Ruxley buying insurance run-off

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1 Ruxley buying insurance run-off RUXLEY RESEARCH AUTUMN/WINTER 2012 ISSUE NO. 3 HOW HARD WILL SURGING U.S. APH CLAIMS HIT EUROPEAN INSURERS?...fortunately the insurance industry has not been hit like the banks...

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3 Welcome Ruxley research 0911_Ruxley research /09/ :28 Page 3 Welcome John Winter CHIEF EXECUTIVE OF RUXLEY I am pleased to present the third in Ruxley s series of research publications focusing on the progress of US APH liabilities held by European insurers. I am glad to be pioneering research on this important area of run-off that has to date received insufficient attention. As we publish this report, there has never been a more important time to consider the challenges facing the holders of US APH. For most of the ten years since I established Ruxley Ventures, all talk about US APH has focused on The finality, exact closure details and of Solvency crucially II a are tailing-off. still to be Out finalised, of sight but what and is out clear of mind is that has both been capital the and mantra disclosure as US APH requirements has sat on are insurers going to books increase gradually dramatically winding for its those way European down. It insurers has, therefore, with old come US APH as a liabilities. shock to have This means witnessed that the any dramatic business turnaround with US APH in liabilities the US APH on its claims books experience needs to consider of the past its options 12 months. and decide on a course of action sooner rather than later. With claim settlement award levels soaring and claims arising from new, unexpected sources, these Ruxley Ventures has been specialising in acquiring are suddenly uncertain times for holders of US APH. and running off US Asbestos, Pollution and Health Perhaps we always knew the long-term impacts of Hazard (APH) liabilities for ten years and we are exposure to asbestos would not go away easily, but one of the very few businesses with the financial at a time when pollution liabilities have apparently resources, experience and knowledge base to do stabilised, we could not have expected that a single so. In that time we have helped a number of both live and run-off insurers close the book on this long-term problem. individual suffering from mesothelioma would be awarded $48 million in damages. In the face of this surprise turnaround some of the biggest insurers in the United States have been forced to increase their reserves and reinsurers JOHN WINTER have CHIEF seen EXECUTIVE their combined OF RUXLEY ratio negatively impacted by the costs involved. Yet while the problem assumes crisis proportions in the United States, European insurers US APH reserves To ensure have we continue shown no to significant be at the forefront movement with of limited understanding appetite for all exit the strategies issues surrounding to bring finality. US APH, Will the we weight have conducted of rising asbestos some research claim settlement into the awards impact and of the Solvency imminent II on arrival US APH of Solvency business II, with for the European increased insurers. disclosure This and research capital has requirements considered the it will current bring, reserve force the levels European of US insurance APH business, the establishment potential increase to increase capital its reserves? requirements Or will it following remain standing the implementation the bridge of refusing Solvency to II see and the how Solvency iceberg ahead? II might impact the reporting environment for European insurers. That is the question facing European insurers in the coming months and years. I hope that our analysis I hope you will find the insights we have been able will assist them in this new, challenging and to identify interesting and useful as you negotiate unexpected US APH environment. the introduction of this new and challenging piece of European legislation. Best wishes Best wishes John Winter 01 RUXLEY RESEARCH: HOW HARD WILL SURGING U.S. APH CLAIMS HIT EUROPEAN INSURERS?

4 Contents 1.0 EXECUTIVE SUMMARY MESOTHELIOMA CLAIMS FILINGS AND COSTS ARE RISING DRAMATICALLY IN THE UNITED STATES SURGING U.S. APH CLAIMS FORCE U.S. INSURERS TO INCREASE RESERVES ARE EUROPEAN INSURERS PREPARED FOR DEALING WITH THE SAME RESERVE HIKES AS THEIR U.S. COUNTERPARTS? URGENT SOLUTION IS NEEDED TO THE PROBLEM OF U.S. APH - 10

