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RLF1 3626577v. 2
                             UNITED STATES BANKRUPTCY COURT
                                  DISTRICT OF DELAWARE

                                  :                         Chapter 11
In re                             :
                                  :                         Case No. 10-11780 (JKF)
SPECIALTY PRODUCTS HOLDING CORP., :
et al.,1                          :                         (Jointly Administered)
                                  :
           Debtors.               :                         Hearing Date: 11/15/10 @ 10:00 a.m.
                                  :                         Objection Deadline: 10/29/10

           CONSOLIDATED REPLY OF THE DEBTORS IN SUPPORT OF
          MOTION PURSUANT TO RULE 2004 OF THE FEDERAL RULES
           OF BANKRUPTCY PROCEDURE FOR AN ORDER DIRECTING
       SUBMISSION OF INFORMATION BY CURRENT ASBESTOS CLAIMANTS

                 The above-captioned debtors (together, the "Debtors") hereby reply to the

objections (collectively, the "Objections") to the motion [D.I. 436] (the "Motion") of the Debtors

for an order, pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure

(the "Bankruptcy Rules"), directing all holders of alleged asbestos personal injury claims for

which litigation is pending to complete and submit the questionnaire attached to the Motion as

Exhibit A (the "Questionnaire"), filed by (i) the Committee of Asbestos Personal Injury

Claimants (the "ACC") [D.I. 498] (the "ACC Objection"); (ii) certain law firms representing

asbestos personal injury claimants (the "PI Firms") [D.I. 509] (the "PI Firms Objection");

(iii) Jacobs & Crumplar, P.A. ("Jacobs") [D.I. 511] (the "Jacobs Objection"); and (iv) the legal

representative for future asbestos claimants (the "FCR") [D.I. 493] (the "FCR Objection").2 In

support of this reply, the Debtors: (i) submit (a) the Supplemental Declaration of Charles E.

Bates, which is attached hereto as Exhibit A and incorporated herein by reference (the "Bates

1
        The Debtors are the following two entities (the last four digits of their respective taxpayer identification
        numbers follow in parentheses): Specialty Products Holding Corp. (0857); and Bondex International, Inc.
        (4125). The Debtors' address is 4515 St. Clair Avenue, Cleveland, Ohio 44103.
2
        Harowitz & Tigerman, LLP, a firm representing certain asbestos personal injury claimants, filed a joinder
        [D.I. 507] in the ACC Objection.



DLI-6330265v2
Declaration") and (b) the Declaration of John A. Fleming (the "Fleming Declaration"), which is

attached hereto as Exhibit B and incorporated herein by reference; and (ii) respectfully state as

follows:

                                       Preliminary Statement

                1.     By the Motion, the Debtors seek an order requiring each asbestos claimant

that has commenced litigation against the Debtors to complete the Questionnaire, which seeks

basic information about the asbestos claims that Bates White, LLC ("Bates White") needs to

estimate the Debtors' asbestos liabilities. As explained in the Motion, Bates White's analysis will

both inform the Debtors' negotiations with the ACC and the FCR and be available for use in

estimation litigation, if necessary.

                2.     Notwithstanding the fact that this Court has permitted virtually identical

discovery of information from asbestos claimants, see Motion, D.I. 436, Ex. D (W.R. Grace

Order), the objectors take the position that the Debtors are entitled to none of that information.

Notably, the objectors do not argue that the discovery requests are outside the scope of, or

otherwise improper under, Bankruptcy Rule 2004. Rather, the objectors contend that the

requests should be rejected principally because they disagree with Bates White's estimation

theory. The contentions advanced by the objectors in the Objections are misplaced.

                3.     As a threshold matter, the alleged issues with Bates White's estimation

theory and methodology are simply irrelevant to consideration of the Motion. It is fundamental

that a party's disagreement with an expert's theory or methodology is no basis to preclude

discovery. For the same reason, the ACC's request that the Court adjourn the Motion pending a

hearing to determine a proper estimation theory should be denied.

                4.     Furthermore, despite the failure of the objectors to at all address

Bankruptcy Rule 2004 in the Objections, the Debtors need only show that the requested


DLI-6330265v2                                   -2-
information is within the scope of Bankruptcy Rule 2004. It plainly is, as information regarding

the asbestos claims asserted against the Debtors unquestionably relates "to the liabilities and

financial condition of the debtor, or to any matter that may affect the administration of the

debtor's estate." Bankruptcy Rule 2004(b). In addition, although the objectors inexplicably

argue that in many cases basic information regarding the asbestos claims purportedly is not

available to plaintiffs' counsel, because each of the claimants has in fact sued the Debtors,

counsel to the claimants should already have the information.

                5.     The Objections to the Motion are in all respects without merit, and the

Debtors respectfully submit that the Motion should be granted.

                                       Consolidated Reply

I.      The Objections to the Estimation Theory of the Debtors' Expert Are Irrelevant

                6.     The principal objection to the Motion is that the requested discovery

should be denied because it is needed for an estimation theory that the ACC and the PI Firms

assert is flawed. (ACC Obj. at 8, 10-14; PI Firms Obj. at 2-7.) According to the ACC, the

Debtors should instead simply use the ACC's expert's estimation method. (ACC Obj. at 4-5.)

The alleged fallacies of the theory and methodology of the Debtors' expert and the alleged

superiority of the estimation method of the ACC's expert are, however, irrelevant to the Debtors'

right to seek the requested discovery. The ACC and the PI Firms can challenge the expert's

theory or methodology under Federal Rule of Evidence 702 only after discovery is completed,

but, for the reasons explained and based on the authorities cited in the Debtors' simultaneously

filed consolidated reply in support of their motion for certain discovery from the claims

processing facilities for certain asbestos trusts ("Trust Motion Reply," incorporated herein by

reference), the exceedingly broad scope of Bankruptcy Rule 2004 discovery requires that, in the




DLI-6330265v2                                   -3-
meantime, the claimants must produce whatever information the expert needs to perform his

analysis.

                7.     Indeed, this Court, in considering the debtors' request to conduct claimant

discovery in the W.R. Grace & Co. bankruptcy case, ruled that evidence relating to either parties'

proposed method for estimation should be gathered through discovery and considered by the

Court before evaluating the estimation methodologies:

                If the debtor wants to produce its evidence based on one model,
                and [the Committee wants] to produce [its] evidence based on
                another, do it. I'll figure out which model has better credibility and
                makes more sense [] doing (sic "during") adjudication. I mean
                that's what my job is. Yours is to produce evidence, the way you
                think it should come in, and my job is to make rulings based on the
                evidence you produce, and that's how we'll go.
                ...
                My bottom line position is I think a questionnaire to the extent that
                the debtor or the other parties want to do discovery is fine.

(See Motion, D.I. 436, Ex. E.)

                8.     Consistent with this Court's ruling in W.R. Grace, the United States

District Court for the District of Delaware rejected attempts by the official committee of asbestos

personal injury claimants and the representative of future claimants in the USG Corporation

bankruptcy case to forbid all claimant discovery pursuant to a questionnaire. In that case, the

court made clear that "[i]f the [d]ebtors wish to get information with respect to claimants, they're

going to be entitled to do that . . . ." (In re USG Corp., Hr'g Tr. at 6:2-4, 7:17-18) (Sept. 20,

2005).) The court further explained:

                [I]f the debtor is going to proceed with an estimation theory,
                they're going to be allowed to get the evidence they feel is
                necessary to make their claim in this case. I'm not going to cut
                them off at the pass, which is what [the official committee of
                asbestos claimants] want[s] to do. [The committee] want[s] me to
                look at the historical information.




DLI-6330265v2                                    -4-
(Id. at 34:15-21.)3

                9.       For these same reasons, the ACC's request to delay consideration of the

Motion until after a hearing on the claims estimation method to be implemented in these cases

should be denied. As explained above, it is premature at this time to evaluate the opposing views

concerning the appropriate method for conducting an estimation. Rather, all that the Debtors

need demonstrate now is whether or not the information sought in the Questionnaire is within the

scope of Bankruptcy Rule 2004. Furthermore, the ACC fails to explain why it would be

appropriate for the Court to prematurely determine the estimation theory that must be

implemented in these cases and cites no precedent for its extraordinary request. At bottom, the

request is a misguided attempt to deprive the Debtors of the opportunity to prepare their

estimation and instead require them to adopt the ACC's expert's estimation theory.4

II.     The Debtors Are Entitled to the Proposed Claimant Discovery

                10.      Many of the Objections argue that the Motion should be denied because

the requested information is generally not necessary for an estimation of the Debtors' liabilities.

(ACC Obj. at 8-9; PI Firms Obj. at 5-7; Jacobs Obj. at 1.) As explained in detail in the Motion,

however, the information the Debtors seek is needed to properly estimate their liability. (See

Motion at ¶ 21.) Fundamentally, the claimants have allegedly been injured by exposure to

asbestos from an unidentifiable source or sources. A definitive amount of money would

appropriately compensate a claimant for his or her injury. Prior to filing this proceeding, Bondex

assessed its exposure to a claimant by evaluating a number of factors, including, but not limited

to, the severity of the disease alleged, the credibility of the diagnosis, the age and occupational

3
        The September 20, 2005 hearing transcript will be made available upon request.
4
        The ACC alleges that the Motion seeks a determination regarding the proper estimation methodology to be
        used in these cases. (ACC Obj. at 3.) This is incorrect. The Motion seeks only the right to conduct
        discovery of information relevant to the asbestos personal injury claims asserted against the Debtors.



DLI-6330265v2                                        -5-
history of the claimant, the strength of the causation assertion, the number and identity of the co-

defendants, the jurisdiction in which the case was filed, the plaintiffs' counsel filing the case, the

claimant's smoking and medical history, and the amount of compensation the claimant had or

would receive from other sources. (See Fleming Decl. ¶¶ 5-8.) To properly estimate the

Debtors' aggregate liability for all claims, the Debtors need the same information for each

claimant.

                11.    The Debtors' estimation expert made clear in his declaration in support of

the Motion the need he has for the information — not, as some Objections suggest, to do some

kind of claim-by-claim resolution, but rather as inputs for a proper "macro-economic" estimation

analysis. (See Motion, D.I. 436, Ex. B. at ¶6.)

                12.    Notably, the objectors do not dispute, nor could they, that the requested

discovery is well within the scope of Bankruptcy Rule 2004. As the Debtors noted in the

Motion, the scope of Bankruptcy Rule 2004 discovery is exceedingly broad. In fact, courts

frequently describe Bankruptcy Rule 2004 examinations and production requests as "fishing

expeditions" designed to quickly ascertain the "financial condition" of the debtor. In re Coffee

Cupboard, Inc., 128 B.R. 509, 514 (Bankr. E.D.N.Y. 1991); see also In re Wilcher, 56 B.R. 428,

433 (Bankr. N.D. Ill. 1985). The information sought by the Questionnaire, which concerns the

asbestos claims asserted against the Debtors, undeniably relates "to the liabilities and financial

condition of the debtor, or to any matter that may affect the administration of the debtor's estate."

Bankruptcy Rule 2004(b). Indeed, this Court has already found that a debtor has the right to take

discovery of the type sought by the Debtors. See In re W.R. Grace & Co., Hr'g Tr. at 90:6-9

(June 27, 2005) ("The debtor has the right to discovery to know what the current claims are, and




DLI-6330265v2                                     -6-
that will be a much better basis for estimation of current claims and possibly future claims than

anything else.").5

                 13.      To support its position, the ACC asserts that the court in In re Federal-

Mogul Global, Inc., 330 B.R. 133 (D. Del. 2005), "rejected individual claimant discovery in

favor of an estimation process based on data from the [d]ebtors' past claim resolution history."

(ACC Obj. at 9-10.) That assertion is wrong. There is no indication in the opinion that any party

had sought claimant discovery, and the court simply does not address any discovery issues in the

opinion. Rather, the opinion merely explains the reasons for the court's estimation of the debtors'

asbestos liability. 330 B.R. at 135-36.

                 14.      The ACC also claims that the result of the claimant discovery process in

the W.R. Grace & Co. bankruptcy case demonstrates that claimant discovery provides no benefit

to the debtor or the court, while creating substantial costs and complications. (ACC Obj. at 3-4,

8.) As an initial matter, whether or not the discovery was helpful in W.R. Grace is irrelevant to

the Debtors' right to conduct the requested discovery under Bankruptcy Rule 2004. In addition,

because the parties in that case reached a consensual agreement regarding the terms of a plan of

reorganization prior to any contested estimation proceeding, the usefulness of the discovery is

unknown. Furthermore, the costs and complications associated with the discovery in these cases

should be significantly reduced compared to the W.R. Grace case because (a) the number of

current asbestos claims pending against the Debtors is substantially less than the number of

asbestos claims at issue in the W.R. Grace case, and, unlike in W.R. Grace, (b) the claimants are

permitted to submit the Questionnaires electronically in a manner similar to the claim filing




5
        Cited portions of the transcript are attached to this Reply as Exhibit D.




DLI-6330265v2                                           -7-
process used by the major claim processing facilities and (c) the Debtors' Questionnaire does not

seek any documents from the claimants.

                15.     Next, the FCR claims that the discovery requests are premature because

the Debtors allegedly do not need this information unless the ACC, the FCR, and the Debtors

cannot agree on a value of the Debtors' aggregate liability. (FCR Obj. at 3.) The ACC raises the

related concern that the discovery requests will result in allegedly undue expenses and burdens

on the progression of the Debtors' cases. (ACC Obj. at 4, 8.) The Debtors' reply to these

misguided concerns has been laid out in its Trust Motion Reply, which is incorporated by

reference herein.

                16.     Finally, the ACC inexplicably asserts that the Motion seeks to "estimate at

zero value whole categories of claims or disallow them entirely without affording claimants the

right to resolution of their claims by a jury trial and in violation of their due process rights."

(ACC Obj. at 17.) According to the ACC, "under the auspices of a Rule 2004 Motion, the

Debtors seek to prematurely evaluate the merits of these claims now." (Id. at 6.) This is a gross

mischaracterization of the Motion, which plainly seeks only the right to conduct discovery of the

asbestos claimants.

III.    Counsel to the Asbestos Claimants Should Already Have the Requested Information

                17.     The ACC and the PI Firms object that in many cases the claimants cannot

provide the information sought by the Debtors. (ACC Obj. at 9; PI Firms Obj. at 6-7.)

According to the ACC, basic information is unavailable because the claimants are in different

stages of trial readiness and "[t]his evidence is properly developed after the chapter 11 case has

confirmed and under the court-approved and negotiated trust distribution procedures." (ACC

Obj. at 9) The information requested by the Questionnaire, however, should be known by the

claimants and their counsel in light of the fact that each claimant has filed a lawsuit against the


DLI-6330265v2                                    -8-
Debtors. Rule 11 of the Federal Rules of Civil Procedure requires that counsel attest that proper

investigation into the facts underlying a lawsuit has been performed prior to filing it. See Fed. R.

Civ. P. 11(b)(3) ("By presenting to the court . . . a pleading . . . an attorney or unrepresented

party is certifying that to the best of the person's knowledge, information and belief, formed after

an inquiry reasonable under the circumstances . . . the allegations and other factual contentions

have evidentiary support . . . ."). Similar rules exist and are applicable to cases filed in state

courts. See, e.g., MISSISSIPPI RULE OF CIVIL PROCEDURE 11(a); TEXAS RULE OF

CIVIL PROCEDURE 13. Courts have recognized that attorneys who fail to gather the very

information sought in the Questionnaire have run afoul of Rule 11. In Harold's Auto Parts, Inc.

v. Mangialardi, 889 So.2d 493 (Miss. 2004), the Mississippi Supreme Court heard an appeal in

an asbestos case where the attorneys filed claims on behalf of plaintiffs without verifying

whether the individual claimants had been exposed to asbestos in the State of Mississippi:

                The case before us has endured seven amended complaints, and
                now involves the claims of 264 plaintiffs against 137 named
                defendants who have identified approximately 600 different
                employers where asbestos exposure might have taken place.
                Approximately 220 of the plaintiffs are unable to identify any
                employment within the state of Mississippi.

889 So. 2d at 494. The court noted that "we are not told which plaintiffs were exposed to which

products manufactured by which defendants; nor are we told when any particular plaintiff was

exposed during the seventy-five year period . . . ." Id. The court called this "basic information"

and found that the failure to provide such basic information constituted "an abuse of, and failure

to comply with, Rules 8, 9, 10 and 11. What is referred to as 'core information' and 'disclosure' is

basic information which should be known to plaintiffs' counsel prior to filing the complaint, not

information to be developed in discovery or disclosure. The information should have been

included in the complaint." Id. at 494-95.



DLI-6330265v2                                    -9-
                18.    The District Court for the Southern District of Texas's opinion in In re

Silica Prods. Liab. Litig., 398 F. Supp. 2d 563 (S.D. Tex. 2005), also reinforces the fact that the

diagnostic information underlying each plaintiff's claim should have been known to the filing

attorney prior to commencing an action against the defendants:

                [B]ecause the lawyers short-circuited the appropriate diagnostic
                process, [they] – at a minimum – recklessly disregarded the fact
                that there is no reliable basis for believing that every Plaintiff has
                silicosis. And this basis information regarding the nature of each
                Plaintiff's injuries is information [the lawyers] should have known
                before filing their claims in this Court.

In re Silica Prods. Liab. Litig., 398 F. Supp. at 350-51 (citing Acuna v. Brown & Root, Inc., 200

F.3d 335, 340 (5th Cir. 2000); Fed. R. Civ. P. 11(b)(3)) (emphasis added).

                19.    In addition, the purported unavailability of the information is belied by the

fact that most of the information sought is very similar if not identical to the claim information

required to be submitted to establish a valid trust claim.

IV.     The Criticisms Leveled Against the Estimation Theory of the Debtors' Expert Are
        Baseless

                20.    Some of the objectors argue that the dramatic increase in the number of

asbestos cases filed against the Debtors following the chapter 11 bankruptcy filings by the

primary asbestos defendants in the early 2000s was based in part on the Debtors' willful

concealment of asbestos-containing products in state court discovery. (ACC Obj. at 12; PI Firms

Obj. 4-5.) The Debtors never concealed the extent to which their products contained asbestos,

whether in interrogatory answers, requests for production of documents or otherwise. (See

Fleming Decl. ¶ 10.) To the contrary, the Debtors responded to all discovery requests honestly

and completely based on the information available to them at the time. (Id.) Moreover, Bondex

International, Inc. ("Bondex") placed warnings on its asbestos containing products in the mid-

1970s as suggested by the Occupational Safety and Health Administration. (Id..) In addition,


DLI-6330265v2                                   - 10 -
the argument by the PI Firms that the dramatic spike in claims is explained by the allegation that

the Debtors' claimants were purportedly exposed later than other claimants is completely without

foundation or epidemiological support, and simply is not credible considering that the spike in

claims occurred immediately following the bankruptcy filings of the primary joint compound and

friable asbestos product defendants. Finally, the PI Firms argue that the Debtors' minuscule

market share of the joint compound market does not suggest that they should have fewer claims

because the "'mega –defendant' companies either produced additional lines of asbestos-

containing products for other industries, or filled additional niches in the joint compound

market." (PI Firms Obj. at 4.) In fact, in testimony given before the United States. Consumer

Product Safety Commission on August 15, 1977, the representative of United States Gypsum

acknowledged that its joint compound products were sold in the consumer market:

                 During the past 50 years, patching compounds have been
                 manufactured in the United States as a complement to the steadily
                 increasing use of gypsum wall board and as a repair material for
                 existing plaster or gypsum wall board, as dry walls and ceilings.

                       *        *       *      *
                 While the contractor is believed to represent the larger share of the
                 market, a certain percentage does find its way into consumer
                 channels. The joint treatment industry is composed of some 100
                 manufacturers in approximately 26 states, which encompass over
                 130 plants in 238 warehouses. An estimated 55 percent of total
                 volume was manufactured by five or six national or near national
                 producers. The balance comes from regional, sectional and local
                 producers.


(Tr. at 8, 12) (Aug. 15, 1977.)6 In light of the Debtors' virtually non-existent market share, the

statistical likelihood that any given plaintiff was actually exposed to a Bondex product

manufactured and sold by the Debtors is exceedingly small.


6
        Cited portions of the transcript are attached to this Reply as Exhibit C.




DLI-6330265v2                                           - 11 -
V.      The Objections to the Proposed Questionnaire Are Misplaced

        A.      Alleged Exposure Site Information

                21.    The ACC argues that Part 6 of the Questionnaire seeking information

regarding the claimants' alleged exposure sites is misleading because it is inconsistent with the

Debtors' allegation that their products were sold primarily to the home patch and repair market

and implies that the Debtors have a discrete list of sites at which a claimant may have been

exposed. (ACC Obj. at 14-15.) The ACC incorrectly assumes, however, that a "site or plant" is

somehow limited only to an industrial site. To the contrary, a "site" can include a home site. In

addition, the Questionnaire seeks information regarding any alleged exposures, including

exposures to nondebtor products or sources, some of which may have occurred at industrial sites.

The Debtors are entitled to discover at which locations each claimant asserts an asbestos

exposure because those locations, along with the identification of the claimant's occupation and

industry in which she or he works, may establish that the claimant was exposed to asbestos from

nondebtor sources and products. Further, while the Debtors assume that most claimants will

allege exposures to the Debtors' products at home sites, the Debtors are entitled to discover

where in fact the claimants allege exposures to the Debtors' products.

        B.      Identification of the Debtors' Products

                22.    The ACC also complains that the request that a claimant identify the

Debtors' products to which it was allegedly exposed is "premature" because counsel may

allegedly still need to "investigate" which products the claimant was purported exposed. (ACC

Obj. at 15; see also PI Firms Obj. at 7.) As discussed above in Section III of this Reply,

however, because each of the claimants has filed a lawsuit against the Debtors, the claimants

should have already provided this information to their counsel. Moreover, to assist the claimants




DLI-6330265v2                                  - 12 -
with identifying the products, the Debtors have included a list of sixteen categories of the

Debtors' products, including a catch all category of "other."

        C.      Information Purportedly in the Possession of the Debtors

                23.    The ACC asserts that the information sought in Part 7 of the Questionnaire

regarding the lawsuits filed against the Debtors should not have to be provided by the claimants

because the Debtors purportedly already have this information. (ACC Obj. at 15-16.) This is

incorrect in many instances, and particularly with respect to what disease the plaintiff alleges. In

a large number of cases, the asbestos condition alleged by the claimant is not disclosed in the

complaint. (See Motion, D.I. 436, at ¶ 12.) Moreover, because a claimant's asbestos condition

may change over time, the condition alleged in the complaint may no longer be accurate. In

addition, as to the codefendants named in a complaint, the Debtors have historically not captured

this information in their claims database. Although the Debtors could conceivably review each

and every complaint to obtain this information, the information contained in the complaints may

be stale because additional defendants may have been identified after discovery. In contrast, the

claimants should have the most current information readily available.

        D.      Trust Claim Information

                24.    The ACC claims that the information regarding whether a claimant has

submitted a claim against a section 524(g) trust is irrelevant. (ACC Obj. at 16.) This objection

is meritless for all the reasons explained in the Debtors’ Trust Motion Reply.

                25.    Both the ACC and the PI Firms object that the request for information

regarding whether a trust claim will be filed in the future is irrelevant and unknown. (ACC Obj.

at 16; PI Firms Obj. at 9.) But, for the reasons discussed in the Debtors' Trust Motion Reply, the

likelihood of future payments from an asbestos trust will clearly impact the value of the

claimant's claim against the Debtors. And, given that each claimant should know to which


DLI-6330265v2                                  - 13 -
products it alleges exposures, claimants should have little difficulty identifying trusts against

which they may assert claims in the future.

                 26.      Finally, the ACC argues that it is improper to seek information regarding

submitted but unpaid trust claims because certain trial courts purportedly exclude consideration

of those types of claims. (ACC Obj. at 17.) But, the admissibility of information has no bearing

on whether it is discoverable and relevant to the Debtors' estimation methodology. See In re

W.R. Grace & Co., Hr'g Tr. at 276:7-9 (July 19, 2005).7 The cases cited by the ACC in support

of its argument are either inapposite or in fact support the Debtors' request. For instance, Coulter

v. Asten Group, Inc. did not address whether information was discoverable, but rather whether

applicable state law allowed the trial court to consider it. No. 63148-9-I, 2010 WL 60181, at *1

(Wash. Ct. App. Jan. 11, 2010). And, Volkswagen of America, Inc. v. Superior Court, in fact

supports the Debtors' position. In that case, a defendant in asbestos-related litigation filed a

motion to compel discovery of all documents the plaintiff had submitted to section 524(g) trusts.

43 Cal. Rptr. 3d 723, 725 (Cal. Ct. App. 2006). The court approved the requested discovery,

finding that even if documents relating to settlements or settlement negotiations were

inadmissible at trial, because they could lead to the discovery of admissible evidence, they were

discoverable. Id. at 733.

        E.       Requirement to Execute Questionnaires Under Penalty of Perjury

                 27.      The Court should also reject the ACC's argument that counsel not be

required to execute the Questionnaires under penalty of perjury. (ACC Obj. at 17.) The

Questionnaire simply requires counsel to attest that the information provided is accurate and

complete "to the best of my knowledge." Moreover, as discussed above, this type of certification


7
        Cited portions of the transcript are attached to this Reply as Exhibit E.




DLI-6330265v2                                           - 14 -
is required by Rule 11 and various state court equivalents. Finally, this Court has already ruled

in the W.R. Grace case that counsel must execute a claimant questionnaire under penalty of

perjury. (See In re W.R. Grace & Co., Hr'g Tr. at 241:25 – 243:21 (July 19, 2005).)

VI.     The Alleged Procedural Issues With the Motion Caused No Prejudice

                28.      The ACC states that the Debtors did not confer with counsel to the ACC

or any of the claimants and did not include a certificate of conference required by Local

Rule 2004-1. (ACC Obj. at 19.) But, the ACC cannot and does not claim that it would have

agreed to the discovery requests (rather than, as it has, object to the requests in their entirety) had

there been a conference and cannot articulate any prejudice from the absence of a conference or

certificate thereof. In fact, following the filing of the Motion, Debtors' counsel contacted counsel

to the ACC to inquire about what modifications, if any, would be necessary to make the

Questionnaire acceptable to the ACC, but to date the ACC has yet to respond to that inquiry.

Further, it was impractical for the Debtors to contact each of the claimants prior to filing the

Motion.

                29.      The ACC complains that claimants were not properly served with the

Motion and requests that, as a result, the Court "consider all responses filed in advance of the

hearing date." (Id. at 20.) But this objection, too, involves no showing of any prejudice. In fact,

to date, no claimant has filed a late objection. Presumably, parties that wished to be heard on the

Motion have already filed objections.8




8
        The ACC suggests that it was somehow improper to serve the Motion on counsel to the asbestos claimants
        rather than on the individual claimants themselves. (ACC Obj. at 21.) But, notice in that manner was
        approved by the Court at the first day hearing in these cases. (See D.I. 34 ¶ 5.)



DLI-6330265v2                                       - 15 -
                                           Conclusion

                30.   For the reasons set forth above and in the Motion, the Court should grant

the relief sought in the Motion and grant the Debtor such other and further relief as the Court

may deem proper.


Dated: November 8, 2010                           Respectfully submitted,

                                                  /s/ Tyler Semmelman
                                                  Daniel J. DeFranceschi (DE 2732)
                                                  Paul N. Heath (DE 3704)
                                                  Zachary I. Shapiro (DE 5103)
                                                  Tyler D. Semmelman (DE 5386)
                                                  RICHARDS, LAYTON & FINGER, P.A.
                                                  One Rodney Square
                                                  920 North King Street
                                                  Wilmington, Delaware 19801
                                                  Telephone: (302) 651-7700
                                                  Facsimile: (302) 651-7701
                                                         -and-
                                                  Gregory M. Gordon (TX 08435300)
                                                  Dan B. Prieto (TX 24048744)
                                                  Robert J. Jud (TX 24041217)
                                                  JONES DAY
                                                  2727 N. Harwood Street
                                                  Dallas, Texas 75201
                                                  Telephone: (214) 220-3939
                                                  Facsimile: (214) 969-5100

                                                  ATTORNEYS FOR DEBTORS




DLI-6330265v2                                  - 16 -
                EXHIBIT A




DLI-6330265v2
                            UNITED STATES BANKRUPTCY COURT
                                 DISTRICT OF DELAWARE

                                  :
In re:                            :                             Chapter 11
                                  :
SPECIALTY PRODUCTS HOLDING CORP., :                             Case No. 10-11780 (JKF)
et al.,1                          :
                                  :                             (Jointly Administered)
           Debtors.               :
                                  :

           SUPPLEMENTAL DECLARATION OF CHARLES E. BATES, PH.D.

                I, CHARLES E. BATES, declare and state as follows:

                1.       I am Chairman and a founding member of Bates White, LLC. Bates

White is an economic consulting firm based in Washington, D.C. I have personal knowledge of

the facts set forth in this declaration and, if called as a witness, could and would testify

competently to such facts under oath.

                2.       I previously submitted a declaration in support of the Debtors’ motion

seeking discovery of asbestos claim information in the possession of certain claims process

facilities. I submit this supplemental declaration in support of the Debtors' replies to various

parties’ objections to the Debtors’ motion seeking discovery from the trusts as well as their

motion seeking discovery, via a claim form, from the claimants.

                3.       I have reviewed the pleadings filed in this case that purport to describe

the proper methods and foundation for estimation, as well as the relevance to the estimation

process of "non-debtor" data; that is to say data beyond that housed in the Debtors’ own claims

1
       The Debtors are the following two entities (the last four digits of their respective taxpayer identification
       numbers follow in parentheses): Specialty Products Holding Corp. (0857); and Bondex International, Inc.
       (4125). The Debtors' address is 4515 St. Clair Avenue, Cleveland, Ohio 44103.
database. I have also reviewed similar filings and participated in certain select hearings

regarding the relevance of non-debtor data in other recent asbestos chapter 11 bankruptcy cases,

most notably the Motors Liquidation and Garlock proceedings. Further, although I am already

very familiar with their work, I have conducted a further review of the methods employed by

other asbestos estimation experts, including the Asbestos Claimants’ Committee (the "ACC")

expert Dr. Mark Peterson, in other completed bankruptcy matters. Based on this review and my

own expertise regarding, and experience with, the asbestos litigation environment and customary

estimation techniques, I have reached certain additional preliminary conclusions as described

herein.

                 4.      The comprehensive databases of claims filed with the asbestos trusts and

asserted against the reorganized top-tier defendants have provided the foundation for asbestos

experts' understanding of trends and patterns for at least two decades. This is true for experts

working on behalf of asbestos claimants’ committees, defendants, insurers, debtors, trusts,

creditors’ committees, equity holders, and court-appointed future claimants’ representatives.

Moreover, these same data have been used extensively by experts employed by these very same

parties in connection with every asbestos-related bankruptcy estimation of which I am aware.

                         a.     Historically, the data from the Manville trust and the 21 companies

          comprising the Center for Claims Resolution were routinely available at nominal expense

          to experts as a source of claimant-level information on all asbestos claims. These data

          provided a source for supplementing the defendant’s own claims data with important

          valuation information not yet revealed to the defendant for pending claims, such as

          diagnosis information, age, occupation, life status, and exposure sources.




                                              -2-
                        b.     Equally important, these data also provided the experts with an

       understanding of how claiming rates were evolving across the country, from jurisdiction

       to jurisdiction and from law firm to law firm for each of a wide variety of claim

       categories. They provided a basis to understand the potential for, and likely impact of,

       known or likely impending changes in the tort environment on the debtor. Examples of

       such impacts included the possibility that new categories of claims would be brought

       against the defendant in the future or why some categories of claims would likely

       disappear in the future.

               5.       Claims data housed in asbestos trusts are vital to producing a reliable

forecast of the Debtors’ asbestos-related expenditures. These are precisely the data that are

needed to quantify properly how much of the Debtors’ rise in claim payments at the beginning of

the millennium is attributable to the halt of payments by the top-tier codefendants as litigation

against these codefendants was stayed during their Chapter 11 reorganizations and how much is

attributable to other sources. Moreover, these data are needed to quantify properly the extent to

which the Debtors’ asbestos liability will be reduced by the recommencement of payments on

behalf of the reorganized codefendants by the asbestos trusts that now "stand in their shoes."

               6.       Specifically, the trusts possess, and the Debtors are seeking in their 2004

request, data on claimant filings against, and recoveries from, the trusts themselves. This will

enable the experts to quantify recoveries for the Debtors' claimants across the various asbestos

trusts. These data are necessary so that the experts can account on a proper empirical, as

opposed to a heuristic, basis for the potential impact of trust payments on the Debtors' asbestos

indemnity obligation.




                                             -3-
               7.      The ACC contends that these data are not useful for a proper forecast of

the Debtors’ future asbestos expenditures in this case. They assert that there is no connection

between payments by the asbestos trusts and the amount of expected future settlements by the

Debtors (see D.I. 517, ¶¶ 26-31). This assertion makes no sense because, as discussed in more

detail in Exhibit 1, it contradicts fundamental principles of the science of economic decisions.

Because asbestos is a shared liability, the availability of codefendants or trusts and their ability to

pay will unequivocally have an impact on the value of the case vis a vis other defendants.

               8.      Current asbestos trust assets exceed $20 billion and will increase by

another $10 billion in the coming years. These assets and the trust distribution procedures that

govern their distribution will result in the typical mesothelioma plaintiff receiving about $1

million from the asbestos trusts. The size of these trust payments will create a powerful

economic incentive for the settling parties to alter their current practices and settle tort claims at

substantially reduced amounts as compared with recent history.

               9.      The data housed in the asbestos trusts are vital for the proper estimation of

the future impact of these substantial trust payments on tort settlements. They provide the basis

for knowing how much the Debtors’ pending and would be future plaintiffs can actually expect

to receive from the trusts. This is a key input into the economic model that will be used to

estimate the size of future asbestos tort settlements in the presence of large asbestos trust

payments. While the Debtors’ current claims data are also a key input into this economic model,

they alone are not sufficient because the Debtors’ recent tort history does not account for the full

impact of the trusts. Although some of the trusts in question began processing claims prior to the

Debtors' petition date, these trusts process the claims on a first in/first out basis and face a huge

backlog of pending claims due to the length of the related reorganization proceedings. It is my




                                              -4-
understanding that the recent trust payments are related to cases that were resolved by the

Debtors prior to the trusts’ creation. What is more, some trusts are only just coming, or are still

yet to come, online. Thus the Debtors’ recent claims history does not and cannot reflect the full

consideration of the impact of the trusts as the ACC asserts (see D.I. 517, ¶ 28) and is

insufficient for forecasting how the trust payments would impact the Debtors once the trusts

begin paying claims on a contemporary basis.

               10.     As there is wide variation in settlement amounts and trust recoveries, the

data are needed at the claimant level so that they can be appropriately matched across trusts and

to the Debtors’ own claims data, which are also maintained at the claimant level, before they are

aggregated for analytical purposes. This concept of working with claimant level data as part of

an aggregate estimation proceeding is not at all novel or unique. My understanding is that the

ACC has recently filed a motion in this case requesting that the Debtors’ produce claimant level

information for use by Dr. Peterson in preparation of his aggregate estimate. Moreover, experts

always work with claimant level data in preparing an aggregate future liability forecast unless,

for whatever reason, the data are unavailable at that level. Doing so allows the experts to

properly account for numerous issues including: duplicate claims, incomplete information such

as missing disease, and potential selection bias issues (e.g. the degree to which the Debtors’

recent claim settlement history, used as a calibration point, is representative of the Debtors’

overall pending and future claiming population). Moreover, the trust data are maintained and

organized at the claimant level and thus producing them in this fashion is less costly and less

burdensome for the trusts than producing them in some other format.

               11.      As the data the Debtors are requesting are stored in electronic databases

maintained by the claims processing facilities, and we are requesting the data in their native




                                             -5-
format, the burden of producing these data is insignificant. For example, the entire Manville

trust database used to be provided to us with a couple of days notice and the payment of a fee of

$10,000. What is more, my understanding is that the Manville Trust made a profit by furnishing

us the data at this rate. The CCR claimant database, which contains the claim filing and

settlement history of 21 member defendants, also was readily available. Both were transmitted

on CDs to valuation experts with little delay when needed. As noted in the declaration I made to

this court on October 11, 2010, Bates White recently attempted to obtain from the Manville Trust

and its claims processing facility, the Claims Resolution Management Corporation, a license to

access the Manville claim database. Our request was denied despite the fact that on October 27,

2009 the Manville Trustees approved a new data use policy that states that the trust "will

consider distribution of individual level claims data to professionals engaged by another asbestos

trust exclusively for aggregate analyses for the other trusts and to professionals who have been

retained to estimate asbestos liabilities in a court proceeding involving a bankruptcy plan." Not

only was our request for such license denied with respect to the Debtors, it was also denied with

respect to our work in the Garlock and Motors Liquidation chapter 11 cases.

               12.     It is disingenuous for the ACC to assert that the trust data are not relevant

for a proper forecast of the Debtors’ future asbestos expenditures in this case. These are precisely

the data that the ACC's expert Dr. Mark Peterson has routinely used in his expert reports

throughout the last decade. In fact, I am not aware of a single instance in the dozens of asbestos-

related estimation cases on which the ACC's expert Dr. Mark Peterson has worked where he did

not rely on some form of non-debtor data provided by at least one trust or the CCR. These data

were cited by him as the basis for raising his forecasts of the expected tort liabilities of the




                                              -6-
reorganizing top-tier defendants far above what could be calculated using a debtor's own claims

history.

                 13.     Examples of Dr. Peterson reliance on non-debtor trust data include his

work on the ASARCO chapter 11 case (see Exhibit 2 for a copy of the report in that matter),

where he used Manville trust data to fill in missing disease information and supplement his

forecast of future claim flows.

          Disease is missing in the historic database for about a third of the cases. We
          linked ASARCO’s historic data to its pre-packaged settlement databases, to the
          Manville Trust data, and to the bardate database and then assigned the most
          serious disease from any of these sources to a given case.
                 -Peterson, ASARCO Projected Liabilities for Asbestos Personal Injury Claims,
                 May 2007, page 6
          In addition to ASARCO’s data we use asbestos claims data from the Manville
          Trust to understand trends in asbestos claim filings since ASARCO’s August 9,
          2005 petition date and to forecast claims that would have been filed against
          ASARCO since that date.
                 -Ibid

Similarly, in the USG chapter 11 case (see Exhibit 3 for a copy of the report in that matter), Dr.

Peterson relied upon the Manville data to fill in missing data and to construct a disease transition

matrix.

          To use information about disease from the USG database, we had to address the
          large number (93,852) of ‘‘unspecified’’ disease claims among recently filed and
          pending claims. We took two steps to address this data problem. First, we were
          able to identify diseases for many of these claimants with unspecified disease by
          linking the USG and Manville Trust databases (August 2005 extract), using social
          security number as the basis for these links.
                 -Peterson, USG Corporation Projected Liabilities for Asbestos Personal Injury
                 Claims, May 2006, page 10

                 14.     Moreover, Dr. Peterson’s use of such data continues to the present. As

recently as last year Dr. Peterson, as the expert for the Asbestos Claimants’ Committee in the

W.R. Grace chapter 11 case, submitted an expert report to this very same court that relied upon



                                             -7-
references to non-debtor data, including trust data, as well as data on total tort recoveries, and

other co-defendant data (see Exhibit 4 for a copy of the report in that matter). As with USG, he

linked the Grace data to the Manville Trust data to fill in missing data and to construct a disease

transition matrix. He also relied upon trust data in developing his claim filing projections.

       In addition to Grace’s data we use asbestos claims data from the Manville Trust
       to understand trends in asbestos claim filings since Grace’s April 2, 2001 petition
       date and to forecast claims that would have been filed against Grace since that
       date. We also use Manville data to impute diseases when disease is unspecified in
       the Grace database.
               -Peterson, W.R. Grace Projected Liabilities for Asbestos Personal Injury Claims,
               June 2007 (Revised January 2009), page 42

In that same report, in his introductory section on "estimation methods" Dr. Peterson indicates

that credible estimates should rely on non-debtor data and consider the impact of impending and

"reasonable" future changes in the litigation environment:


       These forecasts have been done in many ways, with highly varying quality and
       credibility.[footnote omitted] Credible forecasts of asbestos defendants’
       liabilities--those that have been accepted by trustees who are fiduciaries to both
       present and future claimants, that have been accepted by courts in estimation
       hearings and forecasts that have been confirmed by subsequent claims data—
       share several key features:
               • The forecasts draw upon data about the defendant’s own past experience
               and the contemporaneous experience of other asbestos defendants with
               asbestos claims--counts of claim filings, distributions of asbestos diseases,
               resolutions of claims both with and without payment through judgments
               and settlements, trends for all of these elements of liability.
               • The forecasts consider developments and the state of asbestos litigation
               at the time of the forecast and reasonable expectations about future
               developments.…
                       -Peterson, W.R. Grace Projected Liabilities for Asbestos Personal Injury
                       Claims, June 2007 (Revised January 2009), page 8

               15.     Finally, as recently as late last month, in his testimony in front of Judge

Hodges in the Garlock bankruptcy proceedings, Dr. Peterson cited claims data from multiple




                                             -8-
asbestos trusts as his source of understanding of the number of mesothelioma claims filed across

the country and future trends for such claims.

               16.     In summary, the claimant level data sought through the proposed claim

form as well as the claims data sought from the claims processing facilities is vital to a proper

understanding of the value of the Debtors’ pending and future asbestos claims and, in the current

environment, the valuation of any individual entity’s liability for such claims. Any proper

forecast must take into account accurate information regarding pending claims and the impact of

known sources of funds available to pay claims. Simple economics tell us that the more than $30

billion in assets that will soon be available through asbestos trusts and is earmarked to

compensate asbestos claimants must have a substantial impact on the asbestos compensation

system and the Debtors’ aggregate liability for present and future asbestos claims.




                        [The remainder of this page is intentionally blank.]




                                             -9-
               I declare under penalty of perjury that, to the best of my knowledge, information

and belief, the foregoing is true and correct.


Dated: November 8, 2010




                                                                                           _




                                                    Charles E. Bates, Ph.D.




                                             -10-
EXHIBIT 1
                                                     Exhibit I


        ECONOMICS DICTATE THAT ASBESTOS TRUSTS WILL AFFECT THE
                    PAYMENTS OF TORT DEFENDANTS

                  1.       The suggestion that payments from asbestos trusts will not affect the

indemnity payments of tort defendants is clearly incorrect and contradicts the most fundamental

principles of the science of economic decisions.1 The following example illustrates this fact:

                  2.       Consider a plaintiff who sued several dozen codefendants in a jurisdiction

where liability is shared among codefendants, but each defendant faces the risk of an adverse

verdict if it does not settle with the plaintiff. Suppose the plaintiff has reached a settlement with

all defendants but one. The remaining defendant and the plaintiff either also negotiate a

settlement or the case proceeds through trial to verdict, and any appeals either party makes until

a final judgment is reached. Now suppose the defendant makes an offer of settlement. Its offer

considers its assessment of the risk of an adverse verdict, the potential size of such a verdict, the

options for appeals, the costs of continued litigation, its assessment of the offsets it would

receive for payments received from settled parties, and its options for obtaining contribution

from unnamed parties. In addition, the defendant may have some ability to delay the remaining

litigation process and defer the date it finally has to make payment. Clearly as a matter of simple

economic reasoning, anything that increases its potential offsets, increases its sources of potential

contribution, or imposes extra costs on the plaintiff through delay without an offsetting increase
1
  Economics is the relevant field of study to understand how tort settlement values are formed as the result of
negotiations between plaintiffs and defendants, parties that have competing goals and either agree to a settlement or
proceed to trial. This is because economics is the science of how financial decisions are made and how they interact
to form a well-defined concept of value, here tort settlement value. The field of study that is relevant to estimating
settlement values in the future is econometrics, my field of study and the focus of my research in my prior career as
an academic. This is the subfield of economics that focuses on the mathematical modeling of economics decisions
and how to use data to estimate properly how value is affected by changes in related financial factors.
in its own costs, lowers the offer the defendant is willing to make, all else being equal. This is

because the defendant's assessment of its cost of losing at trial is lower. Moreover, the defendant

will believe the plaintiff will settle for less because the defendant's assessment of the plaintiff's

benefit of winning at trial is also lower.

                3.      In this context, a substantial increase in money available to pay plaintiffs

on a contemporaneous basis from asbestos trusts lowers the offers that the defendant will make

to resolve the case. No other outcome is possible. Either the plaintiff already has filed trust

claims prior to trial or deferred filing those claims until after trial. In the first instance, the

remaining defendant receives a greater offset against any potential plaintiff verdict, and, hence,

the presence of the asbestos trust results in a lower settlement offer. In the second instance, there

are two effects, both of which result in a lower settlement offer. First, the remaining defendant

possesses greater sources of potential contribution as it can file contribution claims against the

asbestos trust should a plaintiff verdict be reached. Second, deferring the pursuit of trust claims

is costly to the plaintiff—the longer the plaintiff has to wait to file its trust claims and receive a

trust payment, the more it erodes the value of the claim to the plaintiff at present (payment today

is worth more than payment tomorrow). Thus, the remaining defendant knows that the plaintiff

will accept a lower settlement today in order to accelerate the timing of payment from the trusts.

                4.      The presence of a substantial increase in asbestos trust payments creates

an economic incentive for the plaintiff that reinforces the defendant’s economic incentives to

resolve the case at a lower settlement amount. In its decision to accept the offer or make a

further demand, the plaintiff considers its assessment of a finding of liability, the potential size of

a verdict, the options for appeals, the costs of continued litigation, the amount of money already

received, and the delay in receiving further payment if the settlement is not accepted and the




                                               -2-
litigation continues. As a matter of simple economic reasoning, anything that decreases its

expected return from continuing to litigate or lowers the value of trust recoveries through delay,

lowers the amount the plaintiff is willing to accept to settle the case, all else being equal. Clearly

when the remaining case is worth less to the plaintiff, the plaintiff will accept less money to

resolve the case. In this context, a substantial increase in money available to pay plaintiffs on a

contemporaneous basis from asbestos trusts lowers the amounts that the plaintiffs are willing to

take to resolve the case. This outcome occurs whether the plaintiff already has filed trust claims

prior to trial or deferred filing those claims until after trial. In the first instance, the plaintiff’s

expected recovery has decreased due to the increased offsets the remaining defendant will

receive should a plaintiff verdict occur. In the second instance, the plaintiff’s expected recovery

has decreased as the plaintiff forgoes any deferred trust recoveries should a plaintiff verdict

occur (the remaining defendant now has the right to those recoveries) and delays any trust

recoveries should a defense verdict occur.

