Depending on the actual age of the machine, the material you describe is most probably asbestos as you surmise. Jensen now uses a non-asbestos insulating material that is available from them at a very reasonable price. The material in your old engine can be easily and safely removed by soaking it really well before handling and trying to handle it gently and minimally.
I usually don't remove the old asbestos as it tends to be rather well captured and is generally not likely to become an airborne dust, which is where it is a real problem. Still, if it causes you concern, removal is a fairly easily done option.
Love my older Jensen 70s & others!