5 1.0 Executive summary The last 12 months have seen some exceptional courtroom awards made to claimants suffering from mesothelioma in one case a single victim was awarded $48 million Mesothelioma claim awards are rising dramatically in the United States The last 12 months have seen some exceptional courtroom awards made to claimants suffering from mesothelioma in one case a single victim was awarded $48 million. The extraordinary level of these awards come against a background of claims arising from new, unexpected sources leading to an unforeseen increase in claims filings. The door is now open for a significant upsurge in insurers US APH losses. In the last two years US insurers have been forced to increase their US APH reserves The impact of this surprising deterioration in events is already being seen in the substantial additional reserves that US insurers are having to put in place to deal with their US APH liabilities. This has resulted in three major US insurers having to increase their reserves last year. AIG saw a 75% increase in its US APH reserves in 2010 alone. This is having a significant impact on the bottom line of the US insurance and reinsurance industry, which in 2010 saw a 2.9% increase to the combined ratio of US reinsurers directly related to US APH. Are European insurers ready to deal with the same reserve hikes as their US counterparts? As Ruxley reported in its research last year, European insurers are not engaged in much active management of their US APH reserves which have shown no significant movement. They also demonstrate a limited appetite for exit strategies to bring finality to such liabilities. Current regulatory reporting requirements make it difficult to get a full picture of how well prepared the European industry is for dealing with potential US APH reserve increases but to date, the picture looks calm with survival ratios appearing to be relatively unchanged compared to 12 months ago. However, with the value of claim settlement awards soaring and claims filings increasing in the US, Europeans may be faced with reserve inadequacy if inactive management of US APH continues to be the norm. Solvency II requirements are likely to force European insurers to increase their US APH reserves In its first research project, Ruxley observed that European insurers with US APH liabilities will come under pressure from two fronts as a result of Solvency II. Firstly, increasing regulatory capital requirements and secondly, yet perhaps less well understood, are the increased transparency requirements which will expose insurers US APH liabilities to a similar level of scrutiny as their US counterparts. Scrutiny, which in the last 12 months has resulted in substantial reserve increases. A surge in claims makes dealing with US APH liabilities even more urgent than 12 months ago The fast changing nature of the US APH claims environment means it is vital that European insurers act fast if they are to avoid the unexpected increases in reserves that their US counterparts are facing. As claim values rise and Solvency II looms, coming to a solution that allows the problem of US APH liabilities to be removed from the balance sheet by a transfer to a specialist provider is increasingly urgent. 03 RUXLEY RESEARCH: HOW HARD WILL SURGING U.S. APH CLAIMS HIT EUROPEAN INSURERS?

6 2.0 Mesothelioma claims filings and costs are rising dramatically in the United States insurers need to brace themselves for an increase in claims for asbestos damage that, if the current trend were to persist, could begin to look like the crisis claims peak of the 1990s In the year since Ruxley s previous large scale review of the US APH environment 1 there has been a substantial upsurge in claim settlement amounts, with the rising cost of mesothelioma being highlighted by a number of large high profile awards in the US. As non malignant claims have been barred by tort reform in many jurisdictions and are not getting to trial, plaintiffs counsel are pressing to get the malignant cases to trial more quickly and to increase the settlement and verdict values of malignancy claims, particularly for mesothelioma. Enormous increase in claims awards Two verdicts in late June, both in mesothelioma, illustrate this trend. In Los Angeles, California, a jury awarded $48 million, including $12 million in punitive damages, to Bobby Izell an 86 year old former construction worker, while in New Orleans, Louisiana, Frederick Schulte, a former ship worker, obtained a $12 million award. Awards of this level will undoubtedly reduce substantially any defendant s willingness to pursue the lengthy and complex process of proceeding to trial. At the same time as awards are rising, courts are expediting trials for mesothelioma cases. Manville - claims filings 35,000 30,000 25,000 20,000 15,000 10,000 5, Ruxley Research The Impact of Solvency II on US APH liabilities Profit Opportunity? 04 RUXLEY RESEARCH: HOW HARD WILL SURGING U.S. APH CLAIMS HIT EUROPEAN INSURERS?