                5.      This example focused on the last remaining defendant to show that it

would pay a lower settlement amount to resolve an asbestos tort case in the presence of

substantial trust payments. This result generalizes to other defendants in the case as well. Any

of them is more willing to hold out for the prospect of a lower settlement when the cost of being

the last remaining defendant goes down. Similarly, the plaintiffs' incentives are to try to resolve

the case sooner. Both lead to lower settlements on average.




                                                -3-
EXHIBIT 2
   Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 1 of 57




                            ASARCO

Projected Liabilities for Asbestos Personal Injury Claims




                      Mark A. Peterson

                  Legal Analysis Systems


                           May 2007
       Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 2 of 57
ASARCO                                                                                                                       i




                                               Table of Contents

1. Overview of Repor t ..................................................................................................... 1
2. Dr. Peterson’s Qualifications ....................................................................................... 4
3. Data for Asbestos Bodily Injury Claims Involving ASARCO ....................................... 5
4. Asbestos Business and Litigation for the Three ASARCO Companies ...................... 7
5. Estimation Methods .................................................................................................... 8
    5.1. Uses of Credible Estimation ............................................................................... 8
    5.2. Standard Methods for Forecasting Asbestos Liability ........................................ 8
    5.3. The Three Parameters of Asbestos Forecasts ................................................... 9
       5.3.1. The Number of Claims ............................................................................... 9
       5.3.2. Payment Rates--The Percentage of ASARCO Claims That Would
           Be Compensated .......................................................................................... 10
       5.3.3. Settlement Amounts ................................................................................. 12
    5.4. The Inseparability of Payment Rates and Settlement Values ........................... 17
6. Estimation of ASARCO’s Asbestos Liability, August 2005 ........................................                        18
    6.1. Forecast Indemnity for Claims Pending on August 9, 2005 ..............................                           19
       6.1.1. Number of Pending Claims ......................................................................             19
       6.1.2. Imputation of Disease ..............................................................................        19
       6.1.3. Calculation of Indemnity for Pending Claims ...........................................                     21
    6.2. Projections of Number And Timing of Future Claims .......................................                        27
       6.2.1. The Incidence of Asbestos-Related Cancers ...........................................                       27
       6.2.2. Accuracy of Epidemiological Projections .................................................                   28
       6.2.3. Propensities to Sue ASARCO ..................................................................               31
       6.2.4. Projection of Future Nonmalignancy Claims ............................................                      40
       6.2.5. Forecast Number of Future Claims ..........................................................                 46
       6.2.6. Estimating Liability for Forecast Future Claims ........................................                    46
7. Rule 26 Disclosures and Signature .......................................................................... 50

APPENDIX A ............................................................................................................... A-1



                                                        Figures

Figure 1: ASARCO Mesothelioma Settlement Values .................................................. 14
Figure 2: Trends in Mesothelioma Settlement Amounts ............................................... 16
Figure 3: Total Indemnity Amounts for Pending Claims, Reduced Payment Rates
   & 2003-2005 Base ................................................................................................... 26
Figure 4: Total Indemnity Amounts for Pending Claims, Reduced Payment Rates
   & 2004-2005 Base ................................................................................................... 27
Figure 5: Nicholson Cancer Projections ....................................................................... 28
       Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 3 of 57
ASARCO                                                                                                                          ii




Figure 6: Epidemiological Projections Confirmed by SEER’s Mesothelioma
   Counts ..................................................................................................................... 30
Figure 7: Number of Cancer Filings Against ASARCO ................................................. 33
Figure 8: Nicholson Meso Forecasts vs ASARCO Actuals ........................................... 34
Figure 9: Trends In ASARCO and Manville Mesothelioma Claims (2003-2006
   Smoothed) ............................................................................................................... 37
Figure 10: Trends In ASARCO and Manville Lung Cancer Claims (2003-2006
   Smoothed) ............................................................................................................... 37
Figure 11: Mesothelioma Forecasts, Decrease Model ................................................. 39
Figure 12: Mesothelioma Forecasts, Stable Model ....................................................... 39
Figure 13: Actual And Projected Filings, Decrease Model ........................................... 42
Figure 14: Actual And Projected Filings, Stable Model ................................................. 42
Figure 15: Actual And Projected Cancer Filings ........................................................... 43
Figure 16: Actual And Projected Nonmalignant Filings ................................................ 44
Figure 17: Past and Projected Cancer Filings and Compensable Claims .................... 45
Figure 18: Past and Projected Nonmalignant Filings and Compensable Claims .......... 46



                                                          Tables

Table 1: Data Processing Steps ...................................................................................... 6
Table 2: Numbers of Pending Claims, By Disease and Liquidation Status ..................... 9
Table 3: ASARCO Payment Rates, 2000 to 2005 ......................................................... 10
Table 4: Forecast ASARCO Payment Rates ................................................................. 12
Table 5: Average Settlement Values and Resolution Costs, By Year and Disease ....... 13
Table 6: Trends in Mesothelioma Settlement Averages for ASARCO and Other
   Asbestos Defendants .............................................................................................. 17
Table 7: August 9, 2005 Pending and Resolved Claims ............................................... 19
Table 8: ASARCO - Manville Trust Transition Matrix: Numbers of Claims .................... 20
Table 9: ASARCO - Manville Trust Transition Matrix: Allocation of Claims ................... 20
Table 10: Disease Distributions After Imputation for Pending Claims ........................... 21
Table 11: Estimated Number of Pending, Unliquidated Asbestos-Disease Claims ....... 21
Table 12: Payment Percentages for ASARCO .............................................................. 23
Table 13: Alternative Assumptions of Average Value of Claims .................................... 25
Table 14: Payment Parameters for Valuing Claims ....................................................... 25
Table 15: Forecast of Indemnity for Pending, Unliquidated Claims ............................... 26
       Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 4 of 57
ASARCO                                                                                                                       iii




Table 16: Comparison of Nicholson Projections with SEER 17-Site Estimates of
   Mesothelioma Incidence .......................................................................................... 29
Table 17: Number of Filings Against ASARCO, By Filing Year and Disease (After
   Reallocation) ........................................................................................................... 32
Table 18: Propensities to Sue ASARCO, by Disease: 1990-2004 ................................ 35
Table 19: Rates of Increase in the Propensity to Sue ................................................... 38
Table 20: Patterns of Increase in the Propensity to Sue ............................................... 38
Table 21: Number of Forecast Cancer Claims Filed After August 2005 ........................ 40
Table 22: Number of Forecast Claims Filed After August 2005 .................................... 46
Table 23: Forecast Indemnity for Future Claims after August 2005 .............................. 47
Table 24: Present Value (PV) of Future Claims as of August 2005 .............................. 48
Table 25: Present Value (PV) of Total Liability as of August 2005 ................................ 49
Table A1: Nicholson Epidemiological Projections ........................................................ A-2
Table A2: KPMG Epidemiological Projections ............................................................. A-2
Table A3: Forecasts of Number of ASARCO Filings, by Year, Model, and Disease .... A-3
      Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 5 of 57
ASARCO                                                                                                  1




1. Overview of Report
After submitting its February 28, 2007 report ‘‘Projected Liabilities for Asbestos Personal Injury
Claims’’, Legal Analysis Systems (LAS) and all other experts in this case then received from the
Debtors substantial additional data and information that are material for forecasting asbestos
liabilities for ASARCO LLC (‘‘ASARCO’’) and its subsidiaries Lac d’Aminate du Quebec Ltee,
Lake Asbestos of Quebec, Ltd., and LAQ Canada, Ltd. (collectively, ‘‘LAQ’’) and CAPCO Pipe
Company, Inc. and Cement Products Company (collectively, ‘‘CAPCO’’). The parties agreed to
submit reports to supplement the reports of February 28.
This ‘‘supplementary’’ report does not change either the discussion or methods of the February
report, but rather summarizes results of LAS’s new analyses that incorporate these newly received
data and information. Like the first report, it estimates the aggregate liability of ASARCO LLC
and its subsidiaries for asbestos personal injury claims that had been filed and were unpaid
(‘‘pending claims’’) and claims that would be filed in the future (‘‘future claims’’) as of the date
of the companies’ (collectively, the ‘‘Debtors’’’) bankruptcy petitions in April and August, 2005.
While each of these three companies has been sued by asbestos claimants, it is our (Legal
Analysis Systems’) understanding, supported by the claims data for each company, that claims
were typically resolved and releases obtained for all three companies regardless of which entity
was initially sued. Therefore, we make a single forecast of the expected liability costs across all
three companies, which we label as the ‘‘ASARCO’’ liability.
Also as another change for this report, made at the request of the Legal Representative, Judge
Robert C. Pate, and the ASARCO Official Committee of Unsecured Creditors for the Subsidiary
Debtors, who have each retained me as an expert for purposes of estimating asbestos liabilities
and providing testimony on those matters, we have excluded from the forecasts in this report
ASARCO LLC’s liabilities for ‘‘premises liability claims,’’ personal injury law suits that allege
liability based on plaintiffs’ exposure to asbestos at one or more industrial properties owned or
controlled by ASARCO LLC. While the approaches and much of the data from our earlier report
are carried over here, the limited changes that we now make affect later sequences of our
analyses. To make everyone’s life easier, this report represents a replacement of the February 28
report rather than a piecemeal replacement or supplement to portions of my prior report.
ASARCO companies mined, milled, and sold asbestos fibers and asbestos containing products
from the mid-1950s into the 1990s and have been sued increasingly for asbestos-related injuries.
None of the ASARCO entities had been regarded as primary asbestos defendants (meaning
companies that have histories of prominent sales of asbestos containing products or other reasons
for high visibility and consequent high numbers of claims and high resolution costs). But the
ASARCO entities assumed a more prominent place in the litigation during the years after the
2000 and 2001 bankruptcies of most primary asbestos defendants. These changes in ASARCO’s
asbestos litigation became particularly apparent in 2002 through 2004, the last full years of its
litigation, when ASARCO began receiving sharply increased numbers of claims and paying
increased amounts to resolve those claims.
Section 3 discusses the ASARCO data made available to me to conduct this liability analysis.
Sections 4 and 5 of this report discuss ASARCO’s involvement with asbestos and with asbestos
litigation. In Section 5, I also discuss issues of estimation for asbestos liabilities. I discuss the
standard estimation method that has been regularly accepted as the basis for courts’ past
estimates. To forecast the number of future filings, the standard method relies upon proven
epidemiology, the defendant’s own trends, and the defendant’s levels of past claim filings, and
current information about trends and other information. Similarly, it values claims using the
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 6 of 57
ASARCO                                                                                           2




levels and trends of the defendants’ past resolutions of claims, here settlements reflecting
assessments by both ASARCO and plaintiffs’ lawyers about the likelihood that ASARCO would
be held liable for claims, the likely costs to ASARCO and likely gain to plaintiffs should claims
proceed with litigation. Section 5 discusses the three estimation parameters: the number of
claims, the fraction of claims that get paid and the values of those claims. I discuss how two of
these parameters--the fraction of claims paid and settlement values--changed in related ways
during 2004-2005. I discuss how and why ASARCO’s payment rates (the fraction of claims that
it pays) declined sharply in 2004-2005 and will likely remain below ASARCO’s rates of paying
claims during prior years. I discuss the increases in amounts that ASARCO paid to settle claims
that accompanied reductions in the fraction of claims that it paid and how ASARCO’s settlement
amounts will likely remain at these higher values or continue to increase further. These
increasing settlement values in part reflect broad increases in verdicts and settlement amounts
among all defendants who remained in asbestos litigation. But ASARCO’s settlement amounts
may also have increased because it appeared to change its tactics, rejecting a greater number of
claims but paying more to those who received payment. These two parameters--payment rates
and settlement values--are inseparably and inversely related: in now avoiding payments of claims
that it regarded as having low or marginal risk, ASARCO is then left facing a mix of remaining
claims that on average have higher value, because low value claims have been stripped out.
Throughout Section 5 and the entire report, I describe the many ways that our forecasts are
conservative, underestimating rather than overestimating ASARCO’s liabilities.
In Section 5 and Section 6, I describe our forecasts of ASARCO’s liability and the data upon
which we rely. In analyzing and forecasting ASARCO’s asbestos liabilities, we utilize four types
of information:
 • an historical database of ASARCO claims through 2004,
 • a bar-date database, sought by the debtors to provide proofs of claim and additional
   information about pending claims,
 • a pre-packaged settlement database of settlements agreed upon by ASARCO and plaintiffs in
   2004-2005 and supporting PDF files of settlement documents, all provided after February 28,
   2007, and
 • the experiences of other asbestos defendants. We are able to better understand what would
   have been ASARCO’s asbestos liability at and after its petition date by considering the
   contemporaneous experiences of these other defendants.
Section 6 describes the forecasts first for pending claims and then future claims. After
eliminating overlaps between the historic and bar-date databases, we estimate that ASARCO had
111,051 asbestos claims pending at the time of its bankruptcy petition, of which 20,672 are
reported as already liquidated. We separately value the 20,672 liquidated claims, then exclude
another 4,674 claims that we assume will have no asbestos-related disease or are post-2004 filings
(years for which we have almost no data), leaving 85,705 unliquidated pending claims. We
forecast conservatively that only 37,759 to 46,562 of these unliquidated pending claims would be
paid by ASARCO and that ASARCO’s liability for both liquidated and unliquidated claims
would be between $402 million and $556 million.
We also forecast the number of ASARCO future claims conservatively, assuming despite the
increasingly dangerous litigation environment that it faced, ASARCO would have received fewer
claims filings than it had been receiving before the April and August 2005 bankruptcy petitions.
We forecast that its receipt of nonmalignant claims would have continued to decrease in all future
years. We make two alternative forecasts of future cancer filings: one that these filings will
decrease steadily from their average during the three years preceding ASARCO’s bankruptcy and
      Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 7 of 57
ASARCO                                                                                                3




the second that cancer filings will start below filing levels of recent years, then increase slowly
until 2009 to about their pre-petition level, after which claims will again decline.
Based on these alternative assumptions, we make twelve alternative forecasts of ASARCO’s
liability for pending and future claims, with present values ranging between $1.3 billion and $2.1
billion.
      Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 8 of 57
ASARCO                                                                                                 4




2. Dr. Peterson’s Qualifications
For over twenty-five years I have studied, written about and participated as a special master and
expert in asbestos litigation and other mass tort litigation. I am a lawyer, a graduate of Harvard
Law School and a recognized scholar on asbestos and other mass tort litigation. I have a
doctorate in social psychology from the University of California, Los Angeles. For over twenty
years I conducted research on asbestos and other mass tort litigation as a founding member of the
RAND Corporation’s Institute for Civil Justice. I have published many scholarly, peer-reviewed
articles on asbestos litigation, mass torts, and workers compensation including articles on: how
asbestos and other mass tort claims arise, how the values of asbestos bodily injury claims are
determined by medical and legal issues, evaluations of claims facilities used for paying asbestos
and other mass tort claims, and other subjects related to asbestos litigation. I have taught courses
on mass torts at UCLA Law School and the RAND Graduate Institute. My resume is attached to
this report as Exhibit 1.
I am an expert on claim values, claims procedures and estimations of liabilities for fifteen
asbestos trusts. I am a trustee of the Fuller Austin Settlement Trust, an asbestos trust, and a
director of TSI, a nonprofit corporation that administers the trust distribution procedures for seven
asbestos trusts. I have worked as an expert on asbestos litigation for judges, defendants,
insurance companies, actuarial firms, other businesses, law firms, claimants’ committees in
bankruptcy and legal representatives of future claimants.
I have worked for four U.S. District and Bankruptcy Courts as the Court’s expert on how asbestos
claims are determined to have value, on asbestos claims procedures for trusts and other matters.
As the Special Adviser to U.S. District Court Judge Jack B. Weinstein and U.S. Bankruptcy Court
Judge Burton Lifland I helped the courts and parties to restructure the Manville Trust,
establishing the Manville Trust Distribution Procedures that became a model used in subsequent
bankruptcy cases and by later-created trusts to process, allow and pay the hundreds of thousands
of asbestos claims that they have received so far.
I have been an expert in more than twenty other bankruptcies and class actions in different cases
working for parties with divergent interests: asbestos claimants’ committees, defendant asbestos
companies, insurance companies, and court-appointed representatives for future claimants. In
each of these cases I have provided descriptions and quantitative forecasts of pending and future
asbestos bodily injury claims using the standard forecasting methods that I describe and use in
this report. I have testified in court more than twenty times about my forecasts of asbestos
liabilities. My forecasts and analyses have been accepted and used as the court’s basis for
findings of aggregate asbestos liabilities in the bankruptcy proceedings of Eagle-Picher, National
Gypsum, Babcock and Wilcox (confirmation hearing), Turner & Newall, Western Asbestos,
Armstrong, API, C. E. Thurston, H. K. Porter, E. J. Bartel, Raymark, and J. T. Thorpe.
I have been recognized by courts as an expert on all areas that I address in this report and the
descriptions and analyses in this report come from my scholarship and work as an expert on
asbestos litigation. A listing of the matters in which I have testified as an expert within the past
four years (deposition or trial) is set forth as Exhibit 2.
I have been retained by the Legal Representative, Judge Robert C. Pate, and the ASARCO
Official Committee of Unsecured Creditors for the Subsidiary Debtors as an expert for purposes
of estimating asbestos liabilities and providing testimony on those matters. This report has been
prepared as part of that engagement.
      Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 9 of 57
ASARCO                                                                                                               5




3. Data for Asbestos Bodily Injury Claims Involving ASARCO
We received multiple sources of data about ASARCO claims. First was the company’s electronic
claims database, a routine source for forecasting asbestos liabilities. The two law firms that
represented ASARCO in asbestos litigation each maintained a database of asbestos claims filed
and resolved by ASARCO during the respective periods of their representations. The Claro
Group, a consulting company retained by ASARCO in these proceedings, reconciled these
separate databases and produced a single electronic claims database, which we received in
November 2006. This ‘‘historic’’ claims database was incomplete, providing little information
about recent filings and resolutions of asbestos claims. Although ASARCO remained in litigation
of asbestos claims through more than half of 2005, the database has essentially no filing
information for that year. Its data on recent claim resolutions are even more limited, providing
essentially no information about resolutions after 2003. Finally, we had no assurance that claims
filing data in this database was complete for 2004, given the absence of information about claims
resolutions in that year and the omission of claim filing information during 2005.
Because of these limitations, the Debtors sought a bar date and administered a proof of claim
process in these proceedings for asbestos claims. In pursuing these, the Debtors cited the need for
proofs of claim to provide information about pending and recently filed claims. Proofs of claim
data were also compiled by Claro and we received this database of proofs of claim (POC
database) in November 2006. We used the POC database in the manner suggested by the Debtors
to supplement the historic claims database, adding data for pending and recently filed claims.
The company’s historic database had 276,532 claims records. However, many claimants
appeared more than once, usually because they filed against more than one ASARCO company,
but also because duplicate entries were made into the data systems. We consolidated the multiple
records, based on ASARCO identifiers, claimant names, and social security numbers (SSNs) into
202,982 unique claimant records, accepting the most serious disease when there was conflicting
information, and summing settlement amounts across companies (Table 1). But we used
ASARCO’s historic database only to identify resolved claims (claims closed with or without
payment plus liquidated claims for which a settlement agreement was reached but not yet fully
paid). We specifically excluded pending/unresolved records from the historic database, accepting
that bar-date cases (that did not match a resolved claims record in the historic database) provided
a more appropriate record of now pending claims.
After the expert reports were submitted on February 28, the Debtors provided additional
information on historic claims. In a series of electronic spreadsheets, ASARCO identified several
premises claims that are a part of ASARCO’s overall liability for asbestos bodily injury claims,
but that we were instructed to exclude from our current analyses and forecasts. This eliminated
2,341 claims. Second, ASARCO provided a series of electronic files describing their ‘‘pre-
packaged’’ settlements (and some payments) of claims during the two years preceding their
petitions:1 three PDFs showing copies of letters, agreements, courts’ orders and other documents
that described specific settlements, and an electronic database that was a (partial) list of claims
addressed in the PDFs. The Debtors described most of these as ‘‘pre-packaged settlements’’ that
they reached with plaintiffs’ law firms based on representations that the Debtors planned to seek
quickly bankruptcy protection. Terms in many of these agreements required the ASARCO entity
to begin paying settlements if it had not entered bankruptcy by certain dates that had in fact
passed before the entity actually filed bankruptcy, but few of these settlements have received any
payment. We used these data on pre-packaged settlements to identify recent settlements by


1.   Prior to receiving these files the experts had little useful data about ASARCO’s resolutions of claims during 2004
     and 2005, as I noted in my February 28 Expert Report.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 10 of 57
ASARCO                                                                                            6




ASARCO and combined this with settlement data from ASARCO’s historic database.
We used the bar-date (POC) database to identify unresolved claims now pending against the
ASARCO entities. We began with 102,780 records, then reduced these in a series of steps (Table
1) to: (1) eliminate claims that identified ‘‘premises’’ as the basis of claim (101,838 records
remained), (2) consolidate claims with the same SSNs (101,288 records remained), (3) eliminate
claims names-matched to a resolved record in the history file (99,901 records remained), and (4)
eliminate claims linked by SSN to a resolved record in the history file (90,379 records remained).
We add together the 134,875 resolved claims in the historic database to the 90,379 pending claims
listed in the POC database in order to derive the total number of 225,254 filings against
ASARCO. Table 1 summarizes these steps in identifying the Debtors’ resolved claims from its
history database and its pending claims form its bar-date database.


                                  Table 1: Data Processing Steps

         Source                                                                 Records
         File        Status      Data Processing Step                         Remaining

         Histor y    Original                                                    276,532
         Histor y    Reduced Consolidate by SSN and name                         202,982
         Histor y    Reduced Eliminate premises claims                           200,641
         Histor y    Reduced Eliminate unresolved open                           134,875
         Bar-Date Original                                                       102,780
         Bar-Date Reduced Eliminate premises claims                              101,838
         Bar-Date Reduced Consolidate by SSN                                     101,288
         Bar-Date Reduced Eliminate resolved cases                                90,379
         Histor y+
         Bar-Date    Final       Combine remaining records from both files       225,254


In addition to ASARCO’s data we use asbestos claims data from the Manville Trust to understand
trends in asbestos claim filings since ASARCO’s August 9, 2005 petition date and to forecast
claims that would have been filed against ASARCO since that date.
Disease is missing in the historic database for about a third of the cases. We linked ASARCO’s
historic data to its pre-packaged settlement databases, to the Manville Trust data, and to the bar-
date database and then assigned the most serious disease from any of these sources to a given
case. Among the 9,539 cases closed with payment or scheduled to receive liquidated settlements
that had still not been assigned a disease, we classified all as nonmalignants.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 11 of 57
ASARCO                                                                                                                7




4. Asbestos Business and Litigation for the Three ASARCO
Companies
Robert Brennan, counsel for ASARCO, stated that LAQ mined, milled, and sold asbestos fibers
from 1958 until 1986 and had ‘‘some limited sales of asbestos in the United States between 1952
and 1958 before its own mill opened’’ (Letter of January 23, 2003 from Robert J. Brennan to
Thomas E. Vasquez [‘‘Brennan Letter’’], p. 2). Mr. Brennan stated that LAQ’s earliest claims
were made by plant workers involved in manufacture of products containing LAQ asbestos, but
by the late 1980s most claims were made by workers in a wide range of occupations who worked
with products that contained LAQ asbestos (ibid). Mr. Brennan stated that CAPCO made and
sold asbestos cement pipe from 1963 to 1994 (ibid, pp. 2-3).
The ASARCO companies continued to mine, manufacture and sell asbestos products well beyond
the time that most other companies had stopped such sales. All use of asbestos in the United
States peaked in the early 1970s and most companies claim to have stopped all manufacture and
sales of such products by the end of the 1970s. In contrast, LAQ continued to mine, mill, and sell
asbestos fibers into 1986, and CAPCO continued sales of asbestos containing products until 1994
(ibid). Because the ASARCO companies continued to sell asbestos fibers and products after
other defendants quit, they likely now face greater and longer-extending asbestos liability than
other defendants. Asbestos related disease--both cancers and nonmalignancies--have long
latencies, taking many years after first exposure before the diseases begin to appear and peaking
decades later (the median latency period is around 40 years after first exposure for mesothelioma
and 30 years for other diseases). For most asbestos defendants who had stopped selling asbestos
products by 1980, the numbers of injuries and deaths caused by their products have now reached
their peaks, although deaths and injuries will continue at gradually declining rates for decades.
Indeed, the mostly widely accepted epidemiological forecast, by Drs. Nicholson, Perkel and
Selikoff at New York’s Mount Sinai Hospital, predicts a peak around 2004 in annual U. S.
mesothelioma deaths resulting from pre-1980 work-place exposures to asbestos, while asbestos-
related deaths from lung and other cancers peaked during the 1990s (See, Section 6.2.1). But
even though incidences of asbestos-related cancers have now begun to slowly decline, cancer
filings against many defendants have continued to rise in recent years, because newly diagnosed
victims of asbestos-related cancers are now filing law suits at increasing rates. ASARCO’s claim
filings will likely continue to increase in future years, following the general increases in cancer
filings experienced by other asbestos defendants and also because the later, post-1970s asbestos
exposures that ASARCO caused will lead to additional later-occurring asbestos-related cancers
and deaths beyond those caused by other defendants and beyond those forecast by Nicholson.
Law suits against the ASARCO companies continued to increase until its bankruptcy.2 The
amounts paid by the ASARCO companies to settle claims also increased sharply prior to its
bankruptcy with particularly marked increases in settlements of mesothelioma, the most costly of
claims. And ASARCO faced a future of even more increases in claims filings and settlement
payments. Not only have settlement amounts paid by other asbestos defendants increased
markedly before and after ASARCO’s bankruptcy petition, but ASARCO will likely see a greater
share of future filings and settlements among plaintiffs exposed to asbestos in later years when
few defendants other than ASARCO were selling asbestos fibers and products.



2.   ASARCO’s claims database reports implausibly low numbers of filings during 2005 given that ASARCO had
     been receiving well over 15,000 annually and that ASARCO LLC did not enter bankruptcy until August 2005.
     We therefore do not use data on 2005 filings for our forecast. Similarly, the number of 2004 filings in the claims
     database is less than the number filed in 2003, which might also reflect a reduction in processing and reporting by
     ASARCO’s counsel, who provided data that underlies the database.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 12 of 57
ASARCO                                                                                                  8




5. Estimation Methods
5.1. Uses of Credible Estimation
Forecasts of asbestos liabilities are needed and have become commonplace in many different
circumstances. Asbestos defendants estimate their present and likely future liabilities both for
their own corporate planning and also as part of financial reporting. Insurance companies
forecast asbestos liabilities to create reserves for specific insureds. Insurance rating organizations
forecast liabilities of insurance companies. Financial analysts forecast liabilities of specific
asbestos defendants and insurance companies. Businesses forecast liabilities of other companies
that face asbestos liabilities in order to determine whether or not to engage in business activities
with the companies that face such liabilities. Asbestos trusts are required to forecast their
liabilities in order to determine how much money must be reserved for future claimants and what
amount can be paid to claimants with presently pending claims, forecasts that are required by the
U.S. Bankruptcy Code. Parties to bankruptcy proceedings forecast liabilities in order to draft
reorganization plans and disclosure statements. Bankruptcy courts estimate the asbestos
liabilities of debtors. Other courts estimate the asbestos liabilities of particular defendants in the
course of class action, insurance coverage or other litigation.
These forecasts have been done in many ways, with highly varying quality and credibility.
Credible forecasts of asbestos defendants’ liabilities--those that have been accepted by trustees
who are fiduciaries to both present and future claimants, that have been accepted by courts in
estimation hearings, and that have been confirmed by subsequent claims data-- share several key
features:
 • the forecasts draw upon data about the defendant’s own past experience and the contemporary
   experience of other asbestos defendants with asbestos claims--counts of claim filings,
   distributions of asbestos diseases, resolutions of claims both with and without payment
   through judgments and settlements, and trends for all of these elements of liability.
 • the forecasts reflect the epidemiology of asbestos-related diseases, past trends as well as
   expected future trends in the incidence of asbestos-related disease, past trends and expected
   future trends in filings of claims for those diseases, and past and expected future trends in the
   amounts paid to indemnify claimants.
 • the forecasts attempt to predict the future behavior of litigants: filing behavior among victims
   of asbestos disease and their lawyers, how defendants, plaintiffs and courts will value and
   resolve claims. Because these are forecasts of objective future events, they cannot be based
   on experts’ or clients’ personal views about which claims should or should not be paid or how
   much a plaintiff deserves to be paid.
Courts, litigants, businesses, trusts and others rely upon estimation of asbestos liabilities. Better
forecasts--those that use the sources listed above using methods that have been tested and found
to be reliable--have become important bases for decisions involving tens of billions of dollars.
Forecasts in this report have all of these features of previous forecasts that have been accepted and
found credible.
5.2. Standard Methods for Forecasting Asbestos Liability
To establish an aggregate value of pending and future asbestos bodily injury claims, bankruptcy
estimation looks at how a debtor would continue to receive and resolve claims within the U. S.
court systems. Standard methods for estimating this aggregate liability start by examining and
extrapolating from a debtor company’s prior history in asbestos litigation.
By the time of its bankruptcy petition, the ASARCO companies had already received 225,254 and
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 13 of 57
ASARCO                                                                                             9




evaluated and resolved 114,203 asbestos injury claims within the legal system and processes that
provide the context for now estimating its current liability for asbestos bodily injury claims.
ASARCO’s historic data is particularly important in showing how the company itself valued
asbestos claims in the past and how its values have been changing and could be expected to
continue to change further over time. The database shows how ASARCO has valued some
134,875 settled or liquidated claims.
5.3. The Three Parameters of Asbestos Forecasts
ASARCO’s liabilities for pending claims as well as future claims are determined by estimating
three parameters--the number of claims, the percent of claims that will be paid compensation, and
the average amount of compensation paid--none of which can be known now with certainty, but
can be reasonably estimated using established and accepted methods.
5.3.1. The Number of Claims
5.3.1.1. The Number of Future Claims
The overwhelming bulk of ASARCO’s liability will be for ‘‘future’’ claims that have not yet been
identified: injuries that have already arisen through today but whose claim filings have been
stayed by these bankruptcy proceedings (bankruptcy period claims), and injuries and claims that
will arise after today (true future claims). The number of filings for both of these types of
‘‘future’’ claims is unknown.
5.3.1.2. The Number of Pending Claims
ASARCO’s POC database identifies 90,379 pending unliquidated claims (Table 1) and its historic
database identifies 20,672 pending liquidated claims, together 111,051 pending claims (Table 2).
These two databases provide substantial information about the pending claims, but some
uncertainties remain about disease mix. These uncertainties are modest compared to uncertainties
about other parameters used in forecasting and add relatively little on top of uncertainties about
the number of future claims and other sources of uncertainty about ASARCO’s liability. We
know or infer alleged disease for all but 4,113 of the 111,051 pending claims Fewer than 4
percent are unknown.
Analysts have developed standard methods for supplementing or imputing specific diseases for
such claims, and we apply these methods in Section 6.1.2. both to impute disease when unknown
and also to infer how the distribution of diseases among pending claimants would change as
ASARCO learns more about diseases through negotiations or discovery for these claims.


            Table 2: Numbers of Pending Claims, By Disease and Liquidation Status

                                                Disease
          Claim
          Status             Meso       Lung    OthCan Nonmal        Unspec       Total

          Liquidated           719      1,080       418    18,455          0  20,672
          Not Liquidated     3,120      5,659     1,987    75,500      4,113  90,379
          Total Pending      3,839      6,739     2,405    93,955      4,113 111,051
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 14 of 57
ASARCO                                                                                           10




5.3.2. Payment Rates--The Percentage of ASARCO Claims That Would Be
Compensated
As was discussed above and in later Sections of this report, we reduce the count of pending
ASARCO claims by eliminating claims that have no apparent disease and that have already been
settled though unpaid (Section 6.1.3). Among the remaining pending claims, not all will receive
payment. This Section discusses this second key estimation parameter, the forecast payment rate.
We know ASARCO’s historic payment rate from its claims data (among resolved claims, the
percent that were closed with payment). We expect that because of broad changes in asbestos
litigation, asbestos defendants may now close more claims without payment than they have in
previous years. In fact ASARCO’s data show substantial falls in payment rates during
2004-2005, which might reflect these broader changes (Table 3). In forecasting ASARCO’s
liabilities now for both pending and future claims, we forecast that it will pay lower percentages
than it had in recent years.


                        Table 3: ASARCO Payment Rates, 2000 to 2005

                       Settlement
                       Year            Meso       Lung OthCan Nonmal

                       2000           82.9%      92.6%     97.0%     97.6%
                       2001           88.4       95.8      97.7      96.5
                       2002           93.8       96.9      94.4      96.0
                       2003           77.2       93.4      93.6      98.0
                       2004           83.2       80.0      72.5      85.3
                       2005           61.8       20.4      13.6       7.6
                       2003-05        78.4       81.7      79.0      86.7
                       2004-05        79.8       69.0      64.1      72.5

  Note: Among claims that ASARCO resolved, the percent that were resolved with payment.

It is unclear what contributed to ASARCO’s reduced payment rates during 2004-05. Claims that
ASARCO resolved during these years may have differed from those resolved in prior years
because it was approaching bankruptcy. Or this apparent reduction may be an artifact of
ASARCO’s historical database, which may still provide somewhat incomplete information about
recent events. We will continue to examine both of these types of explanations. But it is likely
that to some degree the reduction after 2003 in the percent of claims that ASARCO resolved with
payment reflects recent events in asbestos litigation that cause us to expect lower payment rates in
the future among asbestos defendants, including ASARCO. I turn to these recent events and their
likely impacts.
In recent years, some defendants and courts have come to criticize certain doctors and medical
facilities who helped recruit and provided reports for some plaintiffs who have filed law suits
claiming nonmalignant asbestos diseases. Several asbestos trusts now refuse to accept medical
reports provided by the criticized doctors and facilities. In addition, there have been some limited
changes in substantive and procedural tort law in several jurisdictions that make it harder for
some plaintiffs to recover, especially for non-malignant claims.
Indeed, we expect and have already seen changes in asbestos litigation from these events.
Plaintiffs and their lawyers now avoid criticized doctors and medical facilities. Medical screening
operations have largely disappeared. New law suits have dropped sharply in some states that have
changed their laws to tighten venue or restrict suits for lesser injuries. New claims for
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 15 of 57
ASARCO                                                                                            11




nonmalignant disease have fallen sharply. But the implications of these changes are not yet fully
evident.
While we expect mixed effects from these recent events in asbestos litigation, these events might
have two different effects that would reduce the number of nonmalignant claims that ASARCO
will pay. First, fewer nonmalignant claims might be filed in the future, an effect that I discuss and
that contributes to our forecast of declining future nonmalignant claims (Section 6.2.4). Second,
as a result of these criticisms of medical evidence sources and other developments in the tort
litigation environment, ASARCO might have come to reject a greater number of claims,
particularly nonmalignant claims pending on the petition date, an effect that we forecast by
assuming that ASARCO’s payment rates will decrease from their past levels and by estimating an
even lower payment percent for nonmalignant claims (Section 6.1.3.1).
We expect that instead of making payments in over 75 percent to as much as 98 percent of
resolved claims (Table 3) as ASARCO had prior to 2004, it would likely pay lower percentages of
pending and future claims. We have already seen reductions in ASARCO’s payment rates among
all diseases when we calculate payment rates for the overlapping periods 2003-2005 and
2004-2005. We forecast that ASARCO’s payment rates may be even lower in the future.
We assume that ASARCO’s future payment rates for nonmalignant claims will drop far below
even its reduced 2004-2005 levels: that ASARCO would now reject 40 percent of nonmalignant
claims that it paid in 2004-2005 or, alternatively 2003-2005. In the past, between 2000 and 2003,
ASARCO rejected only 3 percent of nonmalignant claims that it resolved. We forecast that
ASARCO would now reject between 48 percent and 57 percent of nonmalignant claims (based on
2003-05, 1-52.0% = 48.0%; based on 2004-05, 1-43.5% = 56.5%, Table 4).
We forecast sharp drops as well in the number of cancer claims that ASARCO would pay. At
most we forecast that ASARCO would not pay higher percentages of cancer claims than it had
during 2003-2005 or 2004-2005, the historic base periods that we use as starting points for
forecasting future payment rates. Because ASARCO’s payment rates for cancer claims were so
much lower during 2004 and 2005 than in prior years, our two historic models forecast future
payment rates that are between 10 and 50 percent lower than rates paid by ASARCO in resolving
cancer claims prior to 2004 (compare historic rates in Table 4 to rates in Table 3). Our four other
models forecast even lower future payment rates: our lowest model forecasts that ASARCO will
now reject 30 percent of cancer claims that it would have paid in the past, rejecting about half of
all cancer claims (Table 4). Our reduced model forecasts that ASARCO will now reject 15
percent of cancer claims that it would have paid in the past, rejecting between a third and a half of
all cancer claims (Table 4).
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 16 of 57
ASARCO                                                                                                           12




                               Table 4: Forecast ASARCO Payment Rates

                    Payment                             ASARCO Payment Rates
                    Year            Payment
                    Basis           Rates          Meso         Lung OthCan Nonmal

                    2003-2005 Historic             78.4%       81.7%       79.0%       52.0%
                    2003-2005 Reduced              66.7        69.5        67.2        52.0
                    2003-2005 Lowest               54.9        57.2        55.3        52.0
                    2004-2005 Historic             79.8        69.0        64.1        43.5
                    2004-2005 Reduced              67.9        58.7        54.4        43.5
                    2004-2005 Lowest               55.9        48.3        44.8        43.5


5.3.3. Settlement Amounts
As is the case with payment rates, we cannot directly calculate the amounts ASARCO would pay
to settle asbestos claims after August 2005. Unlike the number of claims pending against
ASARCO at the time of its bankruptcy filings, which can be calculated (with some uncertainty)
directly from the past data in ASARCO’s database, both the payment rates and average settlement
amounts are forecasts of future resolutions by ASARCO that cannot be determined directly by
calculation from its past data.
5.3.3.1. ASARCO’s Historic Settlement Amounts and Trends
Table 5 shows trends in annual payments both for ASARCO’s average settlements (amounts paid
to claimants who receive a settlement) and average resolutions (average cost to ASARCO for
resolving all claims, both those that are closed with and without payment). The averages in Table
5 represent ASARCO’s share of the full liability cost of asbestos claims, what ASARCO itself
actually paid. Typically plaintiffs have been exposed to asbestos by many different companies
and receive payments from more than one. Consequently, the full compensation plaintiffs receive
from all defendants is greater than ASARCO’s share: in 2004-05 when ASARCO’s mesothelioma
settlements averaged $141,513, plaintiffs were receiving $5,000,000 or more from all defendants
(testimony by Mr. Daniel Myers who negotiated settlements for CCR3 and now for other asbestos
defendants). Amounts in Table 5 are adjusted for inflation to show increases in the real value of
dollars beyond increases that occurred solely because of inflation in the dollar.




3.   CCR (Center for Claims Resolution) was a consortium of asbestos defendants created in 1988 by defendants for
     purposes of achieving more favorable settlements and reducing defense and administrative expenses. Because the
     members of CCR accounted for substantial portions of all recoveries that plaintiffs might expect to receive for
     their injuries, CCR members were able to obtain more favorable settlement terms by negotiating jointly than
     individual defendants could have standing alone. The CCR disbanded in January 2001. ASARCO was never a
     member of this organization.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 17 of 57
ASARCO                                                                                            13




         Table 5: Average Settlement Values and Resolution Costs, By Year and Disease

                       Settlement Averages                       Resolution Averages
   Settle
   Year         Meso       Lung    OthCan Nonmal          Meso       Lung    OthCan Nonmal

   1990    $29,252 $21,207 $11,261             $6,447   $24,598 $16,552        $7,507    $5,779
   1991     20,947  17,303     142              3,179    14,663  11,011            28     2,782
   1992      7,692  10,786     138              6,342     3,962   7,191            83     5,290
   1993     11,976  12,425  20,677              1,729     9,191   9,640        18,954     1,624
   1994     29,997     661   1,040                582    23,708     645         1,034       574
   1995      8,588   3,957     727                905     6,071   3,811           707       885
   1996     21,181   1,529     418                516    12,678   1,353           383       452
   1997     11,493   1,854     727                350     9,037   1,799           708       328
   1998     91,550   4,392   1,223                395    70,423   3,969         1,179       375
   1999     26,262   6,542   3,155              1,002    20,598   5,775         2,814       871
   2000     18,258   1,222   2,305                340    15,128   1,132         2,236       332
   2001     14,259   2,083   3,037                480    12,610   1,996         2,966       463
   2002     29,500   7,466   1,194                901    27,673   7,235         1,127       865
   2003     39,529   6,133   2,396              1,045    30,514   5,729         2,243     1,024
   2004    122,116  26,009   6,187              1,825   101,624  20,807         4,487     1,557
   2005    280,143  26,085   5,167              9,108   173,179   5,314           705       692
   2004-05 141,513  26,013   6,156              1,951   112,966  17,962         3,943     1,414

  Notes: Averages expressed in year 2005 dollars. Settlement averages include positive payments
  only. Resolution averages are calculated across all resolved claims, whether or not closed with
  payment.

The sharp drop in ASARCO’s payment rates during 2004-2005 (Table 4) explain in part why its
settlement averages increased sharply in those years. The two parameters, payment rates and
settlement averages, are related as I discuss in Section 5.4. But beyond this, both of these trends
for ASARCO, increasings in values of asbestos claims and decreases in their rates of being paid,
reflect broad changes in asbestos litigation. I discuss some of those broad changes in this Section.
First there have been broad, recent trends of increasing settlement values across asbestos
defendants. We have repeatedly seen the greatest increases among mesothelioma settlements and
we see that again for ASARCO. For ASARCO we also see a trend of increasing settlement
values paid by ASARCO to claimants with all types of cancer and since 2002 increases in
nonmalignant settlements as well. It is likely, based on past history and on litigation
developments discussed in this Section, that settlement values paid by ASARCO would have
remained at levels higher than it had paid through 2003 and far higher for mesothelioma claims.
The amount of these continuing increases in settlement values, however, cannot be predicted with
certainty.
Figure 1 shows the sharply increasing trend in annual ASARCO settlement amounts paid to
mesothelioma claimants. Because of these increases, during 2004-2005 mesothelioma
settlements accounted for 72.9 percent of ASARCO’s total liabilities to asbestos claimants even
though mesothelioma claims accounted for only 4.8 percent of all claims resolved during those
years.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 18 of 57
ASARCO                                                                                                  14




                                       Figure 1: ASARCO Mesothelioma Settlement Values


                              250000
                              200000          Averages
         Settlement Average
                              150000
                              100000
                              50000
                              0




                                       1992        1994   1996        1998         2000   2002   2004

                                                                 Settlement Year



These increases in ASARCO’s mesothelioma settlements seem to reflect general changes in
asbestos litigation that were widely recognized by asbestos defendants and other observers,
changes that occurred first among primary defendants who were targets of the litigation and then
later affected secondary defendants like ASARCO. W. R. Grace’s 2000 Annual Report
acknowledged sharp increases in claim values in 2000, observing that ‘‘costs to resolve asbestos
litigation were higher than expected for bodily injury and certain property damage claims’’ (p.
12). Significantly, Grace foresaw that these costs would continued to increase:
  ‘‘These developments and events (i.e. past increases in costs to resolve claims and bankruptcy
  petitions by five other asbestos defendants) have caused an environment that increases the risk
  of more claims being filed against Grace than previously projected, with higher settlement
  demands and trial risks. These developments and events also raised substantial doubt whether
  Grace would be able to manage its asbestos liabilities over the long term under the existing
  state court system’’ (W. R. Grace 2000 Annual Report, pp. 12-13).
Between January 2000 and December 2001, eight traditional ‘‘top-tier’’ asbestos defendants with
historically very large asbestos liabilities each filed for bankruptcy protection: Babcock & Wilcox
(February 2000), Owens Corning and Fibreboard (October 2000), Armstrong World Industries
(December 2000), GAF (January 2001), Pittsburgh Corning (April 2000), W. R. Grace (April
2001), USG (June 2001) Turner & Newall (T&N) and the other Federal Mogul companies
(October 2001). Asbestos defendants like ASARCO who continued in tort litigation paid more in
part because all the other big payers had gone into bankruptcy. After these bankruptcies had
removed the biggest sources for compensation of asbestos claims, plaintiffs and their lawyers
demanded and received greater settlement payments from those defendants who remained in
litigation. Asbestos plaintiffs and their counsel would successfully demand that the remaining
solvent defendants still in the tort system ‘‘pick up the share’’ of the defendants who sought
bankruptcy protection. Because of these bankruptcies both claims against ASARCO and the
amounts that it would have had to pay to resolve asbestos claims have increased and will likely
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 19 of 57
ASARCO                                                                                             15




continue to increase.
Other asbestos defendants described how these bankruptcy filings by other defendants increased
their own asbestos liabilities. USG described in its financial statements how these bankruptcies
among other asbestos defendants increased the settlement amounts that it had to pay to settle
asbestos claims:
  ‘‘In the first and second quarters of 2001, cash payments to resolve Personal Injury Cases
  increased dramatically, primarily as a result of the bankruptcy filings of other defendants in
  asbestos personal injury lawsuits. As a result of these bankruptcy filings, plaintiffs
  substantially increased their settlement demands to the remaining defendants, including U.S.
  Gypsum, to replace the expected payments of the bankrupt defendants.’’
Mr. Daniel Myer has direct knowledge of the settlement amounts paid by asbestos defendants
before and since the time of ASARCO’s bankruptcy petition and reasons for trends in those
amounts. Mr. Myer settled claims for members of the CCR as a senior claims person, continued
to settle claims for some CCR members after the CCR disbanded in January 2001, and now
continues to settle asbestos claims on behalf of Union Carbide and other asbestos defendants. As
Mr. Myer describes, the 2000 and 2001 bankruptcies of other asbestos defendants increased
settlements among all asbestos defendants. So this would have increased ASARCO’s liability in
two ways. First, by sharply increasing the total value of asbestos claims, particularly
mesothelioma. Mr. Myer estimated that the ‘‘total gross value’’ of mesothelioma claims (i.e. what
a plaintiff might expect to receive across all defendants) has doubled or tripled since 2000 so that
the full value of such claims today is ‘‘(w)ithin the range of probably between $5 and $8 million’’
(Armstrong Confirmation Hearing testimony, May 23 2006). Second, ASARCO (and each other
remaining defendant) would assume an even greater share of this now increased liability to make
up for the shares previously paid by the bankrupt defendants.
CCR’s dissolution in January 2001 added further pressure on ASARCO to increase settlement
payments. Because it settled claims and made payments on behalf of all 20 of its members, CCR
was among the largest single source of payments to plaintiffs and the law firms that represented
them. CCR settled asbestos claims in large groups, saving plaintiffs’ law firms transaction costs
and generating large total payments to the firms and their clients. Again, to make up for these
losses when CCR dissolved, plaintiffs’ law firms looked to other major defendants, like
ASARCO, to increase their settlement payments.
All of these specific causes of increasing settlement values--CCR’s dissolution, the direct and
indirect effects of bankruptcies of eight other primary defendants--have been widely recognized.
In the Armstrong and T&N bankruptcies, attorneys and claims personnel who litigated and settled
asbestos law suits against those companies as well as Union Carbide universally recognized and
explained how the dissolution of CCR and the loss of the indemnity that had been paid by now-
bankrupt defendants led to increasing settlement demands and payments. In turn, all of these
specific causes are superimposed on sharp increases in plaintiffs’ trial verdicts and the broad
increases in asbestos settlement amounts that had been occurring for years, that were increasing
on August 9, 2005, and that are showing no signs of abating and are continuing today. Together
all of these caused settlement levels to increase among all asbestos defendants who remained in
asbestos litigation, and we can see these increases by looking at their litigation experiences after
2000.
5.3.3.2. Recent Settlement Amounts and Trends Since ASARCO’s Bankruptcy
We get a clear picture of what would have been the continuing trends in ASARCO’s asbestos
liabilities by looking at the contemporaneous experience of other asbestos defendants. Figure 2
and Table 6 show trends in mesothelioma settlement values among several asbestos defendants
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 20 of 57
ASARCO                                                                                              16




that continued in litigation after 2000 and for whom we have publicly available data. The Figures
include trends in settlement values from 1991 through their respective bankruptcy petition dates
for three former CCR members, USG, Quigley and Turner & Newall (T&N) as well as Owens
Corning (OC) and ASARCO. The 2001 values were much higher among defendants who
remained in litigation into 2001. We have public data for two companies, Quigley and ASARCO,
who continued to resolve mesothelioma claims after the other companies entered bankruptcy:
Quigley into 2004 and ASARCO into 2003. Trends over these periods show sharp increases in
settlement values for mesothelioma. As Figure 2 shows, ASARCO’s increasing settlement costs
for mesothelioma claims trailed by a couple of years the trends for the primary defendants. By
themselves these graphic comparisons suggest that ASARCO’s settlements would have continued
to increase, like those of the other companies, had it not entered bankruptcy in 2005.

