Highlights of the 4th Quarter 1998 Filing
CONTENTS:
FINANCIAL SUMMARY
OPERATIONS ISSUES
1998 Overview
Settlement Activity
Individual Evaluation Process
New Claim Filings
LEGAL ISSUES
ASSET MANAGEMENT
Total Trust expenses for the year ended December 31, 1998 were $12.3 million compared to $10.5 million for the year ended December 31, 1997. The increase was principally due to the Trust’s efforts to obtain contribution and other payments from cigarette manufacturers for tobacco/asbestos-induced injuries. Other expenses for the year ended December 31, 1998 approximated 1997 expenses for the same period.
Net Claimants’ Equity increased for the year ended December 1998 by almost $800 million principally due to a significant increase in the market value of the Johns Manville Corporation (“JM”) common stock during 1998. In addition, the Trust realized a $46.8 million gain on the sale of 3.6 million shares of JM common stock back to JM in April 1998. Other significant additions to Net Claimants’ Equity were almost $60 million in non-JM investment income, almost $39 million on unrealized gains on non-JM securities and JM dividends of $25 million. Deductions to Net Claimants’ Equity during 1998 included claim payments of approximately $108 million and an increase in outstanding offers of almost $16 million. During 1998, the Trust paid over 25,000 claims for approximately $108 million, exclusive of co-defendant and distributor claims for contribution, compared to the payment of approximately $148 million for 30,000 claims in 1997. Since the implementation of the Trust Distribution Process (“TDP”) in early 1995, the Trust has paid over $842 million in claim payments and settled over 164,000 claims. Since inception, the Trust has paid approximately $2 billion to 193,949 claimants.
As of December 31, 1998, the Trust had approximately $1,020 million in cash equivalents and investments, exclusive of the Trust’s investment in JM securities (valued at $2,080 million as of December 31, 1998), and $3,047 million in Net Claimants’ Equity.
The Trust has now completed its fourth full year of operation under the new Trust Distribution Process (“TDP”) 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 1994, the Trust had received over 248,000 Proof of Claim forms, and had a backlog of over 211,000 unsettled claims. This backlog of claims which built up during the five years of class action litigation which ultimately led to the approval of the TDP, included claims filed in 1988, resulting in a seven-year wait for those claims to be eligible for settlement.
During the following four years, almost 148,000 new claims have been received, for a current total claims filed of 396,000. During the same period, the Trust has settled over 164,000 claims, about 27,000 claims have expired after their offers lapsed, and over 30,000 claims have been disqualified or voided.(1) Therefore, by the end of 1998, the Trust had approximately 134,000 unsettled claims. Meanwhile, the waiting period from date of filing to the date the claim becomes eligible for payment has been reduced from seven years to approximately 14 months, and before the end of 1999 (barring any unforseen surges in new filing rates) that waiting period should be reduced to six months or less. The backlog of claims waiting long periods to receive an offer having been effectively eliminated, the Trust’s greatest concern going forward is to ensure the appropriate, fair and timely payment of bona fide claims.
(1)Includes Maritime Asbestosis Legal Clinic claims which are currently the subject of litigation discussed in the Legal Issues section below.
As was discussed in the last letter to the Courts, the Trust’s policy revising its medical audit program to eliminate certain disease categories from the need for regular random audit, and to require x-rays on all claims alleging interstitial fibrosis, is the subject of litigation. In August of 1998, approximately 53,000 claimants were again notified of the Trust’s requirement for review of an x-ray prior to an offer being made, with a six-month deadline set for a response to that notice. For over two-thirds of those claimants, the original request for an x-ray had been outstanding for more than a year.
In order to enhance understanding of the new program, and to directly communicate with firms filing substantial numbers of claims, senior Trust staff began a series of law firm visits during the Fourth Quarter. Individual firm statistics, and claim status results were discussed, and an opportunity was provided to air any issues that might assist the Trust staff in resolving that firm’s claims. Those visits have continued in 1999 and, upon resolution of the litigation discussed in Legal Issues below, will be repeated as necessary to enhance communication with Trust constituencies.
