Highlights of the 4th Quarter 2001 Filing
CONTENTS:
OPERATIONS REVIEW
2001 Overview
Individual Evaluation Process
LEGAL ISSUES
FINANCIAL SUMMARY
ASSET MANAGEMENT
During the seven years following the implementation of the TDP, the Trust has received approximately 330,500 new claims, which brings total claims filed with the Trust as of December 31, 2001 to 578,700. Excluding almost $124 million in co-defendant and JM liquidated claims, the Trust has paid approximately 442,200 claimants a total of over $2.7 billion, of which about 414,600 claims were paid under the TDP. Additionally, over 40,900 claim filings have been disqualified or voided. The majority of these claims are represented by the Maritime Asbestos Legal Clinic (MALC) and as part of a litigation settlement reached with MALC in 1999, we anticipate that most of these claims have been or will be refiled.
At the end of 2001, the Trust had 52,100 active, unsettled claims. This included 27,400 outstanding offers and deficiency notices, 2,600 claims scheduled for offer and 22,100 claims in process. The Trust also had 43,500 inactive, unsettled claims due to lapsed offers and deficiency notices.
During 2001, the Trust experienced the largest increase in claim filings since it received the initial influx of claims that were stayed during the 6-year bankruptcy proceeding of the Johns Manville Corporation (JM). Since 1997, the number of claim filings has been increasing and since 1999 it has been doing so at an alarming rate.
During 2001 approximately 91,000 new claims were filed with the Trust, even though a voluntary moratorium on claims filing existed for six weeks of the year. This represented a 54% increase in volume over the 59,200 claims filed during 2000, and was the greatest volume of claims received in any year since 1989. The number of claims filed in 2000, in turn, was 84% larger than those filed in 1999. Of the total of 259 law firms that filed claims with the Trust during 2001, seven firms accounted for 51% of all claims filed during the year. The top 25 filers, about 10% of all filing firms, filed over 80% of this year’s claims. At the other end of the spectrum, about 44% (113 firms) filed 10 or fewer claims during the year.
Based on filing data and supported by actuarial analysis, the number of mesothelioma claims may have peaked, but non-malignancy claims from principally unimpaired individuals continue to defy projections. While ‘traditional industries’, where asbestos was used in the manufacturing process (such as construction), continue to supply the bulk of the claims, non-traditional industries such as textile manufacturers involving less direct exposure have emerged as significant contributors. With the average year of first exposure to asbestos still in the late 1950’s (and the median early 1960’s), there is a continuing pool of potential non-traditional claims numbering in the tens of millions. The total number of future claims projected by experts for the Trust estimated in mid-2001 numbers between 750,000 and 2.7 million with the mid-range estimate being 1.3 million. Of course, past projections have consistently been too low.
Throughout 2001, the Trust’s operating company, the Claims Resolution Management Corporation (CRMC) was reorganized and streamlined in preparation for the changeover from labor-intensive, paper-based Trust Distribution Process (TDP) to a highly efficient, systems-based approach, utilizing the Internet (e-Claims). Since the inception of the TDP in 1995, the Trust has been manually categorizing claims based on the injury criteria (and Scheduled Values) set forth in the TDP. While this approach was dramatically more efficient than the previously employed approach of manually reviewing each claim based on all the characteristics used to value claims in the tort system, it had its own shortcomings, principally as a result of continuing misunderstanding with regard to the injury criteria. This resulted in claims having to be re-categorized multiple times and enormous volumes of correspondence and documentation being moved about and ultimately stored. In addition to eliminating this paper, the goal of the e-Claims process is to prevent the filing of incomplete and inaccurate claims. This is accomplished by training and certifying the law firms in the use of the e-Claims system and in particular, the computer driven decision tree that places each claim in the appropriate category before it can be filed with the Trust, thereby reducing the cost and shortening the time to resolve the claim.
While the majority of claimants settle their claims by accepting the Scheduled Value Offer, some claimants request Individual Evaluation (“IE”) if the claim does not meet the criteria of any of the seven TDP Scheduled Value categories or if the claimants believe the claim has a value higher than the Scheduled Value. In 2001, the Trust received 630 requests for IE and at year-end, the Trust had 626 outstanding requests for IE which continues to represent only a very small percentage of claims filed.
During 2001, a total of 1,986 claims were resolved through the IE process of which 290 claims were resolved by re-issuing a matrix offer, as a result of new information being supplied by the claimants and the claim qualifying for a higher Scheduled Value. The Trust also issued 1,078 individually evaluated offers – 669 with an agreed upon value and 409 which were issued as a result of impasse. An additional 618 claims, which were initially denied because they did not meet the criteria of any of the seven TDP Scheduled Value categories, were also denied after individual evaluation, either for a lack of adequate medical documentation or for providing no evidence of an asbestos-related disease.
Since the implementation of the IE program in March of 1996, a total of 9,108 claims have been resolved through this process or only 2% of all TDP resolved claims. However most of those claims were resolved for their respective Scheduled Values and only 1% of all TDP settlements were resolved in IE for an individually negotiated value.
On November 7, 2001, the Courts issued an Order requesting “interested parties” to appear on December 13, 2001 “to consider whether the equities involved and changed circumstances warrant or permit modifications of any relevant prior judgments.” Thereafter, on December 13, 2001 the Courts conducted a hearing concerning issues related to payment of Manville Trust claims. The Courts had taken note of the Trust’s prior reports of escalating numbers of claims and its recent reduction of its pro rata payments from 10% to 5% and expressed their concern about the reported flood of new claims, which bring with them the threat of further dilution of Trust payments. They instructed the representatives of the plaintiffs’ bar and the Trust to consider whether they could reach agreement on appropriate payment plan modifications designed to ensure that a greater proportion of Trust funds are directed to those Trust Beneficiaries who have suffered the most grievous injuries and report back to them in 30 days. The plaintiffs’ bar has been negotiating changes among its members in connection with new, pending asbestos bankruptcies and has reported significant progress toward such an agreement and have made interim reports to the Courts on that progress.