                                   Figure 2: Trends in Mesothelioma Settlement Amounts


                                          ASARCO
                          250000




                                          USG
                                          OC
                                          T&N
                                          Quigley
                          200000
         Avg Settlement
                          150000
                          100000
                          50000
                          0




                                   1992        1994   1996        1998         2000   2002   2004

                                                             Settlement Year
      Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 21 of 57
 ASARCO                                                                                           17




Table 6: Trends in Mesothelioma Settlement Averages for ASARCO and Other Asbestos Defendants

                                                 Defendant
                  Year   ASARCO           USG           OC         T&N     Quigley

                  1996     $21,181     $23,689    $145,021     $36,482
                  1997      11,493      27,752     212,104      55,109     $21,778
                  1998      91,550      39,209     201,471      55,231      22,747
                  1999      26,262      37,298     210,851      66,560      31,781
                  2000      18,258      65,061     233,047      93,502      50,932
                  2001      14,259     241,028                 210,926     204,382
                  2002      29,500                                         177,513
                  2003      39,529                                         224,613
                  2004     122,116                                         285,999
                  2005     280,143

   Note: Entries in 2005 dollars.

 5.4. The Inseparability of Payment Rates and Settlement Values
 Because of uncertainties about how many claims ASARCO would have paid had it continued in
 litigation after August 9, 2005, our future forecasts for ASARCO use six alternative estimates of
 what its payment rates might be, all of which are far lower than its actual past rates through 2003
 (2002 among mesotheliomas). The average settlement cost that ASARCO would incur would
 differ depending upon which of these payment rates it achieved. If ASARCO had been able to
 move from paying almost all claims, as it had prior to 2004, to paying claims at any of our
 alternative forecast rates, it would have paid many fewer claims. But among the now smaller
 fraction of claims that it paid, it would have had to pay more on average.
 As I discussed above (Section 5.3.2), ASARCO may have been able to move toward lower
 payment rates after some courts and legislatures had placed barriers to litigation of the least
 serious claims and as the credibility of some screening procedures and doctors came to be
 questioned. While we expect that these changes will reduce the percent of claims that ASARCO
 would have had to pay by discouraging or eliminating claims with relatively low values, this
 means that the remaining claims that ASARCO would be left to pay would be of higher quality
 and value than the cross section of those it faced before bankruptcy.
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ASARCO                                                                                                         18




6. Estimation of ASARCO’s Asbestos Liability, August 2005
ASARCO’s asbestos liability is the sum of its liability for pending claims, its liability for future
claims and its costs for administering and defending those claims. We do not estimate its costs
for administering and defending asbestos claims in this report, but ASARCO’s costs would have
been considerable. Typically defense and administrative costs can range from 40 percent to 100
percent of indemnity costs.
The following formula is the basis for estimating ASARCO’s total indemnity to resolve these
claims:
     Number of Claims × Payment Rate × Average Settlement Cost = Forecast Indemnity
Here, counts of pending claims are drawn from ASARCO’s POC database. We forecast counts of
future claims by drawing upon three sources: ASARCO’s claims databases (both the historic and
POC databases), epidemiological forecasts of the number of asbestos-related cancer deaths, and
data for other asbestos defendants who recently continued to receive claims to the time of
ASARCO’s bankruptcy. In negotiating and settling litigation, defendants are concerned with
what a claim will likely cost them, the expected resolution cost which is a product of the
probability of payment (i.e. payment rate) and settlement cost. Our forecasts separate the two
parameters of payment rates and average settlements so that we can examine more precisely each
component of resolution costs.
As discussed in Section 5.3.2, the payment rate represents the percent of claims resolved by
ASARCO that received payment by settlement (we know of no trial verdicts). We use six
alternative estimates of ASARCO’s payment rates for cancer claims but only one for
nonmalignant claims (Sections 5.3.2 and 6.1.3.1). Average settlement costs are the costs paid to
claimants averaged across those who received payment. Our alternative estimates of average
settlement costs that ASARCO would have paid after its bankruptcy date are discussed in Section
6.1.3.2. Forecast settlement costs are derived from ASARCO’s historic costs in resolving claims.
We use six alternative estimates of amounts that ASARCO would pay to resolve pending and
future claims, but each of these are linked to one of our six payment rate estimates.
For better precision, we apply the formula above separately for each asbestos disease. For
ASARCO (and for every asbestos defendant), settlement costs vary among different asbestos-
related diseases. Table 5 above shows (1) the average amount paid by ASARCO in settling
claims as well as (2) its average resolution costs, the average paid across all resolved claims both
those settled with payments and those closed without payment (i.e. the product of the payment
rate and average settlement). ASARCO paid far more on average to resolve mesothelioma claims
than any other disease. Settlement and resolution costs differed among all other diseases.
Because the mix of diseases among pending claims may differ from the mix of diseases among
claims previously resolved by ASARCO, we cannot assume that ASARCO’s overall historic
average resolution cost among all claims will be appropriate for estimating the average value of
pending claims. For example, if mesothelioma claims represent a greater percentage of pending
than resolved claims, then use of ASARCO’s overall historic average would underestimate the
company’s liability for pending claims. By applying the formula above separately for claims
within each disease category, we control for differences in disease distributions between pending
and resolved claims.




4.   90,379 pending unliquidated claims comes from the bar-date database and 20,672 pending liquidated claims from
     the historic database.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 23 of 57
ASARCO                                                                                         19




6.1. Forecast Indemnity for Claims Pending on August 9, 2005
6.1.1. Number of Pending Claims
According to our data sources, on August 9, 2005, when it filed for bankruptcy protection,
ASARCO had resolved and fully paid 114,203 claims but still faced 111,051 unresolved asbestos
bodily injury claims.4 We estimate that ASARCO had 20,672 ‘‘liquidated’’ claims in its database
that had been settled but not paid prior to the bankruptcy.
Table 7 shows counts for each type of asbestos-related disease as identified in ASARCO’s historic
database, supplemented by Manville Trust information when disease is unknown (Section 6.1.2.).
Note that for 18,791 resolved claims, the ASARCO historic database does not identify disease
and we use the Manville database as a supplement. While some of these claims were resolved
with payments, most were resolved without payment. We assume conservatively that none of
these unspecified disease claims have value and, therefore, do not use any of these 18,791 in
making our forecasts of future claims.


                     Table 7: August 9, 2005 Pending and Resolved Claims

                                                Disease
          Claim
          Status             Meso       Lung    OthCan Nonmal       Unspec        Total

          Resolved           1,426      3,400     1,106    89,480     18,791 114,203
          Liquidated           719      1,080       418    18,455          0  20,672
          Not Liquidated     3,120      5,659     1,987    75,500      4,113  90,379
          Total Pending      3,839      6,739     2,405    93,955      4,113 111,051
          Total              5,265    10,139      3,511 183,435       22,904 225,254

  Sources: Resolved and liquidated claims from historic database; pending claims from POC
  database.

6.1.2. Imputation of Disease
ASARCO would ordinarily have learned about disease during the process of administering and
resolving asbestos claims. But we expect that ASARCO often did not update its data on disease
among claims that it resolved without payment. According to Table 7, ASARCO resolved mostly
without payment 18,791 claims that had no disease specified in its historic database. Again, this
is a pattern that we see repeatedly in asbestos defendants’ databases, when plaintiffs’ counsel
withdraws claims or defendants reject claims before they have moved to discussion of alleged
disease or because the claim does not present an asbestos-related disease. In making our
ASARCO forecasts we excluded these ‘‘rejected-Unknown’’ claims, essentially treating them as
if they had not been filed, because the claims have no information and no value.
Next, we do not accept at face value the diseases alleged by claimants on POC forms, but assume
rather that after review ASARCO would resolve some of these claims as diseases that differ from
claimants’ allegations. To infer how they might be reclassified, we linked our pending claims to
the Manville Trust database (August 2005 extract) on social security number. As a first step, we
derived a transition matrix, a term of art describing a table that represents how alleged disease
designations in the ASARCO database correspond to evaluated disease in the Manville Trust
database for the same individuals based on every person whose claim can be linked in the two
databases. Table 8 shows this transition matrix for 77,264 linked claims that were pending in
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 24 of 57
ASARCO                                                                                                              20




ASARCO and that were evaluated by Manville. Each row shows diseases as reported in the
ASARCO database; each column shows the disease in the Manville matrix. The table shows, for
example, that among the 2,130 mesothelioma claims in the ASARCO database matched to
Manville (first row of table, total number at far right of the row), 1,900 are reported as
mesothelioma claims in the Manville database and 47 are reported as lung cancer claims by
Manville. Mostly, there is high correspondence in the disease categorizations between the two
database, but there is also a modest number of differences. 5


            Table 8: ASARCO - Manville Trust Transition Matrix: Numbers of Claims

                                                  Manville Trust Disease
                Bar-Date
                Disease         Meso        Lung OthCan Nonmal Unspec                        Total

                Meso            1,900          47            6        151          26       2,130
                Lung               18       2,965           32      1,163         144       4,322
                OthCan              2          26          697        978          41       1,744
                Nonmal             60         125           57     64,385       1,319      65,946
                Unknown             0           1            0      3,117           4       3,122
                Total           1,980       3,164          792     69,794       1,534      77,264


Table 9 takes the transition matrix shown in Table 8 and computes percentages within rows to
show how claims in the ASARCO disease categories are distributed over Manville’s evaluated
disease categories. We use the frequency distributions from Table 9 to impute disease for all of
the pending unliquidated ASARCO claims.


            Table 9: ASARCO - Manville Trust Transition Matrix: Allocation of Claims

                                                  Manville Trust Disease
               ASARCO
               Disease          Meso        Lung OthCan Nonmal Unspec                        Total
               Meso            89.2%        2.2%         .3%         7.1%        1.2%     100.0%
               Lung              .4        68.6          .7         26.9         3.3      100.0
               OthCan            .1         1.5        40.0         56.1         2.4      100.0
               Nonmal            .1          .2          .1         97.6         2.0      100.0
               Unknown           .0          .0          .0         99.8          .1      100.0


Table 10 shows our estimate of the number of pending and unliquidated claims in each disease
category after application of the above transition matrix. We estimate that ASARCO will not
determine the specific diseases for 1,789 of these unspecified claims, but rather will resolve them
without payment. We show these claims under the ‘‘None’’ column to reflect that they would be

5.   This pattern--high agreement with modest differences--occurs in every transition matrix. Differences might
     reflect differences in timing, e.g. Manville’s categorizations were as of 2005 but ASARCO’s as of 2004. Such
     timing differences occur because asbestos diseases progress, because some claimants develop second, more
     serious diseases and because documentation becomes more complete over time. Differences may also reflect
     who is making the categorization: for many of the claims in ASARCO’s database the category represents the
     claimant’s disease allegation, while for Manville we use the Trust’s determination of the disease.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 25 of 57
ASARCO                                                                                            21




rejected without determinations of disease. Applying this reduction, we eliminate 2.0 percent of
the unliquidated pending claims.


               Table 10: Disease Distributions After Imputation for Pending Claims

                                              Distribution of Claims
    Claim
    Status                          Meso     Lung     OthCan Nonmal             None      Total

    Number
      Resolved                      1,426    3,400      1,106        89,480    18,791 114,203
      Pending Liquidated              719    1,080        418        18,455         0  20,672
      Pending Not Liquidated        2,878    4,125        910        80,678     1,789  90,379
      Total Pending                 3,597    5,205      1,328        99,133     1,789 111,051
       Total                        5,023    8,605      2,434 188,613          20,580 225,254
    Percent
      Resolved                      1.2%      3.0%         1.0%       78.4%    16.5%    100.0%
      Pending Liquidated              3.5       5.2          2.0        89.3       .0     100.0
      Pending Not Liquidated          3.2       4.6          1.0        89.3      2.0     100.0
      Total Pending                   3.2       4.7          1.2        89.3      1.6     100.0
       Total                          2.2       3.8         1.1        83.7       9.1    100.0


6.1.3. Calculation of Indemnity for Pending Claims
Here, we describe our forecast for 85,705 pending asbestos claims against ASARCO that have
not been liquidated and that have an asbestos-related disease. Table 11 shows steps we took to
winnow down the number of pending claims to be evaluated: (1) separation of liquidated claims,
(2) elimination of no-disease claims, and (3) disregarding filing information after 2004 due to
lack of completeness.


        Table 11: Estimated Number of Pending, Unliquidated Asbestos-Disease Claims

                                                            Number of
                            Pending Claim Category            Claims

                            Total Pending Claims               111,051
                            Liquidated Claims                  -20,672
                            No-disease Claims                   -1,789
                            Additional Post-2004 Filings           -2,885
                            Total                                  85,705


Using values specified in ASARCO’s historic or pre-packaged settlement databases, the 20,672
liquidated claims present a $99 million total liability for ASARCO, which is folded into our
estimate of pending claims values in Section 6.1.3.3.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 26 of 57
ASARCO                                                                                             22




6.1.3.1. Forecasts of ASARCO’s Payment Rates
As I discussed in Section 5.3.2 and Section 5.3.3, we use two payment parameters to forecast how
much ASARCO would have to pay to resolve these claims: (1) payment rate--the percent of
resolved claims that ASARCO will resolve with payment and (2) average settlement--amount that
ASARCO would pay to claims in each disease category when it makes a payment (i.e. the
average excluding claims closed without payment).
For the reasons described in Section 5.3.2 we forecast that as it resolves claims ASARCO will
now reject a greater percent of claims than it had in the past, i.e. its payment rates will drop. This
forecast has already been confirmed by the pre-packaged bankruptcy data that ASARCO recently
provided to us. In preparing my earlier, February 28 expert report in this case we did not have
data on ASARCO’s resolution of claims during 2004-2005. Instead, based on the same reasons
stated in both my February 28 and in Section 5.3.2 of this report, I forecast that ASARCO’s
payment rates during 2004-2005 would be lower than in prior years. This forecast was confirmed
by ASARCO’s data pre-packaged database that first provided data on it 2004-2005 resolutions
and that was provided to us after the February 28 report had been submitted.
Now that we have this new 2004-2005 data, we have derived six alternative estimates of
ASARCO’s future payment rates for cancers, three of which are based on ASARCO’s litigation
experience during 2004-2005 and three based on its 2003-2005 experience (Table 12). Two of
our payment rate assumptions, our historic models for each period, assume simply that ASARCO
would continue to make settlement payments in the same percent of resolved claims as it had
during each of the two periods, 2004-2005 and 2003-2005. We identify these as our historic
models based on ASARCO’s most recent claims resolution history. But in fact the payment rates
during these most recent last two and three years are far lower than ASARCO’s actual payment
rates had been during all years before 2004 (Table 12). By looking only to this recent history of
unprecedentedly low payment rates, our historic models assume that in the future ASARCO will
have much greater success in asbestos litigation than it had for most of its history--that ASARCO
would be able to continue to reject claims at the high rates that it obtained during the three years
immediately preceding its bankruptcy. Moreover, all of our other four payment rate assumptions
assume even greater success for ASARCO--that it would be able to reject far more claims than it
had even during its most successful period preceding its bankruptcy.
Our lowest payment rate models assume that ASARCO could now reject 30 percent of the cancer
claims that it would have paid in the past (lowest payment rate = .7 x historic rate). When this
30-percent-rejection assumption is used with ASARCO’s data from 2003-2005, it yields a
forecast that ASARCO would now reject almost half of all cancer claims that it resolves--far
greater success than it achieved in the past even during 2004-2005 (Table 12). The 30-percent-
rejection assumption yields still lower payment rate forecasts when used with ASARCO’s
2004-2005 data, forecasting that ASARCO would have to make settlement payments in less than
half of lung cancer and other cancer claims (mesothelioma forecasts do not differ for the two
periods because ASARCO’s actual mesothelioma payment rates were comparable for the two
periods 2004-2005 and 2003-2005). These lowest payment rates are extreme. I present them to
show what ASARCO’s asbestos liability would be if were able to conduct its future asbestos
litigation far more successful than it had in the past, achieving implausibly high rejection rates for
cancer claims.
Our reduced payment rate models is less extreme and more plausible. It is intermediate between
the historic and lowest payment rate models, assuming that ASARCO could now reject 15
percent of cancer claims that it had resolved with payment in the past (reduced payment rate = .85
x historic rate). When used with ASARCO’s data from 2003-2005 this 15-percent-rejection
assumption yields a forecast that ASARCO would now reject about one third of all cancer claims
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ASARCO                                                                                            23




that it resolves--again far greater success than it had achieved in the past (Table 12). The
15-percent-rejection assumption yields lower payment rate forecasts when used with ASARCO’s
2004-2005 data, assuming that ASARCO would reject almost half of lung cancer and other
cancer claims.
We make only one, conservative assumption about ASARCO’s payment rates for nonmalignant
claims: that ASARCO could now reject without payment 40 percent of nonmalignant claims that
it had paid in the past. We use this 40-percent-rejection assumption for all of our forecasts for
ASARCO, with each of the six alternative payment rate assumptions for cancer claims. Note that
because ASARCO’s actual historic rate of paying nonmalignant claims differed between the two
periods, 2004-2005 and 2003-2005, this 40-percent-rejection assumption yields different payment
rate forecasts for each period (Table 12). But in either case, using either of the two periods, we
forecast that ASARCO could reject far more nonmalignant claims than it had in the past. Rather
than the 97 percent of nonmalignant claims that ASARCO had paid through 2003, we assume
that ASARCO would pay between 43.5 and 52.0 percent of pending and future nonmalignant
claims (Table 12).


                          Table 12: Payment Percentages for ASARCO

                  Payment                        ASARCO Payment Rates
                  Year         Payment
                  Basis        Rates         Meso       Lung OthCan Nonmal

                  2003-2005 Historic         78.4%     81.7%      79.0%     52.0%
                  2003-2005 Reduced          66.7      69.5       67.2      52.0
                  2003-2005 Lowest           54.9      57.2       55.3      52.0
                  2004-2005 Historic         79.8      69.0       64.1      43.5
                  2004-2005 Reduced          67.9      58.7       54.4      43.5
                  2004-2005 Lowest           55.9      48.3       44.8      43.5


6.1.3.2. Forecasts of ASARCO Settlement Amounts
For all of the reasons discussed in Section 5.3.3 above, we expected that ASARCO’s average
settlement values would also change from its history before 2003. Again we already have
confirmation of this. My earlier, February 28 expert report predicted that ASARCO would not
only reject more claims in 2004-2005 and later years, but that it would also pay higher amounts to
the lower percent of claims that it did pay. ASARCO’s data on 2004-2005 pre-packaged
settlements (provided after my submission of the February 28 report) confirm both forecasts.
Payment rates during 2004-2005 were far lower and average settlements paid in this smaller
fraction of resolved claims were far higher than ASARCO’s experience through 2003.
Like our payment rate assumptions, we make six alternative forecast assumptions about the
average settlements drawing upon this newly provided pre-packaged settlement data and also on
the observed interrelationship between payment rates and settlement averages (Section 5.4.). We
base our forecasts on the average settlements paid by ASARCO during the same two, most recent
periods: (1) the amounts it had to pay in settlements during 2004-2005, its most contemporaneous
experience, and (2) ASARCO’s settlements during 2003-2005. As we have seen, ASARCO’s
settlement amounts increased sharply in recent years (Table 5), like the increasing settlement
amounts among other defendants (primarily for mesothelioma claims, Table 6).
Given this recent experience and the explanations for increases (Section 5.3.3) it is unlikely that
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ASARCO                                                                                        24




the amounts paid when ASARCO settles claims in the future would now fall back to earlier
levels. Consequently, our settlement average forecasts based on the more recent and higher value
2004-2005 period are the most plausible. Given the upward trends in ASARCO’s settlement
values (and asbestos settlements generally across defendants) settlements during the most
contemporaneous 2004-2005 period best reflect the current values of ASARCO claims and the
likely values after the 2005 ASARCO bankruptcy filings.
We again use three different settlement average forecast among cancer claims for each of the two
periods, settlement amounts that are tied to and based on the three payment rate models for each
period. These alternative forecasts recognize that the average amount that ASARCO would have
to pay in settlement will depend upon how many claims it can resolved without payment (Section
5.3.2). If we assume, for example, that in the future ASARCO would make payments in the same
percent of its resolved cancer claims as it did during 2004-2005, then it is reasonable and
conservative to assume that its settlement average paid to those claimants receiving money would
be the same as its averages during 2004-2005--reasonable because both payment rates and
settlement averages are based on ASARCO’s most contemporaneous experience; conservative
because we would assume no increase in ASARCO’s settlements despite its recent trends and the
many reasons to expect continuing increases. If alternatively we assume that ASARCO could
now be much more (even implausibly) successful in its litigation so that it could reject without
payment 30 percent of cancer claims that it would have paid in the past (during 2004-2005 for
this example), we then must forecast ASARCO’s settlement averages based on its settlements of
the 70 percent of more highly qualified cancer claims that it would not reject. We estimate for
this forecast alternative (30-percent rejection rate, 2004-2005 base period) that ASARCO’s future
settlement average for the 70 percent of cancer claims that it would now pay would be its average
settlement amount during 2004-2005 among the top 70 percent of claimants who received a
settlement. In other words, for the 30-percent-rejection assumption, we move 30 percent of
cancer claims that ASARCO paid during 2004-2005 from paid to rejected claims and we then
calculate the average value of settlements among the remaining 70 percent of claims what would
receive a settlement.
We match the payment rate and settlement value assumptions for all six of our forecasts: (1)
calculating past settlement averages among the top 85 percent of cancer settlements when we
assume that 15 percent of past settled claims would now be rejected and (2) calculating past
settlement averages among the top 70 percent of settlements when we assume that 30 percent of
past settled claims will now be rejected. Similarly, because in each of our forecast models we
assume that ASARCO could now reject 40 percent of nonmalignant claims that it would have
paid in the past, we calculate and use as our forecast for ASARCO’s future settlement average
ASARCO’s past settlements averaged among the top 60 percent of nonmalignant settlements in
each of the respective periods.
Table 13 shows our alternative settlement average assumptions.
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ASARCO                                                                                              25




                 Table 13: Alternative Assumptions of Average Value of Claims

                 Payment                               Payment Amount
                 Year         Payment
                 Basis        Rates          Meso        Lung    OthCan Nonmal

                 2003-2005 Historic $87,819            $14,188    $3,900       $2,160
                 2003-2005 Reduced 102,732              16,608     4,533        2,160
                 2003-2005 Lowest   123,676             20,094     5,454        2,160
                 2004-2005 Historic 141,513             26,013     6,156           3,102
                 2004-2005 Reduced 165,578              30,309     7,145           3,102
                 2004-2005 Lowest   199,328             36,824     8,523           3,102

  Note: Payment amounts are expressed in 2005 dollars.

Table 14 shows our forecasts of settlement parameters for the six combinations of payment rate
and settlement average assumptions.


                        Table 14: Payment Parameters for Valuing Claims

      Payment                    2002 Payment Amount                    Payment Percentage
      Year       Payment
      Basis      Rates      Meso     Lung    OthCan Nonmal       Meso      Lung    OthCan Nonmal

      2003-2005 Historic $87,819 $14,188     $3,900    $2,160    78.4       81.7      79.0   52.0
      2003-2005 Reduced 102,732   16,608      4,533     2,160    66.7       69.5      67.2   52.0
      2003-2005 Lowest   123,676  20,094      5,454     2,160    54.9       57.2      55.3   52.0
      2004-2005 Historic 141,513    26,013    6,156     3,102    79.8       69.0      64.1   43.5
      2004-2005 Reduced 165,578     30,309    7,145     3,102    67.9       58.7      54.4   43.5
      2004-2005 Lowest   199,328    36,824    8,523     3,102    55.9       48.3      44.8   43.5



6.1.3.3. ASARCO’s Liability for Pending Claims
We use these numbers and values to complete the formula for our forecast of ASARCO’s liability
for pending claims.
    Number of Claims × Payment Rate × Average Settlement Cost = Forecast Indemnity
Table 10 (above) shows the number of pending claims within each disease category. Table 14
shows the matched payment rates and average settlements for each of our six alternative forecasts
and for each disease.
Table 15 shows the results of the forecasts using the alternative estimates for average settlements
and payment rates; also included in this table are the values for liquidated claims. Adding
together the results for liquidated and unliquidated claims, we forecast that ASARCO’s liability
for the indemnity of claims pending at the time of its bankruptcy petition was between $402 and
$556 million, including the $99 million for liquidated claims.
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 ASARCO                                                                                           26




                Table 15: Forecast of Indemnity for Pending, Unliquidated Claims

          Payment                                    Forecast Indemnity
          Year             Payment
          Basis            Rates           Meso     Lung OthCan Nonmal             Total

          Liquidated                         $56      $10        $1       $31       $99
          Not Liquidated
           2003-2005        Historic         167       46          3       91       306
           2003-2005        Reduced          166       45          3       91       305
           2003-2005        Lowest           165       45          3       91       303
            2004-2005       Historic         274       71          4      109       457
            2004-2005       Reduced          273       70          3      109       455
            2004-2005       Lowest           270       70          3      109       452

   Note: Millions of dollars of the year when paid. All pending claims are assumed to settle in
   2006. Unliquidated claims are inflated one year at 2.5%; liquidated claims are not inflated.

 Figure 3 and Figure 4 compare graphically ASARCO’s forecast total costs (adding together
 liquidated and unliquidated values) among pending claims for indemnity amounts for each type
 of asbestos disease. For the model using the reduced payment rate and the 2003-2005 base period
 for estimating settlement values, 69.7 percent of ASARCO’s total pending claims liability is for
 cancer claims, 55.1 percent for mesothelioma claims. For the model using the reduced payment
 rate and the 2004-2005 base period for settlement values, 74.7 percent of ASARCO’s total
 pending claims liability is for cancer claims, 59.5 percent for mesothelioma claims.

Figure 3: Total Indemnity Amounts for Pending Claims, Reduced Payment Rates & 2003-2005 Base


                                             Meso
                                              222




                                 Lung
                                   55                          Nonmal
                                        OthCan                 122
                                             4
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 ASARCO                                                                                            27




Figure 4: Total Indemnity Amounts for Pending Claims, Reduced Payment Rates & 2004-2005 Base


                                          Meso
                                           329




                                                                  Nonmal
                                                                  140
                                      Lung
                                        80   OthCan
                                                  4




 6.2. Projections of Number And Timing of Future Claims
 Like other asbestos defendants, ASARCO saw substantial increases in asbestos claim filings over
 the years preceding it is bankruptcy from 1991 to 2004. Taken jointly--increasing claim filings,
 increasing settlement values (Section 5.3.3.2), and prospects of greater future increases in
 both--created extraordinary burdens for asbestos defendants, leading to bankruptcy filings for
 more than a dozen defendants since 2000. The Manville Trust claim filings peaked in 2001 at
 about 85,000 claims, while claims continued to rise after 2001 for ASARCO, who was not a
 major defendant. ASARCO’s claim filings had its recent peak in 2004 at 28,014 claims.
 In this Section, we consider how ASARCO’s increasing claim filing trends might have continued
 into the future, presenting forecasts of future claims that would be filed after ASARCO’s
 bankruptcy petition date. We forecast ASARCO’s future claims using the standard ‘‘Nicholson’’
 forecasting method. In making these forecasts, we look to the effects of recent changes in the
 litigation environment that cause us to adjust and reduce our forecast of the number of future
 nonmalignancy claims against ASARCO (Section 6.2.4).
 The number, timing and types of future claims will depend both upon the number of people in
 each future year who develop diseases that are asbestos-related (the incidence of diseases) and
 also the fraction of those people who will pursue claims (the propensity to sue).
 This Section describes how the historic propensities to sue ASARCO for cancer are calculated
 and used to forecast future cancer claims. Inputs to these calculations are epidemiological models
 of the incidence of asbestos-related cancer deaths, and historic data on the number of cancer
 claims filed against ASARCO and other defendants since ASARCO’s petition date.
 6.2.1. The Incidence of Asbestos-Related Cancers
 Medical research by epidemiologists provides projections of the incidence of asbestos-related
 cancers. Projections differ among epidemiologists, but most agree on the relative changes in
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ASARCO                                                                                                                28




cancer deaths over time--increasing until late in the twentieth century followed by a slow decrease
in the following years. Because of this general agreement on changes over time, projections of
future claims will be generally similar even when based on differing projections of incidence.
Figure 5 shows epidemiological projections of the annual number of asbestos-caused deaths
between 1967 and 2027 from each of three asbestos-related cancers--mesothelioma, lung cancer
and other (primarily gastro- intestinal) cancers--among workers exposed before 1980 in major
asbestos-using industries.6 The Figure represents the results of work by Nicholson, Perkel and
Selikoff (1982) which is generally recognized as the most comprehensive and reliable forecast of
asbestos-related cancer deaths (Appendix Table A1). The peak year of forecast deaths differs
among the three types of cancers because the latency periods, i.e. the time from first asbestos
exposure to the occurrences of cancer, differ among the three diseases. Because the latency
period is longest for mesothelioma, the risk of that disease increases for a longer period and the
incidence of mesothelioma peaks later than for other asbestos-related cancers. The patterns of
asbestos diseases among exposed workers and, therefore, the patterns of legal claims, have been
changing over time with these changes in the relative incidences of each type of cancer. In past
years lung cancer has been the most frequent cancer among occupationally exposed workers and
the most frequently claimed cancer. However, now and in the future workers will face equivalent
risks for mesothelioma and lung cancer.

                                               Figure 5: Nicholson Cancer Projections


                                            Meso
                              5000




                                            Lung
                                            OthCan
                              4000
           Number of Deaths
                              3000
                              2000
                              1000
                              0




                                     1970        1980      1990         2000   2010     2020

                                                                  Death Year



6.2.2. Accuracy of Epidemiological Projections
Epidemiologists’ projections, like those of Nicholson, et. al., have their own uncertainties, but can
be tested by comparing projections for past years with data on mesothelioma deaths in those same


6.   Forecasts for lung and other cancers are excess deaths, i.e. the number of additional deaths that will occur
     because of asbestos exposures that are in addition to cancer deaths that would otherwise have occurred without
     asbestos exposure. Asbestos exposure is the only know cause of mesothelioma.
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ASARCO                                                                                            29




years collected by the National Cancer Institute’s SEER (Surveillance, Epidemiology and End
Results) cancer registry. The SEER program collects comprehensive data on the incidence,
treatment and end results (including deaths) for all types of cancers at fourteen different sites in
the United States. SEER generates cancer rates from these sites that can then be used to estimate
the incidence of each type of cancer for the United States as a whole. The SEER program is
highly sophisticated and recognized as the state of the art for such programs throughout the world
and its results are widely used in medical research and planning.
Because SEER collects data continually, its results include estimates of the annual national
incidence of each type of cancer over many years. The annual SEER estimates of the national
incidence of mesothelioma provide a means to test epidemiological forecasts of mesothelioma
deaths. Because asbestos is the only known cause of mesothelioma, epidemiologists’ forecasts of
asbestos-related mesothelioma deaths should tend to correspond to the annual SEER national
incidence estimates for all mesotheliomas. While the SEER national incidence measures are
themselves estimates based on the sample of SEER sites with their own uncertainties, over many
years an accurate epidemiological forecast of mesothelioma deaths should track trends in the
SEER estimates of actual mesothelioma deaths.
SEER collects its data from a limited number of major sites around the country (e.g. Los
Angeles-Long Beach and the entire state of Iowa are two sites). It is impossible to make a
random selection of such sites, but SEER has attempted to select a cross section of sites that will
closely mimic key demographic characteristics of the U.S. as a whole. In recent years the SEER
program has expanded its number of sites both to provide more data and better matches to the
country as a whole. SEER’s counts of sites went from 9 before 1992, to 13 between 1992 and
1999, and now 17 sites since 2000.
Estimates of 2000 to 2003 annual counts of mesothelioma deaths based on SEER’s 17-site, its
newest and most comprehensive estimates, are remarkably close to Nicholson’s forecasts of
mesothelioma incidence in those years (Table 16). Nicholson forecast 12,173 mesotheliomas for
this four year period, within 233 of the 12,406 mesothelioma deaths derived from SEER. This is
less than a 2 percent difference. This correspondence supports the conclusion that Nicholson’s
forecasts, made almost 25 years ago, remain remarkably accurate even today.


                       Table 16: Comparison of Nicholson Projections with
                       SEER 17-Site Estimates of Mesothelioma Incidence

                                 Death Nicholson         SEER-17
                                 Year Projections       Estimates

                                 2000          3,024         3,172
                                 2001          3,042         3,124
                                 2002          3,060         3,125
                                 2003          3,048         2,985
                                 Total        12,173        12,406


While SEER’s 9-sites provide a somewhat less comprehensive view of national cancer rates than
its 17-sites, the availability of 31 years of data from these 9 sites provides an opportunity to
compare the long-term correspondence between Nicholson’s forecasts and the SEER data.
Nicholson and his colleagues published their forecasts in 1982. Since then and through the most
recent years of data, the Nicholson forecasts closely track the 9-site SEER estimates of annual
mesothelioma deaths. SEER’s 31-year trends are shown in Figure 6 and, as Figure 6 shows, the
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ASARCO                                                                                          30




Nicholson et. al. forecasts correspond remarkably well to SEER’s 9-site estimates of actual
mesothelioma deaths up through 2000, where Nicholson is higher by only 1.4%.

      Figure 6: Epidemiological Projections Confirmed by SEER’s Mesothelioma Counts
                            3000




                                    Nicholson
                                    KPMG
                                    SEER 9
                            2500
                            2000
         Number of Deaths
                            1500
                            1000
                            500
                            0




                                   1980         1990   2000         2010   2020   2030   2040

                                                              Death Year



Subsequently, the 9-site numbers dip considerably, but data from SEER’s 17-sites show that there
continues to be close correspondence between Nicholson and SEER since 2000 despite
divergence between Nicholson’s forecast and the 9-site SEER estimates. The difference between
the 17-site and 9-site estimates suggest that differences in the SEER curves may be due to
uncertainties in estimating national incidence data from SEER.
Because lung cancer and the other asbestos-related cancers have causes other than asbestos
exposure, the SEER estimates of those cancer deaths will exceed and cannot be used to test the
epidemiological forecasts for those other cancers. But because Nicholson’s forecasts for all types
of cancers are based on the same methods and the same estimates of the number of exposed
workers and the extent of their asbestos exposures, the strong confirmation of Nicholson’s
forecast for mesothelioma provides confidence for Nicholson’s epidemiological forecasts for each
type of cancer.
Figure 6 also shows a second forecast of asbestos-related mesothelioma deaths made by analysts
at KPMG-Peat Marwick in 1992 as part of their work as experts in the bankruptcy proceedings of
National Gypsum. Dr. Tom Vasquez and his colleagues at KPMG-Peat Marwick attempted to
update the 1982 forecasts made by Nicholson, et. al., using more recent U.S. Labor Department
statistics on the populations of workers in asbestos exposed industries, more recently formulated
medical models of the risk of mesothelioma and lung cancer from asbestos exposure and several
alternative assumptions (KPMG’s annual forecasts are reproduced in Appendix Table A2). As
Figure 6 illustrates, the KPMG forecasts are very similar to those made by Nicholson et. al., a
decade previously and, as a result, claims forecasts that are based on the two alternative
epidemiological forecasts are only slightly different.
The close correspondence between KPMG and SEER before the 1990s is not a validation of the
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ASARCO                                                                                            31




KPMG forecast. KPMG derived its revised forecasts in part by fitting the forecasts to the SEER
data through the 1980s. The curves correspond not because KPMG was forecasting
mesothelioma incidence before the 1990s but because the KPMG estimates were fitted to SEER’s
estimates by the KPMG researchers. Figure 6 shows that over the subsequent eight-year time
period 1993 to 2000 the original Nicholson projections more closely fit the SEER data on actual
mesothelioma deaths than do the KPMG forecasts. Since 2000, estimates of national
mesothelioma incidence derived from the 9-site SEER fall between the Nicholson and KPMG
forecasts, but national estimates derived from the SEER 17-sites closely validate the Nicholson
but not KPMG forecasts.
6.2.3. Propensities to Sue ASARCO
Data and forecasts of the incidence of asbestos-related diseases describe the potential for liability
against ASARCO. As long as asbestos-related cancers occur, it is likely that some claims will be
filed. We compare Nicholson’s incidence forecasts for past years to ASARCO’s data on past
claims to see how much of this potential for asbestos cancer claims was directed against the
company in the past: among all the potential asbestos-related cancer claims in the U.S., what
fraction resulted in ASARCO claims? We formalize these comparisons through our propensity to
sue calculations shown in the next paragraph. ASARCO’s claims data also show trends in
submitting claims against the company, whether the propensities to sue had increased, decreased
or stabilized in recent years. The historic levels and trends in propensities to sue document the
past behavior by claimants and plaintiffs’ lawyers in pursuing possible claims for asbestos-related
cancers.
We look to this past history of claiming against ASARCO--past propensities to sue and trends in
the propensities to sue--as well as information about claiming against other asbestos defendants to
forecast future claiming against ASARCO. We forecast the number of claims forecast for each
type of cancer in each future year by multiplying the number of deaths projected by Nicholson for
that year times our forecast of the propensity to sue for that cancer in that year. The calculations
that are used first to derive propensities to sue and second to forecast future claims based on these
propensities to sue are stated below.


   Calculation of Propensity to Sue:
       Number of Claims ÷ Incidence = Propensity to Sue


   Forecasting Future Claims from Propensity to Sue:
       Propensity to Sue × Incidence in Future Year = Projected Claims in Future Year


We base our forecast of future propensities to sue ASARCO primarily on the number of cancer
claims filed in the past against ASARCO and its trends in past annual filings. Table 17 shows the
annual number of asbestos bodily injury claims filed against ASARCO for each type of asbestos-
related disease after the imputation of diseases to unspecified disease claims, as described above.
Claim filings against ASARCO continued to increase through 2004 before the ASARCO entities
filed for bankruptcy protection in April and August 2005. Overall, ASARCO saw a sharp
increase in annual claim filings over the decade of the 1990s. This trend too was shared with all
major asbestos defendants. Figure 7 provides graphic representations of these increasing trends
in ASARCO filings for each of the three types of cancers.7
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ASARCO                                                                                                              32




Table 17: Number of Filings Against ASARCO, By Filing Year and Disease (After Reallocation)

                                                     Disease
               Filing
               Year            Meso         Lung     OthCan Nonmal                None         Total

               Unkn              127          112           61       1,219           23       1,542
               <=1990            529          735          199      11,917        2,792      16,170
               1991              106           92           18       1,314        2,008       3,538
               1992               87          332          114       3,442          213       4,188
               1993              119          639          146      11,634          323      12,862
               1994               99          102           20       2,364        3,505       6,090
               1995              200          999          370      23,872        3,335      28,776
               1996              226          531          130      13,810          340      15,038
               1997              154          319           88       6,803        3,096      10,461
               1998              209          512          161      12,837          492      14,211
               1999              199          407          178       8,765          508      10,057
               2000              231          461          152      14,654        1,504      17,001
               2001              296          554          142      13,790          625      15,407
               2002              791          997          254      22,584          686      25,311
               2003              673          600          203      11,597          572      13,644
               2004              465          923          162      25,966          498      28,014
               2005              322          203           30       1,429           41       2,025
               2006              189           89            7         616           18         919
               Total           5,022        8,607       2,435 188,613            20,579 225,254




7.   Filings among all defendants in litigation were unusually high during 1995 and 1996 because of expensive and
     pervasive notice campaigns for two class actions of future asbestos claims in prior years. These media campaigns
     generated substantial publicity about the ability of victims to sue for asbestos-related diseases and also created
     incentives for victims of asbestos-related diseases (particularly asbestosis and pleural disease) to file claims
     immediately in order to avoid the more onerous requirements and lower recoveries that they would have received
     through the two class actions (both of which were rejected later by the U.S. Supreme Court).
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ASARCO                                                                                        33




                                          Figure 7: Number of Cancer Filings Against ASARCO


                            1000             Meso
                                             Lung
                                             OthCan
                            800
         Number of Claims
                            600
                            400
                            200
                            0




                                   1980           1985       1990          1995      2000

                                                                    Year



Figure 8 compares Nicholson’s forecast of mesothelioma deaths between 1990 and 2004 with the
number of mesothelioma claims filed against ASARCO in those years. As Figure 8 shows,
during the three years before its bankruptcy, mesothelioma claims against ASARCO had
increased sharply, growing closer to the incidence of mesothelioma deaths that Nicholson
forecast.
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ASARCO                                                                                                      34




                                            Figure 8: Nicholson Meso Forecasts vs ASARCO Actuals


                                   3500          Nicholson
                                                 ASARCO−Meso
                                   3000
                                   2500
         Number of Deaths/Claims
                                   2000
                                   1500
                                   1000
                                   500
                                   0




                                          1990   1992    1994     1996          1998   2000   2002   2004

                                                                         Year



We used the same standard method for forecasting future cancer claim filings based on
ASARCO’s historic propensities to sue. For example, the forecasts of future mesothelioma claim
filings are based on a calculation of the relationship between past claims to the past incidence of
the disease. The ‘‘propensity to sue’’ is derived by dividing the number of claims for
mesothelioma in a year by the number of mesothelioma deaths projected for that same year and
establishes the historic claiming rate for mesothelioma against ASARCO. Propensities to sue
ASARCO for lung cancer and for other cancers are calculated similarly, by dividing the number
of claims for each type of cancer in a year by the Nicholson forecast of the number of asbestos-
related deaths from that cancer in the same year.
Table 18 shows the annual propensities to sue ASARCO calculated for each of the three types of
asbestos-related cancers for each year since 1990. From the early 1990s the number of cancer
claims filings have increased steadily for most asbestos defendants. Propensities to sue ASARCO
were relatively low and lacking in trends during the early 1990s and before, but propensities to
sue increased among all cancers after 2000 as ASARCO became more prominent in the litigation
and other, target asbestos defendants entered bankruptcy.
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ASARCO                                                                                                               35




                   Table 18: Propensities to Sue ASARCO, by Disease: 1990-2004

                                                      Type of Cancer
                                     Filing
                                     Year        Meso         Lung OthCan

                                     1990         2.9%        1.9%         0.9%
                                     1991         3.9         1.7          1.2
                                     1992         3.2         6.0          7.6
                                     1993         4.3        11.7          9.9
                                     1994         3.5         1.9          1.4
                                     1995         7.0        18.7         25.5
                                     1996         7.7        10.0          9.0
                                     1997         5.2         6.1          6.2
                                     1998         7.0        10.0         11.5
                                     1999         6.6         8.1         13.1
                                     2000         7.6         9.4         11.4
                                     2001         9.7        11.5         10.9
                                     2002        25.9        21.2         19.9
                                     2003        22.1        13.2         16.5
                                     2004        15.3        21.0         13.7


We used ASARCO’s claims experience during the three year period from 2002 through 2004 as
the starting point to forecast claims against ASARCO as of January 2005.8 This three year ‘‘base
period’’ represents ASARCO’s most current claims experience, the period immediately preceding
the date of forecast.
Forecasts of future ASARCO claims must take two matters into account: (1) the most recent level
of claiming shown by the propensities to sue during years preceding ASARCO’s bankruptcy
filing and (2) the fact that cancer filings and propensities to sue had increased sharply as of 2002
and remained high (for mesothelioma and lung cancer) until the bankruptcy petitions among the
ASARCO entities. Together these matters not only establish a starting point for forecasting
future ASARCO cancer claims based on the most recent propensity to sue, but also suggest that
propensities to sue ASARCO would likely continue to increase and exceed the levels of the base
period.
Given the patterns in propensities to ASARCO, we used two alternative forecasts for the number
of future cancer claims. Our first forecast is that ASARCO’s propensities to sue during
2002-2004 would continue unchanged in future years. Because the epidemiological models show
decreases in the incidence of asbestos-related cancers, this decrease alternative posits that
ASARCO’s cancer claims would decrease in 2005 (the first year for which we forecast) and
continue to decrease for all future years. Because the decrease alternative ignores the substantial
recent increases in cancer filings against ASARCO and developments in asbestos litigation that
might lead to further increases, we derived our second stable alternative which assumes that
cancer propensities to sue and claim filings against ASARCO would first increase modestly after
2004 until 2009 and then decrease continuously after 2009. We call this the stable model because
over ASARCO’s first five ‘‘future’’ years after its bankruptcy petitions, its cancer filings would
fall within a stable range around recent pre-petition cancer filings. Nonmalignant filings would
decrease in all years, as we assume in the decrease model.


