Highlights of the 2nd Quarter 1998 Filing
Total Trust expenses for the three months ended June 30, 1998 were $3.0 million, compared to $2.4 million for the same period in 1997. Year to date Trust expenses for 1998 are $5.6 million compared to $5.0 million for the first half of 1997. The increase in each period is principally due to the Trust’s efforts to obtain contribution and other payments from cigarette manufacturers. Other expenses for general administrative expenses and fixed asset acquisitions were lower than the first half of 1997.
During the Second Quarter of 1998, Net Claimants’ Equity increased by approximately $307 million, principally due the increase in value of the Johns Manville (“JM”) common stock. Since the beginning of the year, the increase in Net Claimants’ Equity due to an increase in the value of the Trust’s JM stock was approximately $635 million. For the Second Quarter 1998, non-JM investment income of almost $15 million, unrealized gains on non-JM securities of $4 million, reduction in outstanding claim offers of $10 million and a JM dividend of $5 million increased Net Claimants’ Equity by an additional $34 million. Reductions of Net Claimants’ Equity during the quarter were due to the settlement and payment of $31 million of claims and $3.0 million in total Trust expenses. During the quarter the Trust settled and paid 6,584 claims for $30.8 million compared to 5,985 claims for $28.7 million for the same time period in 1997. Since the implementation of the Trust Distribution Process (“TDP”) in early 1995, the Trust has paid over $750 million in claim payments (representing a liquidated value of $7.8 billion) and settled almost 154,000 claims.
Attached is Exhibit I which reports the Trust’s Claim Payments, Operating Expenses and the ratio of expenses to payments during three different periods of Trust operations. The period 1988 through 1990 is reported as the “Pre-TDP” period during which the Trust evaluated claims and paid them at 100% of their liquidated value. The Trust incurred almost $60 million in litigation defense costs during this period as the Trust was impleaded into tens of thousands of asbestos personal injury lawsuits. The next period, 1991 through 1994, is labeled the “Class Action” period when the Trust was limited to settling Exigent Health and Hardship claims. Most of the claim payments made during that period pertained to Pre-TDP settlements which were paid at a discounted amount, generally 70% to 80% of their liquidated value. The final period is labeled “TDP” and covers 1995 through June, 1998. During this period, the Trust settled claims under the provisions of the TDP and generally paid claims at 10% of liquidated value.
During these three time periods, Trust operating expenses were greatly influenced by the claim resolution procedures and restrictions applicable at the time. During the Pre-TDP period, operating expenses were 17% of claim payments while the Trust was paying 100% of liquidated value and incurring significant legal defense costs. During the Class Action period, operating expenses were 12% of claim payments, but the Trust was constrained in the number of claims it was allowed to settle pending negotiation of the TDP. During the TDP period, operating expenses have averaged 4.0% of claim payments or approximately 0.4% of the claims’ liquidated values when compared to prior time periods. This dramatic reduction is attributable to several factors, including claim resolution efficiencies as part of the TDP and the fact that many of the claims settled under the TDP were processed and evaluated during the Class Action time period, so to that extent, the cost of such processing and evaluation was incurred in the prior period. As the Trust undertakes to resolve the more difficult claims which have rejected previous matrix offers, operating expenses as a percentage of claim payments may rise. In addition, this analysis assumes that all efforts result in claim settlements, when in fact, significant resources are expended in identifying claims that do not meet the minimum standards of the TDP and on offers that are never accepted or rejected.
During the Second Quarter of 1998, the Trust settled a total of 6,584 claims. Offers on the next group of 10,000 claims (FIFO numbers 296,001 through 306,000) were delayed slightly pending a final decision on a new policy regarding changes in the medical audit program. Before the end of August, all claims through FIFO number 306,000 will be eligible for offers.
It is important to note that the Trust is through the seven-year injunction-induced backlog of claims which existed at the implementation of the TDP three years ago. During the interim, in addition to the over 200,000 unsettled claims held at the beginning of that period, the Trust has received over 130,000 additional claims. A total of over 260,000 claims have become eligible for offers under the TDP, 154,000 of which have been settled. Approximately 8,000 additional claimants have outstanding offers (with another 5,000 offers having expired due to non-response), and an additional 15,000 claims have responses to offers “in process”. Claims which are eligible for payment but which have not provided sufficient information to be valued (Category Zero claims), represent still an additional 35,000 claims. The majority of those claims have expired and been deactivated due to non-response. Finally, there are over 43,000 claims eligible for payment, but for which the Trust believes it is prudent and necessary to review the claimant’s X-ray prior to making an offer. Many of those requests for additional information have been outstanding for more than two years.
This data indicates that the Trust has, over the past three years, generally settled most of the claims which could easily and efficiently be provided a matrix-based offer. The remaining eligible-but-unsettled claims can generally be characterized as being more problematic and, therefore, less efficient to settle, frequently requiring a greater level of scrutiny and effort, as described below.
