Highlights of the 2nd Quarter 1997 Filing
CONTENTS:
FINANCIAL SUMMARY
OPERATIONS ISSUES
Settlement Activity
Pro Rata Share Recalculation
Medical Audit Program
Individual Evaluation Process
New Claim Filings
LEGAL ISSUES
ASSET MANAGEMENT ISSUES
Trust Operating and Dispute Resolution expenses for the six months ended June 30, 1997 were $4.7 million, compared to $3.9 million for the same period in 1996. Operating expenses in 1996 were reduced by approximately $300,000 due to the Trust’s collection of a contempt of court proceeding against an attorney brought in 1991. The receipt of the judgment was credited against professional fees because the litigation costs were originally charged to professional fees during the periods they were incurred. Total Trust expenses for the first six months of 1997 were $5.0 million compared to $5.9 million for the same time period in 1996. The reason for the significant decrease is due to incurring no Class Action costs in 1997 compared to $1.2 million for the same period in 1996 and a reduction of Asset Management costs from $784,000 in 1996 compared to $291,000 for the first half of 1997. Asset Management costs were lower during the first half of 1997 than in the similar period in 1996 because the Trust completed most of the work on the Profit Sharing Exchange and sale of Riverwood International Corporation during early 1996. Since implementation of the final Trust Distribution Process (approximately January 1, 1995) total Trust operating costs, including Asset Management and Class Action costs, have represented approximately 4.4% of total claim payments compared to 12.0% since the inception of the Trust.
Net Claimants’ Equity increased for the first half of 1997 by almost $150 million, principally due to an unrealized gain in the Johns Manville Corporation (JM) stock of approximately $153 million and investment income of $43 million, less net claim settlements (including outstanding offers) of approximately $50 million. Net claim settlements during the period included $83 million in claim payments net of a $33 million decrease in settlement offers outstanding. The decrease in settlement offers outstanding is discussed below. The Trust’s investment income increased $20 million for the first six months of 1997 compared to 1996 and included unrealized equities gains of almost $16 million as the Trust continued to diversify its non-JM investments.
As of June 30, 1997, the Trust had approximately $819 million in unrestricted cash equivalents and marketable, fixed income securities, exclusive of the Trust’s investment in JM ($1,541 million) and other equity investments ($148 million).
Because the Trust suspended making new offers on claims throughout almost all of the first two quarters of 1997 (see discussion below regarding recalculation of the pro rata share payment), settlements achieved during that period were related to claims receiving initial offers prior to January 1, 1997, and Exigent Health or Hardship claims. As a result, the Trust settled approximately 17,760 claims during the first six months of 1997, for which the Trust paid a total of $83.4 million. In addition, the Trust paid $4.5 million in payments on contribution and indemnity claims during this period. To date, the Trust has settled and paid 128,428 claims under the Trust Distribution Process (“TDP”), paying a total of over $630 million. Since inception, the Trust has paid over $1.7 billion to over 156,000 claimants.
As previously reported during the First Quarter of 1997, the Trust engaged on a project to re-estimate total liabilities and assets in light of the upsurge in new filings in late 1996. At that time, the FIFO range within which claimants were eligible to receive Trust offers at the 10% pro rata payment level was capped at FIFO number 226,400, or claims filed through November, 1994. That project was completed in late May, with subsequent meetings held with the Selected Counsel for the Beneficiaries, the Representative of Future Claimants and the Special Advisor to the Trust to discuss the results.