8.   Because our data contain virtually no filings in 2005, to account for claims accrued but not filed during 2005, our
     projection period begins January 2005, not the bankruptcy date itself.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 40 of 57
ASARCO                                                                                                                 36




The rates of increase in the propensity to sue that we use for the stable model are the same rates
of increase that actually occurred for the Manville Trust over the period 2000 through 2006. We
base our stable alternative forecasts on the Manville Trust’s propensities to sue during 2000 to
2006 for four reasons: First, because the same claims tend to file earlier against the primary
defendant Manville than against the secondary defendant ASARCO, use of the 2000-2006
Manville increases are appropriate for forecasting ASARCO’s filings after 2004. Second, we
have Manville claim filing data that includes both the base period for our ASARCO forecasts and
then extends into the first two years of the ‘‘future’’ period that we need to forecast for ASARCO.
Third, because Manville data are universally regarded as the most comprehensive data on asbestos
claims filing and have been used repeatedly by analysts in forecasting liabilities for other
defendants, they are appropriate for forecasting ASARCO’s liabilities. Fourth, the Manville data
are remarkably ‘‘clean,’’ current and free of problems such as the need to impute diseases among
claims that do not have specific disease (see discussion of this issue in Section 3 above).
Figure 9 and Figure 10 show respectively the number of mesothelioma and lung cancer claims
filed annually against ASARCO and against Manville. In each Figure, we continue Manville
filings after ASARCO’s bankruptcy filing and through 2006. The Figures show Manville’s filings
for 2003 through 2006 averaged over those years, because claim filings over those years were
distorted by 2003 changes to Manville’s claims procedures. As a result many claimants
‘‘accelerated’’ their filings: claims that would otherwise have been filed in these later years were
filed instead in 2003. Consequently, Manville’s claim filing trends for the four years are best
represented by averaging its claims across 2003 through 2006, as shown in Figure 9 and Figure
10.9




9.   The Manville Trust had notified claimants and their lawyers of these 2003 changes well in advance producing an
     expected result that many claimants rushed to submit claims to take advantage of Manville’s previous TDP. The
     changes and their notice caused claimants to accelerate filings with the Trust. As David Austern, CEO of the
     Manville Trust, reported to Judges Jack B. Weinstein and Burton R. Lifland: ‘‘As you may recall, the deadline to
     file claims pursuant to the original (1995) TDP was in late 2003 and law firms accelerated the filing of many
     claims to meet that deadline that, in the ordinary course, would not have been filed until 2004 or later.’’ Letter of
     February 28, 2006. Because of these temporal disturbances, we know that some of Manville’s 2003 claims would
     have been filed later had the Trust not made and announced its changes, but we cannot know how many filings
     were accelerated. As a result, we can attach no significance to the different levels of filings across each of these
     four years.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 41 of 57
ASARCO                                                                                           37




   Figure 9: Trends In ASARCO and Manville Mesothelioma Claims (2003-2006 Smoothed)


                             2000          Manville Meso
                                           ASARCO Meso
                             1500
          Number of Claims
                             1000
                             500
                             0




                                    1990                   1995                 2000   2005

                                                                  Filing Year



   Figure 10: Trends In ASARCO and Manville Lung Cancer Claims (2003-2006 Smoothed)
                             3000




                                           Manville Lung
                                           ASARCO Lung
                             2500
                             2000
          Number of Claims
                             1500
                             1000
                             500
                             0




                                    1990                   1995                 2000   2005

                                                                  Filing Year



Table 19 shows our calculation of the rates of increase in Manville’s propensities to sue for each
cancer between 2000 and 2003-2006.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 42 of 57
ASARCO                                                                                              38




                       Table 19: Rates of Increase in the Propensity to Sue

                                                  Current
                                          Disease Manville

                                          Meso             1.305
                                          Lung             1.006
                                          OthCan           1.291


Table 20 shows our forecast of the rates of annual increases for propensities to sue, again
spreading the increase gradually over the ‘‘future’’ five years and the propensity to sue estimates
used for each future year. We start with ASARCO’s actual propensities to sue during the three-
year base period, 2002-2004. We then forecast that ASARCO’s propensities to sue would
increase at rates parallel to Manville’s from 2005 through 2009. We then use the propensity to
sue forecasts for 2009 for every year after 2009 to project the number of future cancer claims that
would be filed against ASARCO.


                      Table 20: Patterns of Increase in the Propensity to Sue

                           Rates of Increase                        Propensities to Sue
         Disease   2005    2006   2007     2008    2009      2005   2006    2007    2008    2009

         Meso      1.000 1.076    1.153   1.229    1.305    0.211   0.227   0.243   0.259   0.275
         Lung      1.000 1.002    1.003   1.004    1.006    0.185   0.185   0.186   0.186   0.186
         OthCan    1.000 1.073    1.146   1.218    1.291    0.168   0.180   0.192   0.204   0.216


Figure 11 and Figure 12 present graphic summaries of the calculation of future mesothelioma
claim filings for each future year for each of the two models. The vertical bar left of year 2005
represents the time of ASARCO’s bankruptcy filing. To the left, the upper curve shows the
annual Nicholson forecast of mesothelioma incidence and the lower curve the number of
mesothelioma claims filed against ASARCO, the two parameters that are used to calculate the
ASARCO propensity to sue. Forecast claims are to the right of vertical bar, with the Nicholson
incidence forecast again the upper curve and our forecast of future mesothelioma filings the lower
curve. In each future year the forecast number of mesothelioma claim filings is calculated by
multiplying the Nicholson incidence for that year (the upper curve) times the propensity to sue for
that year. For the decrease model (Figure 11) propensities to sue remain unchanged from the
levels of the 2002-2004 base period, but claim filings decrease at the same rate as decreases in the
epidemiological forecast of the annual incidence of mesothelioma. For the stable model (Figure
12), propensities to sue increase slowly between 2005 and 2009 and, thereafter begin to fall
slowly at the same rate as Nicholson’s forecast of the decrease in annual mesothelioma deaths.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 43 of 57
ASARCO                                                                                                         39




                                           Figure 11: Mesothelioma Forecasts, Decrease Model


                             3000                                                     Actual−ASARCO
                                                                                      Forecast−ASARCO
                                                                                      Nicholson
                             2500
                             2000
          Number of Claims
                             1500
                             1000
                             500
                             0




                                    1990          2000        2010             2020     2030            2040

                                                                 Filing Year



                                            Figure 12: Mesothelioma Forecasts, Stable Model
                             3000




                                                                                      Actual−ASARCO
                                                                                      Forecast−ASARCO
                                                                                      Nicholson
                             2500
                             2000
          Number of Claims
                             1500
                             1000
                             500
                             0




                                    1990          2000        2010             2020     2030            2040

                                                                 Filing Year



We carry out similar calculations for lung cancers and other cancers. Table 21 shows our two
alternative forecasts of future claims for each type of cancer through year 2039, the end of our
forecast period.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 44 of 57
ASARCO                                                                                            40




              Table 21: Number of Forecast Cancer Claims Filed After August 2005

                                               Disease
                        Model          Meso      Lung OthCan          Total

                        Decrease      11,463    10,606      2,595    24,664
                        Stable        14,476    10,658      3,216    28,350


6.2.4. Projection of Future Nonmalignancy Claims
To forecast the number of asbestosis and pleural claims against ASARCO in future years we do
not use the same method that we use to forecast ASARCO’s future cancer claims. First, there are
no published, peer-reviewed epidemiological projections for the incidence of nonmalignant
asbestos-related diseases that are like the Nicholson cancer forecasts and no epidemiological
forecast of nonmalignant asbestos-related disease has been tested and confirmed by actual
experience as have the Nicholson cancer forecasts. Second, the disease processes for asbestos-
related cancers and asbestos-related nonmalignant diseases differ. Unlike the asbestos-related
cancers, which become known to victims abruptly through the rapid onset of symptoms and
diagnoses, nonmalignant diseases are insidious. Asbestosis and pleural diseases are progressive
diseases that develop gradually over time with the accumulation of scarring of the lungs or pleura.
Because dyspnea (shortness of breath) and other effects of these diseases increase over time,
victims of these diseases may be unaware of the earliest onset of symptoms or may attribute
breathing problems to their increasing age or other possible causes. So unlike the asbestos-
related cancers, which become known to victims by a signal event--the diagnosis of a grave
disease--that will be most likely to trigger claim filing, victims of nonmalignant asbestos diseases
may become aware of their diseases gradually or they may be made aware by a medical diagnosis
of asbestosis or pleural disease that could be made early or later in the progression of the disease.
Consequently, filings of claims for asbestosis and pleural disease cannot be predicted from
epidemiological evidence in the same manner as can filings of asbestos-related cancers.
Recent changes in the litigation environment have disturbed what was an historic stability
between cancer and nonmalignancy filings. Now, in contrast while cancer filings have continued
to increase in the last few years, filings of nonmalignant claims have fallen. Some of the decrease
in nonmalignant filings resulted from the U.S. Senate’s extended consideration of asbestos
legislation that would have created a national compensation fund and eliminate asbestos litigation
(‘‘We attribute the comparatively low rate of claim filings in 2004 to three factors ... [3] the
uncertainty surrounding the national asbestos litigation,’’ February 28, 2005 letter from David
Austern to Judges Jack B. Weinstein and Burton R. Lifland). The possibility of such legislation
broadly affected asbestos litigation, resulting in fewer settlements of asbestos law suits and
reduced filings of new law suits. Given uncertainties about whether or not newly filed law suits
would ever result in payment, plaintiffs’ lawyers have become unwilling to spend the time and
money required to prepare new cases, particularly nonmalignant claims. The possibility of
national legislation particularly suppressed nonmalignant claim filings which are more likely than
cancer claims to be generated by law firms’ entrepreneurial activities and whose filings are more
easily deferred because they are less subject to statutes of limitations. This suppression of claim
filings resulting from the Senate’s legislative considerations will likely be transitory, with a
rebound in filings should the prospect of legislation disappear.
However, other developments suggest that filings of nonmalignant claims may never rebound to
their great numbers of several years ago. First, several states that have been centers of much
asbestos litigation have adopted new statutes that will limit the number of new law suits for
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 45 of 57
ASARCO                                                                                            41




nonmalignant claims in those states, primarily by establishing medical criteria that plaintiffs must
establish in order to bring suit. Second, as discussed above, courts and defendants have
documented the troubling practices of some medical providers who have examined and prepared
documents to support many plaintiffs’ claims for nonmalignant injuries. While fewer recent
claims have depended upon documentation by doctors subject to these criticisms, in the past a
significant fraction of law suits for nonmalignant diseases have presented medical documents
from doctors or medical facilities who have been criticized. This criticism and attention will
likely reduce the number of future law suits for nonmalignant claims. Third, some plaintiffs’ law
firms have seemed to redirect their efforts in recruiting and filing asbestos injury claims,
concentrating increasingly on more valuable and less controversial cancer claims. If this
redirection by law firms continues, it could reshape asbestos litigation.
For all these reasons we expect that the historically stable pattern between the number of cancer
and nonmalignant claims will change and that nonmalignant claim filings will decrease in future
years, both relative to cancer filings and in absolute numbers. Although nonmalignant claim
filings increased after 2000 among defendants who continued to receive asbestos claims, we
forecast instead that beginning in the future nonmalignant claims against ASARCO will decrease
steadily from their levels before ASARCO’s bankruptcy. To forecast ASARCO’s future
nonmalignant claim filings, we start with the level of nonmalignant claims that it received in the
2002-2004 base period and then assume that future claims will decrease at a rate parallel to the
Nicholson forecast of the incidence of future asbestos-related cancers (i.e., at a constant
relationship to the projected number of asbestos-related cancers). Medical researchers have
suggested that trends in the incidence of cancers, like those forecast by Nicholson, represent the
best means for estimating asbestos disease generally among exposed workers.
Figure 13 and Figure 14 show our long term forecast of future ASARCO claims for each of our
two future claim models. The Figure shows the number of claims filed against ASARCO
annually prior to the bankruptcy, showing separately our forecasts for cancer and nonmalignant
claims: cancer claims appear at the bottom and nonmalignant claims appear above. For our
decrease model, we forecast that both cancer and nonmalignant claim filings will decrease from
their counts before ASARCO’s bankruptcy. The stable model forecasts that ASARCO’s cancer
claim filings will continue to increase between 2005 and 2009 before they turn and decline
thereafter, our forecasts of future nonmalignant claims start in 2005 lower than the level of such
claims during 2006 and decline year after year thereafter.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 46 of 57
ASARCO                                                                                                                                               42




                                                    Figure 13: Actual And Projected Filings, Decrease Model




                                                                                                                   10000
                                         25000                                                  Cancer−A
                                                                                                Nonmal−A
                                                                                                Cancer−F




                                                                                                                   8000
                                                                                                Nonmal−F
                                         20000
         Number of Nonmalignant Claims




                                                                                                                   6000

                                                                                                                           Number of Cancer Claims
                                         15000




                                                                                                                   4000
                                         10000




                                                                                                                   2000
                                         5000




                                                                                                                   0
                                         0




                                                 1990          2000       2010          2020     2030       2040

                                                                                 Year



                                                        Figure 14: Actual And Projected Filings, Stable Model


                                                                                                                   10000
                                         25000




                                                                                                Cancer−A
                                                                                                Nonmal−A
                                                                                                Cancer−F
                                                                                                                   8000



                                                                                                Nonmal−F
                                         20000
         Number of Nonmalignant Claims




                                                                                                                   6000

                                                                                                                           Number of Cancer Claims
                                         15000




                                                                                                                   4000
                                         10000




                                                                                                                   2000
                                         5000




                                                                                                                   0
                                         0




                                                 1990          2000       2010          2020     2030       2040

                                                                                 Year



The following two Figures (Figure 15 and Figure 16) show past and forecast future claims
separately for cancers and nonmalignancies both to contrast the trends for the stable and decrease
models and also to better demonstrate the differing forecast trends in filing for each type of
    Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 47 of 57
ASARCO                                                                                                     43




disease claim. We forecast modest, short-term increases in filings of cancer claims through 2006
to reflect the experiences of other defendants since ASARCO’s August 2005 petition date.
Thereafter, we forecast that cancer filings against ASARCO will steadily decrease, just as we
forecast steady decreases in ASARCO nonmalignancy filings beginning in 2005.

                                          Figure 15: Actual And Projected Cancer Filings
                            2000




                                                                                  Past−Filings
                                                                                  Decrease Cancer
                                                                                  Stable Cancer
                            1500
         Number of Claims
                            1000
                            500
                            0




                                   1990        2000        2010          2020       2030            2040

                                                                  Year
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 48 of 57
ASARCO                                                                                                         44




                                           Figure 16: Actual And Projected Nonmalignant Filings


                            25000                                                     Past−Filings
                                                                                      Decrease Nonmal
                                                                                      Stable Nonmal
                            20000
         Number of Claims
                            15000
                            10000
                            5000
                            0




                                    1990           2000        2010          2020       2030            2040

                                                                      Year



  Note: Nonmalignant projections are identical for the decrease and stable models, so only one
  line shows.

In order to understand the significance of these trends, it is important to recall that we forecast
sharp decreases in ASARCO’s payment rates for each type of asbestos-related disease compared
to their levels prior to 2003. For each cancer and for nonmalignancies, we forecast that ASARCO
will pay a far smaller fraction of filed claims than it did prior to 2003. In contrast to payment
rates near and usually exceeding the mid-80 percents for each disease prior to its bankruptcy
petition, we forecast that ASARCO will pay as few as 54.9 to 67.9 percent of mesothelioma
claims and only 43.5 to 52.0 percent of nonmalignant claims. As a result, we forecast that
ASARCO will pay fewer claims during all years than it had before bankruptcy.
Because we forecast both decreasing nonmalignant claim filings and a sharp decrease in
ASARCO’s payment rate, we forecast a particularly sharp drop in the number of nonmalignant
claims that ASARCO would pay. We expect such a sharp drop in compensated nonmalignant
claims both because recent increases in filings for such claims may reflect a lower quality among
such claims and also because of the important recent changes in asbestos litigation--criticisms and
increased scrutiny of medical documentation of nonmalignant claims, statutory and judicial
changes in the legal treatment of nonmalignant disease claims, and changes in the practices
among plaintiffs’ law firms.
Figures 17 and 18 demonstrate the resulting sharp drop that we forecast in the number of claims
that ASARCO would pay in the future, for all cancers (Figure 17) and nonmalignant claims
(Figure 18). For each figure, the upper, red lines represent the number of filed claims and the
lower, blue lines represent the number of claims that we forecast will be paid. The figures are
based on our forecasts of reduced payment rates, the 2004-2005 base period and a decreasing
future propensity to sue. Our lowest payment rate models forecast even sharper decreases in the
number of paid cancer claims than shown on this figures, while assumptions using the 2003-2005
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 49 of 57
ASARCO                                                                                                45




base period or the stable future propensities to sue forecast more paid cancer claims. But all of
our models forecast that ASARCO would pay far fewer cancer claims and far fewer
nonmalignancy claims than it has in the past.

                              Figure 17: Past and Projected Cancer Filings and Compensable Claims



                                                                                Past−Compensable
                             2000




                                                                                Past−Filings

                                                                                Fcst−Compensable
                             1500




                                                                                Fcst−Filings
          Number of Claims
                             1000
                             500
                             0




                                    1990   1995      2000      2005      2010       2015       2020

                                                               Year
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 50 of 57
ASARCO                                                                                                                  46




         Figure 18: Past and Projected Nonmalignant Filings and Compensable Claims


                            25000
                                                                                              Past−Compensable

                                                                                              Past−Filings
                            20000




                                                                                              Fcst−Compensable

                                                                                              Fcst−Filings
         Number of Claims
                            15000
                            10000
                            5000
                            0




                                    1990       1995          2000          2005        2010       2015           2020

                                                                           Year



6.2.5. Forecast Number of Future Claims
Table 22 shows the results of the forecast. As a significant change from the past, mesothelioma
claims will be the most frequent cancer filings in the future, surpassing lung cancers. The
incidences of mesotheliomas have now reached a point that they will be equal to or greater than
the number of asbestos-related lung cancers. Mesothelioma claims will exceed lung cancers
because propensities to sue are greater for mesothelioma than for lung cancer and been increasing
at much higher rates. Appendix Table A3 shows the forecast filings for each disease for each year
from 2005 to 2039.


                                    Table 22: Number of Forecast Claims Filed After August 2005

                                                                     Disease
                                    Model             Meso          Lung    OthCan Nonmal                Total

                                    Decrease      11,463        10,606            2,595 292,713 317,377
                                    Stable        14,476        10,658            3,216 292,713 321,063


6.2.6. Estimating Liability for Forecast Future Claims
To value future claims we used the same values that we used for valuing pending claims, the
average settlement values and payment rates shown in Table 14 above.
In forecasting the values of future claims, we assumed that payments would be adjusted for future
inflation at a rate of 2.5 percent per year. This rate was being used by the Congressional Budget
Office at the time of ASARCO’s bankruptcy and is close to the rate of inflation since then. Table
23 shows the value of future claims adjusting future inflation.
      Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 51 of 57
ASARCO                                                                                                           47




                   Table 23: Forecast Indemnity for Future Claims after August 2005

        Payment                                                      Forecast Indemnity
        Year            Payment Filings
        Basis           Rates   Model                  Meso         Lung OthCan Nonmal                   Total

        2003-2005       Historic Decrease             $1,101        $164          $11        $448      $1,724
        2003-2005       Historic Stable                1,401         165           13         448       2,028
        2003-2005       Reduced Decrease               1,095         163           11         448       1,717
        2003-2005       Reduced Stable                 1,394         164           13         448       2,019
        2003-2005       Lowest   Decrease              1,086         163           10         448       1,707
        2003-2005       Lowest   Stable                1,382         164           13         448       2,006
        2004-2005       Historic Decrease              1,807          254           14         538       2,613
        2004-2005       Historic Stable                2,299          256           17         538       3,110
        2004-2005       Reduced Decrease               1,797          252           13         538       2,600
        2004-2005       Reduced Stable                 2,286          253           17         538       3,095
        2004-2005       Lowest   Decrease              1,781          252           13         538       2,585
        2004-2005       Lowest   Stable                2,267          253           17         538       3,075

  Notes: Millions of dollars of the year when paid. Future claims are assumed to settle 2 years
  after filing. Indemnity is inflation adjusted at 2.5% per year.

The results in Table 23 estimate the value that we forecast for future claims in terms of the dollars
of the year when claims will be paid. However, these do not represent the present value of
ASARCO’s liabilities. Since these liabilities will mostly arise in future years, they must be
reduced to present value to account for the time value of money. Table 24 shows the estimated
present value of these liabilities, based on a discount rate of 5.5%.10




10.   A 5.5% discount rate has been provided to me in other cases by experts in matters of discount rates.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 52 of 57
ASARCO                                                                                              48




                Table 24: Present Value (PV) of Future Claims as of August 2005

       Payment                                             Forecast Indemnity
       Year         Payment Filings
       Basis        Rates   Model              Meso       Lung OthCan Nonmal              Total

       2003-2005    Historic    Decrease        $562        $91         $6     $240       $899
       2003-2005    Historic    Stable           703         92          7      240      1,041
       2003-2005    Reduced     Decrease         559         91          6      240        895
       2003-2005    Reduced     Stable           699         91          7      240      1,037
       2003-2005    Lowest      Decrease         554         91          6      240        890
       2003-2005    Lowest      Stable           693         91          7      240      1,030
       2004-2005    Historic    Decrease         922        142          8       288     1,359
       2004-2005    Historic    Stable         1,153        142          9       288     1,592
       2004-2005    Reduced     Decrease         917        140          8       288     1,352
       2004-2005    Reduced     Stable         1,146        141          9       288     1,584
       2004-2005    Lowest      Decrease         909        140          7       288     1,344
       2004-2005    Lowest      Stable         1,137        141          9       288     1,574

  Notes: Millions of 2005 dollars. Future claims are assumed to settle 2 years after filing.
  Indemnity is inflation adjusted at 2.5% per year. Discount rate is 5.5%.

The results in Table 24 show that the choice between payment rate models reduced or historic or
lowest, makes no real difference in the forecast liability. Historically ASARCO had paid very
little to the lowest valued claims that our reduced and lowest payment rate models assume might
now be rejected without payment, so that ASARCO would save relatively little by now closing
those lowest valued claims without payment. Under all three payment rate models ASARCO
would still have to pay the really valuable claims that had represented most of its historic liability
(i.e. the top 70 percent of cancers), so it’s liability remains similar under all three models. The
alternative future claim filing models make modest differences: the Stable model forecasts future
liabilities that are about 17 percent greater.
The most important forecasting choice is between the alternative base periods for deriving
ASARCO’s past payment rates and settlement averages that we use to forecast resolutions for
future claims. ASARCO’s liability for future claims is about 50 percent greater when we use the
2004-2005 base period to forecast its resolution costs instead of 2003-2005. This difference
occurs mostly among mesothelioma claims. As we have seen, mesothelioma settlement payments
have been increasing sharply in recent years for ASARCO and all defendants, a trend that has
been widely recognized and noted among participants in asbestos litigation. Over the 2004-2005
base period ASARCO paid about 60 percent more on average for mesothelioma settlements than
it had over the 2003-2005 period. The 2004-2005 base period is most contemporaneous to the
period for which we predict future ASARCO payments, 2006 and later. It is important to use this
latest period because it best captures the most current status of the increasing trend in
mesothelioma settlement values that continued to the time of the bankruptcy petitions of the
ASARCO entities (and would likely have continued beyond, although we do not base our
ASARCO forecasts on continuation of the trends).
Finally, Table 25 shows the present value of our forecast of ASARCO’s liability for both pending
and future claims.
   Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 53 of 57
ASARCO                                                                                       49




              Table 25: Present Value (PV) of Total Liability as of August 2005

     Payment                                          Forecast Indemnity
     Year         Payment Filings
     Basis        Rates   Model            Meso      Lung OthCan Nonmal             Total

     2003-2005    Historic Decrease         $774      $144       $10      $356    $1,283
     2003-2005    Historic Stable            915       145        11       356     1,425
     2003-2005    Reduced Decrease           771       144        10       356     1,278
     2003-2005    Reduced Stable             911       144        11       356     1,420
     2003-2005    Lowest   Decrease          764       144        10       356     1,271
     2003-2005    Lowest   Stable            903       144        11       356     1,411
     2004-2005    Historic Decrease        1,236       219        12       421     1,886
     2004-2005    Historic Stable          1,467       219        13       421     2,119
     2004-2005    Reduced Decrease         1,229       216        12       421     1,877
     2004-2005    Reduced Stable           1,458       217        13       421     2,109
     2004-2005    Lowest   Decrease        1,219       216        11       421     1,867
     2004-2005    Lowest   Stable          1,447       217        13       421     2,097

 Notes: Millions of 2005 dollars. Pending claims are assumed to settle in 2006. Future claims
 are assumed to settle 2 years after filing. Indemnity is inflation adjusted at 2.5% per year.
 Discount rate is 5.5%.
     Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 54 of 57
ASARCO                                                                                            50




7. Rule 26 Disclosures and Signature
DATA CONSIDERED: In reaching the opinions and conclusions set forth in this Report, I have
considered the following information: my background, training, experience and knowledge of the
asbestos litigation developed over the past 25 years, the items of data explicitly identified in the
report, publicly available sources of information concerning inflation rates, publicly available
documents about ASARCO, and publicly available data from the National Cancer Institute’s
SEER registry.
EXHIBITS: The exhibits which summarize my opinions are included in the graphics and tables
in the report and in the appendices to the report.
QUALIFICATIONS: My qualifications to perform this analysis and provide expert testimony are
set forth in my C.V., a copy of which is attached as Exhibit 1.
PUBLICATIONS: Any publications I have authored within the past ten years are set forth in my
C.V.
COMPENSATION: My compensation for services rendered in this case is set forth in the fee
applications Legal Analysis Systems files on a regular basis with the Bankruptcy Court. At
present, my hourly rate is $700.
PRIOR TESTIMONY: A listing of all cases in which I have testified as an expert at either trial or
deposition within the past four years is attached as Exhibit 2.
I reserve the right to modify this report as new information becomes available between now and
the time of trial. I anticipate that I will review the expert witness reports of opposing expert(s)
and offer my opinions about their analyses and conclusions in a rebuttal report and testimony.


                                                        /s/ Mark A. Peterson
                                                ____________________________________
                                                       Mark A. Peterson, J.D., Ph.D.
                                                       LEGAL ANALYSIS SYSTEMS
    Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 55 of 57
ASARCO                                                                                     A-1




          Appendix A - Year by Disease Projections


This appendix provides the year by disease projections of Nicholson and KPMG (cancer
incidences) and LAS (OC and Fibreboard filings as of October 5, 2000).


                      Table A1: Nicholson Epidemiological Projections

 Death             Disease             Total       Death              Disease              Total
 Year      Meso       Lung   OthCan Cancers         Year      Meso       Lung    OthCan Cancers

 1970      1,010     2,909        963     4,882      2005     3,023      4,230     1,143      8,396
 1971      1,046     3,098        998     5,142      2006     3,011      4,075     1,099      8,185
 1972      1,082     3,286      1,034     5,402      2007     2,999      3,921     1,055      7,975
 1973      1,151     3,502      1,065     5,718      2008     2,931      3,734     1,006      7,672
 1974      1,219     3,719      1,096     6,034      2009     2,864      3,547       958      7,369
 1975      1,288     3,935      1,128     6,351      2010     2,796      3,361       909      7,066
 1976      1,356     4,152      1,159     6,667      2011     2,729      3,174       861      6,763
 1977      1,425     4,368      1,190     6,983      2012     2,661      2,987       812      6,460
 1978      1,495     4,505      1,227     7,228      2013     2,545      2,811       762      6,119
 1979      1,565     4,643      1,264     7,472      2014     2,429      2,635       713      5,778
 1980      1,635     4,780      1,302     7,717      2015     2,314      2,460       663      5,436
 1981      1,705     4,918      1,339     7,961      2016     2,198      2,284       614      5,095
 1982      1,775     5,055      1,376     8,206      2017     2,082      2,108       564      4,754
 1983      1,900     5,138      1,400     8,438      2018     1,965      1,937       519      4,421
 1984      2,024     5,222      1,424     8,670      2019     1,847      1,766       474      4,088
 1985      2,149     5,305      1,447     8,901      2020     1,730      1,596       430      3,755
 1986      2,273     5,389      1,471     9,133      2021     1,612      1,425       385      3,422
 1987      2,398     5,472      1,495     9,365      2022     1,495      1,254       340      3,089
 1988      2,468     5,477      1,495     9,440      2023     1,379      1,132       307      2,819
 1989      2,538     5,482      1,495     9,515      2024     1,264      1,011       274      2,549
 1990      2,608     5,487      1,494     9,589      2025     1,148        889       242      2,279
 1991      2,678     5,492      1,494     9,664      2026     1,033        768       209      2,009
 1992      2,748     5,497      1,494     9,739      2027       917        646       176      1,739
 1993      2,792     5,449      1,480     9,722      2028       827        575       157      1,558
 1994      2,836     5,402      1,466     9,705      2029       740        508       138      1,386
 1995      2,881     5,354      1,453     9,687      2030       657        446       122      1,225
 1996      2,925     5,307      1,439     9,670      2031       579        388       105      1,072
 1997      2,969     5,259      1,425     9,653      2032       507        336        92        935
 1998      2,987     5,146      1,395     9,528      2033       443        316        79        837
 1999      3,005     5,033      1,365     9,403      2034       383        246        67        696
 2000      3,024     4,919      1,334     9,277      2035       332        208        57        596
 2001      3,042     4,806      1,304     9,152      2036       282        174        47        503
 2002      3,060     4,693      1,274     9,027      2037       240        144        38        423
 2003      3,048     4,539      1,230     8,817      2038       201        117        32        351
 2004      3,036     4,384      1,186     8,606      2039       169         94        26        290

  Note: Nicholson’s projections run through 2030. LAS extended those to 2039 using the year
  by disease rates of decline derived from the KPMG projections, below.
   Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 56 of 57
ASARCO                                                                               A-2




                     Table A2: KPMG Epidemiological Projections

Death            Disease             Total    Death               Disease             Total
Year     Meso       Lung   OthCan Cancers      Year     Meso         Lung   OthCan Cancers

1970       861     3,234    1,196    5,291     2005     2,347       3,638      990     6,975
1971       931     3,592    1,130    5,653     2006     2,294       3,474      945     6,713
1972     1,003     3,721    1,171    5,895     2007     2,234       3,311      900     6,445
1973     1,079     3,846    1,211    6,136     2008     2,173       3,149      857     6,179
1974     1,157     3,974    1,251    6,382     2009     2,105       2,989      813     5,907
1975     1,237     4,147    1,305    6,689     2010     2,034       2,831      769     5,634
1976     1,308     4,278    1,165    6,751     2011     1,960       2,674      728     5,362
1977     1,386     4,428    1,204    7,018     2012     1,880       2,520      686     5,086
1978     1,465     4,577    1,246    7,288     2013     1,798       2,371      644     4,813
1979     1,545     4,728    1,287    7,560     2014     1,713       2,224      604     4,541
1980     1,628     4,897    1,333    7,858     2015     1,627       2,083      566     4,276
1981     1,708     5,042    1,371    8,121     2016     1,538       1,942      528     4,008
1982     1,789     5,158    1,403    8,350     2017     1,447       1,808      492     3,747
1983     1,869     5,261    1,432    8,562     2018     1,357       1,677      457     3,491
1984     1,949     5,338    1,452    8,739     2019     1,269       1,553      422     3,244
1985     2,030     5,401    1,469    8,900     2020     1,180       1,434      390     3,004
1986     2,102     5,431    1,478    9,011     2021     1,094       1,317      358     2,769
1987     2,173     5,441    1,480    9,094     2022     1,009       1,206      328     2,543
1988     2,242     5,441    1,480    9,163     2023       928       1,101      300     2,329
1989     2,306     5,433    1,478    9,217     2024       850         998      272     2,120
1990     2,367     5,410    1,472    9,249     2025       775         902      245     1,922
1991     2,418     5,362    1,458    9,238     2026       703         811      221     1,735
1992     2,459     5,293    1,440    9,192     2027       634         724      197     1,555
1993     2,493     5,218    1,420    9,131     2028       571         643      175     1,389
1994     2,521     5,135    1,397    9,053     2029       510         567      154     1,231
1995     2,538     5,037    1,370    8,945     2030       452         497      136     1,085
1996     2,546     4,928    1,341    8,815     2031       398         431      117       946
1997     2,547     4,807    1,307    8,661     2032       348         373      101       822
1998     2,543     4,682    1,273    8,498     2033       303         346       87       736
1999     2,534     4,550    1,238    8,322     2034       262         271       74       607
2000     2,522     4,414    1,201    8,137     2035       226         228       62       516
2001     2,497     4,265    1,159    7,921     2036       192         190       51       433
2002     2,469     4,110    1,117    7,696     2037       163         157       42       362
2003     2,433     3,955    1,076    7,464     2038       136         127       35       298
2004     2,393     3,798    1,033    7,224     2039       114         102       28       244
        Case 05-21207 Document 11934-1 Filed in TXSB on 07/10/09 Page 57 of 57
ASARCO                                                                                                    A-3




         Table A3: Forecasts of Number of ASARCO Filings, by Year, Model, and Disease

                                       Decrease Model                                  Stable Model
Filing          Payment
Year            Year      Meso      Lung    OthCan Nonmal        Total   Meso      Lung    OthCan Nonmal         Total

Liquidated    2006           719    1,080      418    18,455  20,672        719    1,080      418     18,455  20,672
Unliquidated 2006          2,367    3,835      874    78,634  85,710      2,367    3,835      874     78,634  85,710
Total Pending 2006         3,086    4,915    1,292    97,089 106,382      3,086    4,915    1,292     97,089 106,382
2005            2007        638      783       192    19,135    20,748     638      783       192     19,135    20,748
2006            2008        635      754       184    18,678    20,251     684      755       198     18,678    20,315
2007            2009        633      726       177    18,222    19,758     729      728       203     18,222    19,882
2008            2000        618      691       169    17,545    19,023     760      694       206     17,545    19,205
2009            2001        604      656       161    16,869    18,290     788      660       207     16,869    18,524
2010            2012        590      622       152    16,193    17,557     770      626       197     16,193    17,786
2011            2013        576      587       144    15,516    16,823     751      591       186     15,516    17,044
2012            2014        561      553       136    14,840    16,090     733      556       176     14,840    16,305
2013            2015        537      520       128    14,065    15,250     701      523       165     14,065    15,454
2014            2016        513      488       120    13,290    14,411     669      491       154     13,290    14,604
2015            2017        488      455       111    12,516    13,570     637      458       144     12,516    13,755
2016            2018        464      423       103    11,741    12,731     605      425       133     11,741    12,904
2017            2019        439      390        95    10,966    11,890     573      392       122     10,966    12,053
2018            2010        414      358        87    10,208    11,067     541      361       112     10,208    11,222
2019            2011        390      327        80     9,449    10,246     509      329       103      9,449    10,390
2020            2022        365      295        72     8,691     9,423     476      297        93      8,691     9,557
2021            2023        340      264        65     7,933     8,602     444      265        83      7,933     8,725
2022            2024        315      232        57     7,175     7,779     412      233        74      7,175     7,894
2023            2025        291      210        52     6,553     7,106     380      211        66      6,553     7,210
2024            2026        267      187        46     5,931     6,431     348      188        59      5,931     6,526
2025            2027        242      165        41     5,309     5,757     316      166        52      5,309     5,843
2026            2028        218      142        35     4,687     5,082     284      143        45      4,687     5,159
2027            2029        193      120        30     4,065     4,408     252      120        38      4,065     4,475
2028            2020        175      106        26     3,645     3,952     228      107        34      3,645     4,014
2029            2021        156       94        23     3,242     3,515     204       95        30      3,242     3,571
2030            2032        139       83        20     2,868     3,110     181       83        26      2,868     3,158
2031            2033        122       72        18     2,511     2,723     159       72        23      2,511     2,765
2032            2034        107       62        15     2,191     2,375     140       63        20      2,191     2,414
2033            2035         93       58        13     1,959     2,123     122       59        17      1,959     2,157
2034            2036         81       46        11     1,634     1,772     105       46        15      1,634     1,800
2035            2037         70       39         9     1,400     1,518      91       39        12      1,400     1,542
2036            2038         60       32         8     1,182     1,282      78       32        10      1,182     1,302
2037            2039         51       27         6       995     1,079      66       27         8        995     1,096
2038            2040         42       22         5       826       895      55       22         7        826       910
2039            2041         36       17         4       683       740      47       18         6        683       754
Total Futures             11,463   10,606    2,595   292,713   317,377   14,476   10,658    3,216   292,713    321,063
Total                     14,549   15,521    3,887 389,802     423,759   17,562   15,573    4,508   389,802    427,445
EXHIBIT 3
                  USG Corporation

Projected Liabilities for Asbestos Personal Injury Claims

                  As of June 2001




                  Mark A. Peterson

              Legal Analysis Systems


                      May 2006
USG Corporation                                                                                                               i




                                               Table of Contents

1. Overview of Repor t ..................................................................................................... 1
2. Dr. Peterson’s Qualifications ....................................................................................... 2
3. Bases of USG’s Asbestos Liability .............................................................................. 3
4. Estimating Liabilities for Asbestos Bodily Injury Claims .............................................. 6
5. Data for asbestos bodily injury claims involving USG ................................................. 7
6. Estimation of USG’s Asbestos Liability, June 2001 ..................................................... 8
    6.1. Forecast Indemnity for Claims Pending on June 25, 2001 ................................. 9
       6.1.1. Imputation for Unspecified Disease Claims ............................................... 9
       6.1.2. Calculation of Indemnity for Pending Claims ........................................... 11
    6.2. Projections of Number And Timing of Future Claims ....................................... 21
       6.2.1. The Incidence of Asbestos-Related Cancers ........................................... 22
       6.2.2. Accuracy of Epidemiological Projections ................................................. 23
       6.2.3. Propensities to Sue USG ......................................................................... 25
       6.2.4. Projection of Future Nonmalignancy Claims ............................................ 35
       6.2.5. Forecast Number of Future Claims .......................................................... 43
       6.2.6. Estimating Liability for Forecast Future Claims ........................................ 43
    6.4. USG’s Total Asbestos Liability, June 2001 ....................................................... 44
7. Liability from A. P. Green Claims .............................................................................. 46
8. Sensitivity Analyses ..................................................................................................   48
    8.1. Alternative Parameter Selections .....................................................................              48
       8.1.1. Alternative Epidemiological Models .........................................................                   48
       8.1.2. Alternative Rates of Increase in Propensity to Sue ..................................                          48
       8.1.3. Alternative Dollar Amounts ......................................................................              49
       8.1.4. Alternative Payment Rates .......................................................................              50
       8.1.5. Alternative Inflation Rates ........................................................................           50
       8.1.6. Alternative Discount Rates .......................................................................             50
       8.1.7. Tor t Reform Alternative ............................................................................          50
    8.2. Results of Alternative Parameter Selections ....................................................                    51
9. Rule 26 Disclosures and Signature .......................................................................... 53

APPENDIX A ............................................................................................................... A-1



                                                        Figures

Figure 1: USG Mesothelioma Settlement Values ......................................................... 12
Figure 2: USG Lung Cancer Settlement Values ........................................................... 13
Figure 3: Trends in Mesothelioma Settlement Amounts ............................................... 15
Figure 4: Trends in Lung Cancer Settlement Amounts ................................................. 16
Figure 5: Distribution of Indemnity Amounts for Pending Claims, by Disease .............. 21
USG Corporation                                                                                                                 ii




Figure 6: Claim Filings for Major Asbestos Defendants, 1990-2001 ............................. 22
Figure 7: Nicholson Cancer Projections ....................................................................... 23
Figure 8: Epidemiological Projections Confirmed by SEER’s Mesothelioma
   Counts ..................................................................................................................... 25
Figure 9: Number of Cancer Filings Against USG ........................................................ 28
Figure 10: Nicholson Meso Forecasts vs USG Actuals ................................................ 29
Figure 11: Trends In USG and Manville Mesothelioma Claims (2003-2005
   Smoothed) ............................................................................................................... 31
Figure 12: Trends In USG and Manville Lung Cancer Claims (2003-2005
   Smoothed) ............................................................................................................... 32
Figure 13: Nicholson Meso Forecasts vs USG Actuals ................................................ 34
Figure 14: Trends In USG and Manville Mesothelioma Claims (2003-2005
   Smoothed) ............................................................................................................... 34
Figure 15: Trends In USG and Manville Lung Cancer Claims (2003-2005
   Smoothed) ............................................................................................................... 35
Figure 16: Annual Nonmalignant Claims Against USG ................................................ 36
Figure 17: Comparison of Nonmalignant and Cancer Claim Counts ............................ 37
Figure 18: Actual And Projected Filings ........................................................................ 39
Figure 19: Actual And Projected Cancer Filings ........................................................... 41
Figure 20: Actual And Projected Nonmalignant Filings ................................................ 41
Figure 21: Past and Projected Mesothelioma Filings .................................................... 41
Figure 22: Past and Projected Cancer Filings .............................................................. 43
Figure 23: Past and Projected Nonmalignant Filings .................................................... 43
Figure 24: Distribution of PV of Total Liability, by Disease ............................................ 45
Figure 25: Distribution of PV-Liabilities by Expense Type: Future Increase Model ....... 45



                                                          Tables

Table 1: Average Settlement Values and Resolution Costs, By Year and Disease ......... 9
Table 2: June 25, 2001 Pending Claims .......................................................................... 9
Table 3: USG Transitions Among Resolved Claims that Have Unspecified Alleged
   Disease ................................................................................................................... 10
Table 4: Disease Distributions After Imputation for Pending Claims ............................. 11
Table 5: Number of Pending Claims ............................................................................. 11
Table 6: Trends in Settlement Averages for USG and Other Former-CCR
   Members ................................................................................................................. 16
USG Corporation                                                                                                               iii




Table 7: Union Carbide’s Annual Asbestos Claims Resolution Costs ........................... 17
Table 8: Payment Percentage for Turner-Newall and USG ........................................... 17
Table 9: Owens Corning and W. R. Grace Paid A Higher Percent of Claims Than
   Forecast for USG ..................................................................................................... 19
Table 10: Number and Average Value of Pending Claims ............................................ 20
Table 11: Forecast of Indemnity for Pending Claims ..................................................... 20
Table 12: Number of Filings Against USG, By Filing Year and Disease (After
   Reallocation) ........................................................................................................... 27
Table 13: Propensities to Sue USG, by Disease: 1990-2000 ....................................... 30
Table 14: Comparison of Alternative Estimates of Increase in Propensities to Sue ..... 32
Table 15: Patterns of Increase in the Propensity to Sue ............................................... 33
Table 16: Number of Forecast Cancer Claims Filed After June 2001 ........................... 34
Table 17: Number of Forecast Claims Filed After June 2001 ....................................... 43
Table 18: Forecast Indemnity for Future Claims after June 2001 ................................. 43
Table 19: Present Value (PV) of Future Claims as of June 2001 .................................. 44
Table 20: USG’s Nominal Liability for Pending and Future Claims As of June 2001 .... 44
Table 21: PV of USG’s Total Liability for Indemnity: June 2001 .................................... 44
Table 22: Pre-1968 Filings Against A. P. Green (After Reallocation of Unspecified
   Diseases) ................................................................................................................ 46
Table 23: Estimated Numbers of Claims Against A. P. Green, by Disease and
   Claim Status ............................................................................................................ 47
Table 24: Predicted Additional Filings and Liability Against USG Due to Pre-1968
   Exposure to A. P. Green Products ........................................................................... 47
Table 25: Alternative Increases In Propensity to Sue ................................................... 49
Table 26: Alternative Settlement Values ....................................................................... 50
Table 27: Alternative Payment Rates ............................................................................ 50
Table 28: Alternative Payment Parameters If Ohio Legislation Expands
   Nation-Wide ............................................................................................................. 51
Table 29: Sensitivity Analysis Results: Net Present Value ............................................ 51
Table A1: Nicholson Epidemiological Projections ........................................................ A-2
Table A2: KPMG Epidemiological Projections ............................................................. A-2
Table A3: USG Forecasts as of June 2001: Number of Filings ................................... A-3
Table A4: USG Forecasts as of June 2001: Nominal Value of Liability ....................... A-4
USG Corporation                                                                                      1




1. Overview of Report
This report summarizes results of analyses to estimate the liability of USG Corporation (‘‘USG’’)
for asbestos personal injury claims that had been filed and were unresolved (‘‘pending claims’’)
and claims that would be filed in the future (‘‘future claims’’) as of the date of USG’s bankruptcy
petition, June 25, 2001. We use a 2002 USG claims database, but we also look at and draw upon
the experiences of other asbestos defendants who have continued to receive and settle asbestos
claims for the five years since USG entered bankruptcy. We are able to better understand what
would have been USG’s asbestos liability at and after its petition date by considering the
contemporaneous experiences of these other defendants.
The report first discusses USG’s corporate activities that led to its asbestos liability and then
discusses the data and methods used to estimate USG’s liability. The report then presents
estimates of USG’s liability as of June 2001 for pending claims and future claims. Next, the
report presents estimates of the additional liabilities that USG might bear for claims that involved
asbestos exposures caused by A. P. Green but that do not otherwise involve exposures for which
USG would have responsibility. The report’s estimates of the number of future asbestos claims
and the indemnity values of USG’s pending and future asbestos claims are forecast based on
USG’s claims history, as well as trends that we observed among other asbestos defendants since
USG entered bankruptcy, and also take into account changes in the litigation environment since
2001. The passage of time has made this forecasting easier: we can see trends in claims filed
against and settlements paid by other asbestos defendants that USG would have also experienced
had it remained in asbestos litigation. Finally, the report contains several sensitivity analyses that
demonstrate how USG’s liability would change if we changed key assumptions, including
possible broader extension of recent changes in law and procedures. The report includes
appendices containing tables and details of the technical analyses used in the report.
Based on the analyses and information described in this report, it is my opinion that the present
value of USG’s liability for asbestos bodily injury claims (pending and future) as of June 2001
was approximately $8.1 billion. Also, if USG were to pay claimants solely because they were
exposed to A. P. Green asbestos containing products before 1968, USG’s liability from these
additional A. P. Green filers could be as high as $1.3 billion.
USG Corporation                                                                                        2