During the Fourth Quarter, a substantial increase in the submission of x-rays was seen, with 2,200 x-rays received in October, 2,350 received in November and 3,000 x-rays arriving in December. That increasing trend line has continued and even accellerated during the first six weeks of 1999.
Settlement rates in 1998 averaged over 2,100 claims per month, and through the end of the year, over 25,000 claims have been paid a total of approximately $108 million, excluding contribution and indemnity claims. The near elimination of the backlog of claims received but not yet eligible for payment, has resulted in an unsettled claimant population of approximately 131,000 claims consisting generally of: a) approximately 70,000 relatively recently-filed claims (between 50-60% of which will then require an x-ray to complete the offer cycle); b) approximately 50,000 older claims that have never fully complied with Trust requirements for an offer; or c) approximately 11,000 claims awaiting individual evaluation, arbitration or resolution of an outstanding issue that has been identified as an obstacle to resolution.
In 1998, 1,548 claims were resolved through the Individual Evaluation (“IE”) process. Of the 1,548 resolved, 120 were a result of new information supplied and the claim qualifying for a higher matrix offer. Another 205 claims were reissued the previous matrix offer as counsel decided to forego their IE election after discussion with negotiators regarding the merits of those claims. There were 286 accepted offers and 364 final offers issued for a total of 650 offers. An additional 573 claims which were initially unable to be placed in any of the TDP disease categories were also denied after individual evaluation. At year-end, there were 3,260 pending requests for IE. Of those, 408 were assigned to negotiators. The volume of requests for individual evaluation has declined over time. The Trust received an average 79 requests per month in 1998 compared to 120 per month in 1997 and 145 per month in 1996. Since the implementation of the Individual Evaluation program in March of 1996, a total of 3,264 claims have been resolved through Individual Evaluation.
During 1998 approximately 30,000 new claims were filed with the Trust. This represented a 22% increase in volume over 1997. Together, 44 firms represented about 90% of the year’s new claim submissions. Of these 44 firms, eleven filed over 500 in 1998, and seven filed over 1,000. Approximately 6,000 new claims were filed during the Fourth Quarter of 1998, bringing the total claims received to date by the Trust to about 396,000. Two charts are attached. Chart 1, Total POC Filings, 1996-1998, compares monthly claim filing volumes in 1998 against the two previous years. Chart 2, Quarterly POC Filings, compares quarterly claim filing volumes for 1998 against the years 1994 through 1997.
At year end, approximately 27,000 claims of the above total received were in inactive status due to expiration of the Trust’s offers. Some 81% of these expired offers were denials. In addition, during 1998, over 2,300 claims were reactivated.
During the Fourth Quarter, the number of claims in the Trust’s Alternative Dispute Resolution (“ADR”) program continued to increase. As of December 31, 1998, the Trust had 297 pending ADR claims (there were 156 as of December 31, 1997). However, 237 of these claims were awaiting claimants’ position papers to be submitted to arbitrators and 20 additional claims were awaiting claimants’ rebuttal statements to be submitted to arbitrators. The Trust continues to employ three temporary contract attorneys to assist with the ADR caseload.
Under the supervision of the court-appointed Special Master, Edwin J. Wesely, representatives of the Trust and the Maritime Asbestosis Legal Clinic (“MALC”) met to attempt to resolve the litigation between the Trust and MALC. As of the end of the year, it appeared that a settlement of this litigation would be achieved before the end of the First Quarter of 1999.