As reported last quarter, the Trust has reviewed the results, policies and procedures of the Medical Audit Program which has been in operation since 1995, just after the implementation of the TDP. Examination of the results of that program reveals a troubling trend following the announcement of the criteria used to determine a claim’s category under the TDP. First, there has been a decline in the quality of the medical evidence provided in support of claims, as reflected in a steady reduction in the pass rate in medical audit for asbestosis claims. There has also been an increasing trend toward the use of a relatively small number of physicians. We note that, for the 10,000 claims which became eligible for payment in the First Quarter of 1998, fewer than a dozen physicians provided diagnoses on 85% of the claims. In addition, claimants are providing much less information and evidence regarding the claimant’s exposure to asbestos in claims filed since the implementation of the TDP. Specifically, the medical audit program results show the following:
- Medical evidence of asbestos-related malignancies (TDP Categories IV, V, VI and VII) have been confirmed to be generally reliable.
- Medical evidence of bilateral pleural disease (TDP Category I) has been confirmed to be generally reliable.
- Medical evidence of bilateral interstitial fibrosis (TDP Categories II and III) has proven to be generally unreliable, and is confirmed by independent B-readers only approximately half the time.
These findings mirror the overall filing rates of claims. The filing rates for both malignancies and pleural claims have been generally consistent with the predictions of the statistical experts who have examined this issue at length and over many years. Filing rates for interstitial fibrosis claims, however, have significantly exceeded those predictions.
Therefore, in an effort to ensure that the claims are appropriately valued, but mindful of the Trust’s duty to do so efficiently and effectively, the present medical audit program is being revised to reflect what we have learned.
The Trustees and Trust senior staff have met several times during the past year, and the last quarter with the Selected Council for the Beneficiaries, the Representative for Future Claimants and the Special Advisor to the Trust to discuss this important issue.
We believe a clarified and simplified policy will provide faster, more economical processing, as well as significantly decrease the time between receipt of a new claim and it’s eligibility to receive an offer. Security and tracking of X-rays is very important to the Trust and we will work with firms to assure them that any X-rays required under the new policy will be handled in a minimum amount of time, and that if their X-rays are needed for other litigation, they can be retrieved and returned quickly. Final announcement of these changes is intended to be made shortly.
As of the end of the Second Quarter, the Trust had requested, but not received, medical audit responses on approximately 43,000 claims held by law firms whose medical audit response or pass rates were less than required. These claims are eligible to receive offers but for that requirement. Many of those requests have been outstanding for more than two years, with only 13 law firms holding 70% of those claims. For those claims, and any others for which medical audit information is requested, firms will be given a six-month deadline to provide X-rays. If a response is not received by that time, the claim will be deactivated. An additional 6,700 claims which could not be categorized and which received deficiency notices will be placed on a similar notice that they must correct the deficiency and provide an X-ray within the next six months in order to avoid deactivation.
As has been done since the full implementation of the Medical Audit Program in late 1994, prior to making new offers, the Trust audits a 5% random selection of claims in the next eligible FIFO range. The results of the audit are used to determine which claims require submission of additional medical documentation prior to making an offer and which claims can be immediately released for payment.
In Second Quarter 1998, claims in the FIFO range 296,001 through 306,000 completed the random medical audit evaluation. Generally, these claims were filed with the Trust from June 1996 through February 1997. The audit results discussed below apply only to this specific FIFO range. Of these 10,000 claims, 6,566 claimants represented by 31 law firms were subject to random audit. Currently, eight firms representing 1,270 claimants in the FIFO range audited have adequate response and pass rates for their claims to be released for immediate payment without further review. These eight law firms achieved an average pass rate of 93% for this population.
Twenty-three firms of the audited group have inadequate response and/or pass rates and, therefore, for all these claims, the firms must send either an X-ray, corroborating medical reports or evidence of sufficient codefendant settlements prior to the Trust sending an offer. These firms represent approximately 53% of the claimants in the eligible FIFO range. Currently, the average response rate for these firms is 75% and the average pass rate is 42%.
At the end of Second Quarter 1998, there were 3,374 pending requests for Individual Evaluation (“IE”). Of those, 313 were in negotiation. The remainder are in the queue awaiting assignment to one of the five staff negotiators. The Trust has been steadily working through the IE queue and the number of pending requests has decreased each month since the end of 1997. The number of new requests for IE received in 1998 is significantly lower than in prior years. In 1998 the Trust is averaging 55 requests per month as compared to 1997 which averaged 121 per month and 1996 which averaged 145.
