Travelers Boosts Asbestos Reserve To $3.4 B

Regarding Travelers' decision to hike asbestos reserves, Mr. Lipp said, "This reserve strengthening reflects a conservative view of trends that have become clearer over the last few quarters and our estimate of the projected ultimate cost of our asbestos liabilities."

The boost brings Travelers asbestos reserve after reinsurance recoverables to $3.4 billion, up from $950 million on Sept. 30, 2002.

Travelers' announcement was welcomed by Wall Street analysts looking for better disclosures on the asbestos liability issue.

"The company's chairman, Robert Lipp, said that the lack of disclosure on asbestos has been a plague on the property-casualty industry. Importantly, he asserted that asbestos liabilities are not a 'black hole' and are quantifiable within a certain range. We agree completely," stated Prudential Securities Inc. in its report. "If other companies, such as ACE and Hartford, follow suit, this should give investors the information they need to be able to more accurately assess an individual company's asbestos reserve adequacy," the report said.

But the amount of reserve increase–which prompted Travelers to record a $1.3 billion after-tax charge for the fourth quarter of 2002–surprised some industry experts, including Alan Murray, vice president and senior credit officer of property-casualty insurance at Moody's Investors Service.

"Their charge exceeded our expectations. It's a material event if a company boosts reserves from under a billion to more than three billion dollars," Mr. Murray told National Underwriter, adding that his ratings agency lowered the long-term debt and financial strength ratings of Travelers and its subsidiaries following the company's announcement.

The ratings downgrade by New York-based Moody's involves Travelers Indemnity pool and Travelers Casualty and Surety of America, whose financial strength ratings were lowered from "Aa2″ to "Aa3." It also lowered Travelers' Gulf pool insurance financial strength to "A2″ from "A1," Gulf U.K. to "A1″ from "Aa3," and senior unsecured debt to "A2″ from "A1."

"Our previous ratings on Travelers did have an expectation that the company would have a further increase in asbestos liabilities. However, it was not quite of the magnitude to which the company announced. It suggests to us that the asbestos problem is even larger than we had assumed in our previous ratings for the company," he said.

At their new levels, these ratings retain their current outlooks, which are "stable," except for Gulf U.K., whose outlook remains "developing," Mr. Murray added.

"We have historically felt, and continue to feel, that Travelers had a very capable team of specialists dealing with asbestos liability issue. But the magnitude of their charge indicates that the estimates are subject to change," he said.

Standard & Poor's Ratings Services, on the other hand, said it affirmed its "double-A-minus" financial strength ratings on the members of Travelers Property Intercompany Pool and Travelers Casualty and Surety Co. of America, and affirmed various debt ratings as well.

The outlook on all these companies, however, remains negative, said Matthew Coyle, director of S&P's Financial Services Group in New York.

"We expected some development in this area. Our outlook remains negative, but we do believe that the company has the earnings capacity and the financial flexibility to restore its capital to its previous level within a relatively short time. And we expect that to happen in 2003," Mr. Coyle said.

Mr. Coyle also added that there could be more fourth-quarter surprises from other companies regarding their reserves. "Certainly the action Travelers took raises the bar for other companies in regard to their asbestos reserves and what the appropriate level is," he told National Underwriter.

Insurance rater A.M. Best Company Inc. also affirmed its previous ratings of "A-double-plus" of Travelers Property Casualty Pool, which includes Travelers Indemnity Company, Travelers Casualty and Surety Company of America, and Travelers Casualty and Surety Company of Canada. The outlook for the ratings is "stable," the Oldwick, N.J.-based ratings agency said.

"For us, the amount was not a surprise. We actually view the announcement as a positive development in light of the reserve deficiency that we have already contemplated," said Daniel Ryan, assistant vice president at A.M. Best Company.

"It is something that we had anticipated prior to the announcement. We have been discussing the asbestos issue with Travelers for the past couple of months," he said.

He added that A.M. Best has its own internal reserve methodology, which had already taken into account a shortfall in asbestos reserve. "And this applies to other companies as well," Mr. Ryan said.

Mr. Ryan also applauded Travelers' decision to boost its asbestos reserves, arguing that the company is in the forefront of managing asbestos liabilities.

The "asbestos issue is going to prompt other companies to increase their reserves related to these liabilities. We have always felt that companies would need to confront this issue, and companies like Travelers are meeting it head on," he said.

"It's a good beginning, but I am not so sure how many other companies would go as far as Travelers," he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 20, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.