Working with outside counsel, the Trust General Counsel’s Office during the Fourth Quarter assisted in the preparation and filing of answers and counterclaims in response to eight lawsuits and two interventions filed against the Trustees, the Trust, and in some cases, Trust employees, by a number of parties, challenging the Trust’s medical audit program and procedures. Six law suits filed by individual plaintiffs, all of whom are putative Trust beneficiaries, allege that the medical audit policy violates the Trust Distribution Process and the Trustees’ fiduciary obligations to Trust beneficiaries. Although some of the individual plaintiffs allege that their claims have been rejected or downgraded as a result of medical audit, others merely allege that they are Trust beneficiaries subject to medical audit. A lawsuit filed by Owens-Illinois, a codefendant, alleges that the Trust’s x-ray review policy should be extended to additional disease categories and that the Trust’s medical audit procedures are not rigorous enough. The Selected Counsel for the Beneficiaries (“SCB”) has intervened, takes issue with the Trust’s medical audit procedures, and further alleges that the Trustees violated the TDP and the Governance Rights Agreement (“GRA”) by not seeking the concurrence of the SCB prior to implementing the medical audit procedures. Another law suit, filed by the Legal Representative, agrees with the Trust that medical audit is necessary and alleges that the medical audit procedures implemented by the Trustees are within the Trust’s authority and are reasonable and consistent with the relevant Trust documents. The Legal Representative does not allege that the Trustees violated the TDP or the GRA by not seeking his concurrence prior to implementing the medical audit procedures.
The Trustees have counterclaimed for a decision that the Trust’s medical audit procedures are a proper and necessary exercise of the Trustees’ fiduciary obligations to bona fide claimants and fully consistent with the requirements of the TDP, Trust Agreement, Claims Resolution Procedures, and GRA.
All of these cases have been consolidated and are assigned to Magistrate Judge John L. Caden. A discovery schedule has been agreed to by the parties.
Discovery in the litigation filed by the Trust against seven tobacco manufacturers, pursuant to orders issued by Magistrate Judge Steven M. Gold, continued during the Fourth Quarter. Trust legal staff has assisted outside counsel in examining Trust documents, JM documents, and other discovery.
During the Fourth Quarter, based on the advice of outside counsel, the Trustees established a Virginia corporation, the Claims Resolution Management Corporation (“CRMC”), and, the General Counsel’s Office prepared and filed documents to accomplish such incorporation and prepared other documents and agreements pursuant to which the Trust contracted with the CRMC to provide all of the claims resolution and other services formerly performed by the Trust staff in Virginia. The CRMC is wholly-owned by the Trust. All of the former Trust officers and employees are now officers and employees of the CRMC. Three Manville Trustees comprise the majority of the Board of Directors of the CRMC. The Trustees then undertook the relocation of the Trust’s New York office, which is being completed during the first quarter of 1999.
During 1998 the total assets of the Trust increased by approximately $800 million to $3.1 billion, principally due to the market appreciation in the Trust’s JM common stock. During 1998, the price of JM stock rose from $10.06 per share to $16.44 per share. During this period, the total annual return (realized and unrealized) on the JM stock was over 65% versus about –4% in 1997. By way of comparison, the Trust’s primary diversified US equity portfolio had a total annual return of about 24% in 1998 versus approximately 27% in the Trust’s diversified foreign equity portfolio over the same time period. As of December 31, 1998, JM equity securities comprised 66% of Trust assets, and equity securities as a whole were 73% of total assets. The total annual return on the Trust’s entire portfolio of investments in 1998 was 42%.
Other than JM securities, the Trust’s investments at year-end were slightly in excess of $1 billion, over $800 million of which was invested in fixed income securities and the balance in diversified equity securities. Cash inflows from all sources (dividends, interest, realized net capital gains and the sale of 3.6 million shares of JM stock reported in our prior letter) was approximately $128 million, or nearly equal to the total cash outflow of $132 million for the payment of claims and Trust expenses.
On January 25, 1999, the Company and the Trust jointly announced that they will undertake a review of strategic alternatives available to maximize JM’s shareholder value. Such alternatives include the possible sale or merger of the Company. (See attached press release and Wall Street Journal article.)
No decision has been made to enter into any transaction or as to what form any such transaction might take. JM has retained J.P. Morgan & Co. Incorporated as its financial advisor in this connection and the Manville Trust is being advised by Goldman, Sachs & Co.
While the Trust’s cash and investment position remains strong, the Trustees believe it is in the interest of the Trust to continue to consider investment alternatives in line with their long-term intention to further diversify the Trust estate. Once the review process is completed, we will report further on our efforts.
To obtain a complete copy of the quarterly filing, please contact Manville Trust in care of: inquiry@claimsres.com.