2. Dr. Peterson’s Qualifications
For over twenty-five years I have studied, written about and participated as an expert in asbestos
litigation and other mass tort litigation. I am a lawyer, a graduate of Harvard Law School and a
recognized scholar on asbestos and other mass tort litigation. I have a doctorate in social
psychology from the University of California, Los Angeles. For over twenty years I conducted
research on asbestos and other mass tort litigation as a founding member of the RAND
Corporation’s Institute for Civil Justice. I have published many scholarly, peer-reviewed articles
on asbestos litigation, mass torts, and workers compensation including articles on how asbestos
and other mass tort claims arise, how the values of asbestos bodily injury claims are determined
by medical and legal issues, evaluations of claims facilities used for paying asbestos and other
mass tort claims, and other subjects related to asbestos litigation. I have taught courses on mass
torts at UCLA Law School and the RAND Graduate Institute. My resume is attached to this
report as Exhibit 1.
I am an expert on claim values, claims procedures and estimations of liabilities for fifteen
asbestos trusts. I am a trustee of the Fuller Austin Settlement Trust, an asbestos trust, and a
director of TSI, a nonprofit corporation that administers the trust distribution procedures for seven
asbestos trusts. I have worked as an expert on asbestos litigation for judges, defendants,
insurance companies, actuarial firms, other businesses, law firms and claimants’ committees in
bankruptcy.
I have worked for four U.S. District and Bankruptcy Courts as the Court’s expert on how asbestos
claims are valued and on asbestos claims procedures and trusts. As the Special Adviser to U.S.
District Court Judge Jack B. Weinstein and U.S. Bankruptcy Court Judge Burton Lifland I helped
the courts and parties to restructure the Manville Trust, establishing the Manville Trust
Distribution Procedures that became a model used in subsequent bankruptcy cases and by later-
created trusts to process, evaluate and pay the hundreds of thousands of asbestos claims that they
have received so far.
I have been an expert in more than twenty other bankruptcies and class actions in different cases
working for parties with divergent interests: defendant asbestos companies, insurance companies,
claimants’ committees, and court-appointed representatives for future claimants. In each of these
cases I have provided descriptions and quantitative forecasts of pending and future asbestos
bodily injury claims using the standard forecasting methods that I describe and use in this report.
I have testified in court more than twenty times about my forecasts of asbestos liabilities. My
forecasts and analyses have been accepted and used as the court’s basis for findings of aggregate
asbestos liabilities in the bankruptcy proceedings of Eagle-Picher, National Gypsum, Babcock
and Wilcox, Turner and Newall, Western Asbestos, H. K. Porter, E. J. Bartel, Raymark, and
J.T.Thorpe.
I have been recognized by courts as an expert on all areas that I address in this report and the
descriptions and analyses in this report come from my scholarship and work as an expert on
asbestos litigation. A listing of the matters in which I have testified as an expert within the past
four years (deposition or trial) is set forth as Exhibit 2.
I have been retained by the USG Official Committee of Asbestos Personal Injury Claimants
(‘‘ACC’’) as an expert for purposes of estimating asbestos liabilities and providing testimony on
those matters. This report has been prepared as part of that engagement.
USG Corporation                                                                                        3




3. Bases of USG’s Asbestos Liability
The Debtors in this case include USG Corporation (‘‘USG’’), a holding company, and its three
major operating subsidiaries. Those subsidiaries are United States Gypsum Corp.
(‘‘Gypsum’’), which manufactures various gypsum products (including wallboard and joint
compounds); USG Interiors Inc. (‘‘Interiors’’), which manufactures products such as floor tiles,
wall tiles, and ceiling tiles; and L&W Supply Corporation (‘‘L&W’’), which acts as a product
distribution system for Gypsum and Interiors. This holding- company structure was created
as part of a 1984 restructuring.
USG or its predecessors began selling and distributing asbestos- containing products in the
1920s and continued to do so until at least 1978. The USG group has made a variety of
asbestos-containing products during its history, including acoustical plasters, block
insulation, pipe coverings, and joint compounds. USG Informational Brief (June 27, 2001)
(‘‘Info. Br.’’) p. 4 n.3. According to USG, joint compounds, historically manufactured by
Gypsum, are now the principal source of its asbestos liabilities.
Joint compounds are used pervasively in the construction industry. They are applied over the
seams in wallboard and sanded to create a smooth appearance. They are similarly applied to
cover nail holes, to smooth out irregularities in wall surfaces, and to make patches and repairs in
walls and ceilings. Most joint compounds manufactured by USG prior to 1978 contained
asbestos, and asbestos fibers constituted as much as 5% of these compounds by weight. Info.
Br. p. 3. Workers using these joint compounds were exposed to asbestos fibers in various
ways, e.g., when mixing dry powder with water prior to application, and when sanding the
surfaces to which the joint compound had been applied.
Plaintiffs who assert claims against USG typically allege one or more of the standard set of
asbestos-related injuries. These include three groups of cancers all of which have been shown to
be caused by exposures to asbestos: malignant mesothelioma, a rare cancer of the pleural tissue
surrounding the lungs and that separates the abdominal and chest cavities, whose only known
cause is from exposure to asbestos; lung cancer; and several gastrointestinal cancers. A
substantial majority of plaintiffs claimed a nonmalignant disease: either asbestosis, a disease
characterized by scarring and fibrosis of the lung tissue, or pleural disease, involving scarring of
the pleura resulting in pleural plaques or pleural thickening.
USG addressed and defended these law suits as a member of the Center for Claims Resolution
(‘‘CCR’’) a consortium of asbestos defendants created in 1988 to replace a previous consortium,
the Asbestos Claims Facility (‘‘ACF’’). Both organizations were formed by defendants for
purposes of achieving more favorable settlements and reducing defense and administrative
expenses. Because the 20 members of CCR accounted for substantial portions of all recoveries
that plaintiffs might expect to receive for their injuries, by negotiating jointly CCR members were
able to obtain more favorable settlement terms than could individual defendants standing alone.
Wielding this joint power, CCR would either enter into settlement discussions when claims were
listed for trial or else enter into group settlements with plaintiffs’ law firms on terms favorable to
CCR members. The group settlements controlled the flow of claim payments, capped annual
amounts that would be paid, and imposed criteria that plaintiffs were required to satisfy to receive
payment, criteria that were stricter than members could have required outside of CCR. The group
settlement agreements reduced the total indemnity payments to plaintiffs by CCR members,
including USG, and also allowed CCR members to limit their defense and administrative costs.
The CCR dissolved in January 2001, six months before USG’s June 25, 2001 bankruptcy petition
date. During these intervening months, USG resolved claims without the benefits of CCR
membership, but then USG’s bankruptcy interrupted the changes that would have occurred after it
USG Corporation                                                                                       4




left CCR. The likely effects of USG’s loss of the benefits of CCR membership would be
complex, but on balance after CCR’s dissolution USG would have faced considerably greater
total costs for resolving asbestos bodily injury claims. USG probably would have paid fewer
claims as an asbestos defendant handling its cases independently compared to the number of
claims it would have continued to receive and pay as a CCR member. To the extent that USG had
been named as a defendant and paid some claims in the past simply because it was a named CCR
member, it is likely that USG would compensate a somewhat lower number of claims outside
CCR than it had as a member of CCR. However, even if USG were named in or paid
compensation in a smaller percentage of all asbestos law suits, its costs to resolve each claim and
its aggregate costs to resolve all claims would both have increased for several reasons. First, USG
would no longer benefit from the cross-subsidization among CCR members. Second, after it left
CCR, USG no longer had the negotiating advantages provided by CCR. Third, USG would no
longer be one of twenty defendants which resolved claims (and was viewed by plaintiffs) as part a
large group, but instead would be a stand-alone defendant with liability for the manufacture, sale,
and distribution of widely-used asbestos products which were used in construction and in a wide
range of residential and commercial settings. Finally, because USG could no longer share
payment of defense and administrative expenses with other CCR members, those expenses would
have increased greatly for USG. As a CCR member, USG’s defense and administrative costs had
been less than 4 percent of its indemnity payments. In comparison, asbestos defendants who
were not members of CCR typically paid administrative and defense costs that were 40 percent to
100 percent or more of indemnity payments.
In addition to these upward pressures on its aggregate asbestos liability caused by the dissolution
of the CCR, USG also would have faced an increase in liability due to the bankruptcy of many
other ‘‘top tier’’ asbestos defendants. Between January 2000 and December 2001, eight
traditional ‘‘top-tier’’ asbestos defendants with historically very large asbestos liability each filed
for bankruptcy protection: Babcock & Wilcox (February 2000), Owens Corning and Fibreboard
(October 2000), Armstrong World Industries (December 2000), GAF (January 2001), Pittsburgh
Corning (April 2000), W. R. Grace (April 2001), Turner & Newall and the other Federal Mogul
companies (October 2001). As in all other estimations of a bankruptcy debtor’s asbestos liability,
this report forecasts USG’s liability for asbestos claims as they are treated and valued within tort
litigation, accepting all of the characteristics and events of tort litigation and assuming for
purposes of estimation that USG continued in tort litigation as if it had not filed for bankruptcy
protection. Had USG remained outside of bankruptcy after these eight other, major defendants
filed for Chapter 11 protection, USG’s asbestos liabilities would have increased greatly because
of those filings, as plaintiffs and their counsel would expect the remaining solvent defendants still
in the tort system to ‘‘pick up the share’’ of the defendants who sought bankruptcy protection.
It is clear that USG’s total costs of administering, defending and indemnifying asbestos bodily
injury claims would have increased after the CCR dissolved. USG began to experience these
changes as did other former-CCR members after dissolution of the CCR. Turner and Newall
(T&N), like USG a member of CCR, continued to settle and pay asbestos claims at far higher
values during ten months after CCR dissolved until it too sought bankruptcy protection in
October 2001. After leaving CCR, T&N had to pay twice as much on average to resolve
mesothelioma and lung cancer claims. Quigley, another former CCR-member, paid increasing
larger settlements over the four years after it left CCR. Union Carbide, which was also a CCR
member but one that has remained out of Chapter 11, has seen great increases in its aggregate
liability payments and new claim filings. Moreover, settlements paid by other asbestos
defendants continued to increase sharply after USG entered bankruptcy. W. R. Grace, not a CCR
member but, like USG, a manufacturer of asbestos-containing building products, saw its asbestos
liabilities double as five other major asbestos defendants preceded it into bankruptcy during 2000
USG Corporation                                                                                 5




and early 2001. USG itself paid three times as much to resolve mesothelioma and lung cancer
claims in 2001 than it had paid as a CCR member in 2000. We draw on claims data for all of
these defendants to understand and forecast USG’s future liability.
The forecasts in this report are based on standard forecasting methods that have been used by
many researchers over the past twenty years, on substantial data about USG’s past litigation
experience, and the knowledge that I have gained from working as an expert and researcher on
asbestos litigation over more than a quarter century.
USG Corporation                                                                                      6




4. Estimating Liabilities for Asbestos Bodily Injury Claims
Forecasts of asbestos liabilities are needed and have become commonplace in many different
circumstances. Asbestos defendants estimate their present and likely future liabilities both for
their own corporate planning and also as part of financial reporting. Insurance companies
forecast asbestos liabilities to create reserves for specific insureds. Insurance rating organizations
forecast liabilities of insurance companies. Financial analysts forecast liabilities of specific
asbestos defendants and insurance companies. Businesses forecast liabilities of other companies
that face asbestos liabilities in order to determine whether or not to engage in business activities
with the companies that face such liabilities. Asbestos trusts are required to forecast their
liabilities in order to determine how much money must be reserved for future claimants and what
amount can be paid to claimants with presently pending claims, forecasts that are required by the
U.S. Bankruptcy Code. Parties to bankruptcy proceedings forecast liabilities in order to draft
reorganization plans and disclosure statements. Bankruptcy courts estimate the asbestos
liabilities of debtors. Other courts estimate the asbestos liabilities of particular defendants in the
course of class action, insurance coverage or other litigation.
These forecasts have been done in many ways, with highly varying quality and credibility.
Credible forecasts of an asbestos defendant’s liability must look together at several sources of
information. First, forecasts must draw upon data about the defendant’s past and current
experience with asbestos claims--counts of claim filings, distributions of asbestos diseases,
resolutions of claims both with and without payment, trends for all of these elements of liability.
Next, the forecast should consider developments and the state of asbestos litigation at the time of
the forecast and reasonable expectations about future developments. Where, as here, forecasts are
being made for an earlier point in time, the forecasts should rely on data and developments that
have occurred since the date for which forecasts are made. Then the forecast must reflect the
epidemiology of asbestos-related diseases, both past trends as well as expected future trends in
the incidence of asbestos-related disease, past trends and expected future trends in filings of
claims for those diseases, and both past and expected future trends in the amounts paid to
indemnify those claimants. The forecasts in this report are based on all of these sources.
USG Corporation                                                                                     7




5. Data for asbestos bodily injury claims involving USG
The CCR maintained a common database for all law suits filed against any member which
included detailed information about plaintiffs, their claims against CCR members, litigation
events, indemnity costs and other matters useful in estimating USG’s liability for pending and
future claims. Legal Analysis Systems (LAS) received essentially two extracts of CCR data
involving USG claims. These data bases were produced at different times:
             (1) October 2001
             (2) March 2002.
We use the March 2002 database, which reflected updates in claim status as of the bankruptcy
date that had not earlier been entered. We used selection portions of the October 2001 database to
simplify filling in certain pieces of information that might have been spread across many of the
March 2002 tables.
Our analysis is based on individual claims, but USG’s database shows more than one claim for
some claimants. We consolidated the information from duplicate claims into a single record for
each claimant who made duplicate filings. Rarely (in about 0.1 percent of the cases) we accepted
multiple (i.e. ‘‘come-back’’) claims for a single individual: filed and resolved claim for asbestosis,
pleural disease, or unspecified disease, and then a later filed claim for an asbestos-related cancer.
One law firm, the Maritime Asbestos Legal Clinic, submitted 31,047 claims, only 5 of which
were ever been paid (27,590 closed with zero payment, 22,955 closed with zero payment and
unspecified disease, 3,452 currently pending, 3,364 currently pending with unspecified disease).
While USG’s database categorized most as closed claims, many have been placed on inactive
docket by the Federal MDL Court without any resolution on their merits. Uniformly, these claims
are poorly documented and give little information by which to assess their disease or other
characteristics needed to evaluate the claims. Because of the uncertainties and limited
information about these claims, we cannot regard them as representative of other pending or
possible future claims. Therefore, we have excluded the claims from our analyses, in effect
treating them as if they had never been filed. There is little net effect on our forecasts of USG’s
asbestos liabilities from excluding these claims. Further, there is no reason to expect a similar
bloc of such poorly-supported claims in the future and even if like claims would be filed in the
future, they would have little impact on USG’s liability.
USG Corporation                                                                                          8




6. Estimation of USG’s Asbestos Liability, June 2001
USG’s asbestos liability is a sum of its liability for pending claims, its liability for future claims
and its costs for administering and defending those claims. I do not estimate its costs for
administering and defending asbestos claims in this report, but USG’s costs would have been
considerable. Typically defense and administrative costs can range from from 40 percent to 100
of indemnity costs. USG’s defense and administrative costs would have been far greater after
CCR dissolved in January 2001.
The following formula is the basis for estimating the total indemnity that USG would pay to
resolve these claims:
    Number of Claims × Payment Rate × Average Settlement Cost = Forecast Indemnity
Here, counts of pending claims are drawn from USG’s databases. I forecast counts of future
claims by drawing upon three sources: USG’s claims databases, epidemiological forecasts of the
number of asbestos-related cancer deaths, and data for other asbestos defendants who continued
to receive claims to the time of and after USG’s bankruptcy. Payment rate represents the percent
of claims resolved by USG that received payment by settlement or verdict. Average settlement
costs represent the costs paid on average to claimants, averaged across those who received
payment (this includes claims that were paid after trial judgments). Estimates of average
settlement costs that USG would have paid after its bankruptcy date are based on both USG’s
historic experience in resolving claims as well as data on settlement trends among asbestos
defendants who continued to settle claims to and after USG’s bankruptcy.
For better precision, we carry out the formula above separately for each asbestos disease. For
USG (and for every asbestos defendant), settlement costs vary among different asbestos-related
diseases. Table 1 shows the average amount paid by USG in each settled claim as well as its
average resolution costs, the average paid across all resolved claims, both those settled with
payments and those closed without payment (i.e. the product of the payment rate and average
settlement). USG paid far more on average to resolve mesothelioma claims than any other
disease. Settlement and resolution costs differed among all other diseases. Because the mix of
diseases among pending claims may differ from the mix of diseases among claims previously
resolved by USG, we cannot assume that USG’s overall historic average resolution cost among all
claims will be appropriate for estimating the average value of pending claims. For example, if
mesothelioma claims represent a greater percentage of pending than resolved claims, then use of
USG’s overall historic average would underestimate the company’s liability for pending claims.
By applying the formula above separately for claims within each disease category, we control for
differences in disease distributions between pending and resolved claims.
USG Corporation                                                                                      9




         Table 1: Average Settlement Values and Resolution Costs, By Year and Disease

                       Settlement Averages                      Resolution Averages
    Settle
    Year       Meso       Lung     OthCan Nonmal         Meso       Lung    OthCan Nonmal

    1990     $10,502     $3,402     $1,681       $854  $9,545     $3,184     $1,545       $789
    1991      14,199      5,412      2,660      1,047  13,559      5,115      2,202        992
    1992      12,515      5,986      3,669      1,691  11,865      5,848      3,575      1,588
    1993      14,804      5,893      2,897      1,346  14,466      5,814      2,822      1,336
    1994      13,975      5,109      2,580      1,500  11,111      4,418      1,982      1,374
    1995      18,952      6,050      3,176      1,552  15,375      4,967      2,242      1,337
    1996      21,794      5,389      2,946      1,720  19,414      5,061      2,764      1,626
    1997      25,532      7,269      3,046      2,233  20,804      6,532      2,761      2,129
    1998      36,072      7,303      3,018        936  33,557      6,906      2,761        906
    1999      34,314      6,749      2,817      1,553  33,307      6,268      2,567      1,440
    2000      59,856     10,286      3,442      1,915  53,865      9,515      3,260      1,790
    2001     221,745     35,624     12,541      5,207 147,525     29,300     10,611      4,344

  Notes: Averages expressed in year 2001 dollars. Settlement averages include positive
  payments only. Resolution averages are calculated across all resolved claims, whether or not
  closed with payment.

6.1. Forecast Indemnity for Claims Pending on June 25, 2001
On June 25, 2001, when it filed for bankruptcy protection, USG had 176,138 pending asbestos
bodily injury claims and had resolved 268,345 claims for which it was a named defendant. Our
count of pending claims includes 37,837 ‘‘SBND’’ claims (settled but not documented) that were
subject to CCR’s settlement agreements, but that had not provided CCR with documentation
required to establish eligibility for payment. Table 2 shows counts for each type of asbestos-
related disease among both pending claims and resolved USG claims. For resolved claims Table
2 shows the disease identified in USG’s database. Note that for 14,576 resolved claims, no
disease is identified. Almost all of these claims were resolved with no payment or very small
payments, suggesting that most claims in this category resolved-unspecified-disease either had no
asbestos-related disease or else were claims that were not pursued by plaintiffs to the point of
providing documentation of disease. We disregard these claims in forecasting USG’s asbestos
liability.


                              Table 2: June 25, 2001 Pending Claims

                                                    Disease
        Description               Meso       Lung   OthCan Nonmal       Unspec        Total

        Number Pending            3,213    5,801      1,735   110,308    55,081   176,138
        Number Resolved           8,844   15,655      5,038   224,231    14,576   268,345


6.1.1. Imputation for Unspecified Disease Claims
For pending claims, many more claims do not have a disease specified in the USG database than
is the case for resolved claims. This is typical in claims databases that are maintained and used
by asbestos defendants. In many states plaintiffs’ law suits need allege only general descriptions
USG Corporation                                                                                     10




of disease, such as ‘‘asbestos-related disease’’ or ‘‘asbestos lung disease’’ without alleging a
specific type of disease. As a result defendants, including USG, frequently do not know the
specific disease for many claims for some time until the disease is identified through discovery or
discussion with the claimant’s lawyer.
To use information about disease from the USG database, we had to address the large number
(93,852) of ‘‘unspecified’’ disease claims among recently filed and pending claims. We took two
steps to address this data problem. First, we were able to identify diseases for many of these
claimants with unspecified disease by linking the USG and Manville Trust databases (August
2005 extract), using social security number as the basis for these links. Where we could link
claims in the two databases, we used Manville disease data. Even after this process, 55,081
pending USG claims (down from 93,852) still did not have a disease specified in either the USG
or Manville database (Table 2 shows the distribution of diseases after we had used Manville
disease for linked claims).
Second, we estimated the disease distributions of these 55,081 claims by relying upon USG’s
historic data. For each claim, USG’s database has two disease fields: plaintiff’s alleged disease
and CCR’s determination of the disease (on USG’s behalf). Often the plaintiff alleged field is
blank in the database, but CCR (USG) had made its disease determination. We looked to these
claims to construct what analysts call a ‘‘transition matrix’’ that answers the question: among
claims where plaintiffs have not made a specific disease allegation, what has CCR (USG)
determined the disease to be? The transition matrix is the distributions of diseases, as found by
CCR (USG) among claims where plaintiffs have not specified disease. Table 3 shows the
transition matrix that we derived for USG claims, based on 97,004 resolved cases that had no
specific plaintiff-alleged disease.


                       Table 3: USG Transitions Among Resolved Claims
                             that Have Unspecified Alleged Disease

                    Disease     Meso       Lung OthCan Nonmal             None

                    Unspec       1.0%      3.2%       1.2%     77.4%     17.2%


We then apply this USG transition matrix to estimate the disease among the remaining 55,081
pending claims that had no disease in the USG database. In effect we assume that after further
review, USG will find these 55,081 claims will have the same disease distributions that CCR
(USG) had found among similar claims that in the past had no specific plaintiff-alleged disease.
Table 4 shows the results of these steps that we used to fill in unspecified disease among USG’s
pending claims.


               Table 4: Disease Distributions After Imputation for Pending Claims

                                          Percent of Claims
           Claim Status       Meso      Lung    OthCan Nonmal        Unspec        Total

           Pending             2.1        4.3        1.4      86.8        5.4    176,138
           Resolved            3.3        5.8        1.9      83.6        5.4    268,345
USG Corporation                                                                                  11




With these steps we estimate USG would find that 5.4 percent of pending claims will have no
asbestos-related disease, similar to USG’s experience for claims that it had resolved (5.4% with
no disease). We assume that USG would pay no indemnity to 5.4 percent pending claimants with
no asbestos-related disease.
We estimate, in addition, that USG would also deny payment to some claimants within each of
the disease categories (Section 6.1.2.2, below). As I discuss below, I assume that USG would
deny payments to a greater percentage of claimants than USG had resolved without payment prior
to its bankruptcy filing.
6.1.2. Calculation of Indemnity for Pending Claims
Table 5 shows the number of pending claims in each disease category after imputation of
unspecified disease claims.


                              Table 5: Number of Pending Claims

                                                     Disease
     Description                  Meso       Lung    OthCan Nonmal          None       Total

     Realloc Number Pending       3,746      7,583     2,397   152,935      9,476   176,138

  Notes: After imputation of unspecified disease claims.

6.1.2.1. Forecasts of USG Settlement Amounts
We use two payment parameters to forecast how much USG would have to pay to resolve these
claims: (1) payment rate--the percent of resolved claims that USG will resolve with payment and
(2) average settlement--amount that USG would pay to claims in each disease category when it
makes a payment (i.e. the average excluding claims closed without payment). Unlike the number
of claims pending against USG at the time of its bankruptcy filings, which can be calculated
directly from the past data in USG’s database, both the payment rate and average settlement
amounts are forecasts of future resolutions by USG that cannot be determined solely by
calculation from USG’s past data. For many reasons, it is clear that amounts that USG would
have had to pay to resolve asbestos claims would have remained at the higher levels that USG had
paid in 2001 after the CCR dissolved at the beginning of that year.
First, USG’s actual experience showed that its liability had been increasing for many years, and
that during the six months preceding its bankruptcy, when it litigated asbestos claims outside of
CCR, its liabilities increased sharply. USG’s financial statements report that its average cost
(defense and resolution) per resolved claim increased by 230 percent between 2000 and 2001
after it left CCR. Its database shows the increases in its settlement payments both before and
after it left CCR. (Table 1, above). For both mesothelioma (Figure 1) and lung cancer (Figure 2),
the most expensive claims, USG’s average settlements had been increasing steadily during the
1990s even as CCR member, a pattern common among other major asbestos defendants. Then in
2001 during its six months without the advantages of CCR, USG’s average settlements for both
diseases increased greatly, more than tripling between 2000 and 2001.1
Figure 1 shows the sharply increasing trend in annual USG’s settlement amounts paid to
mesothelioma claimants. Because of these increases, by the time of its bankruptcy petition,
mesothelioma settlements accounted for about 37 percent of USG’s total liabilities to asbestos
claimants even though mesothelioma claims accounted for only 3.3 percent of all claims.
USG Corporation                                                                                                                      12




Similarly, Figure 2 shows the sharp increase in USG’s settlement amounts paid to lung cancer
claimants. Further, as Table 1 shows, USG’s settlement values for all other claims--nonmalignant
diseases (asbestosis and pleural) and other cancers-- also increased sharply after it left CCR.
Together the long-term increases in USG’s settlement amounts and the sharp increases after it lost
the protection of CCR suggest that the trends would have continued had USG not filed for
bankruptcy protection.

                                                 Figure 1: USG Mesothelioma Settlement Values



                                             Georgine Period
                          200000




                                             Normal Tort Period
                          150000
     Settlement Average
                          100000
                          50000




                                   1990          1992             1994            1996             1998             2000

                                                                         Settlement Year




1.                        Values of settlements that USG reached between 1992 and 1997 were determined or affected by the Georgine
                          class-action settlement. USG settled relatively few claims between 1994 and 1997. Just before this, during 1992
                          and 1993 USG made large group settlements with many plaintiffs’ law firms, settling over 70,000 claims for
                          settlement amounts that may have been seen as enhancing good will and support for CCR’s Georgine class action
                          among plaintiffs’ law firms.
USG Corporation                                                                                   13




                                         Figure 2: USG Lung Cancer Settlement Values
                      35000



                                     Georgine Period
                                     Normal Tort Period
                      30000
                      25000
 Settlement Average
                      20000
                      15000
                      10000
                      5000




                              1990      1992              1994           1996      1998   2000

                                                                 Settlement Year


Second, with CCR’s dissolution at the beginning of 2001, USG lost the substantial savings in
both defense and indemnity costs that it obtained from its CCR membership. CCR provided
tactical, litigation advantages that would be unavailable to USG outside of CCR. As the largest
provider of settlement dollars to asbestos plaintiffs, CCR had been able to extract favorable
settlements for its members. CCR settled asbestos claims in large groups saving plaintiffs’ law
firms transaction costs and generating large total payments to the firms and their clients.
Plaintiffs’ law firms were willing to give CCR favorable settlements in return for the large,
collective payments that they received only from CCR. After CCR’s dissolution USG would
instead have had to settle asbestos cases on its own without CCR’s advantages in negotiating
favorable settlements and, as a result, it would have to pay much more to settle claims. Former
CCR members who continued in litigation experienced just such sharp increases in settlement
amounts after the dissolution of CCR, as I discuss below.
Third, the spate of 2000-2001 bankruptcies would have continued to affect USG’s asbestos
liabilities. If USG had continued in tort litigation (which must be assumed in determining its
asbestos liabilities within its bankruptcy), it would have paid more in the future simply because
all the other big payers had gone into bankruptcy. Because the bankruptcies removed the biggest
sources for compensation of asbestos claims, plaintiffs and their lawyers demanded and received
greater settlement payments from those defendants who remained in litigation. The effects of the
bankruptcies can be seen in the sharp increases in settlement amounts during 2000 and 2001 that
were paid by W. R. Grace, which was not a CCR member but was otherwise a defendant similar
to USG as a manufacturer of asbestos-containing building products and that also had a troubling
history involving asbestos that made Grace, like USG, a target for large damage awards. Because
Grace had not been a member of CCR, it did not lose the strategic and tactical advantages that
USG Corporation                                                                                    14




USG had enjoyed as a CCR member. But Grace, like USG, faced sharply higher settlement
demands as other major defendants entered bankruptcy. Grace’s average settlements during
2000-2001 for mesothelioma claims and for other cancer claims both doubled from immediately
preceding years, averages for lung cancers and nonmalignant claims each increased by 50
percent.
USG described in its financial statements how these bankruptcies among other asbestos
defendants increased the settlement amounts that it had to pay to settle asbestos claims:
  ‘‘In the first and second quarters of 2001, cash payments to resolve Personal Injury Cases
  increased dramatically, primarily as a result of the bankruptcy filings of other defendants in
  asbestos personal injury lawsuits. As a result of these bankruptcy filings, plaintiffs
  substantially increased their settlement demands to the remaining defendants, including U.S.
  Gypsum, to replace the expected payments of the bankrupt defendants.’’
Fourth, these bankruptcies had another, indirect impact that increased settlement payments, as
explained by Daniel Myer, a senior claim person who had settled claims for USG and other
members within CCR, who continued to settle claims for USG after it left CCR and now
continues to settle asbestos claims on behalf of Union Carbide, a former CCR member.
Responding to a question in his deposition in the Armstrong bankruptcy about ‘‘why it is that
removing from the case bankrupt defendants would derive up the settlement averages for others,’’
Mr. Myer explained:
  ‘‘... as the traditional defendants went into bankruptcy, you had new defendants that were being
  filed against. As a result ... especially in the more serious cases, they would bring into the
  litigation new lawyers, new players, new people that were not as well versed in the
  complexities of the litigation.
  ‘‘There appeared to be, in my opinion, a rush by these new peripheral defendants ... a rush by
  these different firms to get out of the more serious cases as quickly as they could. As a result
  of that, they would pay, in effect, whatever it took to get out of these cases. That issue,
  combined with joint-and-several liability drove the value of these cases up rather significantly
  high.’’ Deposition of Daniel Myer, April 26, 2006, pp. 166-167.
Because of these and other changes in asbestos litigation, Mr. Myer estimated that the ‘‘total
gross value’’ of mesothelioma claims (i.e. what a plaintiff might expect to receive across all
defendants) has doubled or tripled since 2000 so that the full value of such claims today is
‘‘(w)ithin the range of probably between 5 and $8 million’’ (Armstrong Confirmation Hearing
testimony, May 23 2006).
All of these specific causes of increasing settlement values--CCR’s dissolution, the direct and
indirect effects of bankruptcies of eight other, primary defendants--have been widely recognized.
In the Armstrong and T&N bankruptcies attorneys and claims persons who litigated and settled
asbestos law suits against those companies as well as Union Carbide, universally recognized and
explained how the dissolution of CCR and the loss of the indemnity that had been paid by now-
bankrupt defendants lead to increasing settlement demands and payments. In turn, all of these
specific causes are superimposed on the broad increases in asbestos settlement amounts that had
been occurring for years, that were increasing and showed no signs of abating in 2001 and that
continue today. Together all of these caused settlement levels to increase among all asbestos
defendants who remained in asbestos litigation, particularly former members of CCR, and we can
see these increases by looking at their litigation experiences after 2000.
We get a clear picture of what would have been the continuing trends in USG’s asbestos liabilities
by looking at the contemporaneous experience of other asbestos defendants. Figure 3, Figure 4,
and Table 6 show trends in settlement values among several asbestos defendants for whom we
USG Corporation                                                                              15




have publicly available data, including data for Turner & Newall and Quigley, other former CCR
members that continued in litigation to the time of and after USG’s June 25, 2001 bankruptcy
petition date and whose asbestos liabilities increased sharply after CCR’s dissolution at the
beginning of 2001. The figures also include trends in settlement data for Owens Corning (OC)
and W. R. Grace through their bankruptcy petition dates in October 2000 and April 2001,
respectively. Quigley settled claims into 2004, when it entered bankruptcy. The continued
increase in Quigley’s mesothelioma settlements even after 2001 are consistent with Daniel Myer’s
description of growing settlement values for such claims--both suggest that USG would have had
to pay even more in recent years than it paid in 2001 to settle mesothelioma claims.

                              Figure 3: Trends in Mesothelioma Settlement Amounts
                  250000




                              USG
                              AWI
                              OC
                              T&N
                  200000




                              WRG
                              QUI
 Avg Settlement
                  150000
                  100000
                  50000




                           1992     1994       1996        1998      2000      2002   2004

                                                   Settlement Year
USG Corporation                                                                                                              16




                                          Figure 4: Trends in Lung Cancer Settlement Amounts
                  50000



                                                                                                              USG
                                                                                                              AWI
                                                                                                              OC
                  40000




                                                                                                              T&N
                                                                                                              WRG
                                                                                                              QUI
 Avg Settlement
                  30000
                  20000
                  10000




                                   1992         1994        1996             1998         2000        2002          2004

                                                                  Settlement Year




                      Table 6: Trends in Settlement Averages for USG and Other Former-CCR Members

                                              Meso                                                  Lung

Year                        USG        OC     Quigley      T&N       WRG            USG       OC    Quigley      T&N        WRG

1996                      $21,794 $133,419              $33,563    $27,526      $5,389    $31,788             $12,767      $9,737
1997                       25,532  195,135    $20,036    50,700     29,088       7,269     30,291    $7,874    13,609       8,274
1998                       36,072  185,353     20,927    50,812     63,413       7,303     36,451     5,684    12,646      11,853
1999                       34,314  193,982     29,238    61,235     48,930       6,749     49,635     5,926    12,009      11,508
2000                       59,856  214,403     46,857    86,022     91,683      10,286     49,179     8,288    14,274      18,068
2001                      221,745             188,031   194,051     98,788      35,624               31,404    29,836      18,385
2002                                          163,311                                                22,804
2003                                          206,643                                                31,237
2004                                          263,118                                                25,006


    Note: Entries in 2001 dollars.

Other publicly available information shows how asbestos liabilities increased among former CCR
members after CCR dissolved. Financial statements for Union Carbide show that after the CCR
dissolved at the beginning of 2001 its asbestos litigation costs steadily increased through 2004
(Table 7). Although Union Carbide’s asbestos litigation costs fell during 2005 (a time during
which the U.S. Senate renewed its consideration of legislation that would have ended asbestos
litigation relieving Union Carbide from obligations for then-pending asbestos claims), its
aggregate payments during 2005 were still three to four times higher than its aggregate costs
USG Corporation                                                                                   17




during its last year in CCR.


               Table 7: Union Carbide’s Annual Asbestos Claims Resolution Costs

                                                      Indemnity &
                                 Year    Indemnity        Defense

                                 1999                         $44
                                 2000                          53
                                 2001           $39            53
                                 2002           155           247
                                 2003           293           403
                                 2004           300           386
                                 2005           139           214

  Note: Entries in millions of dollars in the year when paid. Prior to 2001, Union Carbide did
  not delineate indemnity and defense costs separately in its financial statements.

We look to all of these sources to conclude that USG would also have continued to pay larger
settlements in 2001 than it had in previous years had it remained in tort litigation. We use USG’s
2001 average settlement for each disease to forecast its liability for both present and future
claims. We assume conservatively that after 2001 USG’s settlement averages would have
increased only at the general rate of monetary inflation, that the real value of USG’s settlements
would not have increased beyond their levels in 2001.
6.1.2.2. Forecasts of USG Payment Percentage
As with all asbestos defendants, USG resolved some asbestos claims without payment. Table 8
(p. 20) shows the percent of claims within each disease category that USG closed with payment
during 1999 to 2001. During 1999 and 2000, while USG was still in CCR, only 3 to 10 percent
of USG’s claims resolved by USG were closed without payment. As Table 8 shows, payment
rates were similar for T&N when both companies were still in the CCR. During 2001, after CCR
ended, both defendants resolved greater percentages of cancer claims without payment, but post-
CCR Trends in resolution for nonmalignant claims differed between the two companies. The
percent of nonmalignant claims resolved without payment increased for USG, but decreased for
T&N.


                    Table 8: Payment Percentage for Turner-Newall and USG

                    Turner-Newall Payment Rates                    USG Payment Rates
   Settlement
   Year           Meso         Lung OthCan Nonmal          Meso       Lung OthCan Nonmal

   1999             96.2       96.1     95.6      95.0      97.1       92.9      91.1      92.7
   2000             95.3       96.9     97.6      92.1      90.0       92.5      94.7      93.4
   2001             65.8       68.9     73.1      97.1      66.5       82.2      84.6      83.4
   Fcst                                                     70.0       70.0      70.0      60.0


We expect that, like changes in USG’s settlement values, USG’s payment percentages would also
change in 2001 after leaving CCR, but that the changes in payment rates would reduce USG’s
USG Corporation                                                                                  18




asbestos liability. First, USG would pay fewer claims as an independent asbestos defendant
handling its own cases than it had as a CCR member. As a policy agreed to by its members, CCR
had not attempted to determine the specific, individual liability for each of its members named in
law suits, i.e. whether or not each company had exposed the plaintiff to asbestos. Rather, once
CCR had verified the plaintiff’s exposure to the asbestos products or operations of one of its
members, the CCR and its members agreed to pay the plaintiff a total settlement amount in
exchange for a release of all CCR defendants. Following a complicated set of formulas agreed
upon by the CCR members, the total cost of the settlement was then shared among all CCR
members named in the plaintiff’s law suit, an agreement that relieved the CCR of costly and
divisive reviews to determine which members should be held responsible for the plaintiff’s claim.
This system limited information that plaintiffs needed to provide about the liability of CCR
members. Once a plaintiff had produced evidence of the liability of any one named CCR
defendant, there was no need to provide evidence establishing the liability of any others. In
contrast, after the CCR dissolved, plaintiffs suing USG would then have had to provide evidence
of USG’s liability in order to maintain their law suits and we expect they would have done so
more consistently than they had when USG was in CCR. In turn, USG, now outside of CCR,
would have had strong incentive to identify those plaintiffs who could not establish its liability
and consequently would have rejected more claims than was the case while it was operating under
CCR rules.
To estimate the higher claims rejection rate that we expect for USG after its petition date, we
looked to both USG’s and T&N’s experience outside of CCR. Both companies closed about 70
percent of mesothelioma claims with payment after leaving CCR and T&N also paid settlements
in about 70 percent of other cancer claims that it resolved, while USG paid over 80 percent of
such claims. We assume that in time USG’s payment percentage would have fallen to the same
70 percent that we observed for T&N and use this 70 percent rate in forecasting how many
pending and future cancer claims would be paid by USG (Table 8), that 30 percent of such claims
would be rejected.
Moreover, recent events in asbestos litigation might contribute further to a reduction in the
percent of nonmalignant claims that USG would pay. In recent years, some defendants and courts
have come to criticize certain doctors and medical facilities who helped recruit and provided
reports for some plaintiffs who have filed law suits claiming nonmalignant asbestos diseases.
Some asbestos trusts and courts now refuse to accept medical reports provided by the criticized
doctors and facilities. In addition, there have been some limited changes in substantive and
procedural tort law that make it harder for some plaintiffs to recover, especially for non-malignant
claims. These events might have two different effects that would reduce the number of
nonmalignant claims that USG will pay. First, fewer nonmalignant claims might be filed in the
future, an effect that we discuss and that contributes to our forecast of declining future
nonmalignant claims (Section 6.2.4). Second, as a result of these criticisms of medical evidence
sources and other developments in the tort litigation environment, USG might have come to reject
a greater number of nonmalignant claims, particularly among claims pending on the petition date,
an effect that we forecast by estimating a lower payment percent for nonmalignant claims.
In forecasting USG’s nonmalignant payment percentage, we considered the effects of recent
litigation events and forecast that USG would reject 40 percent of nonmalignant claims, leaving a
payment rate of 60 percent. Moreover, as I describe in Section 6.2.4., below, we also forecast a
decline in nonmalignant claim filings against USG. We recognize that plaintiffs’ law firms, as
well as USG, will note both relevant legal changes and the heightened scrutiny and criticism of
certain medical providers and, as a result, law firms will themselves reject some claims that they
might have filed in previous years.
We can evaluate our forecast of USG’s payment percentages by looking to the experiences of
USG Corporation                                                                                19




Owens Corning and W. R. Grace, majors asbestos defendants that were not in the CCR and that
handled their asbestos claims as independent defendants--the position USG would have been in
after the end of the CCR. Table 9 compares forecasts of the percent of claims in each disease that
USG would close with payment to the percentages paid by OC and Grace. Owens Corning is a
useful comparison because that company was most notable in pursuing a variety of litigation
strategies, including a period during the early and middle 1990s when it aggressively reviewed
claims, rejecting many and trying many. Even during this period of heightened claim reviews,
Owens Corning rejected far lower percentages of claims than we forecast for USG. Grace, like
USG a manufacturer of asbestos-containing building products, had rejected a relatively high
percentages of claims during the early 1990s when it faced and resolved fewer claims, but in
recent years as Grace’s filings and resolutions approached the levels of other major asbestos
defendants, it rejected far fewer claims than we forecast for USG. These comparisons support our
opinion that our forecasts of USG’s payment percentages are conservative, understating rather
than overstating USG’s likely liability.


                         Table 9: Owens Corning and W. R. Grace Paid
                       A Higher Percent of Claims Than Forecast for USG

                                                      Disease
                   Defendant Year        Meso       Lung OthCan Nonmal

                   OC           1991       88.0      98.4       85.7     94.3
                                1992       92.2      96.9       94.5     92.5
                                1993       81.6      88.0       90.9     90.7
                                1994       89.9      94.5       95.1     88.8
                                1995       84.2      90.7       89.7     96.2
                                1996       80.1      91.5       91.4     81.8
                                1997       82.2      86.1       82.1     77.2
                                1998       85.2      89.1       87.2     88.3
                                1999       93.9      95.9       95.7     96.0
                                2000       95.5      95.6       90.6     96.9
                   WRG          1991       52.6      51.8       35.5     53.9
                                1992       71.1      73.8       73.3     77.2
                                1993       53.7      52.3       72.7     53.2
                                1994       58.4      81.7       92.9     70.6
                                1995       74.5      90.4       92.0     91.4
                                1996       83.1      94.6       96.8     99.0
                                1997       92.7      96.3       96.4     99.2
                                1998       87.7      94.4       96.4     96.2
                                1999       90.1      89.8       86.5     93.2
                                2000       85.9      92.8       95.5     96.5
                                2001       95.0      97.0       98.4     98.9
                   USG          Fcst       70.0      70.0       70.0     60.0

  Note: Entries are percentage of resolved claims resulting in some payment.

6.1.2.3. USG’s Liability for Pending Claims
Table 5 shows the number of pending claims within each disease category. Table 10 adds to this
our forecast value parameters, settlement averages and payment percentages for each disease and
USG Corporation                                                                                 20




the average resolution value for each disease, the amount that we estimate would be paid on
average to all claims within each disease category averaging across all claims whether or not they
receive payment. The forecast resolution average is the product of multiplying the forecasts for
average settlement times the settlement percentage.


                    Table 10: Number and Average Value of Pending Claims

                                                    Disease
 Description                    Meso        Lung     OthCan      Nonmal        None         Total

 Realloc Number Pending        3,746       7,583       2,397     152,935       9,476     176,138
 Forecast 2001-Settle-$     $221,745     $35,624     $12,541      $5,207          $0          NA
 Forecast Pay-%               70.0%       70.0%       70.0%       60.0%        0.0%           NA
 Forecast Resolution-$      $155,222     $24,937      $8,779      $3,124          $0          NA

  Notes: After imputation of unspecified disease claims.

We use these numbers and values to complete the formula (from page 6) for deriving the values of
pending claims as shown in Table 11. As that table shows, we forecast that USG’s liability for the
indemnity of claims pending at the time of its bankruptcy petition was $1.27 billion (2001$).
This forecast does not take into account time value issues, i.e. when pending claims would be
resolved, how much values would be increased by monetary inflation between June 2001 and
their resolution dates and the present value of these payments that would be made after June
2001.


                      Table 11: Forecast of Indemnity for Pending Claims

                                Number of
                               Reallocated        Average       Indemnity
                       Disease      Claims      Resolution     ($millions)

                       Meso             3,746      $155,222        $581.5
                       Lung             7,583        24,937          189.1
                       OthCan           2,397         8,779           21.0
                       Nonmal         152,935         3,124          477.8
                       None             9,476             0            0.0
                       Tot            176,138            NA       $1,269.4

  Note: Average resolution amounts and indemnity are expressed in year 2001 dollars. Average
  resolution amounts apply to all resolved claims (both with and without payment).

Figure 5 compares graphically the amount of indemnity for each type of asbestos disease. As that
figure shows, most of USG’s liability would be for the 13,726 cancer claims that were pending on
its petition date. Although less than 8 percent of pending claims were cancers, these cancer
claims account for 62 percent of USG’s liability for pending claims.
USG Corporation                                                                                  21




          Figure 5: Distribution of Indemnity Amounts for Pending Claims, by Disease



                                                       Meso
                                                       $581 M




                       Lung
                     $189 M



                           OthCan
                            $21 M
                                                             Nonmal
                                                             $477 M




6.2. Projections of Number And Timing of Future Claims
Like other major asbestos defendants, USG saw substantial increases in asbestos claim filings
over the twelve years leading it is bankruptcy, 1990-2001 (Figure 6). Taken jointly--increasing
claim filings, increasing settlement values (Section 6.1.2.1), and prospects of greater future
increases in both--created extraordinary burdens for asbestos defendants, leading to bankruptcy
filings for each defendant shown in these figures and more than a dozen others who have filed
since 2000 (Manville filed in 1982). USG’s claim filings reached their highest level in 2000 and
2001 at about 60,000 claims (annualizing 2001 claims filed through the end of June). This
pattern was not unique to USG. The Manville Trust received 85,000 claims in 2001 and W. R.
Grace, which like USG was a manufacturer of asbestos containing building products, received
claims in 2001 at an annualized rate of 80,000 before it entered bankruptcy in April. Grace’s
experience is particularly relevant to USG because both companies were similar in that their
asbestos liability arises primarily from manufacturing of asbestos-containing construction
products and that both had an unfavorable asbestos-related corporate history. Grace’s claims
almost doubled in 2000 and it was receiving files at an even greater rate in 2001 when it filed for
bankruptcy. USG might have expected to face similar filing pressures, even outside of CCR, had
it not filed for bankruptcy.
USG Corporation                                                                                    22




                               Figure 6: Claim Filings for Major Asbestos Defendants, 1990-2001
                    80000



                                    USG
                                    T&N
                                    OC
                                    Manville
                                    WRG
                    60000
 Number of Claims
                    40000
                    20000




                            1990        1992         1994         1996         1998         2000

                                                            Filing Year


     Note: USG, WRG, and OC entries are annualized for bankruptcy year.

