty industry at $85.0 billion.

The industry has funded just over 90% of its aggregate asbestos and environmental liability exposures, according to Best, leaving an unfunded asbestos liability of $6.7 billion.

This jibes with estimates from Fitch Ratings Inc., which said in its 2014 U.S. Asbestos Liability

Dashboard that it “estimates U.S. property/casualty industry statutory asbestos reserves to be deficient by $2 billion to $9 billion at year-end 2013, based on estimated ultimate industry losses of $85 billion, total paid losses of $53 billion and current reserves totaling $23 billion.”

“Industry reserves are inadequate,” said Jim Auden, Chicago-based managing director of insurance at Fitch.

Mr. Auden added that industry asbestos losses have totaled around $2 billion per year over the last five years and are likely to come in at about that level or a little lower for 2014, although final tallies are not yet available.

At that level, he said, asbestos losses remain a drag on company earnings for those with asbestos exposures. Most companies, however, “have the ability to absorb those losses as they flow through,” he said.

“Most of the larger companies remain strongly capitalized and have the ability to absorb recurring moderate asbestos-related losses,” Mr. Auden said.

In the early 2000s, there were a few instances of companies reporting charges in excess of $500 million for asbestos liabilities, something unlikely to be repeated in today's market, said Mr. Auden.

Tracy Dolin, New York-based director of North American insurance financial services ratings for Standard & Poor's Corp., agreed that the outstanding asbestos liabilities are less of an issue now than a decade or more ago. “A number of years ago we were concerned, but our concern has since subsided,” she said.

Gerard Altonji, who authored the Best report, pointed out that some companies with major asbestos liabilities had divested much or all of those liabilities to Berkshire Hathaway Inc.'s Omaha, Nebraska-based National Indemnity Co. unit, most recently Liberty Mutual Insurance Co. in August 2014 and CNA before that in 2010.

He added that with several such deals already done, there may be less room for future divestitures.

Howard Mills, chief adviser at the insurance industry group at Deloitte Services L.L.P. in New York and the state's former insurance commissioner, agreed that capital levels are adequate to meet asbestos losses.

“The industry is extremely well-capitalized,” said Mr. Mills. “Asbestos is still potentially an open-ended issue, but one for which the industry is prepared.”

Mr. Mills added that while some companies may continue adding reserves, overall capital levels remain good. Additionally, he said, insurers today benefit from more precise modeling, which allows them to more precisely model and thus manage losses.

He is less optimistic about tort reform, which he said is not likely to see movement under the Obama administration.

However, there has been some positive evolution in the litigation environment for asbestos claims, according to Mark Behrens, Washington-based partner with Shook, Hardy & Bacon L.L.P. and co-chair of the firm's public policy group.

He pointed to the introduction late last month of the Furthering Asbestos Claim Transparency Act, H.R. 526, which would require asbestos trusts to file a quarterly report that would disclose the names of parties that filed claims with that trust in that reporting period and what their claimed exposures are, and enactment of state asbestos trust transparency legislation.

The legislation “may finally pass in 2015 now that the GOP controls both houses of Congress,” Best said in its report, adding that developments in litigation against gasket manufacturer Garlock Sealing Technologies L.L.C. in U.S. Bankruptcy Court in Charlotte, North Carolina, may help spur movement toward greater transparency in asbestos litigation.

In that case, U.S. Bankruptcy Judge George Hodges found that plaintiffs attorneys had withheld information in asbestos litigation.

“This recent ruling may pave the way for more transparency and fairness in current and future litigation,” Best said in its report.

Mr. Behrens agrees.

“In the last year, there is a greater public awareness about the problems of asbestos bankruptcy abuses,” he said, citing both the ruling in the Garlock case and the introduction of the FACT legislation.

“The report illustrates that the insurance industry is keeping

up with asbestos claims, with individual insurers adjusting reserves as needed,” David Golden, senior director of commercial lines policy for the Chicago-based Property Casualty Insurers Association

of America, said in an email. “Annual industry claim payments have been consistent for several years. While written about asbestos and environmental losses, the information in the report also supports general tort reforms that will help balance the scales of civil justice.”