7 Surge in claims filings Adding further weight to the thesis of a new emerging crisis is the experience of the Manville Trust. The Manville Trust was formed in 1988 to settle asbestos personal injury claims resulting from exposure to asbestos related products mined or manufactured by the Johns-Manville Corporation and its affiliated entities. Owing to its size and relative maturity it provides a good representation of the general progress of asbestos claims. The trust has seen annual claims filings more than treble since New claimants emerge In addition to this growth in claims arising directly from those exposed in the workplace, Ruxley s first research document highlighted the increase in claims from contractors and the targeting by US lawyers of new insureds, resulting in a wave of unforeseen claims. It appears this trend has continued and new sources of claims continue to be identified. Take home claims, which are made by a family member, typically children, who were exposed to asbestos taken home from work, have surged in the last two years and this is potentially one of the reasons Manville has seen such an increase in claims filings. Settling liability continues to cost the insurance industry Despite the fact that coverage issues involving US APH claims have been intensively litigated for more than 40 years, high-stakes coverage disputes remain pending in US courts. The typical litigation involves a suit by a US policyholder against various US and European insurers, both primary and excess. Some of the most important actions of this nature include: > Exxon Mobil - Asbestos Premises Claims - New York > Motors Liquidation Company DIP Lenders Trust (as alleged successor to General Motors) - Asbestos and Pollution - Delaware > Cities Service Pollution - Louisiana > Corning Asbestos - New York Each suit involves scores of insurers as defendants, and hundreds of insurance policies and claims that could potentially reach hundreds of millions of dollars, for example, Motors Liquidation Company DIP Lenders Trust seeks slightly less than $1 billion in asbestos losses and approximately $723 million in pollution losses. A claims crisis gathers pace With no recent new tort reform initiatives at the state level, and, nationally with the Democrats controlling the presidency and Senate, reform that might improve the outlook for insurers in the US courts seems unlikely. After significant progress in the past, state level reforms have come to a halt. Therefore, insurers need to brace themselves for an increase in claims for asbestos damage that if the current trend were to persist, could begin to look like the crisis claims peak of the 1990s. If we take recent legal actions, claims filing data and the unforeseen new claimant groups together, there is reason to call this the start of a developing wave of claims and increasing awards, making suggestions of a new and emerging US APH crisis increasingly plausible. In such a scenario there can be no doubt that European insurers will be forced to consider the adequacy of their US APH reserves. 05 RUXLEY RESEARCH: HOW HARD WILL SURGING U.S. APH CLAIMS HIT EUROPEAN INSURERS?

8 3.0 Surging US APH claims force US insurers to increase reserves Until recently, it seemed that the U.S. insurance market had the U.S. APH crisis, which emerged two decades ago, under control, but the experience of the last two years is starting to create concerns about the issue again Combined Ratio Impact Heavy Drag (> 3 points) Modest Drag ( 2-3 Points) Slight Drag (< 2 points) Industry Segments Insurer Munich American Holding Corp. Swiss Reinsurance Group Utica National Insurance Group Everest Re U.S Grp FM Global Grp Fairfax Financial (USA) Group Hartford Insurance Group Allianz of America (Fireman s fund) Sentry Insurance Group Argo Group American International Group White Mountains Insurance Group CNA Insurance Cos Travelers Group Farmers Insurance Group Nationwide Group Berkshire Hathaway Ins Group Chubb Group of Insurance Cos Markel Corporation Group Liberty Mutual Insurance Cos Great American P&C Ins Group Zurich Financial Svcs NA Group Erie Insurance Group Cincinnati Insurance Cos Allstate Insurance Group ACE INA Group Commercial Reinsurance Personal Total Industry 5 Yr. Avg Source: Best s Special Report US Asbestos & Environmental Liabilities, Market Review, December RUXLEY RESEARCH: HOW HARD WILL SURGING U.S. APH CLAIMS HIT EUROPEAN INSURERS?

9 The rising tide of claims is now impacting US insurer and reinsurers bottom lines, with estimates suggesting that in 2010 alone US reinsurers combined ratio increased 2.9% due to US APH. In the same year, AIG increased its reserves for US APH by a massive 75%. Across the industry as a whole in 2010 a nearly 1% increase in combined ratio can be attributed to US APH. For the second consecutive year AM Best has reported that US APH losses have increased by nearly 50% for US insurers. In addition to this, three of the major US insurers have increased their US APH reserves in the last two years. Until recently, it seemed that the US insurance market had the US APH crisis, which emerged two decades ago, under control, but the experience of the last two years is starting to create concerns about the issue again. The increase in overall US APH reserves does, at this stage, seem to be confined to asbestos, with pollution seemingly in a stabilised position, despite increased clean-up activity under the Obama administration. The politically sensitive nature of these claims creates ongoing uncertainty but, for now, it appears that the US industry has this under control. 07 RUXLEY RESEARCH: HOW HARD WILL SURGING U.S. APH CLAIMS HIT EUROPEAN INSURERS?

