According to the American Lung Association, an estimated 16% of coal workers are affected by black lung disease, also known as coal workers’ pneumoconiosis – a rate that has been increasing in recent years.¹ Though coal production has slowed in the United States,² the Centers for Disease Control and Prevention found that miners face a higher risk of contracting black lung disease than in the past³ – suggesting that black lung claims may not be slowing with coal production.

Over the years, the federal government has enacted laws and regulations like the Black Lung Benefits Act (BLBA) to provide compensation to miners who develop black lung disease. These laws have largely attempted to reduce the amount of time and litigation required to afford injured miners their benefits. For example, the BLBA was amended to grant miners who worked in a mine for at least 15 years the presumption of having black lung disease (as opposed to another unrelated respiratory condition, such as chronic obstructive pulmonary disease, which is often developed from smoking). Miners found to have black lung disease are presumed to be permanently and totally disabled, signifying an inability to work in any capacity in any occupation. Furthermore, the spouse of a miner who has been afforded benefits automatically receives that benefit stream upon the miner’s death, regardless of cause of death. Claimants who worked at different mines over the course of their careers are not required to identify the companies primarily responsible for their injuries. Additionally, benefit payments are not spread across several employers. Rather, a miner’s last employer is deemed responsible for paying 100% of the benefit amount, even if the miner was only employed there for a relatively short period of time.

Although the lifting of restrictions, burdens-of-proof, and constraints eased miners’ abilities to receive benefits for black lung claims, coal operators have struggled with securing and maintaining adequate funding mechanisms to pay for their black lung claim liabilities. Such financial challenges have been exacerbated by other factors contributing to uncertainty such as decreased production, excise taxes, increased costs, market conditions, political forces, unavailability of bonds, and unaffordable or unavailable insurance coverage. When financial stresses render a coal company unable to pay for black lung claims (e.g., upon bankruptcy), the federal government, through the U.S. Department of Labor (DOL), must step in and pay that operator’s existing and future black lung claims from the Federal Black Lung Trust Fund. According to the U.S. Government Accountability Office, over $865 million in black lung claims were transferred to the Trust Fund from three bankruptcies alone.⁴ The amount of liabilities in the Trust Fund has forced the DOL to borrow from the general Treasury nearly every year since 1979.⁵ For this reason, it is in the DOL’s interest to ensure that coal operators either have insurance coverage responsible for paying black lung claims or are adequately funded self-insureds. As of year-end 2021, Milliman’s black lung actuarial team estimated the industry’s non-Trust Fund black lung liabilities (includes commercially insured and self-insured responsible operators) to be approximately $9.3 billion. ⁶

The DOL issued a final rule on December 12, 2024, revising the regulations for authorization of self-insurers under the Black Lung Benefits Act. This rule aims to decrease the burden of potential future bankruptcies on the Federal Black Lung Trust Fund by ensuring self-insured coal operators maintain sufficient security.⁷ In its final rule, the DOL explains the basis of and requirements for a coal company to become self-insured, including qualifications, amount of security, the process for appealing the Office of Workers’ Compensation Programs’ determinations, and assumptions that actuaries must use to estimate a self-insured coal operator’s black lung liabilities (actuarially-estimated “reserves”).

Actuarial reserving for black lung liabilities is complex and requires specific expertise. For example, there is no statute of limitations applicable to the number of years between the date of loss and the filing of a federal black lung claim, nor a limit on the number of times an individual can refile. The characteristics of black lung disease (e.g., long latency periods) and the legislative history referenced above add to the complexity. These factors lengthen the reporting period as compared to traditional workers’ compensation liabilities and greatly increase the uncertainty surrounding federal black lung claims. For companies lacking the requisite black lung actuarial expertise, the task of estimating these liabilities is nearly impossible.

However, the timing of the DOL rule coincides with an increased interest in an alternative financial mechanism for black lung claims: engaging in a transaction wherein current holders of black lung liabilities divest future exposure to a well-capitalized buyer.

Particularly attractive candidates for transactional opportunities are “legacy” claim liabilities – long-standing or historical obligations related to insurance claims that pay out over a long period of time. Legacy liabilities are those for which the compensable injury has already occurred and therefore should have an established, quantifiable liability. Complications arise when past events require payments over an extended future period, which can be very difficult to quantify – as is the case with federal black lung claims. Legacy liability acquirers are well-versed in the treatment and handling of long-tail legacy claims but are ultimately reliant on an experienced actuarial team to accurately estimate the liability. Once established, the black lung claim liability can be monitored like asbestos claims, workers’ compensation claims, and other long tail commercial exposures. Black lung liability cash flows may be an attractive investment opportunity for specialized firms for the following reasons:

• The number of insurance liability purchasers has expanded considerably over the past decade to include buyers backed by private equity firms, investment banks, and hedge funds.
• Deal structures are more innovative and go beyond traditional reinsurance.
• The amount of capital available for these transactions goes well beyond what is available in the insurance industry, mirroring the growth seen in the catastrophe bond market in the 2005-2007 period⁸ or more recently with legacy health and life blocks.⁹

There are several drivers of transactional activity on black lung claims:

