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15 U.S. Asbestos Liabilities The Future is Not the Past 9 th of May 2015 May 11, 2015 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

16 U.S. Asbestos Background Highly heat resistant mineral mined and utilized in many products, including insulation, gaskets, brakes, building products, as well as on Navy ships, oil refineries and energy plants. Asbestos fibers lodge into lungs causing injury and in some cases cancer, mesothelioma and death. As early as 1930 s, determined to be a health hazard, but extent of injury was unclear. Beginning late 1970 s asbestos is banned for use. Mostly phased out by early 80 s and by 1989 banned in nearly all U.S. consumer products. May 11, 2015 Page 16 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

17 Asbestos Claim Trends Mid-1980 s In the mid 1980 s, asbestos claim filings began to increase against major manufacturers of friable asbestos containing products, e.g. manufacturers of insulation, refractory brick and raw asbestos. Many U.S. insurance companies began creating specialty claim units for managing and tracking the asbestos matters. Asbestos was a product liability claim, and the asbestos defendants pursued in the 1980 s and 1990 s received hundreds of thousands of claims. Many of the manufacturer defendants reporting claims during this time period ultimately file for bankruptcy as a result of the asbestos liabilities, e.g.: Owens-Corning Fiberglas National Gypsum Johns-Manville Major U.S. railroads start reporting asbestos claims in the late 1980 s. CSX Corp. Atchison-Topeka-Santa Fe Railroad Southern Pacific Railroad Amtrak These defendants that first tendered asbestos claims to their insurers ultimately faced several hundred thousands of asbestos claims. U.S. insurers largest asbestos exposures were first reported in 1990 and prior. May 11, 2015 Page 17 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

18 Asbestos Claim Trends 1990 s In the 1990 s, asbestos claim filings begin to ramp up. Gradual increase in non-malignant claim filings in the early 1990 s followed by a more significant increase in these filings in the mid 1990 s. Additional defendants are brought into the litigation; manufacturers of products not immediately associated with asbestos, e.g. turbines, locomotive engines, and industrial valves. Non-product and premises claims begin presenting, e.g. insulation contractors, oil companies and power companies. Primary insurers face the most significant risks with respect to these types of claims as largely this coverage has no aggregate limits applicable to non-products claims. This second wave of defendants begins tendering claims to U.S. insurers, e.g.: American Cyanamid (Adhesive and plastic molding products) Union Carbide (Plastics/Resin products and some raw asbestos) Dial Corporation (Locomotive engines) Duke Power (Power company) Texaco ( Refineries) May 11, 2015 Page 18 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

19 Asbestos Claim Trends 1990 s A few of these insureds ultimately received hundreds of thousands of asbestos claims, but most received tens of thousands of claims. Liability with respect to these insureds is more difficult to prove. Why? Product identification is not as easily made against these defendants. Specialty products not as widely used as insulation. Used in specific types of plants/locations, unlike insulation, not as many claimants exposed. Smaller volume of product sales/distribution than the 1980 s era insureds. Premises and non-products claimants must prove negligence, a more difficult standard than strict liability for products claimants. May 11, 2015 Page 19 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

20 Asbestos Claim Trends 1990 s Products defendants also present non-products claims as products limits rapidly being consumed: PPG Industries (Products claims 1985, non-products 2000) Owens-Corning Fiberglas (Products claims 1984, non-products 1999) May 11, 2015 Page 20 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

21 Asbestos Claim Trends Early 2000 s In the early 2000 s non-malignancy filings show their largest surge. Mass screenings are taking place: Mobile x-ray trailers set up in hotels, shopping center parking lots, and union halls Doctors are diagnosing more patients than they could reasonably see in a 24-hour day and not adhering to basic medical standards Huge numbers of fraudulent asbestos-related disease diagnoses are produced Certain judicial districts are designated judicial hellholes as a result of the way the court system is handling the asbestos litigation, most notably Mississippi, Texas and Illinois. Plaintiffs firms flock to these jurisdictions. Mass settlements and matrix settlements are taking place at an extremely high frequency resolving thousands of non-malignant claims for money. May 11, 2015 Page 21 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

22 Asbestos Claim Trends Early 2000 s In the early 2000 s, asbestos defendant bankruptcies are at their peak, forcing the peripheral defendants to be named more often and pay claims: Pending litigation against debtor stayed during bankruptcy proceedings. Typically a surge in claim filings prior to bar date and increase in settlement values. Attempts by trust to accelerate payment of insurance proceeds. Bankruptcy filing often results in lump sum coverage settlements with insurers, who take advantage of 524(g) channeling injunction. Target defendants departure from litigation left financial void that plaintiffs filled with new defendants. Entities for which asbestos is ancillary to their business (pump manufacturers) and smallto medium-sized businesses with regional, not national exposure. The number of claimants presenting to these defendants is much smaller than in the 1980 s and 1990 s. These defendants begin tendering to their insurers. New claim reports for U.S. insurers ramp up in 2003 and 2004: These are the newest wave of defendants that were being named while a perfect storm is taking place in the litigation. Major target defendants are filing for bankruptcy and claim filings are soaring as a result of mass screenings and poor judicial controls. May 11, 2015 Page 22 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

