June 2016 Resolution Values Dropped 35% While Filings and Indemnity Payments Continued at Historical Levels Snapshot of Recent Trends in Asbestos Litigation: 2016 Update By Mary Elizabeth Stern and Lucy P. Allen1 Each year, we conduct an annual review of asbestos-related liabilities reported in companies’ US Securities and Exchange Commission (SEC) filings. This information can assist companies in benchmarking their own data against trends observed for other defendants, which can help to forecast asbestos-related liabilities. Analyzing the 2015 data, we observed, on average, that dollars per claim fell, as the number of resolutions and dismissal rates increased. Claim filings and indemnity payments continued at historical levels. Specifically, we observed for companies, on average, that: • After almost doubling in 2011, dollars per resolved claim fell substantially in 2015, dropping 35%. • At the same time, both the number of claims resolved and the average dismissal rates increased, while the number of claims pending declined. • Total indemnity payments fell slightly, falling 15%, but remained within the range observed historically. • Filings remained flat at the levels observed since 2007 and have mirrored recent estimates of national mesothelioma incidence, which appear to have plateaued. • Reserves were only slightly below 2014 levels, essentially ending a four-year decline. These trends continue to point to a period of relative stability in the asbestos litigation environment, as filings, total indemnity spending, and reserves remain steady. Yet, there is some uncertainty about future valuations. www.nera.com 2 With respect to valuations, resolution values increased dramatically five years ago, then remained high, likely as a result of a shifting disease mix toward more malignant claims, and this year declined by 35%. Whether this decline in resolution values is the beginning of a longer-term reversal of recent trends is not yet known. For example, we observed that the falling resolution values in 2015 were accompanied by an increase in the number of claims resolved and higher dismissal rates. Together, these trends may indicate that some defendants have been clearing out backlogged claims and resolving older claims for relatively low values. If this is the case, it may mean that the observed drop in value per resolved claim in 2015 does not indicate a new trend toward lower claim values. Methodology This study represents our eighth annual assessment of trends in asbestos-related liabilities of asbestos defendants and extends our analysis one year to include 2015. To analyze these trends, we compiled publicly available data from more than 150 asbestos defendants’ Form 10-K filings with the SEC, from 2001 through 2015. We tracked five key metrics related to asbestos liability2: • Total indemnity paid: the aggregate amount a company pays to resolve claims each year; • Number of claims resolved: how many claims a company closes each year either by settling or obtaining dismissals; • Average settlement paid per resolved claim: the total indemnity paid divided by the number of claims resolved each year; • Percent of claims dismissed: the fraction of claims a company closes without payment; and • Annual filings: the number of new claims a company receives each year. Additionally, for those firms reporting asbestos-related reserves, we tracked the average reserve amount. We also obtained data on mesothelioma incidence rates through 2013 from the Surveillance, Epidemiology, and End Results (SEER) Program of the National Cancer Institute. Average Dollars Per Resolved Claim Dropped 35% • In 2015, dollars per resolved claim fell 35%, on average, representing the first substantive decline since 2011. • In 2011, resolution values rose approximately 75%, where they remained for the next three years. With the drop in 2015, average resolution values approached relative levels last observed in 2010. www.nera.com 3 Figure 1. Average Dollars Per Resolved Asbestos Claim Indexed to 2001 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 35% Decline • Average dollars per resolved claim decreased for slightly more than half of the companies reporting resolution values, with average declines of 60%. Average values rose for the rest of the companies reporting resolution values. Both the Number of Claims Resolved and Dismissal Rates Increased, on Average, While Pending Claims Declined • As average resolution values per claim fell in 2015, the number of claims resolved increased by almost 70%, while dismissal rates also increased by 15%. Figure 2. Average Dismissal Rates, Average Number of Resolved Claims, and Average Number of Pending Claims Indexed to 2001 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 Dismissal Rates Resolved Claims Pending Claims 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 www.nera.com 4 • The increased number of resolutions and dismissal rates may reflect companies’ decisions to clear out their backlog of claims. Pending claims dropped almost 20%, on average, as more than 80% of companies reported a drop in the number of claims pending against them in 2015. In comparison, over the prior five years, pending claims dropped, on average, only 6% each year. • If the drop in average dollars is related to the resolution of older claims, the decline may not reflect a new trend in values for recently filed claims. Whether the lower average values observed in 2015 will apply to the more recent filings going forward is not yet known. Total Indemnity Payments Remain Within the Historical Range • In 2015, total indemnity payments dropped 15%, on average, but still remained within the historical range. • Since 2006, aggregate indemnity payments have ranged from 1.4 to 2.2 times the 2001 levels, as annual averages have fluctuated with no clear upward or downward trend. The 2015 decrease continues this pattern and remains within the historical range. Figure 3. Total Indemnity Payments Per Defendant Indexed to 2001 0.00 0.50 1.00 1.50 2.00 2.50 3.