In this section I consider how USG’s increasing claim filing trends would have continued into the
future, presenting our forecasts of future claims that would be filed after USG’s bankruptcy
petition date. We forecast USG’s future claims using the standard ‘‘Nicholson’’ forecasting
method. In making these forecasts, we look to the effects of recent changes in the litigation
environment that cause us to adjust and reduce our forecast of the number of future
nonmalignancy claims that would be filed against USG (Section 6.2.4).
The number, timing and types of future claims will depend both upon the number of people in
each future year who develop diseases that are asbestos-related (the incidence of diseases) and
also the fraction of those people who will pursue claims (the propensity to sue).
This section describes how the historic propensity to sue USG for cancer is calculated and used to
forecast future cancer claims. Inputs to this calculation are epidemiological models of the
incidence of asbestos-related cancer deaths, and historic data on the number of cancer claims filed
against USG and other defendants since USG’s petition date.
6.2.1. The Incidence of Asbestos-Related Cancers
Medical research by epidemiologists provides projections of the incidence of asbestos-related
cancers. Projections differ among epidemiologists, but most agree on the relative changes in
cancer deaths over time--increasing until late in the twentieth century followed by a slow decrease
in the following years. Because of this general agreement on changes over time, projections of
future claims will be generally similar even when based on differing projections of incidence.
USG Corporation                                                                                                                          23




Figure 7 shows epidemiological projections of the annual number of asbestos-caused deaths
between 1967 and 2027 from each of three asbestos-related cancers--mesothelioma, lung cancer
and other (primarily gastro- intestinal) cancers--among workers exposed before 1980 in major
asbestos-using industries.2 The figure represents the results of work by Nicholson, Perkel and
Selikoff (1982) which is generally recognized as the most comprehensive and reliable forecast of
asbestos-related cancer deaths (Appendix Table A1). The peak year of forecast deaths differs
among the three types of cancers because the latency periods, i.e. the time from first asbestos
exposure to the occurrences of cancer, differ among the three diseases. Because the latency
period is longest for mesothelioma, the risk of that disease increases for a longer period and the
incidence of mesothelioma peaks later than for other asbestos-related cancers. The patterns of
asbestos diseases among exposed workers and, therefore, the patterns of legal claims, have been
changing over time with these changes in the relative incidences of each type of cancer. In past
years lung cancer has been the most frequent cancer among occupationally exposed workers and
the most frequently claimed cancer. However, now and in the future workers will face equivalent
risks for mesothelioma and lung cancer.

                                                     Figure 7: Nicholson Cancer Projections



                                           Meso
                        5000




                                           Lung
                                           Othc
                        4000
     Number of Deaths
                        3000
                        2000
                        1000
                        0




                                   1970            1980            1990           2000            2010           2020

                                                                          Death Year


6.2.2. Accuracy of Epidemiological Projections
Epidemiologists’ projections, like those of Nicholson, et. al., have their own uncertainties, but can


2.                      Forecasts for lung and other cancers are excess deaths, i.e. the number of additional deaths that will occur
                        because of asbestos exposures that are in addition to cancer deaths that would otherwise have occurred without
                        asbestos exposure. Asbestos exposure is the only know cause of mesothelioma.
USG Corporation                                                                                  24




be tested by comparing projections for past years with data on mesothelioma deaths in those same
years collected by the National Cancer Institute’s SEER (Surveillance, Epidemiology and End
Results) cancer registry. The SEER program collects comprehensive data on the incidence,
treatment and end results (including deaths) for all types of cancers at fourteen different sites in
the United States. SEER generates cancer rates from these sites that can then be used to estimate
the incidence of each type of cancer for the United States as a whole. The SEER program is
highly sophisticated and recognized as the state of the art for such programs throughout the world
and its results are widely used in medical research and planning.
Because SEER collects data continually, its results include estimates of the annual national
incidence of each type of cancer over many years. The annual SEER estimates of the national
incidence of mesothelioma provide a means to test epidemiological forecasts of mesothelioma
deaths. Because asbestos is the only known cause of mesothelioma, epidemiologists’ forecasts of
asbestos-related mesothelioma deaths should tend to correspond to the annual SEER national
incidence estimates for all mesotheliomas. While the SEER national incidence measures are
themselves estimates based on the sample of SEER sites with their own uncertainties, over many
years an accurate epidemiological forecast of mesothelioma deaths should track trends in the
SEER estimates of actual mesothelioma deaths.
In fact, as Figure 8 shows, the Nicholson et. al. forecasts correspond remarkably well to SEER
estimates of actual mesothelioma deaths. Nicholson and his colleagues published their forecasts
in 1982. Since then and through the most recent years of data, the Nicholson forecasts closely
track the SEER estimates of annual mesothelioma deaths.
Because lung cancer and the other asbestos-related cancers have causes other than asbestos
exposure, the SEER estimates of those cancer deaths will exceed and cannot be used to test the
epidemiological forecasts for those other cancers. But because Nicholson’s forecasts for all types
of cancers are based on the same methods and the same estimates of the number of exposed
workers and the extent of their asbestos exposures, the strong confirmation of Nicholson’s
forecast for mesothelioma provides confidence for Nicholson’s epidemiological forecasts for each
type of cancer.
USG Corporation                                                                                        25




                       Figure 8: Epidemiological Projections Confirmed by SEER’s Mesothelioma Counts
                     3000



                                   Nicholson
                                   KPMG
                                   SEER
                     2500
                     2000
  Number of Deaths
                     1500
                     1000
                     500
                     0




                                 1980          1990   2000         2010    2020       2030      2040

                                                             Death Year


Figure 8 also shows a second forecast of asbestos-related mesothelioma deaths made by analysts
at KPMG-Peat Marwick in 1992 as part of their work as experts in the bankruptcy proceedings of
National Gypsum. Dr. Tom Vasquez and his colleagues at KPMG-Peat Marwick attempted to
update the 1982 forecasts made by Nicholson, et. al., using more recent U.S. Labor Department
statistics on the populations of workers in asbestos exposed industries, more recently formulated
medical models of the risk of mesothelioma and lung cancer from asbestos exposure and several
alternative assumptions (KPMG’s annual forecasts are reproduced in Appendix Table A2). As
Figure 8 illustrates, the KPMG forecasts are very similar to those made by Nicholson et. al. a
decade previously and, as a result, claims forecasts that are based on the two alternative
epidemiological forecasts are only slightly different. Figure 8 also shows that over the eighteen-
year time period 1982 to 1999 the original Nicholson projections more closely fit the SEER data
on actual mesothelioma deaths than do the KPMG forecasts.
6.2.3. Propensities to Sue USG
Data and forecasts of the incidence of asbestos-related diseases describe the potential for liability
against USG. As long as asbestos-related cancers occur, it is likely that some claims will be filed.
We compare incidence forecasts for past years to USG’s data on past claims to see how much of
this potential for asbestos cancer claims was directed against the company in the past: Among all
the potential asbestos-related cancer claims in the country what fraction resulted in USG claims?
We formalize these comparisons through our propensity to sue calculations shown in the next
paragraph. USG’s claims data also show trends in claiming against the company, whether the
propensities to sue had increased, decreased or stabilized in recent years. The historic levels and
trends in propensities to sue document the past behavior by claimants and plaintiffs’ lawyers in
USG Corporation                                                                                  26




pursuing possible claims for asbestos-related cancers.
We look to this past history of claiming against USG -- past propensities to sue and trends in the
propensities to sue -- as well as information about claiming against other asbestos defendants to
forecast future claiming against USG. We forecast the number of claims forecast for each type of
cancer in each future year by multiplying the number of deaths projected by Nicholson for that
year times our forecast of the propensity to sue for that cancer in that year. The calculations that
are used first to derive propensities to sue and second to forecast future claims based on these
propensities to sue are stated below.


   Calculation of Propensity to Sue:
       Number of Claims ÷ Incidence = Propensity to Sue


   Forecasting Future Claims from Propensity to Sue:
       Propensity to Sue × Incidence in Future Year = Projected Claims in Future Year


We base our forecast of future propensities to sue USG primarily on the number of cancer claims
filed in the past against USG and its trends in past annual filings. Table 12 shows the annual
number of asbestos bodily injury claims filed against USG for each type of asbestos-related
disease after the imputation of diseases to unspecified disease claims, as described above. Like
other CCR members, claim filings against USG (a) were suppressed between 1994 and mid-1997
when the CCR’s Georgine class action was sub judici, (b) increased sharply in late 1997 and 1998
after the U. S. Supreme Court’s Amchem decision confirmed the Third Circuits rejection of the
Georgine class action, and then (c) continued at high levels until USG filed for bankruptcy
protection in June 2001. Overall, USG and other CCR members saw a sharp increase in annual
claim filings over the decade of the 1990s. This trend too was shared with all major asbestos
defendants. Figure 9 provides graphic representations of these increasing trends in USG filings
for each of the three types cancers.
USG Corporation                                                                                27




  Table 12: Number of Filings Against USG, By Filing Year and Disease (After Reallocation)

                                            Disease
             Filing
             Year        Meso       Lung    OthCan Nonmal          None       Total

             Unkn            3          6         2        35          5        51
             1980          195        295       123     4,202      1,085     5,900
             1981           80        101        40     1,324        470     2,015
             1982           90        131        43     1,483        718     2,465
             1983          106        130        49     1,423        436     2,144
             1984          117        166        74     1,638        184     2,179
             1985          334        462       146     5,438      1,308     7,687
             1986          217        533       218     7,052        704     8,725
             1987          491      1,180       375     8,624        702    11,373
             1988          430        836       299    12,367        940    14,872
             1989          474      1,044       252    10,176      1,382    13,328
             1990          546        896       263    11,607        257    13,570
             1991          576      1,043       272    11,841        358    14,091
             1992          635      1,148       414    20,713        501    23,412
             1993          506      1,174       334    15,737      2,297    20,048
             1994          668      1,134       325    15,100        516    17,744
             1995          452      1,241       561    25,075        837    28,166
             1996          520      1,256       515    26,186        686    29,162
             1997        1,090      2,152       678    30,804      1,431    36,155
             1998        1,323      2,314       760    47,288      2,250    53,934
             1999        1,381      2,296       561    41,998      1,725    47,962
             2000        1,617      2,333       741    51,584      2,765    59,040
             2001          739      1,364       390    25,471      2,495    30,459
             [Ann01]     1,478      2,728       780    50,942      4,990    60,918

             Total      12,590    23,235      7,435   377,166     24,052   444,482

  Notes: Entries for 2001 are filings through June 25, 2001. Annualized filings for 2001 are
  shown in the ‘‘Ann01’’ row. Totals are based on 2001 filings through June 25.
USG Corporation                                                                               28




                                    Figure 9: Number of Cancer Filings Against USG



                                  Meso
                    2500




                                  Lung
                                  OthCan
                    2000
 Number of Claims
                    1500
                    1000
                    500
                    0




                           1980            1985          1990             1995       2000

                                                           Year


Figure 10 compares Nicholson’s forecast of mesothelioma deaths between 1990 and 2001 with
the number of mesothelioma claims filed against USG in those years. As Figure 10 shows,
during the three years before its bankruptcy, mesothelioma claims against USG had increased
sharply, growing closer to the incidence of mesothelioma deaths that Nicholson forecast.
USG Corporation                                                                                       29




                                          Figure 10: Nicholson Meso Forecasts vs USG Actuals
                            3000
                            2500




                                          Nicholson
                                          USG−Meso
  Number of Deaths/Claims
                            2000
                            1500
                            1000
                            500




                                   1990      1992        1994         1996         1998        2000

                                                                   Year


We used the same, standard method for forecasting future cancer claim filings based on USG’s
historic propensities to sue. For example, the forecasts of future mesothelioma claim filings are
based on a calculation of the relationship between past claims to the past incidence of the disease.
This calculation, known as the ‘‘propensity to sue,’’ is derived by dividing the number of claims
for mesothelioma in a year by the number of mesothelioma deaths projected for that same year
and establishes the historic claiming rate for mesothelioma against USG. Propensities to sue
USG for lung cancer and for other cancers are calculated similarly, by dividing the number of
claims for each type of cancer in a year by the Nicholson forecast of the number of asbestos-
related deaths from that cancer in the same year.
Table 13 below shows the annual propensities to sue calculated for each of the three types of
asbestos-related cancers for each year since 1990. From the early 1990s the number of cancer
claims filings have increased steadily for most asbestos defendants, but this pattern differed for
USG and other CCR members. Their claim filings were suppressed from 1993 to 1997 by the
pendancy of the Georgine class action. Many victims of asbestos-related cancers delayed filing
law suits while the class action was pending in order to avoid the terms of that settlement. In
turn, cancer filings against USG increased sharply during the eighteen months from the summer
of 1997 after the U. S. Supreme Court halted the Georgine class action until the end of 1998 as
cancer victims who had withheld their claims then filed lawsuits. Propensities to sue then
remained at new, far higher levels during and after 1999.
USG Corporation                                                                                   30




                   Table 13: Propensities to Sue USG, by Disease: 1990-2000

                                              Type of Cancer
                                Filing
                                Year      Meso      Lung OthCan

                                1990       20.9       16.3      17.6
                                1991       21.5       19.0      18.2
                                1992       23.1       20.9      27.7
                                1993       18.1       21.5      22.5
                                1994       23.6       21.0      22.2
                                1995       15.7       23.2      38.6
                                1996       17.8       23.7      35.8
                                1997       36.7       40.9      47.6
                                1998       44.3       45.0      54.5
                                1999       46.0       45.6      41.1
                                2000       53.5       47.4      55.5
                                2001       48.6       56.8      59.9


We used USG’s claims experience during the two and one-half year period from January 1999
through June 2001 as the starting point to forecast claims against USG after June 2001. This two
and one-half year ‘‘base period’’ represents USG’s most current claims experience, the period
immediately preceding the date of forecast, and a period that is after the surge of filings of
deferred Georgine claims. As Table 13 shows, propensities to sue for each type of cancer during
the two and one-half years of the are considerably higher than during or before the years in which
the the Georgine class action was sub judici and were increasing between 1999 and June 2001 for
each cancer.
Forecasts of future USG claims must take two matters into account: (1) the most recent level of
claiming shown by the propensities to sue during years preceding USG’s bankruptcy filing and
(2) the fact that cancer filings and propensities to sue had increased sharply as of June 2001.
Together these matters not only establish a starting point for forecasting future USG cancer
claims based on the most recent propensity to sue, but also suggest that propensities to sue USG
would continue to increase and exceed the levels of the base period.
We forecast that the number of cancer claim filings against USG would have continued to
increase after its June 2001 bankruptcy filing: that the increase in propensities that we observed in
USG claims prior to the bankruptcy would have continued for five more years and then the
propensities to sue would increase no further but would remain for all further years at the level
reached in the fifth future year. The rates of increase in the propensity to sue would be the same
as rates of increase that have actually occurred for the Manville Trust over the very period for
which we forecast ‘‘future’’ USG claims, i.e. from 2001 through 2005.
We can base our forecasts on the Manville Trust’s propensities to sue during 2001 to 2005 for
three reasons: First, we have Manville data about claim trends that are exactly contemporaneous
for the ‘‘future’’ period that we need to forecast for USG. Second, because Manville data are
universally regarded as the most comprehensive data on asbestos claims filing and have been used
repeatedly by analysts in forecasting liabilities for other defendants, they are appropriate for
forecasting USG’s liabilities. Further, the Manville data are remarkably ‘‘clean,’’ current and free
of problems such as the need to impute diseases among claims that do not have specific disease
(see discussion of this issue in the USG data at Section 6.1.1 above).
Manville’s claim filings have continued to increase since USG’s bankruptcy filing in mid-2001.
USG Corporation                                                                                                                        31




Figure 11 and Figure 12 show respectively the number of mesothelioma and lung cancer claims
filed annually against USG and against Manville. On each figure we continue Manville filings
after USG’s bankruptcy filing and through 2005. The figures show Manville’s filings for 2003
through 2005 averaged over those years, because claim filings over those years were distorted by
2003 changes to Manville’s claims procedures. As a result many claimants ‘‘accelerated’’ their
filings; claims that would otherwise have been filed in 2004 or 2005 were filed instead in 2003.
Consequently, Manville’s claim filing trends for the three years are best represented by averaging
its claims across 2003, 2004 and 2005 as shown in Figure 11 and Figure 12, below.3

                        Figure 11: Trends In USG and Manville Mesothelioma Claims (2003-2005 Smoothed)



                                           Manville Meso
                                           USG Meso
                         2000
     Number of Claims
                         1500
                         1000
                         500




                                1990                          1995                            2000                           2005

                                                                           Filing Year




3.                      The Manville Trust had notified claimants and their lawyers of these 2003 changes well in advance producing an
                        expected result that many claimants rushed to submit claims to take advantage of Manville’s previous TDP. The
                        changes and their notice caused claimants to accelerate filings with the Trust: claims that would ordinarily have
                        been filed in 2004 or 2005 were instead filed during 2003. As David Austern, CEO of the Manville Trust,
                        reported to Judges’ Jack B. Weinstein and Burton R. Lifland: ‘‘As you may recall, the deadline to file claims
                        pursuant to the original (1995) TDP was in late 2003 and law firms accelerated the filing of many claims to meet
                        that deadline that, in the ordinary course, would not have been filed until 2004 or later’’ Letter of February 28,
                        2006. Because of these temporal disturbances during 2003 through 2005, we know that some of Manville’s 2003
                        claims would have been filed in 2004 or 2005 had the Trust not made and announced its changes, but we cannot
                        know how many filings were accelerated. As a result, we can attach no significance to the different levels of
                        filings across each of these three years.
USG Corporation                                                                                                 32




                      Figure 12: Trends In USG and Manville Lung Cancer Claims (2003-2005 Smoothed)
                     3000



                                        Manville Lung
                                        USG Lung
                     2500
  Number of Claims
                     2000
                     1500
                     1000




                              1990                      1995                    2000                     2005

                                                                 Filing Year


Table 14 shows our calculation of the rates of increase in Manville’s propensities to sue for each
cancer between 2000 and 2003-2005.


                            Table 14: Comparison of Alternative Estimates of Increase in Propensities to Sue

                                                                  Current
                                                          Disease Manville

                                                          Meso         1.396
                                                          Lung         1.078
                                                          OthCan       1.398


Table 15 shows our forecast of the rates of annual increases for propensities to sue, again
spreading the increase gradually over the ‘‘future’’ five years and the propensity to sue estimates
used for each future year. We start with USG’s actual propensities to sue during the two and one-
half year base period, 1999-June 2001, and we assume that USG would have continued to receive
cancer filings at this rate after June 2001. We then forecast that USG’s propensities to sue would
increase at rates parallel to Manville’s from 2002 through2006.
USG Corporation                                                                                                              33




                                        Table 15: Patterns of Increase in the Propensity to Sue

                                               Rates of Increase                    Propensities to Sue
                            Disease   2002    2003   2004   2005    2006    2002        2003   2004    2005    2006

                            Meso      1.000   1.099 1.198 1.297 1.396        49.5       54.4   59.3     64.2   69.1
                            Lung      1.000   1.020 1.039 1.058 1.078        48.5       49.5   50.4     51.3   52.3
                            OthCan    1.000   1.100 1.199 1.299 1.398        50.5       55.5   60.6     65.6   70.6


We then use the propensity to sue forecasts for 2006 for every year after 2006 to project the
number of future cancer claims that would be filed against USG. Figure 13 presents a graphic
summary of the calculation of future mesothelioma claim filings for each future year. The
vertical bar at year 2001 represents the time of USG’s bankruptcy filing. To the left, the upper
curve shows the annual Nicholson forecast of mesothelioma incidence and the lower curve the
number of mesothelioma claims filed against USG, the two parameters that are used to calculate
the USG propensity to sue. Forecast claims are to the right of vertical bar, with the Nicholson
incidence forecast again the upper curve and our forecast of future mesothelioma filings the lower
curve. In each future year the forecast number of mesothelioma claim filings is calculated by
multiplying the Nicholson incidence for that year (the upper curve) times the propensity to sue for
that year. As I have discussed, forecast mesothelioma filings increase until 2005 as the propensity
to sue increases and, thereafter, begin to fall slowly at the same rate as Nicholson’s forecast of the
decrease in annual mesothelioma deaths.

                                        Figure 13: Nicholson Meso Forecasts vs USG Actuals
                     3000




                                                                                                      Actual−USG
                                                                                                      Forecast−USG
                                                                                                      Nicholson
                     2500
                     2000
  Number of Claims
                     1500
                     1000
                     500
                     0




                             1990             2000           2010                2020             2030                2040

                                                                   Filing Year
USG Corporation                                                                                         34




We carry out similar calculations for lung cancers and other cancers. Table 16 shows our forecast
of future claims for each type of cancer through year 2039, the end of our forecast period.


                              Table 16: Number of Forecast Cancer Claims Filed After June 2001

                                                            Disease
                                      Model         Meso      Lung OthCan             Total

                                      Nicholson    43,123    37,822       13,242     94,187


Figure 14 shows the context of our forecast of USG’s future mesothelioma claims comparing both
past and forecast future claims for USG from 1990 through 2005 with the number of
mesothelioma claims received by Manville over the same period (again averaging the 2003-2005
filings because of the 2003 accelerated filings). Figure 15 is a similar comparison for lung cancer
claims. Note that while we forecast that cancer filings against USG will increase at rates parallel
to rates of increase for Manville, we forecast that USG would receive fewer claims than Manville
in each future year.

                    Figure 14: Trends In USG and Manville Mesothelioma Claims (2003-2005 Smoothed)



                                   Manville Meso
                                   USG Meso
                    2000
 Number of Claims
                    1500
                    1000
                    500




                           1990                    1995                       2000               2005

                                                            Filing Year
USG Corporation                                                                                       35




                      Figure 15: Trends In USG and Manville Lung Cancer Claims (2003-2005 Smoothed)
                     3000



                                   Manville Lung
                                   USG Lung
                     2500
  Number of Claims
                     2000
                     1500
                     1000




                            1990                   1995                 2000                   2005

                                                          Filing Year


6.2.4. Projection of Future Nonmalignancy Claims
To forecast the number of asbestosis and pleural claims that will be filed against USG in future
years we do not use the same method that we use to forecast USG’s future cancer claims. First,
there are no published, peer-reviewed epidemiological projections for the incidence of
nonmalignant asbestos-related diseases that are like the Nicholson cancer forecasts and no
epidemiological forecast of nonmalignant asbestos-related disease has been tested and confirmed
by actual experience as have the Nicholson cancer forecasts. Second, the disease processes for
asbestos-related cancers and asbestos-related nonmalignant diseases differ. Unlike the asbestos-
related cancers, which become known to victims abruptly through the rapid onset of symptoms
and diagnoses, nonmalignant diseases are insidious. Asbestosis and pleural diseases are
progressive diseases that develop gradually over time with the accumulation of scarring of the
lungs or pleura. Because dyspnea (shortness of breath) and other effects of these disease increase
over time, victims of these diseases may be unaware of the earliest onset of symptoms or may
attribute breathing problems to their increasing age or other possible causes. So unlike the
asbestos-related cancers, which become known to victims by a signal event--the diagnosis of a
grave disease--that will be most likely to trigger claim filing, victims of nonmalignant asbestos
diseases may become aware of their diseases gradually or they may be made aware by a medical
diagnosis of asbestosis or pleural disease that could be made early or later in the progression of
the disease. Consequently, filings of claims for asbestosis and pleural disease cannot be predicted
from epidemiological evidence in the same manner as can filings of asbestos-related cancers.
Based on our analyses of claims data for USG and many other defendants we have seen that
across all past years there has been an historically stable relationship between the number of
USG Corporation                                                                                  36




cancer and nonmalignant filings against USG. This is shown in Table 12: the past trend in annual
filings of nonmalignant claims against USG is similar to its trends for cancer claims (filings are
placed on different scales to demonstrate this parallelism). Like cancer filings, the Georgine class
action suppressed filings of nonmalignant claims during the mid-1990s, but filings rebounded
greatly after the U.S. Supreme Court rejected the Georgine class action in mid-1997 and, as with
cancer filings, nonmalignancy filings remained at these new, higher levels until the time of USG’s
bankruptcy. Figure 16, below, shows USG’s annual nonmalignant claim filings.
To facilitate comparison of trends in cancer and nonmalignant claim filings, Figure 17 shows
annual filings in each year from 1980 through 2000 using different scales for cancer claims and
for nonmalignant claims. As Figure 17 demonstrates, throughout twenty years of its asbestos
litigation the trends in annual filings of cancer and nonmalignant claims filed against USG have
been similar. While there is some divergence in trends during the 1980s, trends for both types of
disease are highly similar since the early 1990s.

                                    Figure 16: Annual Nonmalignant Claims Against USG
                     50000




                                    Nonmal
                     40000
  Number of Claims
                     30000
                     20000
                     10000
                     0




                             1980            1985          1990            1995         2000

                                                            Year
USG Corporation                                                                                                                               37




                                                 Figure 17: Comparison of Nonmalignant and Cancer Claim Counts




                                                                                                                 5000
                                  50000



                                                      Nonmal
                                                      Cancer




                                                                                                                 4000
                                  40000
  Number of Nonmalignant Claims




                                                                                                                 3000

                                                                                                                        Number of Cancer Claims
                                  30000
                                  20000




                                                                                                                 2000
                                  10000




                                                                                                                 1000
                                  0




                                          1980             1985           1990           1995           2000

                                                                            Year


Claims filing trends for nonmalignant and malignant asbestos-related diseases since the early
1990s correspond closely because those filings are generated by similar sets of social,
institutional and behavioral determinants. As Figure 17 demonstrates, in the past filings of
asbestos nonmalignant claims in a year could be predicted well from filings of cancer claims.
The stable relationship between filings of cancer and nonmalignant claims has been one of the
most common patterns in asbestos litigation, not only for USG, but for other asbestos defendants
as well.
Now, however, recent changes in the litigation environment have disturbed this historic stability
between cancer and nonmalignancy filings. While cancer filings have continued to increase in the
last few years, filings of nonmalignant claims have fallen. Some of the decrease in nonmalignant
filings results from the U.S. Senate’s extended consideration of asbestos legislation that would
create a national compensation fund and eliminate asbestos litigation (‘‘We attribute the
comparatively low rate of claim filings in 2004 to three factors ... 3) the uncertainty surrounding
the national asbestos litigation’’, February 28, 2005 letter from David Austern to Judges Jack B.
Weinstein and Burton R. Lifland). The possibility of such legislation has broadly affected
asbestos litigation, resulting in fewer settlements of asbestos law suits and reduced filings of new
law suits. Given uncertainties about whether or not newly filed law suits would ever result in
payment, plaintiffs’ lawyers have become unwilling to spend the work and money required to
prepare new cases, particularly nonmalignant claims. The possibility of national legislation
particularly suppressed nonmalignant claim filings which are more likely than cancer claims to be
generated by law firms entrepreneurial activities and whose filings are more easily deferred
because they are less subject to statutes of limitations. This suppression of claim filings resulting
from the Senate’s legislative considerations will likely be transitory, with a rebound in filings
USG Corporation                                                                                   38




should the prospect of legislation disappear.
However, other developments suggest that filings of nonmalignant claims may never rebound to
their great numbers of several years ago. First, several states that have been centers of much
asbestos litigation have adopted new statutes that will limit the number of new law suits for
nonmalignant claims in those states, primarily by establishing medical criteria that plaintiffs must
establish in order to bring suit. Second, as I discussed above, courts and defendants have
documented the troubling practices of some medical providers who have examined and prepared
documents to support many plaintiffs’ claims for nonmalignant injuries. While fewer recent
claims have depended upon documentation by doctors subject to these criticisms, in the past a
significant fraction of law suits for nonmalignant diseases have presented medical documents
from doctors or medical facilities who have been criticized. This criticism and attention will
likely reduce the number of future law suits for nonmalignant claims. Third, some plaintiffs’ law
firms have seemed to redirect their efforts in recruiting and filing asbestos injury claims,
concentrating increasingly on more valuable and less controversial cancer claims. If this
redirection by law firms continues, it could reshape asbestos litigation.
For all these reasons we expect that the historically stable pattern between the number of cancer
and nonmalignant claims will change and that nonmalignant claim filings will decrease in future
years, both relative to cancer filings and in absolute numbers. Although nonmalignant claim
filings increased after 2000 among defendants who continued to receive asbestos claims, we
forecast instead that beginning in 2001 future nonmalignant claims against USG will decrease
steadily from their levels before USG’s bankruptcy. To forecast USG’s future nonmalignant
claim filings, we start with the level of nonmalignant claims that it received in 1999 and 2000 and
then forecast that future claims will decrease at a rate parallel to the Nicholson forecast of the
incidence of future asbestos-related cancers. Medical researchers have suggested that trends in
the incidence of cancers, like those forecast by Nicholson, represent the best means for estimating
asbestos disease generally among exposed workers.
Figure 18 shows our long term forecast of future USG claims. The figure shows the number of
claims filed against USG annually prior to the bankruptcy, showing separately our forecasts for
cancer and nonmalignant claims: cancer claims appear at the bottom and nonmalignant claims
appear above. While we forecast that USG’s cancer claim filings will continue to increase
between 2001 and 2005 before they turn and decline thereafter, our forecasts of future
nonmalignant claims start in 2001 lower than the level of such claims during 2000 and decline
year after year thereafter.
USG Corporation                                                                                   39




                                     Figure 18: Actual And Projected Filings
                     50000



                                                                                Cancer−A
                                                                                Nonmal−A
                                                                                Cancer−F
                                                                                Nonmal−F
                     40000
  Number of Claims
                     30000
                     20000
                     10000
                     0




                             1990   2000         2010           2020           2030        2040

                                                        Year


The following two figures (Figure 19 and Figure 20) show past and forecast future claims
separately for cancers and nonmalignancies in order to better demonstrate the differing forecast
trends in filing for each type of disease claim. We forecast modest, short-term increases in filings
of cancer claims through 2006 to reflect the experiences of other defendants since USG’s June
2001 petition date. Thereafter, we forecast that cancer filings against USG will steadily decrease,
just as we forecast steady decreases in USG nonmalignancy filings beginning in 2001.
USG Corporation                                                                                           40




                                      Figure 19: Actual And Projected Cancer Filings
                    5000



                                                                                        Cancer−A
                                                                                        Cancer−F
                    4000
 Number of Claims
                    3000
                    2000
                    1000
                    0




                            1990       2000           2010           2020              2030        2040

                                                             Year


                                   Figure 20: Actual And Projected Nonmalignant Filings
                    50000




                                                                                        Nonmal−A
                                                                                        Nonmal−F
                    40000
 Number of Claims
                    30000
                    20000
                    10000
                    0




                            1990       2000           2010           2020              2030        2040

                                                             Year
USG Corporation                                                                                       41




In order to understand the significance of these trends, it is important to recall that we forecast
sharp decreases in USG’s payment rates for each type of asbestos-related disease. For each
cancer and for nonmalignancies, we forecast that USG will pay a far smaller fraction of filed
claims than it did prior to 2001 when it was a member of CCR. In contrast to payment rates
exceeding 90 percent for each disease as a CCR member, we forecast that USG will pay only 70
percent of cancer claims and 60 percent of nonmalignant claims. As a result, we forecast that
USG will pay fewer claims during 2001 and all later years than it had as a CCR member. As the
following figures show, we forecast that USG will pay fewer mesothelioma claims (Figure 21),
fewer cancers of all types (Figure 22) and fewer nonmalignant claims than it had in the past
(Figure 23). Because we forecast both decreasing nonmalignant claim filings and a sharp
decrease in USG’s payment rate, we forecast a particularly sharp drop in the number of
nonmalignant claims that USG would pay. Our forecast of the number of nonmalignant claims
that USG would compensate starts at only 58 percent of the number it paid as a CCR member and
then drops thereafter. We expect such a sharp drop in compensated nonmalignant claims both
because of USG’s exit from the CCR and also because of the important recent changes in asbestos
litigation--criticisms and increased scrutiny of medical documentation of nonmalignant claims,
statutory and judicial changes in the legal treatment of nonmalignant disease claims, changes in
the practices among plaintiffs’ law firms.

                                  Figure 21: Past and Projected Mesothelioma Filings
                    2000




                                                                            Past−Compensable

                                                                            Past−Filings

                                                                            Fcst−Compensable
                    1500




                                                                            Fcst−Filings
 Number of Claims
                    1000
                    500
                    0




                           1990      2000           2010           2020            2030        2040

                                                           Year
USG Corporation                                                                                        42




                                      Figure 22: Past and Projected Cancer Filings
                    5000



                                                                             Past−Compensable

                                                                             Past−Filings
                    4000




                                                                             Fcst−Compensable

                                                                             Fcst−Filings
 Number of Claims
                    3000
                    2000
                    1000
                    0




                            1990      2000           2010           2020             2030       2040

                                                            Year


                                   Figure 23: Past and Projected Nonmalignant Filings
                    50000




                                                                             Past−Compensable

                                                                             Past−Filings
                    40000




                                                                             Fcst−Compensable

                                                                             Fcst−Filings
 Number of Claims
                    30000
                    20000
                    10000
                    0




                            1990      2000           2010           2020             2030       2040

                                                            Year
USG Corporation                                                                                     43




6.2.5. Forecast Number of Future Claims
Table 17 shows the results of the forecast. Appendix Table A3 shows the forecast filings for each
disease for each year from 2001 to 2039.


                   Table 17: Number of Forecast Claims Filed After June 2001

                                                Disease
                  Model           Meso       Lung    OthCan Nonmal            Total

                  Nicholson     43,123      37,822     13,242   810,328    904,515


6.2.6. Estimating Liability for Forecast Future Claims
To value future claims we used the same values that we used for valuing pending claims, the
average settlement values and payment rates shown in Table 10 above. Our forecast average
resolution values are obtained by multiplying settlement values and payment rates for each
disease.
In forecasting the values of future claims, we assumed that payments would be adjusted for future
inflation at a rate of 2.5 percent per year. This rate was being used by the Congressional Budget
Office at the time of USG’s bankruptcy and is close to the rate of inflation since then. Table 18
shows the value of future claims using those values shown in Table 10 adjusted for future
inflation. Table A4 shows the value of future claims for each disease for each year from 2001 to
2039.


                 Table 18: Forecast Indemnity for Future Claims after June 2001

                                                Disease
                  Model           Meso       Lung    OthCan Nonmal            Total

                  Nicholson     $9,928      $1,317       $164     $3,604   $15,013

  Notes: Millions of dollars of the year when paid. Future claims are assumed to settle 2 years
  after filing. Indemnity is inflation adjusted at 2.5% per year.

The results in Table 18 estimate the value that we forecast for future claims in terms of the dollars
of the year when claims will be paid. However, these do not represent the present value of USG’s
liabilities. Since these liabilities will mostly arise in future years, they must be reduced to present
value to account for the time value of money. Table 19 shows the estimated present value of these
liabilities, based on a discount rate of 5.55%.
USG Corporation                                                                                  44




                 Table 19: Present Value (PV) of Future Claims as of June 2001

                                              Disease
                   Model         Meso       Lung OthCan Nonmal             Total

                   Nicholson    $4,443      $667        $81     $1,758   $6,950

  Notes: Millions of 2001 dollars. Future claims are assumed to settle 2 years after filing.
  Indemnity is inflation adjusted at 2.5% per year. Discount rate is 5.55%.

6.4. USG’s Total Asbestos Liability, June 2001
To estimate USG’s full obligations for present and future asbestos claims, we added its forecast
indemnity for pending claims and its forecast indemnity for future claims (we do not address
USG’s costs to defend and administer both groups of claims in this report). Table 20 shows these
calculations.


       Table 20: USG’s Nominal Liability for Pending and Future Claims As of June 2001

                               Type of Expense             Increase

                               Indemnity, Pending Claims       $1,334
                               Indemnity, Future Claims        15,013
                               Total Liability                $16,347

  Notes: Millions of 2001 dollars. Pending claims are assumed to average 2 years to settlement.
  Future claims are assumed to settle 2 years after filing. Indemnity is inflation adjusted at 2.5%
  per year.

Table 21 shows the present value of USG’s forecast liability for pending and future claims, as of
June 2001, using the discount rate assumptions described above.


                Table 21: PV of USG’s Total Liability for Indemnity: June 2001

                               Type of Expense             Increase

                               Indemnity, Pending Claims       $1,197
                               Indemnity, Future Claims         6,949
                               Total Liability                 $8,146

  Notes: Millions of 2001 dollars. Pending claims are assumed to average 2 years to settlement.
  Future claims are assumed to settle 2 years after filing. Indemnity is inflation adjusted at 2.5%.
  Discount rate is 5.55%.

Figure 24 shows how the present values of USG’s obligations for future claims are distributed
among the different types of diseases for our preferred forecasting model. This figure again
demonstrates that USG’s liabilities are concentrated heavily among cancer claims. We forecast
that 73 percent of USG’s liabilities will be owed to pending and future cancer claimants with over
55 percent going to mesothelioma victims.
USG Corporation                                                                             45




                  Figure 24: Distribution of PV of Total Liability, by Disease



                                          Meso
                                      $4,991 M




                                                               Nonmal
                                       Lung                    $2,209 M
                                     $845 M OthCan
                                            $101 M




Figure 25 shows how the present values of USG’s obligations are distributed between indemnity
for pending claims and indemnity for future claims.

       Figure 25: Distribution of PV-Liabilities by Expense Type: Future Increase Model




                                                                    Pending Claims
                                                                    $1,197 M




                     Future Claims
                         $6,949 M
USG Corporation                                                                                 46




7. Liability from A. P. Green Claims
It is likely that USG will sustain additional asbestos liabilities from its 1967 merger with A. P.
Green. A. P. Green manufactured asbestos-containing insulation products and also owned
companies that manufactured or installed asbestos products. Immediately after this merger USG
conveyed A. P. Green to a wholly owned USG subsidiary.
We looked at data on A. P. Green claims to identify claimants with pre-1968 exposures. By
linking the USG and A. P. Green database, we estimated that 79 percent of A. P. Green claimants
exposed before 1968 had also made claims against USG. Presumably the other 21 percent of A.
P. Green claimants with pre-1968 exposures could have but did not (yet) make claims against
USG. Note that because USG went into bankruptcy in 2001, we looked only to A. P. Green
claimants who filed before 2001. We would get an artificially low rate of overlapping claimants
if we included later years when plaintiffs were barred from suing USG.
We might expect that this 79 percent overlap would go up to 100 percent if USG were to pay
claimants solely because they were exposed to A. P. Green before 1968. We estimated how many
additional claims this might represent.
We counted of filings against A. P. Green with pre-1968 exposures. Table 22 shows the number
of filings by year. The numbers of cases are quite large, averaging about 45,000 per year during
1999-2001.


                         Table 22: Pre-1968 Filings Against A. P. Green
                          (After Reallocation of Unspecified Diseases)

                                            Disease
               Filing
               Year      Meso       Lung    OthCan Nonmal        Unspec        Total

               1990        413        841       263     10,395        539    12,451
               1991        376        792       211      8,864        328    10,572
               1992        415        989       288     19,246        163    21,102
               1993        347        788       229     11,853        219    13,436
               1994        491        696       198      8,632      1,413    11,430
               1995        460        847       318      9,611        189    11,424
               1996        537      1,140       477     26,309        613    29,076
               1997        851      1,577       494     21,810        424    25,155
               1998      1,342      2,624       886     46,106        936    51,894
               1999      1,106      2,061       566     34,477      1,259    39,468
               2000      1,051      1,847       610     36,460      1,401    41,369
               2001        974      2,317       883     50,613      1,998    56,785
               2002         18         40        19      2,364         39     2,480
               Total    10,346    20,380      6,452   326,051     10,275    373,503


We then applied our standard forecasting methods to this subpopulation using the same
parameters applied to forecast USG claims:
 • Nicholson epidemiology,
 • 1999-2001 as the base years for computing propensities to sue,
USG Corporation                                                                                   47




 • Manville increases in cancers, and
 • nonmaligant claims proporational to cancer epidemiological forecasts.
Using this method we predict about 730,000 future claims against A. P. Green, as shown in Table
23.


                   Table 23: Estimated Numbers of Claims Against A. P. Green,
                                  by Disease and Claim Status

                                               Disease
                   Claim
                   Status        Meso      Lung    OthCan Nonmal            Total

                   Pending       3,095     7,540      2,688   145,433    158,756
                   Future       29,541    31,871     13,150   656,800    731,362
                   Total        32,636    39,411     15,838   802,233    890,118


As a last step, we applied the 79 percent reduction to our estimates of pending and future claims
and asumed the USG payment parameters shown in Table 10 to estimate liability. Table 24 shows
the resulting A. P. Green liability estimates. The net present value of total liability is about $1.3
billion.


                Table 24: Predicted Additional Filings and Liability Against USG
                       Due to Pre-1968 Exposure to A. P. Green Products

                                                   Disease
             Quantity Status          Meso       Lung    OthCan Nonmal              Total

             Filings       Pending      650      1,583       564     30,541    33,339
                           Future     6,204      6,693     2,762    137,928   153,586
                           Total      6,854      8,276     3,326    168,469   186,925
             NPV           Pending       $95       $37         $5       $90       $227
                           Future        635       117         17       297      1,066
                           Total         730       154         22       387      1,293

  Notes for NPV calculations: Millions of 2001 dollars. Pending claims are assumed to average
  2 years to settlement. Future claims are assumed to settle 2 years after filing. Indemnity is
  inflation adjusted at 2.5%. Discount rate is 5.55%.
USG Corporation                                                                                     48




8. Sensitivity Analyses
Forecasts of asbestos liabilities are inherently uncertain. Our forecasts have strong
bases--epidemiological forecasts of asbestos diseases that have been tested and confirmed by
twenty years of SEER counts of mesothelioma deaths, USG’s own recent claims history,
contemporaneous data and trends concerning claim filings and payments for defendants whose
experience we believe is relevant to USG’s liability, and conservative assumptions about future
dismissal rates. However our forecasts of USG’s future liability would differ somewhat if we had
made different assumptions about epidemiology, propensities to sue, payment amounts, or other
factors in future years. This section examines how forecasts would have differed under different
assumptions.
We define and then report on the results of systematically varying seven types of parameters:
 • the choice of epidemiological projections: Nicholson vs. KPMG (see below for a discussion
   of the KPMG model).
 • use of cancer propensity to sue assumptions: (a) no change from 1999-2001 base year and (b)
   increases based on Manville and UNR filings during the 1990s.
 • use of dollar amounts that vary according to the experiences of other defendants.
 • use of alternative payment rates.
 • use of an alternative inflation rate assumption.
 • use of alternative discount rates.
 • changes in filings and settlements that would result if national legislation were passed that
   would treat most nonmalignant claims as not compensable.
We first define these alternatives, then we present the results from systematically varying them.
Our analyses and reported results are for NPV of total liability based on the alternative
assumptions examined in the sensitivity analyses.
8.1. Alternative Parameter Selections
8.1.1. Alternative Epidemiological Models
In 1992 the consulting firm KPMG-Peat Marwick adjusted the Nicholson epidemiological
forecasts as part of their engagement in the bankruptcy proceedings of National Gypsum. KPMG
retained most of elements of the Nicholson forecasts but used more recent Labor Department data
and alternative medical models to estimate the probabilities of mesothelioma and lung cancer. As
shown in Figure 8, above, the KPMG forecasts are a reasonable, although less preferable
alternative to the original Nicholson forecasts of asbestos related cancer deaths. The Nicholson
forecasts are preferable because they have been more closely confirmed by subsequent SEER data
on annual mesothelioma deaths. To examine the effects of using the specific Nicholson
epidemiological forecasts of future cancer deaths, we also forecast future claims and liabilities
using the KPMG forecasts.
8.1.2. Alternative Rates of Increase in Propensity to Sue
Throughout this report we have presented forecasts for the assumption that propensities to sue for
cancer claims would increase like Manville’s, increasing over five years by the ratio of Manville’s
2001-2005 propensity to sue divided by its 2000 propensity to sue. We include two alternatives
for our current sensitivity analyses: (a) that propensities to sue would not increase at all (‘‘Flat’’
propensities to sue), and (b) that propensities to sue would increase according to the experience of
Manville and UNR during the 1990s (an older measure of increasing propensities to sue that we
USG Corporation                                                                                  49




have used previously). Table 25 contrasts the rates of increase over the five years 2001-2005.


                       Table 25: Alternative Increases In Propensity to Sue

                                           Type of Increase
                                 Filing
                         Disease Year Manville   1990s      Flat

                         Meso        2002     1.000      1.000     1.000
                                     2003     1.099      1.098     1.000
                                     2004     1.198      1.196     1.000
                                     2005     1.297      1.294     1.000
                                     2006     1.396      1.392     1.000
                         Lung        2002     1.000      1.000     1.000
                                     2003     1.020      1.123     1.000
                                     2004     1.039      1.245     1.000
                                     2005     1.058      1.368     1.000
                                     2006     1.078      1.490     1.000
                         OthCan      2002     1.000      1.000     1.000
                                     2003     1.100      1.198     1.000
                                     2004     1.199      1.396     1.000
                                     2005     1.299      1.593     1.000
                                     2006     1.398      1.791     1.000

  Note: Base case is shown in red.

8.1.3. Alternative Dollar Amounts
Our base case uses year 2001 settlement averages to forecast USG liability. During that time,
USG settled cases both inside and outside of CCR. As one alternative, we computed average
settlement amounts in 2001 after USG left CCR. As a second alternative, we scaled up USG’s
2000-2001 CCR settlement averages by an estimate based on comparing USG’s ‘‘unbundled’’
settlements outside of CCR to its settlements in ‘‘bundled’’ (i.e. within CCR) that were ‘‘trial
ready’’. While this comparison tries to consider settlements in trial ready cases, we could attempt
to identify these only by using post-CCR settlement averages to the 2001 settlement averages for
non-group settled cases. Table 26 shows the three sets of settlement averages which we employed
in our analysis.


                             Table 26: Alternative Settlement Values

                                                      Average Settlement Value
         Description                            Meso        Lung     OthCan      Nonmal

         2001-Averages                      $221,745     $35,624     $12,541      $5,207
         Post-CCR Averages                   270,868      39,488      13,012       5,020
         2000-2001 Averages (Rescaled)       158,106      18,470       4,447       1,739

  Note: Base case is shown in red.
USG Corporation                                                                                  50




8.1.4. Alternative Payment Rates
The primary analyses presented in this report assume that after leaving CCR USG’s payment rates
will go down. Because of USG’s June 2001 bankruptcy filing, we have some experience about
post-CCR payment rates for USG, so that is one variation we examined. We also looked to the
post-CCR experience for T&N as alternative. T&N’s payment rates after CCR are lower for
cancer but higher for nonmalignancies. Our base case approximates the USG and T&N
experience for cancers at 70 percent and reduces this to 60% for nonmalignants. See Table 27.


                               Table 27: Alternative Payment Rates

                                                          Percent Paid
               Description                      Meso      Lung OthCan Nonmal

               USG Post CCR Assumption           70.0      70.0       70.0      60.0
               USG Post CCR Experience           66.5      82.2       84.6      83.4
               T&N Post CCR Experience           65.8      68.9       73.1      97.1

  Note: Base case is shown in red.

