Asbestos could lead to more downgrades, says S&P

The recent series of announcements regarding U.S. insurers’ reserve moves over asbestos could signal further downgrades in early 2003, says Standard & Poor’s Ratings Services. In recent weeks, Travelers Property Casualty Corp. and ACE Ltd. have announced sizeable increases to their reserves, and The Hartford Financial Services Group just this week announced an asbestos reserve study to be completed during the second or third quarter of this year.In a press release, S&P notes that “as companies rush to finalize their 2002 financial statements, the fourth quarter is truly turning into the “kitchen sink” quarter predicted by Standard & Poor’s and other industry observers.”Travelers boosted its reserves by US$2.5 billion, and ACE Ltd. added US$1.9 billion to its reserves in respect of asbestos and environmental concerns.The Hartford had already boosted reserves to the tune of US$600 million in 2002, with other companies taking charges for reserves including The St. Paul Cos. Inc., Fireman’s Fund Insurance Co. (part of Allianz) and The Chubb Corp.S&P comments on the growth of a new class of asbestos claimant, people who have been exposed to asbestos, but who do not show any signs of illness. At the same time, traditional defendants including companies who produced asbestos or asbestos-laden products have declined as these companies have declared bankruptcy, causing plaintiffs’ lawyers to change their focus to companies that used or installed products containing asbestos.There has been little action from the Republican-led U.S. Congress to suggest that any tort reform action will be made on asbestos litigation, such as the creation of a global settlement of claims. “Standard & Poor’s feels that Travelers and ACE are being prudent in assuming no significant change in the current legal environment, even as they work with manufacturers and politicians to bring about a legislative solution to asbestos litigation.”The current reserving actions call into question the adequacy of insurers’ provisions for asbestos, says S&P. “These startlingly high reserve additions highlight the difficulty of making industry-wide ultimate loss estimates and cast doubt on the widely-used survival ratio as a metric to assess reserve adequacy for any insurer.” S&P feels that many companies may be under-reserved for asbestos, and while asbestos exposures are not viewed by the rating agency as lax underwriting, failure to bolster reserves appropriately is being noted.Among the companies S&P will be looking at as a result of their significant asbestos exposures are ACE Ltd., AIG, Berkshire Hathaway, Chubb, Fairfax, Liberty Mutual, Munich Re, SCOR, Royal & SunAlliance, Swiss Re, St. Paul, Travelers and Zurich Group, as well as others. S&P intends to meet with those companies who have interactive ratings to review their asbestos claims and reserves. “If Standard & Poor’s determines that the current level of asbestos reserves appears materially deficient and that the required reserve strengthening charge needed to correct the problem would have a material adverse impact on capital adequacy, Standard & Poor’s will discuss with management their strategy for financing this pending capital need.” Ratings adjustments could follow these discussions.