Resource Planning Consultants (“RPC”), was engaged to update their previous new filing estimations given in 1993 and 1995, and were also asked to review their methodology in light of new non-malignancy claim filings consistently exceeding those estimates. Their work yielded a new range of estimates of new filings beginning in 1997 of approximately 480,000 to 650,000, with a “base case” estimate of 550,000 new claims. While these new estimates may add approximately 156,000 to the total expected claim population, this is primarily due to the large number of claims filed in 1996, an event that may or may not be an ongoing trend. Also, revisions in other aspects of Trust liabilities and assets were important to the analysis of the appropriate pro rata payment. Specifically, the Trust’s medical audit program has resulted in a significant number of claims being downgraded in severity. Furthermore, based on these results, a far larger population of claims have been targeted for future audit and we expect many may be similarly downgraded. Using those results to assist in assigning settlement values to the new estimates, where appropriate, as well as the sustained growth in the Trust’s assets, has more than offset the impact of the higher claim filings. After a careful review of all the data and the uncertainties of making projections both as to liabilities or assets, at their meeting on June 10, 1997, the Trustees approved the resumption of the making of new offers at the 10% pro rata payment level. Therefore, the Trust has now expanded the range of claimants eligible to receive offers through FIFO number 256,000, which encompasses claims filed through August 1995.
Prior to making new payment offers, the Trust audited a 5% random selection of claims within the FIFO range 226,401 through 256,000 (August, 1995). This FIFO range encompasses First and Second Quarter 1997 offers which were eligible for payment after the Trustee’s June 10th meeting. The original response deadline of January 15, 1997 was extended in May to June 15, 1997, so firms would not be placed on 100% medical audit due to lack of response. Unfortunately, many firms waited until June 15 to respond and therefore, their results are not yet complete. Rather than hold claims for all the firms, we have released and will continue to release the payments as results are received and compiled.
Effective January 1, 1997, the Trust changed how it compiles medical audit statistics. Now, medical audit results pertain only to claims within the FIFO range being audited. Therefore, the medical audit results reported here applied only to FIFO range 226,401 through 256,400 and do not affect a firm’s medical audit status for claims with FIFO numbers less than 226,401.
The medical audit results for this FIFO range are as follows:
- Sixty-eight firms, which represent 16,954 claims in this FIFO range, were audited. An additional 1,300 claims are represented by firms with populations considered too small for a comprehensive audit. If the firm had already established a medical audit record in previous quarters, their claims will be paid based on the firm’s prior period medical audit status.
- At this time, 24 firms, or about 35% of those audited, have adequate response and pass rates for their claims to be released for immediate payment. In total, these firms received 4,752 offers and 1,138 deficiency notices. For the population being audited, the average response rate for these firms is currently 98%, and the average pass rate is 95%.
- Currently, the medical audit status of 26 firms, or another 38% of the firms representing 7,080 claimants in the eligible FIFO range, is still pending. These firms submitted their responses near or at June 15, so we are still processing their responses. Each week, new statistics will be compiled to determine which firms have achieved the minimum response and pass rate criteria for their offers to be released.
- Eighteen firms, or the remaining 27% of the audited group, have inadequate response and/or pass rates and, therefore, have been placed on 100% medical audit. These firms represent 3,049 claimants with eligible offers and 935 deficient claims. Certain malignancy claims (Category 5 and Category 7) will be released without further audit. However, all the remaining claims must submit to medical audit in order to be processed further. Currently, the average response rate for these firms on 100% medical audit is 97%, and the average pass rate is 31%.
The above claim payment statistics cover a total of almost 19,000 claims out of the 30,000 claim FIFO range. The number of claims eligible for payment in this FIFO range was reduced significantly by the disqualification in April of approximately 9,000 claims filed by the Maritime Asbestosis Legal Clinic (see Legal Issues below). An additional 2,000 claims have either already been settled (1,311) or have been disqualified for a variety of reasons. The remaining claims are in various stages of processing, including being held because of a notice of a potential contribution claim or because there is a particular issue on that claim which needs resolution prior to payment.
As reported last quarter, the Trust has become increasingly concerned about the slow pace of settlements in individual evaluation and has modified its policies and procedures accordingly. While we are encouraged by the results thus far, sufficient time has not yet elapsed to determine if the changes we implemented will be effective.
We continue to find firms who have requested individual evaluation for a large volume of claims without understanding that individual evaluation could result in a offer of less than matrix value. We have an ongoing educational effort which involves contacting these firms and explaining to them the individual evaluation process. When this problem is identified, firms are given a one-time offer to review the claims for which they have requested individual evaluation to determine if they would like to withdrawn them for the original matrix offer. Once negotiations begin on a claim, the original matrix offer is not re-extended. In these instances, once notified, many firms will withdraw in favor of the matrix offer.
