Highlights of the 4th Quarter 1997 Filing
CONTENTS:
FINANCIAL SUMMARY
OPERATIONS ISSUES
1997 Overview
Settlement Activity
Medical Audit Program
Individual Evaluation Process
New Claim Filings
LEGAL ISSUES
ASSET MANAGEMENT ISSUES
Total Trust expenses for the year ended December 31, 1997 were $10.5 million compared to $11.0 million for the year ended December 31, 1996. The decrease in total Trust expenses is principally due to the elimination of $1 million of Class Action costs in 1997 and the $500,000 reduction in Johns Manville Corporation (JM) Asset Management costs. Class Action costs for 1996 principally represent the payment to one subclass counsel for services provided in prior years during the prolonged class action litigation. The decrease in JM Asset Management Costs in 1997 is attributed to the Trust completion in 1996 of the conversion of the Profit Sharing Exchange Agreement into JM common stock and sale of Riverwood International Corporation resulting in the Trust’s receipt of a $771 million special dividend. Since implementation of the final Trust Distribution Process in January 1995, total Trust Operating Costs, including JM Asset Management and Class Action costs, have represented approximately 4.8% of total claim payments compared to 11.8% since the inception of the Trust.
Total Trust Operating and Dispute Resolution expenses for the year ended December 31, 1997 were $9.9 million, compared to $8.4 million for the year ended December 31, 1996. The net increase of Trust Operating expenses over 1996 is attributable to an increase in staffing, principally filling vacant senior positions (Chief Claims Officer, Treasurer and Managing Attorney), and an increase in general legal fees. General legal fees were higher in 1997 due, in part, to new litigation associated with the Trust’s efforts to recover amounts from tobacco companies and for defense of the Trust’s action which disqualified approximately 27,000 claims filed by the Maritime Asbestosis Legal Clinic (see Legal Issues). In addition, Operating expenses in 1996 were reduced by approximately $300,000 due to the one-time collection of a contempt of court proceeding brought in 1991 against an attorney.
Net Claimants’ Equity decreased for the year ended December 1997 by approximately $82 million due to the settlement and payment of almost $150 million in claims and the transitory dip in the market price of JM common stock at the end of 1996 of approximately $72 million, from which it has now more than recovered. These reductions in Net Claimants’ Equity were partially offset by $70 million in investment income and JM dividends, almost $23 million on unrealized gains on non-JM securities and the reduction of outstanding offers by $57 million. In the three years since the inception of the TDP, the Trust has paid over $720 million in claims. Since Consummation in late 1988, the Trust has paid over $1.83 billion in claims. Of the over 366,000 claims the Trust has received, approximately 135,000 remain currently eligible for settlement.
As of December 31, 1997, the Trust had approximately $985 million in cash equivalents and investments, exclusive of the Trust’s investment in JM securities (valued at $1,317 million as of December 31, 1997), and $2,251 million in Net Claimants’ Equity.
The Trust is has now completed its third full year of operation under the new Trust Distribution Process and it is useful to look back over that period to see what has been achieved, and what issues have arisen that will impact the Trust’s future operations. By the end of 1993, the Trust had received over 222,000 claims. Of those filed claims, approximately 8,500 had been voided, disqualified or deactivated, almost 30,000 had been settled, and the Trust faced a then-current balance of over 184,000 unsettled claims. A claim filed in 1988 faced a seven-year wait to settlement.
During the intervening four years, over 143,000 new claims have been added to the 184,000 unsettled claim population, but during the same period, the Trust has settled almost 140,000 claims, over 10,000 claims have expired after their offers lapsed, and over 32,000 claims have been disqualified or voided. Therefore, by the end of 1997, the Trust had approximately 135,000 unsettled claims. Even more significant, the wait period from date of filing to the date the claim became eligible for payment had been reduced from seven years to approximately 18 months, and the Trust continues to reduce that period. The Trust has issued over 162,000 payment offers, and 53,300 deficiency notices under the TDP.
We anticipate that approximately 50,000 claims will become eligible for payment during 1998, and that by the end of 1999, a perfected claim will receive an offer from the Trust within less than six months of filing.
There are, however, some troubling trends the Trust has seen in claims filed during the ten years of Trust operations. As you are aware, the Trust began medically auditing its claims with the implementation of the TDP. When a law firm has either failed to respond adequately to the 5% random medical audit for a specified FIFO range, or has not achieved a sufficient pass rate for those claims, that firm is required to provide additional information (such as an x-ray, additional corroborating medical reports, or a sufficient number of co-defendant settlements to indicate that the diagnosis is credible) for all of that firm’s claims in the audited FIFO range. (Specific results for the Fourth Quarter of 1997 are discussed below under Medical Audit Program.) The number of claims affected by that policy has risen dramatically over the past two years, until there are now approximately 59,000 claims awaiting submission of additional information before an offer can be made. Seventy-seven percent of those claimants are represented by only 20 law firms.
