Social inflation and potential exposure to litigated COVID-19-related claims have dominated the headlines in 2020, but Travelers Cos. Inc.'s third-quarter earnings release offered a reminder that one decades-old risk to liability insurers has not disappeared.
Travelers reported its largest amount of unfavorable development of asbestos reserves in a third quarter since the 2006 shift of its annual review of related exposures to that period. The $295 million result exceeded the company's previous high of $250 million for the three months ended Sept. 30, 2014, and the $220 million increase recorded in the third quarter of 2019.
The company noted "some slight improvement" in certain key indicators, but Executive Vice President and CFO Daniel Frye during a conference call said its overall level of paid losses and general claims activity had persisted at higher-than-expected levels.
"This year's asbestos charge is greater than last year's charge as a result of our updated view of the range for ultimate losses, not as a result of increases in paid losses or severity," Frye added.
The CFO expressed optimism about future trends, however, given that the downward trend in mesothelioma deaths, as indicated by a 5.7% overall reduction between 2010 and 2018, according to the most recent underlying cause of mortality data released by the U.S. Centers for Disease Control and Prevention, was "directionally consistent" with Travelers' expectations.
Over time, Frye said, Travelers anticipates that the "high-risk group of people actually exposed to asbestos in the workplace prior to the late 1970s" when usage of the product peaked "will get smaller and will not be replaced by younger people" as individuals who entered the workforce from the 1980s onward were not as exposed to asbestos.
Travelers added in its 10-Q that its view of the underlying asbestos environment is "essentially unchanged" from recent periods.
A cursory glance at overall U.S. property and casualty industry trends in net incurred asbestos losses and loss adjustment expenses, or LAE, for recent calendar years would suggest a significant improvement. S&P Global Market Intelligence finds that net incurred asbestos losses and LAE increased to $1.07 billion in 2019 from $804.3 million in 2018, but remained well below the average for the previous five years of $1.68 billion.
Looking closer at individual company results, however, finds that affiliated reinsurance agreements involving U.S. subsidiaries of two European companies artificially depressed overall results by shifting reserves outside the scope of U.S. statutory disclosures. In the absence of the favorable net incurred asbestos losses and LAE reported by Allianz SE's Allianz Reinsurance America Inc. in 2018 and Zurich Insurance Group AG's Zurich American Insurance Co. in 2019, the industry totals for those years would have been $1.23 billion and $1.28 billion, respectively.
The accounting treatment for the underlying affiliated reinsurance arrangements differs from that associated with the retroactive reinsurance agreements that Berkshire Hathaway Inc.'s National Indemnity Co. entered in recent years with several unaffiliated carriers. Whereas the Allianz and Zurich subsidiaries reported materially lower levels of net asbestos reserves after giving effect to their agreements, given the prospective treatment they were afforded, the statutory statements for the applicable U.S. units of American International Group, Inc., Hartford Financial Services Group, Inc., CNA Financial Corporation and Liberty Mutual Holding Co. Inc. consider the National Indemnity agreements as retroactive reinsurance and do not show reductions to losses and LAE.
All four of those companies joined Berkshire, Travelers and Nationwide Mutual Group among the U.S. P&C groups with the top seven net asbestos reserve positions at year end 2019. When viewing asbestos reserves on a gross basis, Allianz's asbestos reserves would have ranked fifth-highest among U.S. P&C groups.
Certain of the affiliated and unaffiliated adverse development covers also pertain to latent environmental claims, typically for accident years 1986 and prior. The historical trend in net incurred losses and LAE for those liabilities shows a decline for four consecutive years. However, that is not fully reflective of underlying trends.
In the absence of the negative net incurred environmental losses and LAE posted by Allianz Reinsurance America and Zurich American in 2018 and 2019, respectively, the industry's result would have dipped to $494.2 million in 2018 from $635.9 million in 2017, but then climbed to $530.6 million in 2019.
Travelers, whose net environmental reserves ranked fourth-highest among U.S. P&C groups at year end 2019 behind Berkshire, the Hartford and Chubb Ltd., reported a $38 million increase in its position through the first nine months of 2020.