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Total spending remains within the historical range Filings Remain Steady • On average, filings in 2015 were slightly below filings in the prior year. • After increasing in the early 2000s, annual filings declined mid-decade to only 20% of 2001 levels and have remained steady since. www.nera.com 5 Figure 4. Average Number of Asbestos Filings vs. Estimated Mesothelioma Incidence Indexed to 2001 Mesothelioma Incidence Claim Filings 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 • The big changes in filing activity came between 2004 and 2007, as filings dropped dramatically. As we have noted in prior updates, the drop in filings over this period was likely a decline in non-malignant filings (based on a key judicial decision at the time which questioned the medical documentation of non-malignant claims).3 As a result, the current filing activity likely represents malignant disease claims – mesothelioma, lung cancer, and other cancers, along with some remaining non-malignant claims. • Although the disease mix of filings is not known, the flat trend in filings since 2007 mirrors stable estimates of the annual incidence of mesothelioma (asbestos’ signature disease) over this period as reported by SEER (extrapolating incidence rates to the national population). Note: there is a two-year lag in the release of the SEER data. As a result, a contemporaneous estimate of mesothelioma incidence is not known. • According to the most recent SEER update, incidence rates are dropping, even within age/gender groups. However, the declines have been offset by a growing population, particularly in older age groups. As a result, incidence was relatively flat over the 2010 through 2013 period. When the path of future incidence will begin to decline is not yet known. • Although not apparent from the aggregate data reported in SEC filings, there are some signs that mesothelioma filings may be starting to slow down. For the last several years, asbestos-related filings have dropped in Madison County, Illinois, a jurisdiction known for heavy mesothelioma filings against companies and allegations of out-of-state exposure.4 Asbestos filings peaked at more than 1,600 in 2013, before dropping to 1,300 in 2014 and approximately 1,200 in 2015. www.nera.com 6 Reserves Levels Appear to Have Plateaued • In 2015, reserves dropped less than 1% from 2014 levels, essentially remaining flat. • In contrast, over the prior five years, reserves declined 5% each year, on average. Figure 5. Average Asbestos Reserves Indexed to 2001 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Reserves plateaued in 2015 • Although reserves appeared to have plateaued on average, more companies reported declines in reserves than increases: 60% of companies reported a decline in reserve of 10%, on average, while 40% of companies increased their reserves by approximately 25%, on average. • The median number of years for which companies reserved was 15 years. But the distribution was bimodal, with 70% reserving for 20 years or fewer and 30% reserving for 35 years or more. www.nera.com 7 Summary of Trends Through 2015 • Overall, the litigation environment in 2015 was relatively unchanged—with claim filings, aggregate indemnity, and reserves remaining steady. • Where there have been changes—decreased average resolution values, increased number of claims resolved, and increased dismissal rates—it is too soon to tell if the differences were driven by a clearing out of older claims, as opposed to new trends affecting recently filed claims. In particular, the continued decline in the number of pending claims may be an indication that recent resolution patterns are related to backlogged claims. A review of the underlying data would be necessary to assess the drivers behind the decreased resolution values, and whether the drop will be reversed in subsequent years or represents a new trend in values. • The steady annual flow of filings corresponds to stable mesothelioma incidence estimates over the 2010 through 2013 period. With a two-year lag in the SEER data, current incidence estimates are not known. There are some indications that mesothelioma filings may be starting to fall, if the decline in filings in Madison County, Illinois over the past two years is indicative of a wider trend. • While we have presented aggregate data here, as recorded in companies’ SEC filings, a more refined analysis would be possible by reviewing individual companies’ own data in terms of type of filings, age of claims, average resolution values by disease, along with other metrics, to assess company-specific trends. But this national analysis may provide a benchmark through which companies can gauge their own experience. www.nera.com 8 Endnotes 1 The authors would like to thank Vincent Li, Mikhail Kazi, and Sonya Natarajan for their research. The authors also thank Dr. Stephanie Plancich for her comments and suggestions. 2 Data from each firm’s most recent Form 10-K were used whenever available. We included only data reported at the individual claim level for companies reporting at least two consecutive years in the period. The indexes shown below represent an average of trends observed at the company level. Each chart may contain different companies, depending on the data reported by each company, each year. Data for prior years were updated if companies changed previously reported information. As a result, the graphs in the current update may differ from those in the previous update over the earlier period. 3 See, Judge Janis Graham Jack’s decision in In Re Silica Products Liability Litigation, Order No. 29, MDL Docket No. 2:03-MD-1553 (July 1, 2005). 4 See, Gvillo, Heather Isringhausen, “Madison County asbestos filings total 1,224; Only 6 percent filed on behalf of Illinois residents,” The Madison County Record, March 23, 2016. About NERA NERA Economic Consulting (www.nera.com) is a global firm of experts dedicated to applying economic, finance, and quantitative principles to complex business and legal challenges. For over half a century, NERA’s economists have been creating strategies, studies, reports, expert testimony, and policy recommendations for government authorities and the world’s leading law firms and corporations. We bring academic rigor, objectivity, and real world industry experience to bear on issues arising from competition, regulation, public policy, strategy, finance, and litigation. NERA’s clients value our ability to apply and communicate state-of-the-art approaches clearly and convincingly, our commitment to deliver unbiased findings, and our reputation for quality and independence. Our clients rely on the integrity and skills of our unparalleled team of economists and other experts backed by the resources and reliability of one of the world’s largest economic consultancies. With its main office in New York City, NERA serves clients from more than 25 offices across North America, Europe, and Asia Pacific. Contacts For further information and questions, please contact the authors: Mary Elizabeth C. Stern Vice President +1 914 448 4054 [email protected] Lucy P. Allen Senior Vice President Mass Torts & Product Liability Practice Chair +1 212 345 5913 [email protected] The opinions expressed herein do not necessarily represent the views of NERA Economic Consulting or any other NERA consultant. Please do not cite without explicit permission from the authors.
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