8.1.5. Alternative Inflation Rates
We use a 2.5 percent inflation rate. At the time of the bankruptcy, CBO was assuming 2.5 percent
in its analyses, and the rate of inflation over the years 2000 to 2005 was actually 2.5 percent.
Now, however, CBO is assuming 2.2 percent, so we examine the effect of this assumption on our
projections. It is plausible that the real rate of return (the difference between discount rates and
inflation rates) will remain constant. Nevertheless, we examine the effect of inflation holding the
discount rate constant.
8.1.6. Alternative Discount Rates
The financial analyst for the Future Claimants has suggested a discount rate of 5.55 percent. We
examine the sensitivity of bracketing this at (a) 5 percent and (b) 6 percent.
8.1.7. Tort Reform Alternative
Ohio, Texas, Florida and other states have recently passed legislation which will prevent tort
compensation for some victims of asbestos-related nonmalignant diseases. Proposed
Congressional ‘‘criteria’’ legislation would, in effect, extend these laws nationally. As a
sensitivity we examine a variation that assumes similar legislation on a national level. We assume
first that 60 percent of the nonmalignant claims will get zero value (claims will still be filed, so
our forecasts of the number of filings will not change--certain claims will just not be paid).
Because the legislation is intended to eliminate the least severe nonmalignant claims, we assume
that will affect the 60 percent of nonmalignants who previously received the lowest values, i.e. the
60th percentile and below. Those nonmalignant claimants who continue to receive compensation
are the claimants who were in the top 40 percent of historic settlement values among
nonmalignant claimants. We also assume behavioral change among courts and lawyers: without
the lesser-valued nonmalignant claims, both courts and plaintiffs’ lawyers will devote more
money and effort on the cancer claims and so resolution values for cancers will increase by 10
percent. The net change in resolution amounts is described in Table 28. We apply these
resolution amounts to our base forecasts below.
USG Corporation                                                                                     51




      Table 28: Alternative Payment Parameters If Ohio Legislation Expands Nation-Wide

                      Avg Settlement             Payment Rate             Avg Resolution
        Disease      Current Natl Legis        Current Natl Legis        Current Natl Legis

        Meso        $221,745      $243,920        70%          70%     $155,222     $170,744
        Lung          35,624        35,624          70         70        24,937       24,937
        OthCan        12,541        12,541          70         70         8,779        8,779
        Nonmal         5,207        10,846          60         24         3,124        2,603

  Notes: Base case is shown in red. Nonmalignant resolution averages decrease because 60
  percent of nonmalignant claimants who historically received the lowest settlement values
  would now receive no payment. This results in an average resolution that is 19 percent lower
  for USG.

8.2. Results of Alternative Parameter Selections
Table 29 displays the sensitivity results for all variations described above, contrasting the net
present value of total liability with the base case.


                     Table 29: Sensitivity Analysis Results: Net Present Value

 Parameter            Variation                             Meso       Lung OthCan Nonmal                Total

 Epidemiology         Nicholson                            $4,991       $845      $101     $2,209    $8,146
                      KPMG                                  4,635        844       101      2,096     7,677
 Propensity to Sue    Manville Increase                      4,991       845        101     2,209        8,146
                      1990s Increase                         4,980     1,043        120     3,109        9,253
                      Flat                                   3,909       808         82     2,209        7,008
 Dollar Values        2001-Averages                          4,991       845        101     2,209        8,146
                      Post-CCR Averages                      6,098       937        105     2,129        9,269
                      2000-2001 Averages (Rescaled)          3,559       438         36       737        4,771
 Payment Rates        USG Post CCR Assumption                4,991       845        101     2,209        8,146
                      USG Post CCR Experience                4,742       992        122     3,070        8,928
                      T&N Post CCR Experience                4,692       833        106     3,575        9,205
 Inflation Rate       2.5 Percent                            4,991       845        101     2,209        8,146
                      2.2 Percent                            4,823       823         99     2,148        7,893
 Discount Rate        5.55 Percent                           4,991       845        101     2,209        8,146
                      5.00 Percent                           5,314       887        106     2,324        8,632
                      6.00 Percent                           4,750       814         97     2,122        7,783
 Tort Environment     Current                                4,991       845        101     2,209        8,146
                      National Legislation                   5,491       845        101     1,840        8,278

  Note: Base case is shown in red.

Table 29 shows that the forecast results presented in the body of this report are intermediate
between these variations. Forecasts using the Nicholson epidemiological model are about six
percent greater than those based on the KPMG alternative. Forecasts using the alternative
USG Corporation                                                                               52




propensity to sue variations (flat, 1990s increase) are about 145 percent different from the
Manville-based increases of 2001-2005. The dollar values and payment rates affect the outcomes
considerably: the post-CCR settlement averages add about 14 percent, the rescaled 1999-2001
averages reduce payments by about 40 percent (although it is implausible that payments would be
that low along with the low payment rates of the baseline case). With higher payment rates,
liability goes up by by about 10 percent. Inflation and discount rates do not seem to matter very
much, affecting estimates uniformly by only about three percent. A discount rate of 6 percent,
however, reduces liability by about $1 billion. Finally, the national legislation model has the
desired reduction in nonmalignant payments, but the assumed greater attention to cancers offsets
that effect and produces, on balance, a slightly positive increase in liability.
USG Corporation                                                                                   53




9. Rule 26 Disclosures and Signature
DATA CONSIDERED: In reaching the opinions and conclusions set forth in this Report, I have
considered the following information: my background, training, experience and knowledge of the
asbestos litigation developed over the past 25 years, the items of data explicitly identified in the
report, publicly available sources of information concerning inflation rates, publicly available
documents about USG including its Disclosure Statement and its 10-Ks and 10-Qs filed during
1999, 2000, and 2001, publicly available data from the National Cancer Institute’s SEER registry,
discount rates agreed to by the commercial creditors in the recently conducted Armstrong
Confirmation Hearing, and the items identified in Exhibit 3 of this report attached.
EXHIBITS: The exhibits which summarize my opinions are included in the graphics and tables
in the report and in the appendices to the report.
QUALIFICATIONS: My qualifications to perform this analysis and provide expert testimony are
set forth in my C.V., a copy of which is attached as Exhibit 1.
PUBLICATIONS: Any publications I have authored within the past ten years are set forth in my
C.V.
COMPENSATION: My compensation for services rendered in this case is set forth in the fee
applications Legal Analysis Systems files on a regular basis with the Bankruptcy Court. At
present, my hourly rate is $700.
PRIOR TESTIMONY: A listing of all cases in which I have testified as an expert at either trial or
deposition within the past four years is attached as Exhibit 2.
I reserve the right to modify this report as new information becomes available between now and
the time of trial. I anticipate that I will review the expert witness reports of opposing expert(s)
and offer my opinions about their analyses and conclusions in rebuttal testimony.


                                                        /s/ Mark A. Peterson
                                                ____________________________________
                                                       Mark A. Peterson, J.D., Ph.D.
                                                       LEGAL ANALYSIS SYSTEMS
USG Corporation                                                                            A-1




          Appendix A - Year by Disease Projections


This appendix provides the year by disease projections of Nicholson and KPMG (cancer
incidences) and LAS (OC and Fibreboard filings as of October 5, 2000).


                      Table A1: Nicholson Epidemiological Projections

 Death             Disease             Total       Death              Disease              Total
 Year      Meso       Lung   OthCan Cancers         Year      Meso       Lung    OthCan Cancers

 1970      1,010     2,909        963     4,882      2005     3,023      4,230     1,143      8,396
 1971      1,046     3,098        998     5,142      2006     3,011      4,075     1,099      8,185
 1972      1,082     3,286      1,034     5,402      2007     2,999      3,921     1,055      7,975
 1973      1,151     3,502      1,065     5,718      2008     2,931      3,734     1,006      7,672
 1974      1,219     3,719      1,096     6,034      2009     2,864      3,547       958      7,369
 1975      1,288     3,935      1,128     6,351      2010     2,796      3,361       909      7,066
 1976      1,356     4,152      1,159     6,667      2011     2,729      3,174       861      6,763
 1977      1,425     4,368      1,190     6,983      2012     2,661      2,987       812      6,460
 1978      1,495     4,505      1,227     7,228      2013     2,545      2,811       762      6,119
 1979      1,565     4,643      1,264     7,472      2014     2,429      2,635       713      5,778
 1980      1,635     4,780      1,302     7,717      2015     2,314      2,460       663      5,436
 1981      1,705     4,918      1,339     7,961      2016     2,198      2,284       614      5,095
 1982      1,775     5,055      1,376     8,206      2017     2,082      2,108       564      4,754
 1983      1,900     5,138      1,400     8,438      2018     1,965      1,937       519      4,421
 1984      2,024     5,222      1,424     8,670      2019     1,847      1,766       474      4,088
 1985      2,149     5,305      1,447     8,901      2020     1,730      1,596       430      3,755
 1986      2,273     5,389      1,471     9,133      2021     1,612      1,425       385      3,422
 1987      2,398     5,472      1,495     9,365      2022     1,495      1,254       340      3,089
 1988      2,468     5,477      1,495     9,440      2023     1,379      1,132       307      2,819
 1989      2,538     5,482      1,495     9,515      2024     1,264      1,011       274      2,549
 1990      2,608     5,487      1,494     9,589      2025     1,148        889       242      2,279
 1991      2,678     5,492      1,494     9,664      2026     1,033        768       209      2,009
 1992      2,748     5,497      1,494     9,739      2027       917        646       176      1,739
 1993      2,792     5,449      1,480     9,722      2028       827        575       157      1,558
 1994      2,836     5,402      1,466     9,705      2029       740        508       138      1,386
 1995      2,881     5,354      1,453     9,687      2030       657        446       122      1,225
 1996      2,925     5,307      1,439     9,670      2031       579        388       105      1,072
 1997      2,969     5,259      1,425     9,653      2032       507        336        92        935
 1998      2,987     5,146      1,395     9,528      2033       443        316        79        837
 1999      3,005     5,033      1,365     9,403      2034       383        246        67        696
 2000      3,024     4,919      1,334     9,277      2035       332        208        57        596
 2001      3,042     4,806      1,304     9,152      2036       282        174        47        503
 2002      3,060     4,693      1,274     9,027      2037       240        144        38        423
 2003      3,048     4,539      1,230     8,817      2038       201        117        32        351
 2004      3,036     4,384      1,186     8,606      2039       169         94        26        290

  Note: Nicholson’s projections run through 2030. LAS extended those to 2039 using the year
  by disease rates of decline derived from the KPMG projections, below.
USG Corporation                                                                       A-2




                      Table A2: KPMG Epidemiological Projections

Death             Disease             Total    Death               Disease             Total
Year      Meso       Lung   OthCan Cancers      Year     Meso         Lung   OthCan Cancers

1970        861     3,234    1,196    5,291     2005     2,347       3,638      990     6,975
1971        931     3,592    1,130    5,653     2006     2,294       3,474      945     6,713
1972      1,003     3,721    1,171    5,895     2007     2,234       3,311      900     6,445
1973      1,079     3,846    1,211    6,136     2008     2,173       3,149      857     6,179
1974      1,157     3,974    1,251    6,382     2009     2,105       2,989      813     5,907
1975      1,237     4,147    1,305    6,689     2010     2,034       2,831      769     5,634
1976      1,308     4,278    1,165    6,751     2011     1,960       2,674      728     5,362
1977      1,386     4,428    1,204    7,018     2012     1,880       2,520      686     5,086
1978      1,465     4,577    1,246    7,288     2013     1,798       2,371      644     4,813
1979      1,545     4,728    1,287    7,560     2014     1,713       2,224      604     4,541
1980      1,628     4,897    1,333    7,858     2015     1,627       2,083      566     4,276
1981      1,708     5,042    1,371    8,121     2016     1,538       1,942      528     4,008
1982      1,789     5,158    1,403    8,350     2017     1,447       1,808      492     3,747
1983      1,869     5,261    1,432    8,562     2018     1,357       1,677      457     3,491
1984      1,949     5,338    1,452    8,739     2019     1,269       1,553      422     3,244
1985      2,030     5,401    1,469    8,900     2020     1,180       1,434      390     3,004
1986      2,102     5,431    1,478    9,011     2021     1,094       1,317      358     2,769
1987      2,173     5,441    1,480    9,094     2022     1,009       1,206      328     2,543
1988      2,242     5,441    1,480    9,163     2023       928       1,101      300     2,329
1989      2,306     5,433    1,478    9,217     2024       850         998      272     2,120
1990      2,367     5,410    1,472    9,249     2025       775         902      245     1,922
1991      2,418     5,362    1,458    9,238     2026       703         811      221     1,735
1992      2,459     5,293    1,440    9,192     2027       634         724      197     1,555
1993      2,493     5,218    1,420    9,131     2028       571         643      175     1,389
1994      2,521     5,135    1,397    9,053     2029       510         567      154     1,231
1995      2,538     5,037    1,370    8,945     2030       452         497      136     1,085
1996      2,546     4,928    1,341    8,815     2031       398         431      117       946
1997      2,547     4,807    1,307    8,661     2032       348         373      101       822
1998      2,543     4,682    1,273    8,498     2033       303         346       87       736
1999      2,534     4,550    1,238    8,322     2034       262         271       74       607
2000      2,522     4,414    1,201    8,137     2035       226         228       62       516
2001      2,497     4,265    1,159    7,921     2036       192         190       51       433
2002      2,469     4,110    1,117    7,696     2037       163         157       42       362
2003      2,433     3,955    1,076    7,464     2038       136         127       35       298
2004      2,393     3,798    1,033    7,224     2039       114         102       28       244
USG Corporation                                                                          A-3




                   Table A3: USG Forecasts as of June 2001: Number of Filings

                                                Disease
          Filing      Payment
          Year        Year         Meso       Lung    OthCan       Nonmal        Total

          Pending     2002         3,746      7,583        2,397   152,935    166,661
          2001        2004           756      1,147         324     23,213     25,441
          2002        2004         1,512      2,295         649     46,434     50,889
          2003        2005         1,658      2,245         683     45,145     49,731
          2004        2006         1,800      2,210         718     44,071     48,799
          2005        2007         1,941      2,172         749     42,997     47,859
          2006        2008         2,081      2,131         776     41,923     46,911
          2007        2009         2,072      2,050         745     40,848     45,715
          2008        2000         2,026      1,953         711     39,299     43,989
          2009        2001         1,979      1,855         676     37,750     42,260
          2010        2012         1,932      1,757         642     36,201     40,532
          2011        2013         1,885      1,660         608     34,653     38,806
          2012        2014         1,839      1,562         573     33,104     37,078
          2013        2015         1,759      1,470         538     31,356     35,123
          2014        2016         1,679      1,378         503     29,609     33,169
          2015        2017         1,599      1,286         468     27,862     31,215
          2016        2018         1,519      1,194         433     26,114     29,260
          2017        2019         1,439      1,102         398     24,367     27,306
          2018        2010         1,358      1,013         367     22,662     25,400
          2019        2011         1,276        924         335     20,957     23,492
          2020        2022         1,195        834         303     19,252     21,584
          2021        2023         1,114        745         272     17,547     19,678
          2022        2024         1,033        656         240     15,842     17,771
          2023        2025           953        592         217     14,458     16,220
          2024        2026           873        529         194     13,075     14,671
          2025        2027           793        465         171     11,691     13,120
          2026        2028           714        401         147     10,307     11,569
          2027        2029           634        338         124      8,923     10,019
          2028        2020           572        300         111      7,997      8,980
          2029        2021           511        266          97      7,110      7,984
          2030        2032           454        233          86      6,287      7,060
          2031        2033           400        203          74      5,501      6,178
          2032        2034           350        176          65      4,799      5,390
          2033        2035           306        165          56      4,296      4,823
          2034        2036           265        129          47      3,574      4,015
          2035        2037           229        109          40      3,061      3,439
          2036        2038           195         91          33      2,581      2,900
          2037        2039           166         76          27      2,172      2,441
          2038        2040           139         61          23      1,802      2,025
          2039        2041           117         49          19      1,488      1,673
          Futures                 43,123     37,822       13,242   810,328    904,515
          Total                   46,869     45,405    15,639      963,263   1,071,176
USG Corporation                                                                          A-4




           Table A4: USG Forecasts as of June 2001: Nominal Value of Liability

                                               Disease
          Filing    Payment
          Year      Year         Meso       Lung     OthCan       Nonmal         Total

          Pending   2002        $596.0     $193.8         $21.6    $489.7     $1,301.2
          2001      2004         $126.3      $30.8         $3.1      $78.1     $238.3
          2002      2004          252.7       61.6          6.1      156.2       476.7
          2003      2005          284.1       61.8          6.6      155.7       508.2
          2004      2006          316.1       62.3          7.1      155.8       541.4
          2005      2007          349.4       62.8          7.6      155.8       575.6
          2006      2008          383.9       63.2          8.1      155.7       610.9
          2007      2009          391.9       62.3          8.0      155.5       617.7
          2008      2000          392.7       60.8          7.8      153.3       614.6
          2009      2001          393.2       59.2          7.6      151.0       611.0
          2010      2012          393.5       57.5          7.4      148.4       606.8
          2011      2013          393.6       55.7          7.2      145.6       602.0
          2012      2014          393.5       53.7          6.9      142.6       596.7
          2013      2015          385.7       51.8          6.7      138.4       582.6
          2014      2016          377.4       49.8          6.4      134.0       567.5
          2015      2017          368.4       47.6          6.1      129.2       551.3
          2016      2018          358.7       45.3          5.8      124.1       533.9
          2017      2019          348.3       42.9          5.5      118.7       515.4
          2018      2010          336.9       40.4          5.1      113.2       495.6
          2019      2011          324.7       37.7          4.8      107.3       474.5
          2020      2022          311.6       34.9          4.5      101.0       452.1
          2021      2023          297.7       32.0          4.1       94.4       428.2
          2022      2024          283.0       28.9          3.7       87.3       402.9
          2023      2025          267.6       26.7          3.4       81.7       379.5
          2024      2026          251.3       24.4          3.2       75.7       354.6
          2025      2027          234.0       22.0          2.8       69.4       328.3
          2026      2028          215.7       19.5          2.5       62.7       300.5
          2027      2029          196.4       16.8          2.2       55.7       271.0
          2028      2020          181.6       15.3          2.0       51.1       250.0
          2029      2021          166.5       13.9          1.8       46.6       228.8
          2030      2032          151.5       12.5          1.6       42.2       207.8
          2031      2033          136.9       11.1          1.4       37.9       187.4
          2032      2034          122.9        9.9          1.3       33.9       167.9
          2033      2035          109.9        9.5          1.1       31.1       151.7
          2034      2036           97.5        7.6          1.0       26.5       132.6
          2035      2037           86.5        6.6          0.9       23.3       117.2
          2036      2038           75.5        5.7          0.7       20.1       102.0
          2037      2039           65.8        4.8          0.6       17.3        88.6
          2038      2040           56.5        4.0          0.5       14.7        75.8
          2039      2041           48.7        3.3          0.4       12.5        64.9
          Futures              $9,928.1   $1,316.6       $163.6   $3,603.7   $15,012.5
          Total               $10,524.1   $1,510.4   $185.2       $4,093.4   $16,313.7
Exhibit 1 to Peterson’s Report
Exhibit 2 to Peterson’s Report
    Reports and Testimony in Asbestos Matters for Dr. Mark Peterson
                        within Past Four Years
    In re Owens Corning, Estimation hearing, D. Del., 2005              C&D
        • Trial Testimony – 1/05
        • Deposition Testimony – 12/04
        • Rebuttal Report – 12/04
        • Expert Report – 10/04

    In re Federal Mogul, Estimation hearing, D. Del., 2005              C&D
        • Trial Testimony – 6/05
        • Deposition Testimony – 5/05
        • Rebuttal Report – 5/05
        • Supplemental Report – 4/05
        • Deposition Testimony – 12/04
        • Expert Report – 11/04

    JT Thorpe, Adv. Pr. No. 04-01438, 2006                              C&D
       • Rebuttal Report – 2/06
       • Expert Report – 1/06

    JT Thorpe, Bankruptcy Confirmation hearing, 2005                    C&D
       • Testimony by declaration, live cross-examination – 7/05 *
       • Rebuttal Report – 7/05
       • Expert Report – 6/05
       • Correction to Expert Report – 6/05

    Thurston, Bankruptcy Confirmation hearing, 2006                     *
      • Trial Testimony – 3/06 *

    API, Confirmation hearing, 2005                                     *
      • Testified by declaration – 12/05 *

    Fuller Austin Insulation Co. v. Fireman’s Fund Insurance Company,   C&D
    Superior Court, Los Angeles, BC 116835, 2003
       • Trial Testimony – 5/03 *
       • Deposition Testimony *
       • Expert Reports

    Lippe v. Bairnco Corp., S.D.N.Y., 2003                              C&D
       • Deposition Testimony *
       • Expert Report

    National Gypsum, 2003                                               C&D


•         {D0060983:1 }DOC#   263230 v1 - 05/29/2006
       •        Expert Report

 Grace Asbestos Creditors Committee v. Sealed Air Corp., D.Del., 2002              C&D
    • Report and deposition testimony are protected by confidentiality agreement

 Western MacArthur v. General Accident Ins. Co., State Court, Alameda County,      *
 California, 2002
    • Trial Testimony *
    • Deposition Testimony *

 In re Western MacArthur, Confirmation hearing, Bankr. N.D. Cal., 2003             C&D
     • Trial Testimony – 11/03
     • Deposition Testimony *
     • Expert Report – 8/03

 Armstrong v. CCR, Bankr. D. Del., 2003                                            **
    • Deposition Testimony – 10/03
    • Rebuttal Report – 9/03
    • Expert Report - 7/03

 In re Armstrong World Industries, Confirmation hearing, Bankr. D. Del., 2003      **
     • Trial Testimony – 11/03
     • Expert Report – 11/03
     • Expert Reports – 3/29/06 and 4/21/06
     • Deposition 5/9/06
     • Trial Testimony 5/23 and 5/24/06

 In re Babcock & Wilcox Company, Confirmation hearing, Bankr. E.D. La., 2003       C&D
     • Trial Testimony – 10/03
     • Deposition Testimony – 9/03
     • Expert Report - 8/03

 In re Oglebay Norton, Bankr. D. Del, 2004                                         C&D
     • Trial Testimony – 9/04 *
     • Expert Report – 9/04

 In re G-I Holdings, GAF adversary proceeding, 2005                                C&D
     • Deposition Testimony – 10/05
     • Deposition Testimony – 8/05
     • Expert Report – 3/05

 In re G-I Holdings                                                                C&D
     • Supplemental Affidavit – 1/03
     • Affidavit – 8/02



{D0060983:1 }
Exhibit 3 to Peterson’s Report
                        Materials on which Dr. Mark Peterson relied or considered
                                    for purposes of his report in USG

Nicholson, et al., Occupational Exposure to Asbestos: Population at Risk &          C&D
Projected Mortality – 1980-2030, AM. J. INDUS. MED. 3:259-311 (1982)
Weill, et al., Changing Trends in US Mesothelioma Incidence, Occup. Environ.        C&D
Med. 61:438-441 (2004)
USG claims database(s)                                                              LAS
CCR Producer Agreement (CCRAWI106001-049)                                           C&D
CCR Summary Verdict Information (CCRAWI0600050-283)                                 C&D
CCR settlement agreements entered into between CCR defendants and asbestos          C&D
personal injury plaintiffs or their lawyers (CCRAWI0600284-1558)
Complete trial record in In re Owens Corning, No. 04-905 (D. Del. 2005)             C&D
Complete trial record in In re Armstrong, No. 00-4471 (D. Del. 2006)                C&D
Complete trial record in In re Federal Mogul, No. 05-59 (D. Del. 2005)              C&D
SEER data                                                                           LAS
(http://seer.cancer.gov/faststats/sites.php?site=Mesothelioma&stat=Incidence)
Manville Trust claims information database                                          LAS
Manville Trust Projected Claim Filing Scenarios, Tillinghast, May 17, 2005          C&D
In re Silica Prods. Liab. Litig., 398 F.Supp.2d 563 (S.D. Tex. 2005)                C&D
Union Carbide SEC Form 10-K – FY2000 through FY2005                                 C&D
Manville Trust claims filing – summary business record                              C&D
USG SEC Form 10-K – FY2001                                                          C&D
Mealey’s Presentation from C. Michael Evert, Jr., Asbestos Litigation: Where        C&D
has it been and where is it headed? (2006)
Summary claims data for Owens Corning, Turner & Newell, W.R. Grace,                 LAS
Quigley, Armstrong and other companies referenced in the report.
AP Green Claims Database                                                            LAS




{D0060984:1 }DOC#   263231 v1 - 05/29/2006
EXHIBIT 4
                     W. R. Grace

Projected Liabilities for Asbestos Personal Injury Claims

                  As of April 2001




                  Mark A. Peterson

              Legal Analysis Systems


         June 2007 (Revised January 2009)
W. R. Grace                                                                                                                   i




                                               Table of Contents

EXECUTIVE SUMMARY ..........................................................................................              ES-1
  Purpose and Approach .......................................................................................            ES-1
  Source of Grace’s Liability ...................................................................................         ES-1
  Data Sources .......................................................................................................    ES-1
  Accepted Method for Estimating Asbestos Liability .............................................                         ES-1
  Choice of Conservative Estimation Methods .......................................................                       ES-2
  Liability for Pending Claims .................................................................................          ES-3
  Liability for Pending and Future Claims ...............................................................                 ES-4
  Conclusions .........................................................................................................   ES-5

1. Overview of Repor t ..................................................................................................... 1
2. Dr. Peterson’s Qualifications ....................................................................................... 2
3. Grace’s Asbestos Business and Litigation .................................................................. 3
   3.1. Grace Asbestos Products and Resulting Exposures .......................................... 3
   3.2. Timing and Values of Grace Claim Filings ......................................................... 4
4. Estimation Methods .................................................................................................... 8
    4.1. Uses of Credible Estimation ............................................................................... 8
    4.2. Standard Methods for Forecasting Asbestos Liability ........................................ 9
    4.3. The Three Parameters of Asbestos Forecasts ................................................. 13
       4.3.1. The Number of Claims ............................................................................. 13
       4.3.2. Payment Rates--The Percentage of Grace Claims That Would Be
           Compensated ............................................................................................... 14
       4.3.3. Settlement Amounts ................................................................................. 22
    4.4. The Inseparability of Payment Rates and Settlement Values ........................... 39
5. Data for Asbestos Bodily Injury Claims Involving Grace ........................................... 42
6. Estimation of Grace’s Asbestos Liability, April 2001 .................................................                    43
    6.1. Forecast Indemnity for Claims Pending on April 2, 2001 ..................................                           44
       6.1.1. Number of Pending Claims ......................................................................                44
       6.1.2. Results of the Bankruptcy Discovery (PIQs) and Bar Dates (POCs) .......                                        44
       6.1.3. Adjustment for Stale Claims .....................................................................              46
       6.1.4. Imputation of Disease ..............................................................................           50
       6.1.5. Calculation of Indemnity for Pending Claims ...........................................                        53
    6.2. Projections of Number And Timing of Future Claims .......................................                           60
       6.2.1. The Incidence of Asbestos-Related Cancers ...........................................                          61
       6.2.2. Accuracy of Epidemiological Projections .................................................                      63
       6.2.3. Propensities to Sue Grace .......................................................................              66
       6.2.4. Projection of Future Nonmalignancy Claims ............................................                         78
       6.2.5. Forecast Number of Future Claims ..........................................................                    87
       6.2.6. Estimating Liability for Forecast Future Claims ........................................                       87
       6.2.7. Estimating Liability for Pending and Forecast Future Claims ...................                                88
7. Sensitivity Analyses ..................................................................................................   90
    7.1. Alternative Parameter Selections .....................................................................              90
       7.1.1. Alternative Epidemiological Models .........................................................                   90
       7.1.2. Alternative Propensities to Sue ................................................................               91
       7.1.3. Alternative Payment Rates .......................................................................              92
W. R. Grace                                                                                                                     ii




       7.1.4. Historic Settlement Amounts ....................................................................                92
       7.1.5. Restoring the Timing of Payment Rates and Settlement Averages .........                                         93
       7.1.6. Alternative Inflation Rates ........................................................................            94
       7.1.7. Alternative Discount Rates .......................................................................              94
    7.2. Results of Alternative Parameter Selections ....................................................                     94
    7.3. Trial Verdict Settlement Values .........................................................................            95
8. Rule 26 Disclosures and Signature .......................................................................... 97

APPENDIX A ............................................................................................................... A-1

APPENDIX B ............................................................................................................... B-1

APPENDIX C .............................................................................................................. C-1



                                                         Figures

Figure 1: Grace Mesothelioma Settlement Values ....................................................... 24
Figure 2: Grace Lung Cancer Settlement Values ......................................................... 25
Figure 3: Trends in Mesothelioma Settlement Amounts ............................................... 28
Figure 4: Trends in Lung Cancer Settlement Amounts ................................................. 28
Figure 5: Forecast Trends in Settlement Amounts ........................................................ 33
Figure 6: Regression-Based Forecasts of Mesothelioma Settlement Amounts ............ 35
Figure 7: Projected Mesothelioma Settlement Amounts ............................................... 37
Figure 8: Projected Lung Cancer Settlement Amounts ................................................ 38
Figure 9: Projected Other Cancer Settlement Amounts ............................................... 39
Figure 10: Projected Nonmalignant Settlement Amounts ............................................. 39
Figure 11: Proportion of Mesothelioma Claims Resolved, by Age of Claim ................. 47
Figure 12: Proportion of Lung Cancer Claims Resolved, by Age of Claim ................... 48
Figure 13: Proportion of Other Cancer Claims Resolved, by Age of Claim .................. 48
Figure 14: Proportion of Nonmalignant Claims Resolved, by Age of Claim ................. 49
Figure 15: Indemnity Amounts for Pending Claims (Reduced Payment Rates,
   Long-Term Dollar Values) ........................................................................................ 59
Figure 16: Indemnity Amounts for Pending Claims (Lowest Payment Rates,
   Long-Term Dollar Values) ........................................................................................ 59
Figure 17: Claim Filings for Major Asbestos Defendants, 1990-2001 ........................... 61
Figure 18: Nicholson Cancer Projections ..................................................................... 63
Figure 19: Epidemiological Projections Confirmed by SEER’s Mesothelioma
   Counts ..................................................................................................................... 65
W. R. Grace                                                                                                                     iii




Figure 20: Number of Cancer Filings Against Grace .................................................... 68
Figure 21: Nicholson Meso Forecasts vs Grace Actuals .............................................. 69
Figure 22: Trends In Grace and Manville Mesothelioma Claims (2003-2006
   Smoothed) ............................................................................................................... 72
Figure 23: Trends In Grace and Manville Lung Cancer Claims (2003-2006
   Smoothed) ............................................................................................................... 73
Figure 24: Nicholson Meso Forecasts vs Grace Actuals .............................................. 76
Figure 25: Trends In Grace and Manville Mesothelioma Claims (2003-2006
   Smoothed) ............................................................................................................... 77
Figure 26: Trends In Grace and Manville Lung Cancer Claims (2003-2006
   Smoothed) ............................................................................................................... 78
Figure 27: Annual Nonmalignant Claims Against Grace .............................................. 80
Figure 28: Comparison of Nonmalignant and Cancer Claim Counts ............................ 81
Figure 29: Actual And Projected Filings ........................................................................ 83
Figure 30: Actual And Projected Cancer Filings ........................................................... 85
Figure 31: Actual And Projected Nonmalignant Filings ................................................ 85
Figure 32: Past and Projected Cancer Filings .............................................................. 86
Figure 33: Past and Projected Nonmalignant Filings .................................................... 87



                                                           Tables

Table ES-1: Present Value of Grace Liability for Pending and Future Claims
   (Average of Five Alternative Estimates of Grace’s Liability) ................................ ES-4
Table 1: Asbestos Trial Verdicts for Compensatory Damages: Per Plaintiff Awards ....... 7
Table 2: Defendants’ Financial Reports Underestimate Liabilities .................................. 8
Table 3: Numbers of Pending Claims, By Disease and Liquidation Status ................... 14
Table 4: Grace Payment Rates, 1991 to April 2001 ...................................................... 15
Table 5: Grace’s Use of Each Resolution Approach, January 2000 to April 2001 ........ 16
Table 6: Outcomes by Resolution Approach, January 2000 to April 2001 .................... 16
Table 7: Grace’s Overall Costs by Resolution Approach, January 2000 to April
   2001 ........................................................................................................................ 17
Table 8: Payment Percentage for Grace ....................................................................... 22
Table 9: Average Settlement Values and Resolution Costs, By Year and Disease ....... 23
Table 10: Trends in Settlement Averages for Grace and Other Asbestos
   Defendants .............................................................................................................. 29
Table 11: Union Carbide’s Annual Asbestos Claims Resolution Costs ......................... 29
W. R. Grace                                                                                                                    iv




Table 12: 2001 Settlement Amounts for Quigley, T&N and USG .................................. 31
Table 13: Forecast Grace Settlement Values ................................................................ 32
Table 14: Extending Grace Recent Trends ................................................................... 34
Table 15: Extending Grace Long-Term Trends .............................................................. 36
Table 16: Grace Settlement Values Used in Alternative Forecasts ............................... 36
Table 17: April 2, 2001 Resolved and Unresolved Claims ............................................ 44
Table 18: April 2, 2001 Description of Pending Claims ................................................. 50
Table 19: Grace - Manville Trust Transition Matrix: Numbers of Claims ........................ 52
Table 20: Grace - Manville Trust Transition Matrix for Allocation of Claims ................... 53
Table 21: Disease Distributions After Imputation for Pending Claims and
   Elimination of Stale Claims ...................................................................................... 53
Table 22: Estimated Number of Pending, Unliquidated, Active, Asbestos-Disease
   Claims ..................................................................................................................... 54
Table 23: Payment Percentages for Grace ................................................................... 55
Table 24: 2002 Settlement Values Forecast ................................................................. 56
Table 25: Payment Parameters for Pending Claims ...................................................... 56
Table 26: Forecast Resolution Costs for Pending Claims Are Lower than Grace’s
   2000-2001 Resolution Averages ............................................................................. 57
Table 27: Forecast of Indemnity for Pending Claims ..................................................... 58
Table 28: Comparison of Nicholson Projections with SEER-17 Site Estimates of
   Mesothelioma Incidence .......................................................................................... 64
Table 29: Number of Filings Against Grace, By Filing Year and Disease (After
   Reallocation) ........................................................................................................... 67
Table 30: Propensities to Sue Grace, by Disease: 1990-2001 ..................................... 70
Table 31: Rates of Increase in the Propensity to Sue ................................................... 73
Table 32: Rates of Increase in the Propensity to Sue ................................................... 74
Table 33: Actual and Forecast Propensities to Sue for Cancers ................................... 75
Table 34: Number of Forecast Cancer Claims Filed After April 2001 ........................... 78
Table 35: Number of Forecast Claims Filed After April 2001 ........................................ 87
Table 36: Forecast Indemnity for Future Claims after April 2001 .................................. 88
Table 37: Present Value (PV) of Future Claims as of April 2001 .................................. 88
Table 38: Forecast Indemnity for Pending and Future Claims after April 2001 ............. 89
Table 39: Present Value (PV) of Pending and Future Claims after April 2001 .............. 89
Table 40: Alternative Cancer Propensities to Sue ........................................................ 92
Table 41: Alternative Settlement Values and Payment Rates ....................................... 93
Table 42: Sensitivity Analysis Results: Net Present Value ............................................ 95
W. R. Grace                                                                                              v




Table C1: Nicholson Epidemiological Projections ....................................................... C-2
Table C2: KPMG Epidemiological Projections ............................................................ C-2
Table C3: Forecasts of Number of Grace Filings, by Year, Model, and Disease ......... C-3
W. R. Grace                                                                                      ES-1




                                Executive Summary


Purpose and Approach
This report summarizes results of analyses to estimate the liability of W. R. Grace (‘‘Grace’’) for
asbestos personal injury claims that had been filed and were unresolved (‘‘pending claims’’) and
claims that would be filed in the future (‘‘future claims’’) as of the date of Grace’s bankruptcy
petition, April 2, 2001.
Source of Grace’s Liability
Grace is an unusual asbestos defendant. Grace was both a miner and manufacturer with a broad
array of over 200 asbestos-containing products that were sold directly to the public and used in
many different industries. From 1923 the Zonolite Company, which Grace acquired in 1963,
mined, processed and sold vermiculite, an ore that was contaminated with tremolite, a particularly
dangerous amphibole form of asbestos. Vermiculite dust is primarily responsible for the widely
publicized health problems in Libby Montana. Grace also used chrysotile, another form of
asbestos, in products that it manufactured and sold. Grace continued to mine vermiculite until the
1990s, selling asbestos containing fibers and commercial and consumer products for years after
other major companies stopped such sales. Despite its large numbers of asbestos products and its
sales of asbestos containing fibers and products in eight decades, Grace arrived late as a primary
asbestos defendant before quickly becoming one of the greatest current targets of litigation by the
time of its bankruptcy petition.
Data Sources
In analyzing and forecasting Grace’s asbestos liabilities we use a 2002 Grace claims database.
We also consider and draw upon the experiences of other asbestos defendants who have continued
to receive and settle asbestos claims during the six years since Grace entered bankruptcy. We can
better understand what would have been Grace’s asbestos liability at and after its petition date by
examining what has happened with other defendants in these last six years. Our forecasts also
consider effects of recent and foreseeable continuing changes in the asbestos litigation
environment.
Accepted Method for Estimating Asbestos Liability
We use standard forecasting methods that have been regularly accepted by courts, asbestos trusts
and businesses for establishing asbestos liabilities. Asbestos liability is estimated as the product
of three factors: (1) the number of claims, (2) the fraction of claims that get paid and (3) the paid
values of those claims.
Concerning (1), the number of pending claims is generally known or can be derived from
available data. To forecast the number of future claims, we use standard forecasting methods that
rely upon proven epidemiology, Grace’s own trends in claim filings, its levels of past claim
filings, and information on trends and levels of filings against other asbestos defendants before
and during the six years that Grace has been in bankruptcy.
Concerning (2), the fraction of claims paid by Grace, we first analyzed at, but did not adopt,
W. R. Grace                                                                                     ES-2




Grace’s actual history before its bankruptcy when it rejected 8 percent of mesothelioma cases and
4 percent of nonmalignants, lung, and other cancers. Instead, for two reasons, we forecast that
Grace would now reject many more cases. First, Grace now asserts an aggressive litigation
strategy that is sharply different from the strategy it employed in the past, a strategy that would
challenge and likely reject many more claims. Second, since Grace’s bankruptcy petition,
asbestos litigation has changed in ways that might reduce the number of claims that Grace would
now pay. Based on these reasons we forecast that Grace would now reject 42 percent of
nonmalignant claims and most likely about 20 percent of cancers claims, but possibly as many as
33 percent of cancers.
Concerning (3), we forecast amounts that Grace would pay by looking at amounts that it had paid
before bankruptcy, trends in Grace’s payments, and amounts paid by comparable defendants at
and after Grace’s bankruptcy petition--all standard sources of information used in estimating
asbestos liabilities. These sources provided four different sets of settlement data which we
analyzed using three different analytic methods. We used these analyses to derive five alternative
estimates of amounts that Grace would now pay to asbestos claimants. The results of these
alternative analyses are robust. All yield markedly similar predictions: that amounts of Grace’s
payments would have continued to increase at their rates of increase before Grace’s April 2001
bankruptcy petition.
Choice of Conservative Estimation Methods
Our forecasts are based on conservative assumptions and analyses that are more likely to
underestimate, rather then overestimate, Grace’s liabilities. Many of these assumptions and
reasoning that supports them are consistent with Grace’s own statements at the time of its
bankruptcy about its asbestos liabilities.
Grace’s annual claim filings were increasing sharply before its April 2001 petition date. As
Grace itself recognized, its future filings would likely have increased further after the 2000 and
2001 bankruptcy filings by other target defendants removed those defendants from asbestos
litigation, and also as a result of increasingly negative publicity about Grace’s asbestos activities.
Despite Grace’s reasoned expectations of more future claims, we forecast conservatively that after
April 2001 Grace would have received far fewer annual claim filings than it had been receiving
before. We forecast that Grace’s nonmalignant claim filings in 2002 would have been 30 percent
below its pre-petition (2000-2001) levels and that filings would decrease continuously from there
in all future years. We forecast that Grace’s future cancer filings would also have been at least 20
percent below its pre-petition filing levels for all future years.
Our forecast of sharp decline in Grace’s claim future filings implies that plaintiffs’ lawyers would
be more selective in choosing which claims to file against Grace so that future claims would be of
higher quality than claims filed with less selectivity before Grace’s bankruptcy. The history of
asbestos litigation shows such inverse relationships between the number and the quality of claim
filings, as Grace’s lawyers recognized. Despite the expectation that reduced future filings would
yield higher quality claims against Grace, we conservatively forecast that Grace would reject far
more of these future claims than it had in the past. Together our two future claims assumptions,
that Grace would both receive far fewer claims and also pay far lower fractions of those claims,
means that after April 2001 Grace would pay only about half as many asbestos claims each year
as it had paid before its bankruptcy petition.
For many reasons, after April 2001 Grace would have paid more on average to the reduced
number of claims that it did pay. By 2001, past settlement averages for Grace and other
defendants had been increasing over more than a decade, and averages among other defendants
continued to increase after April 2001. We forecast that after April 2001, Grace’s settlement
averages would also have continued to increase as they had for many prior years. We derived five
W. R. Grace                                                                                   ES-3




alternative estimates of the amounts of these increases based on past trends in Grace’s settlement
averages and on trends among other asbestos defendants.
But several important events would have caused Grace’s settlement averages to increase at rates
even greater than in the past and at rates greater than increases among other defendants. First,
compared to the claims that it paid pre-petition, claims paid by Grace after April 2001 would be
more selective and higher quality, giving them greater value. As I have described above, we
forecast two changes in how claims are filed against and handled by Grace, both of which would
involve more intensive screenings that would weed out weaker, low value claims: (1) Law firms
would review claims more selectively as they file fewer claims, and (2) Grace would then follow
with an intensified scrutiny leading to rejections of far more claims. As a results of these
intensified reviews, Grace would be faced with paying smaller numbers of much more valuable
claims. Grace’s lawyers recognized both effects of intensified reviews: fewer claims paid, but
higher payments. Second, as Grace also anticipated, changes in asbestos litigation would have
forced it to pay more to settle claims. The break-up of the Center for Claims Resolution, a
defendants’ consortium that had made the largest contributions to plaintiffs’ settlements, and then
bankruptcy filings by eight other major defendants cost plaintiffs major sources of
indemnification. After April 2001 Grace would have faced increasing demands by plaintiffs to
make up some of this lost compensation forcing Grace to increase what it would pay to settle
claims. Third, as Grace also anticipated, it would be forced to pay increasing settlement values
because of the highly negative publicity about its asbestos activities, a pressure that increased
markedly after April 2001.
Liability for Pending Claims
Grace’s data show 135,190 asbestos claims pending at the time of its bankruptcy petition,
including 18,520 claims that Grace reports as already liquidated for a total amount of $62.5
million. We do not include these 18,520 in our pending claim forecast, but separately value them
by their amounts stated in Grace’s database. This leaves 116,670 Grace claims that were pending
and unliquidated on its petition date. We forecast conservatively that between one third and one
half of these pending claims will present no liabilities to Grace and no value to our forecasts. We
estimate that about 14,000 of these claims either do not have any asbestos related disease or else
are abandoned claims no longer being pursued against Grace (12 percent of unliquidated pending
claims). We estimate that Grace would reject about 40,000 more claims after increased scrutiny,
leaving about 60,168 pending claims to be paid. Grace’s liability for these unliquidated pending
claims would be between $453 and $564 million at the date of settlement (2002). Adding in the
value of liquidated claims, we estimate a range of liability between $516 to $627 million for all
pending claims.
Despite its deteriorating litigation position, we forecast that Grace’s costs for resolving its
unliquidated pending claims would be lower than Grace’s actual costs before its bankruptcy. We
forecast that Grace would pay between 19 to 28 percent less than the average amounts that it cost
Grace to resolve claims during 2000 to April 2001.
W. R. Grace                                                                                      ES-4




Liability for Pending and Future Claims
We provide ten alternative estimates of Grace’s liability for future claims (i.e., those claims that
would have been filed against Grace after April 2, 2001 but for its bankruptcy petition) and for
the total of all pending and future claims (5 alternative estimates of settlement values times 2
alternative payment rate estimates--the percent of claims that Grace would resolve through
payment).
I fully report calculations and results for all ten alternatives in this report, but show here the
average estimates of Grace’s total liability based on the five most likely forecasts. Table ES-1
shows our forecast of Grace’s liability for pending future claims averaged across our five
alternative settlement value estimates assuming for each forecast the more likely reduced payment
rates (i.e., Grace would pay 58% of nonmalignant claims and 78 percent of cancers). Based on
these conservative assumptions that are favorable to Grace, its total liability for pending and
future claims would be about $5.3 billion (present valued and in year 2001 dollars). Grace’s
liabilities costs would distribute 59 percent for mesothelioma claims and only 30 percent for
nonmalignant claims.


           Table ES-1: Present Value of Grace Liability for Pending and Future Claims
                  (Average of Five Alternative Estimates of Grace’s Liability)

                                            Forecast Indemnity PV
                    Period       Meso       Lung OthCan Nonmal              Total

                    Pending      $249         $91        $12     $228      $578
                    Future      $3,196       $474        $71    $1,022    $4,763
                    Total       $3,445       $565        $83    $1,250    $5,341

  Notes: Millions of 2001 dollars. Future claims are assumed to settle 2 years after filing,
  pending claims in 2002. Indemnity is inflation adjusted at 2.5% per year. Discount rate is
  5.11%.