23 Asbestos Claim Trends Mid s In the mid-2000 s, the tide turns. Judge Jack issues a seminal ruling in 2005 regarding the filing of silica claims that has implication for asbestos filings: Revealed the high percentage of dual diagnoses made as part of mass screenings. Unlikely claimant can suffer from both asbestos and silica injuries ( like hitting a hole in one ). Noted failure of screening doctors to adhere to widely accepted medical standards. Excluded plaintiff s expert doctors testimony and diagnoses. Medical boards, attorneys general and other courts begin to take action against mass screening doctors Doctors begin recanting diagnoses or pleading the 5 th when testifying Judicial Hellholes don t want to be designated as such and begin making changes to how they process asbestos litigation. Many states implement judicial and legislative reforms (tort reform) to control what asbestos claims may proceed in the judicial process. Non-malignancy claims become almost valueless. Bankruptcy filings drop. Asbestos claims begin to normalize and act like true product liability claims. May 11, 2015 Page 23 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

24 Asbestos Claim Trends Late s Late 2000 s, U.S. District Court for the Eastern District of Pennsylvania (Multi District Litigation (MDL) 875) May 11, 2015 Page 24 Since the inception of the MDL in 1991, through January 2015, 186,600 asbestos cases had been transferred to MDL from Federal Courts. Until late-2008 with the appointment of Judge Robreno, cases languished in MDL, with only 1,985 of 53,803 cases resolved. Since his appointment in October of 2008, Judge Robreno has cleaned up the clogged asbestos MDL: Ordering each plaintiff to state a specific claim against each defendant. Dismissing claims with no product identification and where state specific medical criteria not met. Adhering to strict standards for trial settings and motion dates. Of the 186,600, there remain only 1,819 pending cases. Most dismissed Some settled Some remanded for trial CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

25 MDL Case Trends May 11, 2015 Page 25 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

26 Asbestos Claim Trends Late s U.S. insurers see a marked decrease in the number of new insureds tendering asbestos claims. While new defendants are still being brought into the litigation by plaintiffs, the number of claimants being filed is steadily decreasing. Only a very limited number of non-malignancies are being filed. Insureds tendering asbestos claims during these years continue to be peripheral defendants, e.g. Regional flexible duct connector manufacturers, local building material supply houses, wholesalers of commercial refrigeration and air conditioning equipment, local flooring /decking contractor. Even though the claims being brought against insureds during this time period involve more serious (and costly) injuries, only a small number of such claims are being filed against them. Historical asbestos litigation trends confirm that, unlike the insureds that reported claims in the 1980 s and even in the 1990 s, the majority of the insureds reporting claims to U.S. insurers since 2006 will not have the same volume of asbestos claimants presenting. May 11, 2015 Page 26 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

27 Asbestos Claim Filings May 11, 2015 Page 27 Towerswatson.com CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

28 Mesothelioma Filings May 11, 2015 Page 28 Towerswatson.com CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

29 Cancer Filings May 11, 2015 Page 29 Towerswatson.com CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

30 Non-Malignant Filings May 11, 2015 Page 30 Towerswatson.com CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

31 Total Asbestos Claim Filings May 11, 2015 Page 31 Towerswatson.com CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

32 Projected Future Filings May 11, 2015 Page 32 Towerswatson.com CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

33 Driver of Litigation Costs May 11, 2015 Page 33 Towerswatson.com CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

34 Mesothelioma Incidence & Filings May 11, 2015 Page 34 Towerswatson.com CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

35 The Future is Not the Past U.S. insurers and defendants have learned from the past Defending these cases is the key Mesothelioma and lung cancer cases are the battle ground New defenses: Every fiber theory Dose Serpentine vs. amphibole Component part ( bare-metal defense ) Duty owed to take home exposure claimants Mesothelioma causation Radiation Ambient air May 11, 2015 Page 35 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

36 The Future is Not the Past Bankruptcy trusts as source of settlement money Many bankruptcy trusts have begun paying claims; more money to come Established trusts paid At least $17.5 billion through 2010 (GAO) $2 billion in 2011 $1.3 billion in 2012 $18 billion in remaining assets at year end 2012 (Bates White) Significant additional sums become available once these large trusts begin making payments NARCO Pittsburgh Corning Quigley WR Grace May 11, 2015 Page 36 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

37 The Future is Not the Past May 11, 2015 Page 37 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

38 The Future is Not the Past Trust transparency Major defendants have gone bankrupt; increasing share of solvent peripheral defendants Only want to pay their fair share Defendants believe access to Trusts claimant information is key Plaintiff firms and Trusts resist demands for transparency Garlock Judge found startling pattern of misrepresentation by plaintiffs Reduced Garlock s asbestos liability from $1.4B (claimants assessment) to $125M RICO action being pursued against claimants counsel Highlights need for transparency Legislative effort FACT Act passed by House, uncertain how it will fare in the Senate Transparency laws at state level Still difficulties in problematic jurisdictions (CA, IL, NY) May 11, 2015 Page 38 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

