Moody's: An Asbestos Fund Won't Budge Ratings

NU Online News Service, April 25, 2:19 p.m. EDT?Creation of a national fund to settle asbestos claims would be a positive development for insurers, but it is unlikely to affect their financial strength ratings, Moody's Investors Service said.

A possible Congressional measure setting up a settlement agreement has recently been the focus of talks in Washington, involving legislators, insurers, labor unions and businesses subject to asbestos claims. Aspects of the legislation were the subject of an April 4 NU Online News report and an editorial in the April 14 National Underwriter print edition.

Moody's said a settlement, involving a fund to pay claims, could be helpful if it can dramatically reduce the uncertainty related to the cost of the exposure.

Such a settlement, the New York-based ratings agency noted, would create a trust to be funded through contributions by affected businesses and insurers, which would then become the funding source for more than $100 billion of asbestos claims settled in the future.

A settlement would lower the uncertainty related to the ultimate cost of the exposures, but on the flip side, it could cost insurers substantially, both in terms of the absolute amount and timing of the funding.

Furthermore, for individual companies, the settlement cost could exceed the discounted value of reserves they have already established to fund these exposures, and might even be greater than the nominal amount of their reserves.

Moody's said that after an article on the topic appeared yesterday in The New York Times, it received inquiries about how a national settlement would impact the ratings of insurance companies with asbestos claims exposure.

Describing how it could incorporate a settlement into its ratings action, Moody's suggested that it would analyze the net impact by comparing the required funding from each insurer to its discounted reserves, and this would then be viewed in the context of how much of the financial uncertainty is reduced for a company under review.

Moody's pointed out that the overall impact of this consideration could be either positive or negative and that this factor would be added into the insurer's overall credit profile.

Additionally, the rating agency will scrutinize several other factors, including: the amount an insurer is required to contribute to the national fund; the payment schedule for the contribution; the effect of a nationwide settlement on the payout of previously closed cases; the possibility that the trust may require more money in the future; and whether the settlement would leave open any windows for future legal claims.

In the overall picture, Moody's said it was "unlikely that the combination of financial benefit and uncertainty reduction would be large enough to move many ratings."

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Moody's: An Asbestos Fund Won't Budge Ratings

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