In 1987, The Hartford notified Mac Arthur that it had paid the full limit of its policies, but in 2000, Mac Arthur filed suit against The Hartford, contending that limits on those policies have not yet been exhausted. While this litigation was eventually dismissed last March, Mac Arthur had also filed a separate suit in the Superior Court in Alameda County in California against The Hartford Accident and Indemnity.

Earlier, in June 2002, the St. Paul Companies in St. Paul, Minn., another major insurer that sold policies to Mac Arthur, had reached its own settlement to pay some $975 million to resolve its asbestos liability. “Thats when Mac Arthur really showed up on anyones radar screen; when the St. Paul took that hit,” said Bill Yankus, an analyst at New York-based Fox-Pitt, Kelton Inc., who has been monitoring Mac Arthur asbestos litigations.

Commenting on the settlement decision, Hartford Chairman and Chief Executive Officer Ramani Ayer said accepting this agreement was “very difficult, but absolutely the right thing to do.”

“My team and I fervently believe that The Hartford long ago satisfied all of our obligations to Mac Arthur,” Mr. Ayer said. “Nonetheless, because of the unique facts associated with this matter, this exposure presented a potential multibillion-dollar risk to our company if our defenses failed.”

Mr. Ayer also explained that Mac Arthur was “far and away our largest asbestos exposure,” and that no matter how strong his belief in the merits of The Hartford's position in litigation, “I could not gamble the interests of our shareholders, customers and employees when the opportunity became available to end the litigation.”

The Hartford noted that it wont incur any earnings charge for the settlement, since the cost will be funded through existing reserves. (Last May, the insurer had strengthened its asbestos reserves by $2.6 billion and posted a $1.7 billion charge to its 2003 first-quarter earnings.) The Hartford would still lose its previously anticipated investment income on the cash that will now be used to fund the settlement, but the company said that the loss wont be big enough to alter its previous earnings guidance for 2004.

Commenting on the settlement, Mr. Yankus from Fox-Pitt, Kelton told National Underwriter that while he has been expecting a settlement on this issue sooner or later, he was still caught off guard by the $1.15 billion price tag.

“We knew this was coming. We knew this was in the works. However, the surprise was in the magnitude of the settlement,” Mr. Yankus noted. “The way it has been portrayed by The Hartford going into this was that our defense is very strong, and we should be able to get through this okay. So something over a billion dollars is definitely bigger than what we had expected.”

The silver lining in all this, however, according to Mr. Yankus, is that this settlement finally puts to rest a thorny issue that has been hanging over The Hartford, “which is very good news for investors.”

New York-based Fitch Ratings agreed with that assessment, noting that this agreement “will remove The Hartford's single largest asbestos exposure and eliminate any risk of ultimate claims costs from Mac Arthur growing significantly higher than the planned payment.” Fitch announced that its current rating opinion on The Hartford will remain unchanged.

“Management asserts that asbestos reserves remain well within the range set by The Hartford's ground-up study in May,” said Ron Frank, an analyst at New York-based Smith Barney. “We find this to be credible.”

However, Mr. Frank added, his firm still feels that “accurate outside assessment of asbestos reserve adequacy for The Hartford and its peers remains virtually impossible, especially in a volatile claims and legal environment.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 2, 2004. Copyright 2004 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.