39 The Future is Not the Past/Balance Achieved? Negatives: Some Plaintiff firms have recently been focusing on trying to increase the number of lung cancer cases being filed, in part because of the ease of getting more Trust money by asserting a lung cancer claim. Fraud still persistent. Continued focus is likely to be a smaller number of malignant cases for high value rather than mass settlements of low value claims. Judicial hellholes still exist. Trusts still opaque. May 11, 2015 Page 39 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

40 The Future is Not the Past/Balance Achieved? OFFSET by: Positive Developments Judge investigation/power (Hodges/Garlock case) Judicial turnover (Heitler/NY) Increased awareness/scrutiny (Garlock) National legislation (FACT) State legislation (FACT like and tort reform) Judicial hellholes aversion Case severity stable/slight increases. May 11, 2015 Page 40 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

41 Asbestos Verdicts The Reality STATE PLAINTIFF DISEASE ORIGINAL VERDICT OUTCOME NY Assenzio Lung cancer $20,000,000 pain & suffering $10,000,000 loss of consortium $5,500,000 pain & suffering $500,000 loss of consortium NY Brunck Meso $20,000,000 past pain & suffering $3,200,000 past pain & suffering NY Levy Lung cancer $15,000,000 past pain & suffering; $35,000,000 future pain & suffering; $10,000,000 loss of consortium $4,000,000 past pain & suffering $3,500,000 future pain & suffering $650,000 loss of consortium NY Serna Meso $30,000,000 past pain & suffering; $30,000,000 future pain & suffering $4,500,000 past pain & suffering $3,000,000 future pain & suffering NY Vincent Meso $20,000,000 past pain & suffering $5,000,000 past pain & suffering $190,000,000 $29,850,000 PA Graver Meso $4,500,000 Jury verdict reversed NY Hackshaw Meso $10,000,000 past pain & suffering $6,000,000 past pain & suffering NY Sweberg Meso $5,000,000 past pain & suffering $10,000,000 future pain & suffering $25,000,000 $16,000,000 $5,000,000 past pain & suffering $5,000,000 future pain & suffering PA Nelson Meso $14,500,000 Appeal pending CA Whalen Meso $40,000,000 past pain & suffering $861,113 economic damages $30,000,000 loss of consortium Appeal pending Crane share 3% May 11, 2015 Page 41 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

42 U.S. P&C Insurers May 11, 2015 Page 42 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

43 Net Incurred & Payments May 11, 2015 Page 43 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

44 Asbestos Coverage Litigation Issues Trigger Historic views (triple, actual injury, continuous, manifestation, exposure) Some of these theories (exposure, triple, continuous) based upon assumptions related to asbestos disease agency, progression and compensability. These theories lead to spreading of risk but result in reduced burden for policyholder claimants and thus, increased insurer payout. Theories based upon dated science and decisions e.g. Zurich v. Raymark (1987); Keene v. Ins. Co. of N. Am. (1981); Ins. Co. of N Am. V. Forty-Eight Insulations (1980). Emerging science allows challenge to some of the assumption theories Actual injury means what it says - new traction as a defense The Keasbey case. (NY 2008) Requires proof of actual injury for each disease type and each claimant. Rejects exposure theory. What constitutes sufficient bodily injury to trigger coverage? Subclinical damage vs actual impairment. May 11, 2015 Page 44 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

45 Asbestos Coverage Litigation Issues Policyholder s Ultimate Damages Includes payout pattern (how much/how fast). Typically damage range may differ several hundred million between low, central and high. May have a dramatic impact on exposure... or none at all. Most policyholders are well into claims cycle but may claim they are not. Judge Jacks chilling effect. Number of occurrences Typical arguments are each claim is an occurrence, or one decision is THE occurrence or perhaps each location an occurrence, or hybrid arguments. May dictate whether policies are impacted at all. Will certainly impact timing analysis (higher level policies.) May mean low lying policies hit again and again if no aggregates and multiple occurrences. Today issue is often compromised. May 11, 2015 Page 45 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

46 Asbestos Coverage Litigation Issues Operations v. completed operations claims Claims against non-product defendants may be applied against products/completed operations aggregates. Courts show willingness to carefully examine non -products claims. Limits for multi-year policies New limit or one? (Note connection to number of occurrences question.) Allocation Various theories, all with different results (Pro rata, all sums, hybrids (e.g. Zurich influenced).) Treatment of white space, insolvencies, exclusion critical. Exhaustion of underlying was it proper? Limits dumping? Often influenced heavily by defense spend. Defense inside/outside limits (Great effect on timing at least.) May 11, 2015 Page 46 CONFIDENTIAL Commercially sensitive and proprietary information Not for further distribution

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