Chris Winans, an equity analyst for New York-based Lehman, said he reached the conclusion about ACE's second major review of its asbestos reserve situation by looking at other similar studies already undertaken by ACE's asbestos-exposed competitors.

“We expect the company will disclose the results of its next study later this year. Our estimated charge represents about 14 percent of its existing gross asbestos reserves of about $2.9 billion.”

ACE declined to comment on Lehman Brothers' forecast in detail, but said the investment firm's forecast of $400 million reserve addition is higher than any other predictions it has come across recently.

Mr. Winans acknowledged that, as an outsider, he recognizes the difficulty in estimating asbestos losses “when experts inside the companies have not been able to get it right themselves.”

But he explained that his own forecast of the $400 million asbestos hit was made by looking at comparable asbestos studies already conducted by ACE's competitors: Chubb Corp. in Warren, N.J.; the Chicago-based CNA Financial Corporation; and The St. Paul Companies, now part of The St. Paul Travelers Companies Inc. in St. Paul, Minn.

In their second major asbestos reserve reviews, Mr. Winans observed, Chubb and CNA Financial each added to reserves by more than 20 percent of their existing gross reserves, while The St. Paul Companies increased its asbestos reserves by about 9 percent of its existing gross reserves.

Examining these results, Mr. Winans said, “We think ACE's exposure lies somewhere in the middle, as St. Paul Travelers had already settled its largest asbestos exposure, while Chubb and CNA were adding to much smaller bases of existing asbestos reserves than ACE will be.”

ACE took on an asbestos exposure with its purchase of Westchester Specialty in 1998, as well as the property-casualty business of CIGNA in 1999, with most of the asbestos liabilities coming from CIGNA's balance sheet. ACE had bought reinsurance against asbestos losses from National Indemnity at the time of the acquisition, but it was exhausted with ACE?s 2002 asbestos reserve boost.

As for The St. Paul Travelers analysis by Morgan Stanley, the New York-based firm said it is downgrading the insurance giant to “Underweight” from “Equal-weight” and offered four reasons for its downgrade decision the first on which was that The St. Paul Travelers' reserve risk is “perhaps larger and more imminent than expectations.”

Currently, the investment firm is including in its 2004 estimate for The St. Paul Travelers a reserve charge of $650 million pretax, or 65 cents per share. Morgan Stanley stated that “a provision for environmental strengthening” is a large portion of the charge forecast. Still, the firm acknowledged that it?s not in the business of making predictions and that the firm's current forecast could prove to be erroneous.

“Clearly, this is a highly subjective number,” the firm said. “We could be directionally correct, but may miss the order of magnitude.”

The St. Paul Travelers declined to comment on Morgan Stanley's downgrade and the firm's forecast on the insurer's reserve risk, noting that it's the company's policy not to discuss any specific analyst report. “We don't discuss analyst reports. We try not to even get into it,” said Joan Palm, a St. Paul Travelers spokesperson.

According to the Morgan Stanley report, other reasons for downgrade included the insurer's lower leverage to specialty classes of business where margins are still expanding, the fact that the insurer stands to garner few gains from tort reforms, and that it has a financial picture that comes up less favorable when compared to other companies.

Regarding tort reform, Morgan Stanley analyst William Wilt said, “Our perspective has been that companies likely to benefit the most from tort reforms are those that are in professional liability classes of business, particularly medical malpractice and other broad specialty lines of business.” For The St. Paul Travelers, he said, the bulk of the business is in lines such as workers' compensation, personal auto or commercial auto.

“We prefer commercial insurers with less reserve risk and more leverage to specialty classes of business. The Chubb Corporation and ACE Limited are examples,” Morgan Stanley said in it's announcement.

Reproduced from National Underwriter Edition, June 25, 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.