Fitch Ratings Publishes Report on U.S. Insurer Asbestos Exposures.

Business Editors

CHICAGO--(BUSINESS WIRE)--July 25, 2002

Fitch Ratings has published a new special report titled 'Asbestos: Impact on the U.S. Insurance Industry'. Following a relatively quiet period prior to 2001, asbestos reemerged last year as a major headline news item. This was due mainly to several major settlement announcements, claims re-openings and an influx of new claims, followed by large reserving charges incurred by several prominent insurers.

The following is a summary of the key findings of this report:

-- Two prominent actuarial firms have pegged ultimate asbestos costs for the U.S. insurance industry at a range of $55-$70 billion. Total costs for the U.S. economy, including costs borne by non-U.S. reinsurers and uninsured amounts, are pegged at $200-$275 billion.

-- Fitch estimates that current reserving shortfalls for the U.S. property/casualty industry range between $10-$35 billion, and that a bulk of asbestos payments will need to be made over the next 20 years. Such reserving shortfalls can be absorbed without the emergence of wide-spread solvency problems.

-- Reserving shortfalls will be recognized into financial statements through a combination of one-time 'shock losses' as well as a 'slow bleed' that will depress future earnings for many years. The historic asbestos earnings drag has averaged 1.7 combined ratio points for the commercial lines/reinsurance sectors over the past few years. However, Fitch believes that 'shock losses' will become more prevalent as insurers feel external and internal pressures to 'true up' their reserves through single large charges.

-- Discounting asbestos at a portfolio rate is generally inappropriate, as the amount of claim payments, and their timing, is highly uncertain. Fitch believes discounting at a portfolio rate is only appropriate for future claims payments that are certain, such as structured settlements. If a discounting approach is used for claims for which the amount and timing is uncertain, a risk-adjusted discount rate that is materially lower than a portfolio rate should be used.

-- The industry's 2001 normalized asbestos survival ratio was just under 9 times (x). This compares to a survival ratio target developed by Fitch of 16x using risk-adjusted present value analysis. Though Fitch believes survival ratio analysis is useful for aggregate industry analysis, it is much less useful at the company level due to potentially wide variances in the speed of company payment patterns that can distort results.

-- Fitch believes that actuarial and audit firms' opinions provide little comfort into an insurer's asbestos reserve adequacy. Ironically, there is still a large gap between reserves carried by insurers that are opined to be adequate, and the actuarial firms' aggregate estimates. Fitch is hopeful this difference will be reconciled in the near-to-intermediate term.

-- The development of asbestos claims is expected to have a moderate negative impact on a select number of commercial lines insurers' and reinsurers' credit ratings. Downgrades will most likely results for those who suffer shock losses that weaken capital, or those who allow deficiencies to grow unchecked. Insurers need to conduct detailed, grounds up analyses of their asbestos exposures as a high priority.

The report is available at 'www.fitchratings.com' under the Insurance sector within the Criteria and Special Report page. It is also available to subscribers of FitchResearch.