While the original designers of the TDP contemplated that only high value cases would choose individual evaluation, the Individual Evaluation Queue is dominated by claims which were either denied or placed in Category I. Denied claims (Category 0) represent 52% of the queue and pleural (Category I) claims are 14%. While some of the claims which did not fit into a matrix category will have some value after individual evaluation, the majority of them will not be assigned a value because of the failure of the claimant’s counsel to establish the presence of an asbestos-related disease. In Second Quarter 1998, 381 claims were resolved through the Individual Evaluation (“IE”) process.
During the Second Quarter of 1998 the Trust received approximately 8,600 new claim filings, bringing the six-month total to 17,700 new claim filings. Five law firms represent nearly 10,000 of the claims filed during 1998. This volume of claims (which equates to annual filing volume of 35,000 new claims) was significantly greater than the same six-month period last year when the Trust received 11,300 new claims. Six-month filing volumes in 1998 look similar to filing rates in 1995 (at 24,500). As of June 30th, the total number of claims received by the Trust was approximately 381,000 (not including 2,900 in the backlog of unprocessed claims). Total claim filings are depicted graphically on two attached charts. Chart 1, titled Total POC Filings, 1996-1998, compares monthly claim filing volumes in 1998 against those of the two most recent years. These monthly numbers include all claims received and processed by the Trust regardless of their current status (e.g. disqualified, settled, deactivated, etc.). Chart 2, titled Quarterly POC Filings, 1994-1998 compares quarterly claim filings for the most recent five years.
As of June 30th, there were 41,300 void or disqualified claims, including the 25,600 MALC claims discussed in the Trust’s 1997 year-end report to the Courts. In addition, there were approximately 24,900 claims in expired status. This reflects a very small increase in number since the end of 1997. Some eighty percent of these expired claims received Category 0 offers, meaning that the offer was actually a deficiency letter. Ten law firms represent 40% of all expired offers. We expect that some percentage of outstanding expired offers will eventually be reactivated and recategorized with better medical information. Over 11,250 claims have been reactivated to-date.
At the end of the Second Quarter, a total of 235 claims were in active stages of alternative dispute resolution (“ADR), as compared to 185 claims in the ADR process reported at the end of the First Quarter. During the Second Quarter, 53 ADR cases were resolved, with 20 decisions returned by arbitrators (13 in favor of the Trust, 7 in favor of the claimant), and 33 claimants withdrew their claims from ADR. Since the inception of the ADR program, the Trust has prevailed in slightly over 80% of all ADR claims submitted to arbitrators.
The litigation between the Maritime Asbestosis Legal Clinic (“MALC”), a division of the Jaques Admiralty Law Firm, and the Trust and the Trustees was referred in April to Special Master Edwin J. Wesely. Under the Special Master’s supervision, the parties are now engaged in an experimental filing and processing of a small number of claims. The principal of the Jaques firm, Leonard C. Jaques, died on June 10, 1998.
The Trust’s lawsuit against the tobacco industry continues. In an order dated July 2, 1998, Judge Weinstein denied the tobacco defendants’ motion to dismiss, with leave to renew in the form of a motion for summary judgment, and permitted the parties to perform discovery regarding the defendants’ alleged fraud and the effect earlier knowledge of it would have had on the Trust.
With respect to tobacco legislation, although a major tobacco bill failed to receive Senate approval during the Second Quarter, the Trust’s legislative efforts directed at receiving funds from Congressional legislation continues.
On June 18, 1998, the Trustees filed with the United States Bankruptcy Court for the Southern District of New York the Account of The Trustees For The Period January 1, 1997 through December 31, 1997, the twelfth such accounting of the Trustees.
During the Second Quarter of 1998, the Trust sold 3.6 million shares of common stock to the Johns Manville Corporation’s (JM) for $46.8 million. Since the beginning of the year, these shares increased in value almost $3 per share or almost $10.6 million. After the sale of these shares, the Trust continues to own approximately 125 million shares of JM common stock or roughly 79% of the outstanding shares with a market value of about $1.9 billion as of June 30, 1998. The proceeds of the above sale were re-invested in a mix of fixed income investments. As of June 30, 1998, the Trust’s holding of JM stock, which has appreciated by approximately 50% in market value during the first half of this year, comprised 64% of the Trust estate. Other diversified holdings of equities comprise another 6%, and equities as a whole are 70% of total investments of $2.9 billion. Almost all the remaining 30% of the portfolio was invested in investment quality fixed income securities. The Trust continues to restructure its portfolio of investments to achieve greater diversification.
With the payment of the JM regular quarterly dividend in April of 1998, the Trust has now received over $1 billion in dividends from JM since 1992. After a ten-year hiatus, payment of regular quarterly dividends were resumed in the third quarter of 1996 and were increased by one-third in the third quarter of 1997. During the same period, the market value of the Trust’s remaining equity interests (including converted profit sharing rights) in JM has increased by approximately $870 million. From inception through June 30, 1998, the Trust has generated over $2.1 billion in cash from its various investments in JM and paid out over $1.9 billion to its beneficiaries.
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