10 4.0 Are European insurers prepared for dealing with the same reserve hikes as their US counterparts? the recent uptick in asbestos claims filings and award levels could see the situation tip over more drastically into a U.S. APH crisis not seen since the early 1990s To date, European insurers have escaped the scrutiny of their US APH reserves under the more flexible accounting regime to which they are currently subject. In fact, in last year s research paper Ruxley highlighted the relative strength of the European insurers reserves compared to US Insurers. This conclusion was based upon a survival ratio test which considers the number of years the existing reserves are expected to last, based on the current level of claim payments. The updated research has found that the gap between the survival ratios for US APH liabilities held by European insurers, relative to US insurers, has actually widened over the last 12 months. Perhaps this is unsurprising considering last year s research which concluded that European insurers are less likely to actively manage their US APH liabilities than their US peers. As a result, European insurers are yet to experience the rising claims filings and award costs faced by US companies. 08 RUXLEY RESEARCH: HOW HARD WILL SURGING U.S. APH CLAIMS HIT EUROPEAN INSURERS?

11 This gap between US and European company US APH reserves is surprising if we consider the recent deteriorating claims experience of some US insurers which have been forced to increase reserves. Although if the increases were only in proportion to the increases in claims settlement activity then the impact upon the survival ratio would be limited. implemented and European insurers are faced with increased transparency leading to a negative impact on their combined ratio and requiring substantial reserves increases. However, the recent uptick in asbestos claims filings and award levels could see the situation tip over more drastically into a US APH crisis not seen since the early 1990s. The gap between the US and Europe is likely to change in the next couple of years as Solvency II is Comparison of European and US insurers US APH Survival Ratio Europe US Survival ratios can be particularly volatile to short term claims experience, the research has, therefore, been aggregated over many companies in order to prevent this issue arising. 09 RUXLEY RESEARCH: HOW HARD WILL SURGING U.S. APH CLAIMS HIT EUROPEAN INSURERS?

12 5.0 Urgent solution is needed to the problem of US APH Insurers need to consider exit strategies such as sales or transfers to deal with a problem that is growing ever more urgent by the day When Ruxley reported last year on the impact that Solvency II would have on the transparency of US APH reserves held by European insurers we had not yet experienced the full force of the surge in settlement costs and claims filings of mesothelioma claims that are now looming into view. Then we urged European insurers to consider their position in advance of the implementation of Solvency II, today we can see that situation has become increasingly severe. Insurers need to consider exit strategies such as sales or transfers to deal with a problem that is growing ever more urgent by the day. Unlike the late 1980s and early 1990s, when the problem of US APH liabilities hit an unprepared insurance industry, today the information exists for effective warning and mitigating action to be taken. The insurance industry needs to look again at the information on US APH as it has evolved over recent years and focus on dealing with a crisis that they may have thought was dealt with 20 years ago, but is now more pressing than ever. 10 RUXLEY RESEARCH: HOW HARD WILL SURGING U.S. APH CLAIMS HIT EUROPEAN INSURERS?

13 Contacts Ruxley Ventures Limited New Broad Street House 35 New Broad Street London EC2M 1NH T +44 (0) F +44 (0) John H Winter Chief Executive T +44 (0) [email protected] Juliette Winter Director & General Counsel T +44 (0) [email protected] Katrina Holford Company Secretary T +44 (0) [email protected] 11 RUXLEY RESEARCH: HOW HARD WILL SURGING U.S. APH CLAIMS HIT EUROPEAN INSURERS?

14 Research conducted by Ruxley Ventures between June and August Public company published information from large international insurers and reinsurers was analysed in order to produce these results. The opinions and statements expressed by Ruxley Ventures in this document are based on its own research and interpretation of that research. The opinions and statements are not intended to be relied upon by third parties who, if appropriate, should obtain their own advice. 12 RUXLEY RESEARCH: HOW HARD WILL SURGING U.S. APH CLAIMS HIT EUROPEAN INSURERS?

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16 Ruxley buying insurance run-off RUXLEY RESEARCH AUTUMN/WINTER 2012 ISSUE NO. 3