• First, long duration bond rates are at the highest levels in recent decades subsequent to the Federal Reserve’s hike of the Federal Funds rate. It is unclear how long higher yields will be sustained, so buyers and sellers have been moving with urgency to take advantage of the current environment.
• Second, investors are viewing long duration liabilities as financial instruments, providing a stable cash flow and reliable yield with potentially less market risk than equities or real estate.
• Third, eliminating black lung or other legacy liabilities adds other benefits for the transferor as well. For publicly traded companies, removing these liabilities—often seen as unpredictable and therefore riskier in the long term—may mitigate investor uncertainty in the market. A transfer provides clarity and reassurance to investors and can ease regulatory pressure. Eliminating exposure to coal-related liabilities may have further practical applications, appealing to environmental groups, regulators, and shareholders. Additionally, by gaining balance sheet relief, shedding liabilities unlocks cash flows that can be utilized for other strategic initiatives or invested into core business operations. Moreover, through the divestiture of these liabilities, companies can alleviate concerns regarding their future solvency, further lessening investor apprehension and bolstering the company’s outlook.
• Fourth, legacy liabilities can be transacted in a variety of ways. The ability to specifically tailor the structure of transactions increases optimal financial outcomes and decreases risk. For example, a structure may involve the divestiture of the affected company from a larger group, with the condition that neither the parent company nor other group members bears any shared responsibilities for the future liabilities. Alternatively, the structure may establish a new entity, funded by the parent company, that acquires the at-risk operating business on arm’s-length terms. Additional funds are then infused into the business and “sold” to an acquiring entity. In many instances, the best approach is determined by tax strategies or the corporate structure of the divesting group. As a result, de-mergers, company reorganizations, or even captive formations may emerge as the best path forward, carrying tax and legal implications. The best path forward for each entity is largely dependent on management preferences. Additional discussion about various structures for legacy liability transactions can be found in Milliman’s article of February 2024, “Market Conditions Lead to Rise in Legacy Asbestos Transactions.”¹⁰
• Fifth, for buyers, assuming legacy liabilities provides additional means to execute investment strategies, leveraging the influx of capital resulting from these transactions. Including assets that back these liabilities presents an attractive opportunity to grow an asset portfolio, potentially leading to profitable runoff.

Federal black lung liabilities, while complex and often unpredictable, present unique and challenging opportunities for transactions in the current market environment. However, the drivers described above have led to market conditions that present a favorable opportunity for divestiture, as buyers are able to gain experience assuming blocks of legacy liabilities. As a result, more entities have begun to take advantage of this favorable environment, engaging both legal counsel to assist with deal structure and policy discovery and actuaries to prepare reports containing independent estimates of the liabilities along with documentation of the key risks and uncertainties—an essential step before buyers will consider engaging in transactions. Thus, the new DOL final rule addresses key issues to coal miners and coal companies alike, while also reminding capital markets and self-insureds that the shift in perception regarding transactional solutions has unlocked new advantages.

¹ American Lung Association. Learn About Coal Worker’s Pneumoconiosis. Retrieved December 31, 2024, from https://www.lung.org/lung-health-diseases/lung-disease-lookup/black-lung/learn-about-black-lung.

² Mine Safety and Health Administration (December 31, 2024). Silica Final Rule Resources. DOL. Retrieved December 31, 2024, from https://www.msha.gov/.

³ Almberg, K. & Cohen, R. (February 27, 2023). Modern Coal Miners Have Higher Death Rates From Lung Diseases Than Their Predecessors. CDC. Retrieved December 31, 2024, from https://blogs.cdc.gov/niosh-science-blog/2023/02/27/mining-lung-disease/.

⁴ GAO (May 22, 2024). Black Lung Benefits Program: Lack of Resolution on Coal Operator Self-Insurance Increases Financial Risk to Trust Fund. Retrieved December 31, 2024, from https://www.gao.gov/products/gao-24-107597.

⁵ GAO (June 20, 2019). Black Lung Benefits Program: Financing and Oversight Challenges Are Adversely Affecting the Trust Fund. Retrieved December 31, 2024, from https://www.gao.gov/products/gao-19-622t.

⁶ Grulkowski, T.J., Fleming, C.M., York, A. et al. (May 23, 2022). Milliman Estimates $9.3 Billion in Federal Black Lung Liabilities. Milliman. Retrieved December 31, 2024, from https://www.milliman.com/en/insight/Milliman-estimates-9-billion-in-federal-black-lung-liabilities.

⁷ DOL Office of Workers’ Compensation Programs. 20 CFR Part 726 RIN 1240-AA16: Black Lung Benefits Act: Authorization of Self-Insurers.

⁸ Cummins, J.D. (March 4, 2008). CAT Bonds and Other Risk-Linked Securities: State of the Market and Recent Developments. Risk Management and Insurance Review Vol. 11, No. 1, p. 23-47. Retrieved December 31, 2024, from https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6296.2008.00127.x.

⁹ Bergerson, M. & Chaudhury, P. (September 6, 2023). Could Legacy Long-Term Care (LTC) Blocks Be the Next Wave of M&A Deals? Milliman. Retrieved December 31, 2024, from https://www.milliman.com/en/insight/could-legacy-long-term-care-blocks.

¹⁰ Groth, D. and Grulkowski, T. (February 6, 2024). Market Conditions Lead to Rise Legacy Asbestos Transactions. Milliman. Retrieved December 31, 2024, from https://www.milliman.com/en/insight/market-conditions-lead-to-rise-in-legacy-asbestos-transactions.