Washington, DC, May 25--Despite more than three decades of efforts by the insurance industry to seek final settlement of scores of asbestos-related claims, a large -- and potentially growing -- contingent of insurers has concluded that Sen. Arlen Specter's trust fund proposal simply isn't the answer.
Given Washington's track record on the asbestos issue -- Congress has failed to pass all 21 previous incarnations of asbestos legislation introduced since 1970 -- Specter's bill is far from guaranteed passage, with or without the insurance industry's support. Political analysts Kim Wallace and Rami Armon of equities firm Lehman Bros. place the likelihood of passage this year at around 25%, adding that the Pennsylvania Republican "must generate sufficient momentum to keep his bill strong going into (the) Senate floor."
Opposition to the measure has come from both the political right -- with former House Majority Leader Dick Armey's FreedomWorks group launching a nationwide media blitz characterizing the measure as a "$140 billion tax on business" -- and the political left, as Ralph Nader's Public Citizen organization charges virtually the exact opposite, that the bill serves to reduce payments to asbestos victims and limit the liabilities of defendant companies.
In a paper issued on the eve of the bill's markup before the Senate Judiciary Committee, Public Citizen noted that while such "Tier II" companies as Dow Chemical and Honeywell have estimated their future asbestos liabilities over the next 15 years at $2.2 billion and $2.75 billion, respectively, their annual payments to the trust fund would be capped at $27.5 million, or $378.5 million over the next 30 years.
Notably absent from Public Citizen's account of Fortune 500 companies receiving a "discount" on their asbestos liabilities was any mention of insurance companies, and a glance at the numbers may provide some insight as to why.
The bill calls for insurers to contribute $46.025 billion over the life of the trust fund, an amount more than double the $21.5 billion currently held as asbestos reserves by the U.S. property/casualty industry, noted Karen Horvath, a vice president in A.M. Best Co.'s property/casualty division. And while A.M. Best believes the industry currently is under-reserved for its asbestos exposures to the tune of some $11 billion, insurers' trust fund contributions still would exceed the combined $32.5 billion of anticipated liability.
"It's more than our estimate, but it's not completely out of line with our projection," Horvath said of the proposed industry trust fund obligation. "The other thing to consider is that the $46 billion would include contributions from at least some non-U.S. insurers, whereas our estimate is just for the U.S. industry. You add to that reserves held by insolvent insurers and reserves held by offshore reinsurers, Lloyd's and so on, and it probably isn't too far off."
Nearly half of the industry's obligations would be paid over the first five years of the program, with the bill calling for insurers to pay aggregate amounts of $2.7 billion annually for the first two years of the fund's existence and $5.075 billion annually for the following three years. That $20.6 billion in payments would just about exhaust the U.S. industry's current reserve levels, though some insurers may seek alternative means to finance their obligations, noted Gerard Altonji, managing senior financial analyst with A.M. Best.
"If there is an implied shortfall for any of the individual companies such that they are not currently reserved for this level of payout, it's not unreasonable to think they might go to the capital markets," Altonji said. "If they are able to put up assets on a discounted basis, they may not need to raise additional capital to fund the shortfall."