Perhaps even more troubling than the sheer number of claims affected is the lack of response to the requirement to provide that additional information. All of these claims will promptly receive an offer upon submission of an x-ray, and yet very few x-rays have been provided, despite our efforts to encourage firms to supply them. It is unknown whether this lack of response indicates that the firms do not have the x-rays, or whether they are unwilling to provide them for other reasons.
The phenomenon of lack of response by law firms is echoed in the firms’ non-response to offers in Individual Evaluation (see Individual Evaluation Process) and their non-response to the Trust’s position papers prepared for arbitration of a claim (see Legal Issues).
These issues will have an impact on Trust operations going forward, as the issue of an efficient, effective mechanism for determining the validity of a claim is explored and the claims process is redesigned to address these problems. The backlog of claims waiting long periods to receive an offer has been effectively eliminated, and the greatest concern at this point should be to ensure the appropriate, fair and efficient payment of bona fide claimants.
Throughout 1997, settlement rates have averaged over 2,500 claims per month, and through the end of the year, over 30,000 claims have been paid a total of approximately $148 million, excluding contribution and indemnity claims. When compared to the very high settlement rates in 1995 and 1996 (4,500 settlements per month over the two year period), settlement rates have decreased due to the large percentage of claims that now require the submission of an x-ray prior to an offer being made as a result of the Trust’s medical audit program (see Medical Audit Program), and the substantial lack of response to those requirements.
Since the full implementation of the Medical Audit Program in late 1994, prior to making new payment offers, the Trust audited a 5% random selection of claims within the FIFO range 271,001 through 286,000 (generally, these 15,000 claims were filed from April 1996 through December 1996). The results of that audit were then used to determine which claims would require submission of additional documentation prior to making an offer, and which claims would be immediately released for payment. The audit results discussed below apply only to this limited FIFO range, which became eligible for payment in the Fourth Quarter of 1997.
- Of those 15,000 claims, 9,039 claimants represented by 36 firms were subject to random audit. (An additional 3,800 claims are represented by firms with populations considered too small for a comprehensive audit, or were claims already in medical audit for reasons other than the random sample process. If the firm had already established a medical audit record in previous quarters, their claims are paid based on the firm’s prior period medical audit status.) Approximately 2,100 claims within the relevant FIFO range were either already settled or had been deactivated.
- Currently, 9 firms representing 3,219 claimants in the FIFO range subject to random audit have adequate response and pass rates1 for their claims to be released for immediate payment without further review. These 9 law firms achieved an average pass rate of 88% for this population.
- Currently, the medical audit status is still pending for 6 firms which represent a total of 1,463 claimants in the eligible FIFO range. These firms submitted their responses after the deadline and are still in the review process.
- Twenty-one firms of the audited group have inadequate response and/or pass rates and, therefore, all the claims represented by those firms must send either an x-ray, corroborating medical reports or evidence of sufficient co-defendant settlements prior to the Trust sending an offer. These firms represent 4,357 claimants, or approximately 30% of the claimants in the eligible FIFO range. Certain malignancy claims (Category 5 and Category 7) will be released without further audit. Currently, the average response rate for these firms is 75% and the average pass rate is 57%.
Through the end of the Fourth Quarter of 1997, the Trust is holding approximately 59,000 claims or over 20% out of the FIFO range from 1 to 286,000 pending a medical audit response from law firms placed on 100% medical audit. Despite this large number of claims currently eligible for offers, very few firms have submitted the additional material needed for their claims to be released for payment. The Trust is in active conversations with representatives of the firms representing these claimants to encourage them to submit the required documentation. As previously noted, 20 law firms represent 77% of those 59,000 claims.
In 1997, approximately 1,200 claims were resolved through the Individual Evaluation (“IE”) process. Of the 1,200 resolved, 88 were a result of new information supplied and the claim qualifying for a higher matrix offer. Another 531 claims were reissued the previous matrix offer as counsel decided to forego their IE election. There were 229 accepted offers and 163 last best offers issued for a total of 392 offers. An additional 185 claims were denied. At year-end, there were 3,864 pending requests for IE. Of those, 400 were assigned to five staff members and one Supervisor. Our largest stumbling block continues to be receiving the time and attention of the attorneys who are not prepared to negotiate, and who allow significant time to elapse between responses. During the course of the year, we have made several changes to our policies, procedures, and system changes, which will enable us to expedite the settlement of claims in 1998. At the formation of Individual Evaluation, we believed that only those claims of exceptional value would seek individual evaluation. However, of the claims in the IE queue at year-end, 1,851 claims or 54% were denied at matrix. The number of denied claims seeking individual evaluation has increased significantly. At the end of 1996, denied claims represented 42% of the total. We anticipate that an increasing number of claims will be denied at Individual Evaluation as having no value. Since the implementation of the Individual Evaluation program in March of 1996, a total of 1,714 claims have resolved through Individual Evaluation.