At the end of June, the Trust had a total of 3,842 outstanding requests for individual evaluation. Since January 1, 1997, the Trust has received 946 new requests and resolved 714. Individual evaluation requests are assigned for negotiation in the order in which the requests are received, however Exigent Health and Hardship claim are always given priority.
Approximately 1,900 new claims were filed in June, bringing the total number of claims received by the Trust to about 352,300. Claim filings during the first six months of 1997, at 8,981 were significantly lower than the 19,172 received during the first six months of 1996, and lower than the 23,422 received during the first six months of 1995.
During this quarter, the number of claims eligible for settlement declined to 138,324 in large part because of the disqualification of over 27,000 claims filed by the Maritime Asbestosis Legal Clinic, but also because there are now over 20,000 claims that have been deactivated due to non-response of six months or longer to a settlement offer or deficiency notice put forward by the Trust. Because the number of claims presently disqualified from receiving settlement offers is so large, at 57,942 claims, we are depicting our claims graphically in two different ways. Two charts are attached. Chart 1, titled, Qualified POC filings, 1994-1997, shows monthly claim filings excluding void, deactivated and disqualified claims. Chart 2, which is a more accurate depiction of Trust-wide workload, encompasses all claims filed with the Trust, is titled, Total POC Filings, 1994-1997includes all claims received and processed by the Trust. A review of either of these charts shows how similar this year’s claim filings are to filings in 1994.
During the second quarter of 1997, the Alternative Dispute Resolution (“ADR”) claims ending in the Legal Department queue continued to grow. As of the end of the quarter, 86 ADR position papers were in process and two claims were pending decisions by arbitrators. The Trust has employed on a temporary basis two contract attorneys to assist in the ADR program.
The General Counsel’s Office during the second quarter, in conjunction with other departments, prepared documentation and a letter which resulted in the disqualification of approximately 27,000 unsettled claims which had been filed by the Maritime Asbestosis Legal Clinic (“MALC”) on the grounds, that, among other things, the documentation that had been submitted in support of the MALC claims was inadequate and that the claims lack both credibility and reliability. Thereafter, MALC filed two similar complaints against the Trust and the Trustees on behalf of present and future MALC claimants. The General Counsel’s Office has been preparing answers to these complaints.
Codefendant contribution claims, a plan for processing these claims particularly when they are filed by multiple codefendants, and the preparation of contribution claim releases and other contribution claim legal documents continue to occupy substantial time.
The Trust maintains a document depository in Denver, Colorado, consisting of approximately 40,000 boxes and several thousand rolls of microfilm, which contain asbestos-related records of the Johns-Manville Corporation. A full-time paralegal is employed at the depository. During the second quarter, substantial time was devoted to legal issues concerning the operations of the depository, requests by non-Trust officials to examine documents, claims of privilege associated with these requests, and the future of the depository.
During the first six months of 1997, the total return on the Trust’s investments was 8.4%, primarily driven by a very robust equity market and the strong returns from the Trust’s large investment in the common stock of the Johns Manville Corporation (JM). Due to the continuing strong performance of the JM and the equity markets as a whole, and despite the payment of over $80 million in claims in the last six months, net claimants’ equity increased $56 million and was about $2.5 billion as of June 30, 1997. Approximately 59% of the Trust’s total investments are in the common stock of JM with another 6% of the investments in other diversified equities, bringing the total investment in equities to 65%, above the Trust’s long-term target of 60% in equities, but below the Trust’s long-term policy ceiling of 70%. Due to the payment of the large special dividend to JM shareholders out of the proceeds of the JM’s sale of Riverwood, the Trust’s holdings of JM common stock as a percentage of total assets hit a historic low of nearly 50% in the second quarter of 1997. The Trustees, their investment advisor and the Trust’s investment staff are continuing to actively monitor and assess the future prospects of the Trust’s investment in JM. In pursuit of the goal of better matching assets to estimated liabilities, the Trust is continuing to restructure the fixed income sector of the portfolio, including adopting new investment mandates and guidelines.