During the Fourth Quarter, CRMC completed processing of the first two arbitrations referred to the CRMC by the Eagle-Picher Trust. Those arbitrations were conducted pursuant to an agreement entered last year with the Eagle-Picher Trust, whereby the CRMC handles assignments to members of the arbitration panel assembled and trained by the Manville Trust shortly after implementation of its TDP. The CRMC has had a similar agreement with the UNR Trust since 1995. Like the Manville Trust’s Alternative Dispute Resolution (ADR) program, it is anticipated that most Eagle-Picher Trust arbitrations will be conducted on the basis of written submissions. Those submissions are forwarded through a CRMC ADR administrator to the assigned arbitrator. Members of the CRMC arbitrator panel were nominated, vetted and trained with the assistance of counsel for Manville Trust beneficiaries as well as the Trust’s Special Advisor. Since 1995, these arbitrators have resolved disputes for more than 160 Manville Trust claimants. Their preparation for participating in the Eagle-Picher Trust’s program is being done through highly cost-effective computer-based training. Sharing this experienced panel of arbitrators with other asbestos trusts provides them a significant service while enhancing the CRMC’s own ADR program. The arbitrators will gain a broader base of experience with asbestos claims, and fees from the program will provide income to the CRMC, thus helping defray the cost of the program for Manville Trust beneficiaries.
At the end of the Fourth Quarter, there were 255 pending claims in the Trust’s ADR program, as compared to 283 claims at the end of Fourth Quarter 2000. Some of these claims, however, were awaiting claimants’ position papers to be submitted to arbitrators and additional claims were awaiting claimant’s rebuttal statements to be submitted to arbitrators.
Operating expenses for the year 2001 were $19.2 million compared to almost $25.0 million for the year ended December 31, 2000. Operating expenses, net of tobacco litigation costs for the years ended December 31, 2001 and 2000 were $15.1 million compared to $10.1 million, respectively. The increase in operating costs in 2001 is principally due to e-Claims and reorganization costs associated with reducing the staff by approximately 50%. It is expected that e-Claims development costs will benefit future periods through reduced operating costs, but such costs have nevertheless been expensed as incurred and not capitalized. The system is scheduled for implementation in early 2002.
In February 2001 the Trust sold its JM stock and received over $1.3 billion in cash from the stock proceeds. The Trust also received $90 million from JM in exchange for which the Trust assumed the obligation from JM for paying the Trust’s future income taxes, which payment was recorded as an addition to Net Claimants’ Equity. Net Claimants’ Equity increased as outstanding claim offers decreased almost $34 million from the end of 2000 and the Trust realized almost $63 million in non-JM investment income during the year. Claim payments of over $312 million and net unrealized losses on non-JM available-for-sale securities of almost $73 million were the significant deductions to Net Claimant’s Equity during 2001.
During 2001, the Trust paid over 101,000 claimants approximately $309 million, plus $3.8 million paid for co-defendant and distributor contribution claims. For the years 2001 and 2000, the Trust paid over $564 million to over 165,000 claimants, plus almost $15.0 million paid for co-defendant and distributor contributions claims. Since implementation of the TDP in early 1995, the Trust has paid almost $1.7 billion to TDP claimants and settled almost 415,000 TDP claims. For that period, operating expenses, excluding class action, litigation costs and JM asset management expenses, represent 3.9% of total Trust expenditures. Since inception, the Trust has paid approximately $2.8 billion to claimants and at year-end 2001, had approximately $2.0 billion in assets.
Approximately $986 million (50%) of the Trust’s investments are in diversified equities: $733 million (37%) in fixed income securities and the remaining $254 million (13%) in cash equivalents. In contrast, at the same time last year, the Trust held about $1.3 billion in common stock in the JM that amounted to 59% of the Trust Estate. The net proceeds of the sale of JM generated about $1.4 billion in cash that was used to supplement the Trust’s diversified portfolio of about $900 million. However, claim payments in excess of $300 million discussed above significantly diminished the portfolio in 2001.
Despite the significant negative return of about 11.5% in the overall US equity markets (based on the Russell 3000 Index) in 2001, the total return on the Trust’s portfolio is positive at .1%. Large declines in stock prices in the Trust’s portfolio were offset by capital appreciation and interest income generated by the Trust’s fixed income and money market investments. Diversification, both within asset classes (such as equities) and across the asset allocation (stocks, bonds and cash) have preserved the Trust Estate during two difficult years for equity investors as a whole. While the Trustees continue to maintain a defensive posture, presently significantly under weighting equities relative to our long-term target allocation, we are poised to make selective, incremental investments in equities in the near future.
The changing estimates of the timing and amount of claim payments into the future is the driving force behind the Trust’s long-term asset allocation targets. The current negotiations over the appropriate minimum criteria for various injuries and the relative value of different injuries may materially impact those estimates and change our asset allocation targets or the pace at which we move towards our long-term goals. Market conditions, inflation and expected returns for various asset classes also play a part in the decision, but the principal, and most uncertain, driver is the volatile projection of future claims. As the outlook for TDP amendments becomes clearer, we will adjust our assumptions with regard to the financial performance of the Trust and adjust our investment decisions accordingly.
To obtain a complete copy of the quarterly filing, please submit your request via e-mail to: inquiry@claimsres.com.