Asbestos top-ups shock U.S. market

U.S. insurers are questioning their ability to pay out on long-tail asbestos claims in the wake of two carriers taking large reserves for environmental claims. First, Travelers Property Casualty Pool took an after tax charge of US$1.3 billion to shore up its asbestos reserves by US$2.55 billion. This resulted in Travelers recording a loss of US$793.4 million for the fourth quarter 2002, versus income of US$303.3 million for the same period a year earlier.

Bermuda-based ACE Ltd. followed a week later by taking a US$354 million charge to boost its reserves by US$2.178 billion. The company notes that US$1.86 billion of this reserve is offset by reinsurance. The effect on earnings is expected to be US$1.32 per share.

At the same time, The Hartford Financial Services Group said it would undertake an asbestos reserve study to be complete in the second or third quarter of 2003. The Hartford has already boosted its reserves by US$600 million in light of asbestos exposures. The announcements could signal further downgrades in early 2003 for insurers, says Standard & Poor’s Ratings Services. 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'”.

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.” The rating agency also notes that a new class of asbestos claimant – those who have been exposed to asbestos but show no sign of ill-effects – is upping the insurance cost. Added to this is the lack of action on asbestos litigation reform by U.S. Congress. “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 Travelers’ announcement raised concerns at the recent Joint Forum conference hosted by the Insurance Information Institute (III) in New York City. Panelists in one session noted that a high standard of disclosure and reserve adequacy has been set. “Other companies will have to scramble a bit to catch up,” says Alice Schroeder, a managing director at Morgan Stanley. Also important is that Travelers’ was acting on a re-analysis of existing information, rather than on new claims issues, says Michael Pritula, director with McKinsey & Company.