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ANALYSIS-New asbestos charges point to reserve woes

by Reuters
Thursday, 28 July 2011 14:12 GMT

* Hartford, AIG have surprised with asbestos claims

* Competitor data suggests claims falling, not rising

* Analysts says reserve changes are surprising

By Ben Berkowitz

NEW YORK, July 28 (Reuters) - Asbestos-related diseases have been falling for a decade, but warnings from a pair of U.S. insurance giants about new claims raise questions about the industry's ability to put the scourge behind it.

While medical evidence suggests fewer new cases of asbestosis and the lung cancer mesothelioma, insurers say they are getting sued more frequently and aggressively by people with claims against "peripheral insureds," such as contractors that worked on projects where asbestos was used.

As some of these lawsuits succeed in courts across the country, it fuels new suits by aggressive plaintiffs' lawyers and compounds the problem for insurers trying to understand their exposure.

The disconnect between a waning disease and flourishing claims also exposes a flaw endemic to insurers. When they set aside reserves for indistinct risks, they are making guesses -- even if educated ones -- on how long a particular risk will endure and what it will cost them to be done with it.

No law says any particular company's guess has to match anyone else's, but investors raise alarms about companies where reserves are not in line with peers.

That's why Hartford Financial's <HIG.N> announcement this month of a ${esc.dollar}290 million pretax earnings hit from increasing reserves for asbestos cases fostered concerns beyond the insurer's citation of rising claims for mesothelioma. [ID:nL3E7ID3NT]

"Although these items are one-time events, the result raises questions about ... reserve adequacy," Barclays Capital analyst Jay Gelb said in a note to investors. He was referring to both the asbestos charge and Hartford's sharp rise in second-quarter catastrophe losses.

American International Group Inc <AIG.N> similarly riled investors in early February with a ${esc.dollar}4.1 billion addition to its reserves, including more than ${esc.dollar}1 billion related to its asbestos exposure.

Fitch Ratings responded by cutting the credit rating on AIG's domestic property unit insurance units, calling the charges "a significant outlier" compared to competitors and the whole property insurance market.

According to insurance ratings agency AM Best, the Hartford had the fourth-highest level of asbestos and environmental reserves of all large property insurers at the end of 2009 while AIG ranked seventh. They also ranked in the top seven in terms of average annual asbestos losses in 2005-2009.

AIG and The Hartford are in particularly sensitive positions since they were two of the three insurers who took government bailouts during the financial crisis. Their reserve accounting has not been questioned by any of their regulators.


For decades asbestos was a favorite material in building products, naval applications and other industrial settings because of its fire-retardant properties. Over time, though, exposure to its microscopic fibers causes health problems.

More recently, many of the rescue workers at the Ground Zero site in New York after the 9/11 attacks were exposed to high concentrations of asbestos - in some cases, reports have said, nearly a million times the normal background level.

To be sure, some of the new claims stem from plaintiffs' lawyers becoming more effective at suing people who are only peripherally connected to asbestos victims. Late-night cable television is flooded with ads from asbestos lawyers, and "mesothelioma" is among the most valuable of advertising keywords on Google. Since there is still plenty of asbestos in buildings across the country, it is also possible that new cases are adding to insurers' burdens.

Best warned in February that the insurance industry is generally underfunded in its asbestos reserves. It cited a growing number of legal claims reflecting a weakening of tort reform in some states and the "ongoing filing of mesothelioma claims for years to come."

Asbestos claims have been a bane of insurers for at least a decade. They nearly brought down the Lloyd's of London market in the 1990s and have cost some of the industry's largest players billions of dollars. Insurers like MetLife <MET.N> were accused for decades of helping to conceal the deadly side effects of the fire retardant.

In recent years, insurance investors have been celebrating the steady decline of asbestos-related claims and reserves. According to the Insurance Information Institute, reserves grew every year from 2001 to 2005, then shrank every year since through 2009.


GRAPHIC-MetLife asbestos cases http://r.reuters.com/dut62s



The trend appeared to be tracking the medical evidence. New cases of malignant mesothelioma, a lung cancer caused only by asbestos exposure that one oncologist called a "tremendously lousy disease," declined at an annual rate of 1.8 percent from 1999 to 2008, according to the American Cancer Society.

"I am surprised myself to hear insurers are (seeing) more claims, because we think with the reduction of asbestos years back we're starting to see a reduction in incidence of the disease," said Kevin Becker, an oncologist at Maimonides Medical Center in New York.

Annual reports from MetLife, the country's largest life insurer, show new claims and total outstanding claims dropping at a steady pace from 2003 through 2010, declining around 40 percent over the period.

The sums paid annually by the industry as settlements also have generally been shrinking. A.M. Best's forecast that the insurance industry may ultimately end up paying ${esc.dollar}75 billion in asbestos claims over time seems inflated to some regulators.

"I can't speak for everyone out there but (claims) may be a little less than that," said Joseph Torti, Rhode Island's superintendent of insurance and the designated spokesman on asbestos issues for the National Association of Insurance Commissioners.


But deciding to build or draw down reserves remains a crapshoot for insurers.

Mesothelioma has an incredibly long latency period, meaning 30 years or more can pass between exposure to asbestos and the onset of the cancer. That is why companies such as Travelers <TRV.N> and Berkshire Hathaway <BRKa.n> continue to build reserves.

"Trends were kind of favorable, but you still see the companies with exposure kind of trickling up their reserves from time to time," said Jim Auden, head of the property and casualty insurance unit at Fitch Ratings.

Another concern for insurers are new and expensive therapies being developed to treat mesothelioma.

The upshot? Asbestos claims and payments are not going away, and no one knows when the bend will turn.

"You wish that this would be completed," Auden said. "These claims are tied to activities in the '70s mostly (and) you still can't get your arms around it." (Reporting by Ben Berkowitz, editing by Dave Zimmerman)

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