During 1997 approximately 24,400 new claims were filed with the Trust. This represented less than half the number received in 1996, the Trust’s highest volume year since start-up. Approximately 7,500 new claims were filed during the Fourth Quarter of 1997, bringing the total number of claims received to date by the Trust to about 366,000. 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, 1994-1997, and includes all claims received and processed by the Trust. A review of either of these charts shows how similar this year’s claim filing patterns are to 1994.
As of December 31, 1997, the Trust has approximately 29,500 currently disqualified claims which represents an increase over 1996 of approximately 28,500. The significant increase is principally due to the Trust disqualifying approximately 27,000 unsettled claims due to inadequate documentation of the claims filed by the Maritime Asbestosis Legal Clinic (see Legal Issues). In addition at year end, approximately 23,300 claims were in inactive status due to expiration of the Trust’s offer. A claim may be reactivated upon written request and is eligible for a new offer at the end of the FIFO queue. During 1997, over 10,000 claims were reactivated.
During the Fourth Quarter, the number of claims requesting Alternative Dispute Resolution (“ADR”) continued to grow. As of December 31, 1997, the Trust had 156 pending ADR claims. However, 112 of these claims were awaiting claimants’ position papers to be submitted to arbitrators and 27 additional claims were awaiting claimants’ rebuttal statements to be submitted to arbitrators. The Trust now employs three temporary lawyers to assist with the increased ADR caseload.
The Trust’s Legal Department remained active during the Fourth Quarter in the Maritime Asbestosis Legal Clinic (“MALC”) civil actions commenced by MALC in the United States District Court for the Eastern District of New York. In addition to preparing for arguments concerning the Trust’s motions to dismiss the pending actions, the Legal Department spent substantial time preparing a Show Cause Order with respect to the conduct of counsel for MALC in filing an action against the Trust’s Executive Director in State Court in Virginia which has now been withdrawn without prejudice by MALC. Following the U.S. District Court’s six-month adjournment of the litigation pending before it, the Legal Department has been active in negotiations between the Trust and MALC.
The Trust filed an Amicus Curiae brief in Porter Hayden, et al. v. Bullinger, et al. in the Court of Appeals in Maryland with respect to whether Maryland Courts have the authority to ignore the orders entered by your Courts concerning calculations of pro rata shares and fully crediting Manville Trust payments to settling defendants in Maryland.
Finally, during the Fourth Quarter the Trust Legal Department prepared and filed a complaint on behalf of the Trustees against seven tobacco manufacturers, parties to the proposed tobacco industry settlement being reviewed by the Congress, pursuant to which the Trust seeks both contribution and indemnification for claims paid and to be paid in which a portion of the claimant’s injury was caused by smoking, which claims could be foreclosed by the proposed settlement. In addition to the pursuit of litigation, the Trust has joined a coalition of victim’s groups, unions and co-defendants to attempt to resolve the issue through legislative means.
As of December 31, 1997, the Trust’s allocation of its investments by sector was as follows:
|
Market Value (Millions) |
L/T TargetAllocations |
||
| Equity in Johns Manville |
$ 1,298 |
56% | |
| Diversified Equities |
$ 155 |
6% | |
| Subtotal – Equities |
$ 1,453 |
62% |
60% |
| Fixed Income Investments |
$ 862 |
38% |
40% |
| Total Investments |
$ 2,493 |
100% |
100% |
The Trust’s long-term target allocation to equity remains at 60% of total investments and the actual allocation to equities of 62% remains below the Trust’s internal investment ceiling of 70%. Since 1991, the Trust has diversified its total investment portfolio by reducing the part represented by JM securities by more than 45% from over 90% of the total portfolio to less than 53%. In order to better match anticipated cash requirements and make the portfolio more efficient, the Trust is continuing to reallocate fixed income investments into different markets and to extend the duration of these investments. This diversification activity is shown in greater detail in Footnote 2(d) to the attached Financial Statements.
The Trustees, and their staff and outside investment advisers, are continuing to monitor the total portfolio and revise the Trust’s investment strategy and tactics in anticipation of and response to changing conditions.
1The Trust requires a 90% response rate and an 80% pass rate to have all claims released for immediate payment.