Table ES-1 shows estimates that are neither our highest nor lowest forecasts. Liabilities ranges
plus or minus 8 percent using different forecasts of Grace’s future settlement values. Our five
alternative settlement value models forecast Grace’s liability between $5.1 billion and $5.8
billion. All share assumptions that about 20% of the lung and other cancer claims would be
resolved without payment (compared to 3-5% pre-petition), and that 22% of mesothelioma claims
would be resolved without payment (compared to 8% pre-petition). Grace’s asbestos liability still
ranges between $4.4 billion and $5.0 billion when we assume implausibly favorable future
litigation outcomes for Grace: that over the last six years it would have received 33 percent fewer
claims per year than at the time of its bankruptcy, but would also reject mesothelioma claims at
rates five times greater than it had before bankruptcy and all other cancers at rates seven to ten
times higher.
W. R. Grace                                                                                   ES-5




Conclusions
Based on the conservative assumptions of these forecasts, it is my opinion that the present value
of Grace’s liability for pending and future asbestos bodily injury claims as of April 2, 2001 range
will be between $4.4 and $5.8 billion and most likely between $5.1 and $5.8 billion.
W. R. Grace                                                                                           1




1. Overview of Report
This report summarizes results of analyses to estimate the liability of W. R. Grace (‘‘Grace’’) for
asbestos personal injury claims that had been filed and were unresolved (‘‘pending claims’’) and
claims that would be filed in the future (‘‘future claims’’) as of the date of Grace’s bankruptcy
petition, April 2, 2001.
In Section 2 I discuss my training, background, and experience in studying asbestos litigation and
in performing forecasts like those in this report.
Section 3 of this report discusses Grace’s unusual history in mining, processing and selling an
unusually wide array of asbestos containing products and in asbestos litigation.
In Section 4, I discuss issues of estimation for asbestos liabilities. I discuss methods for
forecasting and valuing claims that have been regularly accepted as the basis for courts’ past
estimates. Throughout this section (and the entire report), I describe the many ways that our
forecasts are consistent with Grace’s own view of its asbestos liabilities at the time of its
bankruptcy and conservatively underestimate, rather than overestimate, Grace’s liabilities.
In Section 5 I describe our forecasts of Grace’s liability and the data and information upon which
we rely.
In Section 6, I describe our forecast methods and results. Despite changes in asbestos litigation
that would have likely increased Grace’s future claim filings, we forecast the number of Grace’s
future claims conservatively, assuming that had it not entered bankruptcy it would have received
fewer claims filings than it had been receiving before its April 2, 2001 bankruptcy petition. We
assume further that Grace would have sharply reduced the fraction of these claims that it paid: in
the future rejecting between 20 and 35 percent of cancers and between 24 and 42 percent of
nonmalignants compared to 6 percent of cancers and 4 percent of nonmalignants that it rejected
pre-petition. We estimate that Grace’s liability would range between $4.4 to $5.8 billion, most
likely between $5.1 and $5.8 billion (present valued to year 2001 dollars).
In Section 7.3, I discuss sensitivity analyses which show the effects of various assumptions about
claims forecast and valuation parameters. The results here show an extended range of estimates:
total liabilities from $3.7 to $6.8 billion.
Based on the conservative assumptions of these forecasts, it is my opinion that the present value
of Grace’s liability for pending and future asbestos bodily injury claims as of April 2, 2001 range
will be between $4.4 and $5.8 billion and most likely between $5.1 and $5.8 billion.
W. R. Grace                                                                                            2




2. Dr. Peterson’s Qualifications
For over twenty-five years, I have studied, written about, and participated as a special master and
expert in asbestos litigation and other mass tort litigation. I am a lawyer, a graduate of Harvard
Law School, and a recognized scholar on asbestos and other mass tort litigation. I have a
doctorate in social psychology from the University of California, Los Angeles. For over twenty
years, I conducted research on asbestos and other mass tort litigation as a founding member of the
RAND Corporation’s Institute for Civil Justice. I have published many scholarly, peer-reviewed,
articles on asbestos litigation, mass torts, and workers compensation, including articles on: how
asbestos and other mass tort claims arise, how the values of asbestos bodily injury claims are
determined by medical and legal issues, evaluations of claims facilities used for paying asbestos
and other mass tort claims, and other subjects related to asbestos litigation. I have taught courses
on mass torts at UCLA Law School and the RAND Graduate Institute. My resume is attached to
this report as Exhibit 1.
I am an expert on claim values, claims procedures, and estimations of liabilities for fifteen
asbestos trusts. I am a trustee of the Fuller Austin Settlement Trust, an asbestos trust, and a
director of TSI, a nonprofit corporation that administers the trust distribution procedures for seven
asbestos trusts. Effective July 1, 2007 I will become a trustee of the Manville Personal Injury
Settlement Trust. I have worked as an expert on asbestos litigation for judges, defendants,
insurance companies, actuarial firms, other businesses, law firms, and claimants’ committees in
bankruptcy.
I have worked for four U.S. District and Bankruptcy Courts as the Court’s expert on how asbestos
claims are determined to have value, on asbestos claims procedures and trusts and other matters.
As the Special Adviser to U.S. District Court Judge Jack B. Weinstein and U.S. Bankruptcy Court
Judge Burton Lifland, I helped the courts and parties to restructure the Manville Trust,
establishing the Manville Trust Distribution Procedures that became a model used in subsequent
bankruptcy cases and by later-created trusts to process, allow, and pay the hundreds of thousands
of asbestos claims that they have received so far.
I have been an expert in more than twenty other bankruptcies and class actions in different cases
working for parties with divergent interests: asbestos claimants’ committees, defendant asbestos
companies, insurance companies, and court-appointed representatives for future claimants. In
each of these cases I have provided descriptions and quantitative forecasts of pending and future
asbestos bodily injury claims using the standard forecasting methods that I describe and use in
this report. I have testified in court more than twenty times about my forecasts of asbestos
liabilities. My forecasts and analyses have been accepted and used as the court’s basis for
findings of aggregate asbestos liabilities in the bankruptcy proceedings of Eagle-Picher, National
Gypsum, Babcock and Wilcox (confirmation hearing), Turner & Newall, Western Asbestos,
Armstrong, API, C. E. Thurston, H. K. Porter, E. J. Bartel, Raymark, and J. T. Thorpe.
I have been recognized by courts as an expert on all areas that I address in this report, and the
descriptions and analyses in this report come from my scholarship and work as an expert on
asbestos litigation. A listing of the matters in which I have testified as an expert within the past
four years (deposition or trial) is set forth as Exhibit 2.
I have been retained by the W. R. Grace Official Committee of Asbestos Personal Injury
Claimants (‘‘ACC’’) as an expert for purposes of estimating asbestos liabilities and providing
testimony on those matters. This report has been prepared as part of that engagement.
W. R. Grace                                                                                       3




3. Grace’s Asbestos Business and Litigation
Grace was significantly involved in the business of mining, manufacturing and selling asbestos-
containing products. Zonolite Company, which Grace acquired in 1963, began in 1923 to mine
vermiculite, an ore that was contaminated with tremolite, a particularly dangerous amphibole
form of asbestos. Zonolite and then Grace continued to mine vermiculite until 1990, according to
the company, using the vermiculite in a wide range of industrial and consumer products sold to
the public [www.grace.com/html/reorg/history.html ‘‘Financial Reorganization: Asbestos
Litigation Chronology]. News reports claim that Grace continued to ship vermiculite even longer,
into 1993 [seattlepi.com, ’’Asbestos study is expanded nationwide,‘‘ January 18, 2000].
Vermiculite, contaminated with as much as 7 percent tremolite asbestos, was shipped in box cars
throughout the country, off-loaded, and stored in open piles at dozens of sites, and then processed
at 60 expansion and other plants in the U.S. and Canada (Seattle Post-Intelligencer: Deadly Ore
Was Shipped Around U.S., Canada, December 22, 1999; Vermiculite, Respiratory Disease and
Asbestos Exposure in Libby, Montana: An Update of a Cohort Mortality Study. Patricia A.
Sullivan, National Institute of Environmental Health Sciences, National Institutes of Health, U.S.
Department of Health and Human Services, January 2007, p. 6)
Grace also used chrysotile, another form of asbestos, in products that it manufactured and sold.
Grace’s High Temperature Insulation Cement was 15-19% chrysotile. Monokote, Grace’s first
spray-on insulation product, contained 12% asbestos, including both chrysotile and expanded
vermiculite [seattlepi.com, August 23, 2000; industryweek.com ‘‘The Editor’s Page--W. R.
Grace’s Disgrace,’’ August 13, 2001; New York Times, July 9, 2001]. Because spray-on
insulation makes asbestos fibers airborne (friable) by design, they are readily inhalable and
particularly dangerous types of asbestos-containing products. Grace reports that it removed
chrysotile from later formulations of its line of Monokote spray-on insulation and claimed that
levels of vermiculite remaining in the products did not constitute health hazards [W.R.Grace &
Co., Grace. News, ‘‘GRACE REAFFIRMS THAT ITS FIREPROOFING PRODUCTS SOLD IN
THE 70s AND 80s ARE SAFE’’]. But both plaintiffs’ lawyers and newspapers challenge Grace’s
safety claims, alleging that studies conducted by both the EPA and by Grace found that tremolite
levels in Grace’s vermiculite products were highly variable, were at times greater than reported by
Grace, and that Grace’s products could cause asbestos disease and death [seattlepi.com, August
23, 2000; industryweek.com ‘‘The Editor’s Page--W. R. Grace’s Disgrace,’’ August 13, 2001;
New York Times, July 9, 2001]. Disagreements about Grace’s safety claims are featured in the
bodily injury litigation against the company and are bases for plaintiffs’ claims both that the
Grace’s products were defective and also that the company falsely claimed that the products were
safe despite knowing that its own studies showed the products to be unsafe [New York Times,
July 9, 2001]. The Seattle Post-Intelligencer quoted a 1969 report by R. M. Vining, head of
Grace’s construction products division, to Peter Grace, company president, describing the
‘‘serious health hazard caused by the presence of vermiculite and asbestos dust.’’ ‘‘The dust
problem is particularly serious since the vermiculite ore from Libby contains tremolite asbestos....
Tremolite asbestos is a definite health hazard at both the Libby operation and at the expansion
plants using the ore’’ [seattlepi.com, December 22, 1999].
3.1. Grace Asbestos Products and Resulting Exposures
Grace sold a wide range of asbestos-containing products, about 200 products or product names
according to lists provided by the company in these bankruptcy proceedings. These include a
variety of insulation products; construction products (including cements, plasters and other
surfacing materials, paint, spray-on products, caulks, mastics, flooring, roofing, sheet rock,
waterproofing); automotive products (including gaskets, sealers, adhesives, spray-on
undercoating); asbestos tapes, papers, gaskets and textiles; loose vermiculite home insulation;
W. R. Grace                                                                                      4




industrial equipment (such as drying ovens); medical products (such as filters and adhesives); and
exotic products (such as livestock feed, gardening products). While a large fraction of Grace’s
asbestos claims in the past have arisen among construction workers, the company caused
industrial exposures among a much broader set of workers, including

  1. Miners
  2. Expansion plant workers, vermiculite plant workers
  3. Insulators
  4. Railroad workers
  5. Health care workers
  6. Plant workers
      Soil and lawn products
      Wallboard and sheet rock products
      Cement products
  7. Nursery workers
  8. Laboratory workers
  9. Automobile workers
[seattlepi.com ‘‘Asbestos protection pledged for workers, August 23, 2000; Grace answers to
product interrogatories; Grace claims database]. The Seattle Post-Intelligencer reported that
200,000 or more workers used vermiculite on a regular basis [seattlepi.com, August 23, 2000].
Other exposures would have occurred among workers proximate to areas where Grace products
were being unpacked, mixed, cut, sprayed or installed. Most famously, Grace also caused
asbestos exposures among residents of Libby, Montana and at other locations where Grace’s
vermiculite was transported, off-loaded, stored and processed (such as Northeast Minneapolis,
Glendale and Phoenix, Arizona and 25 other sites addressed by EPA).
Grace continued to manufacture and sell its asbestos containing products well beyond the time
when most other, primary defendants had withdrawn from asbestos business. Commercial use of
asbestos peaked in the United States in 1973. By 1979 usage had dropped sharply and most
defendants had quit making and marketing asbestos products. In contrast, Grace continued to
mine, make and sell asbestos-containing materials and products into the 1990s. Earlier, as other
defendants were reducing their sales of asbestos products, Grace increased its manufacturing and
marketing. Grace claimed that during the 1970s and 1980s its spray-on insulation Monokote was
used in 60% to 80% of the country’s 150,000 steel-frame structures [New York Times,
‘‘Protecting the Product: A special report: Company’s Silence Countered Safety Fears About
Asbestos,’’ July 9, 2001].
3.2. Timing and Values of Grace Claim Filings
Because Grace continued to make and sell asbestos products after other defendants quit, it now
faces greater and longer-extending asbestos liability than other defendants. Asbestos related
disease--both cancers and nonmalignancies--have long latencies, taking many years after first
exposure before the diseases begin to appear and peaking decades later (the median latency
period is around 40 years after first exposure for mesothelioma and 30 years for other diseases).
For most asbestos defendants who had stopped selling asbestos products by 1980, the numbers of
injuries and deaths caused by their products have now reached their peaks, although injuries and
deaths will continue for decades at slowly declining rates. Indeed, the mostly widely accepted
epidemiological forecast, by Drs. Nicholson, Perkel and Selikoff at New York’s Mt. Sinai
Hospital, projects a peak around 2004 in annual U. S. mesothelioma deaths resulting from
pre-1980 work-place exposures to asbestos, while asbestos-related deaths from lung and other
cancers peaked during the 1990s (see Section 6.2.1). But even though incidences of asbestos-
related cancers have now begun to slowly decline, cancer filings against many defendants have
continued to rise in recent years, because increasing percentages of new asbestos-related cancer
W. R. Grace                                                                                                         5




victims now file claims and law suits.
Prior to its bankruptcy, filings against Grace increased at even greater rates than rates of increase
among other defendants. Grace’s 2000 filings were almost double its 1999 filings (46,861 in
2000, 24,576 in 1999). During the three months in 2001 to the time of its April 2, 2001
bankruptcy petition, Grace received 33,653 claims, 37% more claims in three months than in all
twelve months of 1999. Its annualized rate of 2001 filings was up almost 50 percent over 2000
(68,683 when conservatively annualized across the rate of claims from January 1999 to April
2001). The amounts paid by Grace to settle asbestos claims were also increasing markedly at the
time of its bankruptcy (settlement amounts paid by other asbestos defendants also increased
markedly before and after Grace’s bankruptcy petition, particularly for mesothelioma and other
cancers). In other words, claim filings against and payments by Grace at the time of its
bankruptcy were at their highest points ever, and both were increasing, a broad deterioration in its
litigation that Grace itself acknowledged in its 2000 Annual Report:
     ‘‘During 2000, the number of bodily injury claims made against Grace increased significantly
     compared to 1999 and prior claim levels, with a total of 48,786 injury claims being received in
     2000, versus 26,941 in 1999. Also costs to resolve asbestos litigation were higher than
     expected for bodily injury and certain property damage claims’’ (Grace 2000 Annual Report, p.
     12).1
Grace recognized that it would have continued to be among the most frequently sued asbestos
defendants had it not filed for bankruptcy protection. Grace described the asbestos litigation that
it faced at the time of its bankruptcy petition as:
     ‘‘an environment that increases the risk of more claims being filed against Grace than
     previously projected, with higher settlement demands and trial risks’’ (ibid).
Grace identified its recently increasing claim filings and costs and the recent bankruptcy petitions
by ‘‘five significant co-defendant companies in bodily injury litigation’’ (ibid) as causes of the
increasingly threatening litigation environment that it faced. These certainly contributed, but
there were also other important reasons why Grace would have faced increasing claims and
higher settlement costs after April 2, 2001.
First, because Grace continued to produce and market asbestos containing insulation products
into the early 1990s, later than other asbestos manufacturers, it would continue to become a more
prominent asbestos defendant facing increasing responsibility for asbestos injuries that would
occur in future years. Many workers were exposed to Grace asbestos containing products in
relatively recent years, a period when other manufacturers were reducing and then stopping the
sales of asbestos-containing products. Grace’s asbestos containing products were sold and used
during and after the late 1950s, a period that started and went on later than is typical of other
asbestos defendants. Due to these later exposures, the asbestos-related diseases and,
consequently, future law suits that will occur among persons exposed to Grace products will
continue on in later years and in greater numbers than claims against most manufacturers whose
products had exposed workers over periods of years earlier than Grace’s exposure years. As time
passes, asbestos disease and claims will increasingly be among the more recently exposed
workers, the years in which Grace’s exposures are concentrated. Moreover, the share that Grace
will have to pay to settle these future claims would increase. As time passes fewer of Grace’s co-
defendants will have contributed to injuries caused by recent asbestos exposures and fewer will
contribute to compensation of those injuries. Grace will be one of the few manufacturers


1.     Our analyses show that after we eliminate duplicate claims in Grace’s database, actual filings in each year are
       about 2,000 less than reported in the 2000 Annual Report. See, Table 29 below.
W. R. Grace                                                                                                  6




responsible for recent asbestos exposures and the injuries that result from these exposures.
Second, Grace has increasingly become a ‘‘target defendant’’. Even before its bankruptcy, Grace
had become a primary target defendant, receiving concentrated attention from asbestos exposed
workers, their lawyers and the media. News media, including a feature article in the New York
Times, a continuing series of articles in the Seattle Post-Intelligencer, and a nationally televised
ABC news magazine feature on Libby Montana, discussed and condemned Grace’s asbestos
exposures of workers and the general public. Media coverage concentrated on Grace’s continued
mining and sale of asbestos-containing insulation products into the 1990s, decades after the
dangers of asbestos had become evident and other manufacturers had withdrawn asbestos-
containing insulation products, and on Grace’s failure to warn about dangers of its operations and
products.
Since its April 2001 bankruptcy, Grace has become the most visible and criticized asbestos
defendant in the U.S. even while its bankruptcy has prevented continuing litigation. Grace’s
exposure of workers and residents in Libby Montana has been extensively discussed in
newspapers, television, a 2004 book (republished in paper-back in 2005)2 and a documentary
film--a level of recent negative publicity that has not been focused against any other asbestos
defendant. The U. S. Justice Department’s 2005 indictment of Grace and some its employees not
only intensified this publicity, but gave ‘‘legs’’ to the story, assuring that it would remain before
the public for years. EPA investigations, reports and abatement actions in Libby, Minneapolis,
Phoenix and other locations have repeatedly brought attention to Grace’s asbestos activities and
exposures in multiple jurisdictions across the country. Discussion surrounding proposed federal
legislation to create a national asbestos compensation fund focused on Grace’s contamination of
Libby and sites across the country as claimants’ groups, unions, and politicians fought to get their
constituents the same favorable treatment that the legislation would have provided to residents of
Libby.
All of these events, documents, and negative publicity increase the likelihood that plaintiffs and
their lawyers will sue Grace for causing their asbestos exposures and injuries. These documents
and publicity would have likely increased Grace’s exposure to large trial verdicts and, in turn, to
large settlements that reflect Grace’s risk of such large verdicts. The increased asbestos liability
pressures on Grace would have occurred during a time when liability costs where growing sharply
across defendants.
The third reason pressuring Grace toward paying greater settlement values would have been that
defendants’ costs for resolving asbestos cases have increased greatly since Grace entered
bankruptcy, particularly the size of plaintiffs’ trial verdicts, which lead to higher settlement
demands and costs. Table 1 shows that plaintiffs’ compensatory trial verdicts have increased
sharply since 2000. Average cancer verdicts over the past six years are more than double the
amounts during 1993-2000, the last years preceding Grace’s bankruptcy petition. Since 2001,
verdicts for mesothelioma plaintiffs have averaged $7.5 million (2001 to 2006), a two-fold
increase over the $3.7 million during 1993-2000; the average verdict for lung cancer reached $2.9
million, about 2.5 times average lung cancer verdicts before 2001 (Table 1). The increase in
verdicts for asbestosis was more striking. Prior to Grace’s bankruptcy (1993-2000) plaintiffs with
asbestosis received on average $0.6 million; since 2001 the average compensatory verdict among
the 111 successful trial plaintiffs reached $4.4 million. In an era in which legislatures, courts,
defendants and plaintiffs lawyers have turned away from paying less serious or questionable
nonmalignant claims, courts continue to recognize and highly compensate victims of real and


2.   An Air that Kills: How the Asbestos Poisoning of Libby, Montana, Uncovered a National Scandal. Andrew
     Schneider and David McCumber (G. P. Putnam’s Sons, 2004).
W. R. Grace                                                                                                             7




serious asbestosis.
These patterns of sharply increased plaintiffs’ damage awards are not simply the result of a few
extraordinarily large verdicts. Table 1 also shows the median (50th percentile) verdict within
each disease category.3 Median verdicts also increased sharply, almost doubling among
mesothelioma verdicts, almost tripling among lung cancer verdicts, and increasing four-fold
among verdicts for nonmalignant diseases. In other words, since 2001 asbestos defendants now
face much higher verdicts in all cases. And, as I discuss in Section 4.3.3.2 below, these
increasing verdicts are reflected in increasing settlement amounts demanded by plaintiffs and
increases in settlement amounts paid by defendants (Figure 3 and Figure 4; Table 10 in that
section).


                       Table 1: Asbestos Trial Verdicts for Compensatory Damages:
                                           Per Plaintiff Awards

                                                                Award, by Disease
                          Statistical
                          Quantity Period                 Meso      Lung       Othc Nonm

                          Average        1993-2000         $3.7       $1.2      $1.5      $0.6
                                         2001-2006          7.5        2.9       8.9       4.4
                          Median         1993-2000         $2.2       $0.6      $0.3      $0.3
                                         2001-2006          4.1        1.6       9.6       1.8

     Notes: Compiled from Mealey’s Asbestos Litigation Reporter. Entries in billions of 2006
     dollars.

Had it not been protected by the bankruptcy stay, Grace too would have been subject to these
sharp increases in amounts that juries awarded to asbestos plaintiffs. Its highly adverse events
during this period--unfolding of the Libby story and similar stories in other locations across the
country, scathing newspaper reports, the critical book, documentary and television coverage, and
then the indictment--would have made Grace a prime target for trials and the likely recipient of
adverse verdicts at least as large as those actually entered against other defendants since 2001.




3.     Note that while the median represents the midpoint value--half the verdicts are greater and half are less--medians
       do not represent what defendants such as Grace would have to pay. Defendants and their insurers have to pay all
       adverse judgments. The ‘‘average’’ (arithmetic mean) represents the cost per claim, since it is calculated by
       dividing total verdicts, which defendants must pay, divided by the number of plaintiffs who received a verdict.
W. R. Grace                                                                                                          8




4. Estimation Methods
4.1. Uses of Credible Estimation
Forecasts of asbestos liabilities are needed and have become commonplace in many different
circumstances. Asbestos defendants estimate their present and likely future liabilities both for
their own corporate planning and also as part of financial reporting. Insurance companies
forecast asbestos liabilities to create reserves for specific insureds. Insurance rating organizations
forecast liabilities of insurance companies. Financial analysts forecast liabilities of specific
asbestos defendants and insurance companies. Businesses forecast liabilities of other companies
that face asbestos liabilities in order to determine whether or not to engage in business activities
with the companies that face such liabilities. Asbestos trusts are required to forecast their
liabilities in order to determine how much money must be reserved for future claimants and what
amount can be paid to claimants with presently pending claims, forecasts that are required by the
U.S. Bankruptcy Code. Parties to bankruptcy proceedings forecast liabilities in order to draft
reorganization plans and disclosure statements. Bankruptcy courts estimate the asbestos
liabilities of debtors. Other courts estimate the asbestos liabilities of particular defendants in the
course of class action, insurance coverage or other litigation.
These forecasts have been done in many ways, with highly varying quality and credibility.4
Credible forecasts of asbestos defendants’ liabilities--those that have been accepted by trustees
who are fiduciaries to both present and future claimants, that have been accepted by courts in
estimation hearings and forecasts that have been confirmed by subsequent claims data--share
several key features:
     • The forecasts draw upon data about the defendant’s own past experience and the
       contemporaneous experience of other asbestos defendants with asbestos claims--counts of
       claim filings, distributions of asbestos diseases, resolutions of claims both with and without
       payment through judgments and settlements, trends for all of these elements of liability.
     • The forecasts consider developments and the state of asbestos litigation at the time of the
       forecast and reasonable expectations about future developments. Where, as here, forecasts are
       being made as of an earlier point in time, forecasts can and should rely on data and




4.      Some forecasts have had influence and currency despite using methods and producing results of poor quality. For
        example, estimations by putatively solvent companies for SEC purposes have routinely and notoriously
        underestimated asbestos liabilities as shown by the following comparison of estimations in financial statements
        for four companies with courts’ determinations of those liabilities (Table 2).



                     Table 2: Defendants’ Financial Reports Underestimate Liabilities

                                                          10k      Court
                                  Defendant               Estimate Estimate

                                  McDermott (B&W) $1.3                  $7 to 9
                                  Armstrong       $0.7                  $3.1 or more
                                  Owens Corning   $2.2                  $7.0
                                  Federal Mogul   $1.6                  $9.0

Note: Entries in billions of dollars of the reporting dates.
W. R. Grace                                                                                           9




   developments that have occurred since the date for which forecasts are made.
 • The forecasts reflect the epidemiology of asbestos-related diseases, both past trends as well as
   expected future trends in the incidence of asbestos-related disease, past trends and expected
   future trends in filings of claims for those diseases, and both past and expected future trends
   in the amounts paid to indemnify those claimants.
 • The forecasts value asbestos claims as they have been valued in reality by defendants,
   plaintiffs and courts as shown by trial judgments, if any, and settlements that reflect the
   business judgment of all parties as to the likelihood that a plaintiffs could obtain a judgment,
   anticipated indemnity payments and litigation costs, the parties’ risk preferences and
   assessments of the time value of money. These forecasts avoid and attempt to adjust for
   artificial effects of matters such as deadlines, bar-dates, stays or moratoria on claims filings
   and resolutions each of which affect litigation in ways that do not occur and would not recur
   in the ordinary tort litigation of the defendant’s asbestos law suits.
 • The forecasts attempt to predict the future behavior of litigants: filing behavior among victims
   of asbestos disease and their lawyers; how defendants, plaintiffs and courts will value and
   resolve claims in the future. Because these are forecasts of objective future events, they
   cannot be based on the experts’ or their clients’ subjective, personal views about which claims
   should or should not be paid or how much a plaintiff deserves to be paid. Rather the forecasts
   are based on actual past behavior of plaintiffs and law firms in filing claims and on how
   defendants, plaintiffs and courts have actually valued and resolved the asbestos claims.
Courts, litigants, businesses, trusts and others rely upon estimations of asbestos liabilities. Better
forecasts, those that use the sources listed above applying methods that have been tested and
found to be reliable, have become important bases for decisions involving tens of billions of
dollars.
Forecasts in this report have all of these features of previous forecasts that have been accepted and
found credible by trusts, courts and other entities with incentives to determine and rely upon the
best possible estimates of asbestos liability.
4.2. Standard Methods for Forecasting Asbestos Liability
To establish an aggregate value of pending and future asbestos bodily injury creditors, bankruptcy
estimation looks at how a debtor would continue to receive and resolve claims within the U. S.
court systems instead of within the protection of Chapter 11. Standard methods for estimating
this aggregate liability start by examining and extrapolating from a debtor company’s prior
history in asbestos litigation. Some experts characterizes this as estimation based on the
proposition that ‘‘past is prologue’’ for future liabilities.
By the time of its bankruptcy petition, Grace had already received 328,658 and evaluated and
resolved 193,468 asbestos injury claims within the legal processes that provide the context for
now estimating its aggregate current and future asbestos liability. Grace’s historic data is
particularly important in showing how the company had itself valued asbestos claims in the past
and how its values have been changing and could be expected to continue to change further over
time. Where, as here, Grace has placed values on 157,084 settled claims (i.e., those claims that
were resolved by payment of money to the claimant), we have enormous data on how it valued
asbestos claims up to the time of its bankruptcy petition.
In that process, Grace had every interest in evaluating claims with the most accurate and realistic
basis it could adopt. Grace and all asbestos defendants (indeed businesses who are defendants in
any litigation) address and resolve the asbestos suits brought against them as business judgments,
just as plaintiffs and their lawyers do on the other side.5 In deciding to settle, defendants look to
W. R. Grace                                                                                                            10




the risks and likely amounts that they would have to pay later to resolve claims. They settle to
avoid greater future costs--including the costs of paying judgments based on adverse verdicts they
might suffer. Like most defendants, Grace sometimes found it advantageous to resolve claims in
groups, rather than individually, and normally found it advantageous to resolve claims through
settlements, rather than trials, because both decisions lowered its resolution costs (as shown
clearly in our analysis of Grace’s data at Section 4.3.2.1 below).6
The result is that most asbestos claims against Grace were resolved without making a final
determination of liability in those claims after a full trial and a jury verdict. Specifically,
according to its database and the Snyder expert report (Attachment 2), Grace resolved 193,468
asbestos bodily injury claims prior to its bankruptcy, but only 78 claims were tried to verdict and
perhaps another 1,543 were resolved by summary judgment entered for one side or the other.7
Accordingly, almost all claims were resolved by negotiated agreements between Grace and
plaintiffs.
In this process, Grace was not helpless. Grace refused to enter into large-scale, inventory
settlements that were not in its interest.8 Grace closed many claims without payment, presumably


5.   In his February 22, 2007 deposition in this case, Jay Hughes, Grace’s lawyer who oversaw its asbestos litigation,
     described Grace’s approach to defending that litigation:
        A: First of all, you have to understand it’s all market driven. I mean
          we’re going to get out of the case based on the amount on money that we can.
          .... So it was an economically-driven decision.‘‘
          (February 22, 2007 Deposition of Jay Hughes, p. 96).
        A: We were trying to get the cases at the cheapest possible amount? [‘‘?’’ in transcript]

        Q: That was true in all of your dealing with W. R. Grace, you were trying
         to resolve the cases for the cheapest amount that you could,
         correct?

        A: Yes.

        Q: And you were successful in doing that in your own view, correct?

        A: Generally. (Ibid, p. 254).
6.   Mr. Hughes described Grace’s asbestos litigation strategy: ‘‘the management of the asbestos litigation involves
     the balancing of large-scale settlements with the advantages and disadvantages of a trial settlement/litigation
     strategy.’’ Ibid.

     Mr. Hughes ‘‘believed it to be in Grace’s interest’’ to enter into inventory settlement (Ibid, pp. 85-85).

     Mr. Hughes lists some ways in which inventory settlements benefited Grace in his February 2, 1999
     memorandum to his superior, Bob Beber:
      ‘‘Such a comparison shows modest savings when inventory settlements are
       employed to resolve these claims.
      ’’Inventory settlements, however, also reduce outside defense costs and
       significantly reduce the risk of adverse verdicts.
      ‘‘Adverse verdicts not only result in an immediate cash requirement far
       in excess of any reserved amount or anticipated settlement, but tend
       to adversely affect future settlement values in that jurisdiction.’’
       Ibid, pp. 127-133, Exhibit 113.

7.   Some of these cases with verdicts may have been on appeal or might not yet have reached final judgments at the
     time of Grace’s petition.

8.   When it could not reach settlements at terms that it found acceptable Grace was prepared to and did go to trial
     (Ibid, p. 254).
W. R. Grace                                                                                                            11




because it believed that the claimants had inadequate evidence of an asbestos-related disease,
could not establish a Grace asbestos exposure, or that Grace had a legal defense that would keep a
case from ever reaching a jury (Section 4.3.2). In addition, Grace let thousands of claims
languish for years without any resolution until they were apparently abandoned (Section 6.1.3).
When it did choose to settle, Grace worked to do so under favorable terms. Grace frequently
chose the timing of settlements, settling ‘‘tens of thousands of cases’’ early before they had trial
dates, because ‘‘asbestos claims have little settlement value until a trial date is scheduled.’’9 Grace
also reached an unusual arrangement to settle cases directly with a lawyer who ‘‘originated’’
many of Grace’s mesothelioma claims, settling at lower values than those cases would have
received after referral to lawyers who would actually prepare and, if necessary, try those cases.10
Importantly, Grace paid more or less in settlement depending upon its perception of the strength
of liability claims, just as it paid more or less depending upon the strength of injury and damage
claims. Mr. Hughes testified that (1) the likelihood that a claimant would show liability, (2) the
potential size of a verdict and (3) the impact of large verdicts on its ability to settle later cases
were all among a number of issues that determined the amount that Grace would pay in
settlement and, indeed, whether it would pay at all (Ibid, p. 97, p. 272, p. 133), along with such
other matters as the strength of the medical evidence, the availability of legal defenses, a case’s
’’jury appeal,‘‘ and other factors.
As is true of virtually all tort settlements, in its settlements Grace would have rarely if ever
acknowledged liability in a settlement or even necessarily concluded that in its perfect world as
designed by asbestos defendants it should have to pay at all. It is also true that plaintiffs would
seldom have accepted a settlement with Grace as representing the full measure of their view of
Grace’s ‘‘true’’ and ‘‘just’’ liability for the plaintiff’s damages. The tort system for asbestos cases
has advantages and disadvantages for both sides. But both sides accepted settlements as a
compromise that eliminated their risks and their continuing litigation costs within the actual tort
system, not an idealized system that would have been preferred by one side or the other. Grace
settled claims because it recognized the risks of those claims: some probability that it would be
found liable for an amount greater--usually far greater--than what it had to pay in settlement.11
The record is clear that Grace was able to settle claims, including the most serious, for fractions
of verdicts in similar cases (Section 4.3.2.1). Plaintiffs, for their part, accepted less to get faster
payment and to eliminate their own risks, which included the risk of receiving nothing.
To determine the amounts that it would pay for settlements, Grace looked to the amounts it had
paid in the past, its historic settlements and judgments.12 Standard asbestos liability estimation
methods use an asbestos defendant’s actual past payments in precisely the same way--here
estimating how Grace would have fared in further tort litigation had it not entered bankruptcy by


9.    Ibid, pp. 104-105; Hughes Deposition Exhibit 152, Jay Hughes memorandum to Paul Norris, president and CEO
      of Grace, Bates 109-0152.

10.    Q: So you established a course of dealing with him in settling
         mesothelioma claims?
       A: Yeah, I established a relationship with Roger, and we settled
         some cases directly.‘‘
         Ibid, p. 255

11.   This recognition was key to Grace’s attempts to achieve inventory settlements with law firms, which Grace
      pursued in part to avoid the risks that some of the clients of the law firm who were subject to the inventory
      settlements might instead take their cases to trial and obtain verdicts adverse to Grace. Ibid, pp. 130-131.

12.   Grace’s past settlements ‘‘gave us insight into what plaintiffs would be willing to accept’’ (Ibid pp. 97-98). But as
      plaintiffs’ lawyers increased their settlement demands, as they did for mesothelioma in 2000 and 2001, Grace had
      to increase the amounts of its settlements. (Ibid, pp. 269-270).
W. R. Grace                                                                                       12




taking into account Grace’s historic amounts of settlements and judgments, trends in those
amounts, and foreseeable future trends. Just as in Grace’s past litigation, standard liability
estimates assume that some percent of claims would be closed without payment, while the rest
would be paid amounts reflecting the parties’ assessments of the risks of trials. Standard liability
estimates also recognize that claims will differ in their strengths and values, just as Grace
recognized when it evaluated claims that it faced. We expect that had Grace not entered
bankruptcy, asbestos claims with unchallengable exposures and medical evidence and severe
damages would have received large settlements, because Grace faced huge verdicts if those
claims were tried. Other claims with debatable exposures or damages would receive small
settlements, perhaps nothing, because Grace would have a better chance if those cases were tried.
Historically Grace refused some claims and paid both of these types of claims, high and low
settlement amounts respectively. Our forecasts reflect how Grace has responded to these
differences in the strengths of claims: Grace’s history of rejecting claims contributed to our
estimations of Grace’s future payment rates (Section 4.3.2) and its payment of both high and low
settlements figure in our estimations of Grace’s future settlement averages (Section 4.3.3).
In looking to Grace’s historic payments, we do not assume that all of the claims that it settled
would have been determined to have ‘‘merit’’ in that they would have been paid if tried. Rather
we make our estimates on the basis that Grace settled claims that presented some financial risks
to the company, even modest risks in many cases, and expect that many pending and future claims
would also present risks like those that gave value to past settled claims. In sum, our forecasts,
like the practices used by Grace (and all defendants) in actually resolving claims, recognize that
most asbestos claims are to a greater or lesser extent uncertain and disputed; that most claims
present a probability of a verdict adverse to Grace that is greater than zero but less than one (with
a similar, complementary range for the plaintiff); and that the settlement values attached to the
claim by the parties are the product of each side’s assessment of the probability of liability and
their assessment of potential damages, their views about risk and their sense of the time-value of
money (i.e the value of money now relative to the value of money in the future).
Accordingly, Grace’s past resolutions present the best evidence about how the actual participants
in Grace’s asbestos litigation had put values on the risks and value-determinants of claims at the
time of those resolutions, including their assessment that some claims had no value. This best
evidence is available for 193,468 claims actually resolved by Grace and these historic resolutions
demonstrate how it placed money values on its risks from asbestos law suits at the times and
within the litigation system in which it then operated, i.e., state tort law and (primarily) state
courts during the 1990s through early 2001. Grace’s historic claim filings also represent a
particular time and litigation environment.
But we forecast for a different period: beginning April 2001 through today and for three more
decades in the future. So we must adjust our analyses to reflect changes that have occurred in the
litigation environment during the six years since Grace’s petition date and other changes that
seem likely. We know, for example, that asbestos defendants now pay far more to resolve claims
than during the period up to April 2001 when Grace still participated in the tort litigation. We
know that claim filings against other defendants have increased for cancers but decreased for
nonmalignancies (decreasing overall because so many past claims were for nonmalignancies).
We know that many courts and defendants now scrutinize the medical evidence in nonmalignant
claims more closely and that some important jurisdictions have changed their tort law to
discourage mass filings particularly for nonmalignancies or make their courts less hospitable to
non-resident plaintiffs. These changes would have affected claim filings and resolutions against
Grace had it remained in tort litigation. Therefore, while we start our analyses with filing and
resolution data from Grace’s database, we expect that the patterns of pre-petition claim filings
against Grace would change, with now more cancer filings and fewer nonmalignant filings. We
W. R. Grace                                                                                                           13




expect also that Grace’s resolutions would change with the changing litigation environment and,
perhaps, changes in Grace’s approach to the litigation, so that Grace would close without payment
far more claims than it had in the past, but like other asbestos defendants, would pay more on
average to the claims that it does pay.
4.3. The Three Parameters of Asbestos Forecasts
Grace’s liability for pending claims as well as future claims are determined by estimating three
parameters--the number of claims, the percent of claims that will be paid compensation, and the
average amount of compensation paid--none of which can be known now with full certainty, but
all of which can be reasonably estimated using established and accepted methods.
4.3.1. The Number of Claims
4.3.1.1. The Number of Future Claims
The overwhelming bulk of Grace’s liability will be for ‘‘future’’ claims that have not yet been
identified, which consist of: (a) injuries that have already arisen through 2006 but whose claim
filings against Grace have been stayed by these bankruptcy proceedings (bankruptcy period
claims) and (b) injuries and claims that will arise after 2006, (true future claims). The number of
filings for both of these types of ‘‘future’’ claims is unknown. Our forecast of the number of
Grace claims that would have arisen between April 2, 2001 and today (bankruptcy period claims)
is based in part on looking at how many claims have actually been filed against other asbestos
defendants over this same period. We use these contemporaneous filing data as part of our
forecast of Grace claims that have arisen and would have been filed by now over the years since
its bankruptcy petition, claims that were stayed by these proceedings. These bankruptcy period
claims are particularly important because a substantial portion of Grace’s liability arises during
these years.
Data on recent filings against other asbestos defendants also help provide a basis for estimating
how many claims will be filed against Grace after 2006. By looking to filing levels and trends
before and now five years after Grace’s bankruptcy petition, we are better able to estimate year
2007 filings, the starting point for our forecast of true future claims.
4.3.1.2. The Number of Pending Claims
Grace’s claims database provides substantial information about claims pending at its petition date,
identifying 135,190 claims that had been filed but were not resolved as of that date (Table 3).
Although we have substantial information about the number of Grace’s pending asbestos claims
from its claims database, it is subject to uncertainties about disease mix, about which of these
‘‘pending’’ claims had liquidated values from settlements that had not yet been paid by Grace and
about how many claims might have had been abandoned by plaintiffs. These uncertainties about
the number of pending claims are modest compared to uncertainties about other parameters used
in forecasting and add relatively little on top of the other uncertainties about the number of future
claims and other sources of uncertainty about Grace’s liability.
Grace’s database provides no specific disease for 81,634 pending claims.13 As we discuss below
(Section 6.1.3), this pattern is typical of asbestos defendants’ claims databases and so analysts
have developed standard methods for supplementing or imputing specific diseases for such
claims.



13.   An additional 16,581 claims are described has having an ‘‘asbestos-related’’ disease. We treat these as
      nonmalignant claims, the least costly to Grace, because Grace’s resolutions for ‘‘asbestos-related’’ disease claims
      were similar to those for identified nonmalignant claims.
W. R. Grace                                                                                      14




              Table 3: Numbers of Pending Claims, By Disease and Liquidation Status

                                                Number of Pending Claims
      Description                 Meso       Lung    OthCan Nonmal        Unspec        Total

      Number Liquidated             139        466       215     17,700         0  18,520
      Number Not Liquidated       1,406      1,931       477     31,222    81,634 116,670
      Total Pending               1,545      2,397       692     48,922    81,634 135,190

  Note: Nonmalignant claims include claims classified as ‘‘asbestos-related’’ by Grace.

The various discovery and proof of claim processes in this case show how modestly estimation is
affected by the question: how many pending claims have been settled but not paid pre-petition?
Although Grace’s historic database reports that among the 135,190 unresolved asbestos claims,
18,520 have been settled but not fully paid (Table 3), more than twice as many claimants (38,953)
filed POCs for the October bar date asserting that they have settled but unpaid claims. There is
relatively little difference in Grace’s aggregate liability to the 38,953 reportedly-settled claims
depending up whether all or half are treated as pre-petition liquidated claims, so the question has
little significance for estimation of Grace’s overall liability for asbestos bodily injury claims.
This issue is examined further in Appendix A.
Our primary forecast of liability for pending claims, presented in Section 6, assumes 18,520
pending liquidated claims, as reported in Grace’s historic database.
Finally, some claims identified as pending in Grace’s pre-petition database are likely to have been
abandoned by claimants, without being entered as dismissed in Grace’s claims database. These
must be excluded in estimating Grace’s liability for pending claims. In Section 6.1.4, I discuss
adjustments to our analyses to reflect a reduction for abandoned claims.
4.3.2. Payment Rates--The Percentage of Grace Claims That Would Be
Compensated
As I discuss above and in later sections of this report, we reduce the count of pending Grace
claims by eliminating claims that have no apparent disease (Section 6.1.3), that have already been
settled though unpaid (Section 6.1.3) or that have been abandoned (Section 6.1.4). Among the
remaining pending claims, not all will receive payment. This section discusses this second key
estimation parameter, the forecast payment rates.
We know Grace’s historic payment rates from its claims data (among resolved claims for each
disease, the percent that was closed with payment), but we expect that after April 2, 2001 Grace
would pay fewer claims than this historic rate, both because of broad changes in asbestos
litigation and also because Grace now represents that it might have changed its litigation
strategies.
Prior to its bankruptcy, Grace made payments in a very high percent of asbestos claims that it
resolved. Among the 14,127 claims that Grace resolved in 2001, fewer than one in twenty was
resolved without payment (Table 4). The percent of claims closed by payment was modestly
lower during the five prior years.
W. R. Grace                                                                                        15




                        Table 4: Grace Payment Rates, 1991 to April 2001

                                                 Payment Rates
                       Settlement
                       Year            Meso       Lung OthCan Nonmal

                       1991            56.8%     51.4%      41.4%     51.8%
                       1992            71.2      76.2       73.8      75.1
                       1993            53.6      52.8       72.5      23.1
                       1994            60.0      80.9       93.0      67.7
                       1995            76.5      91.3       91.5      84.8
                       1996            85.6      95.0       97.1      96.1
                       1997            93.8      96.3       95.8      97.5
                       1998            86.9      94.4       96.4      96.1
                       1999            90.4      89.6       86.4      93.2
                       2000            90.0      93.9       95.8      96.4
                       2001            95.7      97.8       98.5      96.1

  Note: Among claims that Grace resolved, the percent that were resolved with payment

Despite this fairly stable five year pattern, we expect that Grace would not have continued with
such high percentages of payment among resolved claims had it continued in tort litigation after
April 2, 2001. As discussed in the following sections, two developments might contribute to
reduction in Grace’s payment rates for pending and future claims.
4.3.2.1. Effects of Litigation Strategies on Grace’s Payment Percent
First, Grace might have adopted a different strategy for resolving its asbestos claims that would
have lowered its payment rates (but that, in turn, would have increased the average settlement
amounts that it would pay to claimants receiving payment). Grace’s pre-petition database shows
it used two primary approaches to resolve asbestos claims:
 • group settlement agreements that Grace had negotiated with major plaintiffs’ law firms, and
 • individual or smaller group resolutions.
Jay Hughes, Grace’s senior litigation counsel, described the differing results that Grace obtained
with each of these methods. Hughes’ February 2, 1999 memo to R. H. Beber provided his
‘‘thoughts on Grace’s future strategy for defending and resolving asbestos bodily injury claims:
  ‘‘... management of the asbestos litigation necessarily involves balancing the (1) predictability,
  (2) lower per case settlement costs, (3) decreased outside legal expense, and (4) increased filing
  rates associated with large scale settlements with the (1) higher per case settlement costs, (2)
  increased outside legal expenses, (3) lack of predictability, (4) lower filing rates, and (5) higher
  dismissal rates associated with a trial settlement/litigation strategy.’’ Exhibit 113 to Hughes
  Deposition, BOCAS 0000692-3.
Grace’s balance between these two approaches for resolving asbestos cases differed among
diseases (Table 5). Grace resolved mesothelioma claims primarily through individual or smaller
group settlements (79% of mesothelioma resolutions), but resolved nonmalignant and other
cancer claims primarily through group settlements (60% group settlements among lung cancers,
69% among other cancers, 70% among nonmalignant resolutions).
W. R. Grace                                                                                      16




         Table 5: Grace’s Use of Each Resolution Approach, January 2000 to April 2001

                                                   Number or Percent Resolved
         Resolution Approach               Meso       Lung OthCan Nonmal            Total

         Number of Claims Resolved
          Group                              194      1,090      544    25,376    27,204
          Individual                         732        739      249    10,738    12,458
         Percent of Claims Resolved
          Group                           21.0%      59.6%     68.6%      70.3%    68.6%
          Individual                      79.0       40.4      31.4       29.7     31.4

  Note: Excludes 3,897 claims resolved with no specified disease.

As Mr. Hughes described, Grace paid very different amounts depending upon which method it
used to resolved claims. Grace’s data confirm this (Table 6). When it resolved claims
individually, Grace was able to reject more claims without payment, rejecting 9% of individually
reviewed mesothelioma claims compared to a 2% dismissal rate among mesothelioma claims
resolved as parts of groups. For other diseases differences in dismissal rates between the two
approaches were even greater. These differences result in part from the greater information that
Grace typically had for claims that it resolved individually: Mr. Hughes describes these as ‘‘trial
settlements,’’ claims that were being prepared for trial after some discovery or other exchange of
information. But as Mr. Hughes noted (Ibid), when this greater information and review showed
Grace that it could not reject a claim, Grace then had to pay more to settle these more fully
developed claims (Table 6). Grace’s average settlement paid to mesothelioma claimants was
$104,291 when claims were reviewed and resolved individually compared to an average payment
of $56,476 to mesothelioma claimants resolved as part of large groups. The pattern is the same
for lung cancer and nonmalignant claims (the pattern was reversed for other cancers, but these
involve few claims and little total liability).


              Table 6: Outcomes by Resolution Approach, January 2000 to April 2001

                                               Average or Dismissal Rate
                Approach & Outcome         Meso        Lung     OthCan      Nonmal

                Group Resolution
                 Dismissal Rate            2.1%        0.2%       0.0%        1.2%
                 Settlement Average      $56,476     $15,912    $10,408      $2,989
                Individual Resolution
                  Dismissal Rate           9.4%       11.4%      10.4%        9.6%
                  Settlement Average    $104,291     $21,234     $8,629      $4,361


Because of these cost savings, Mr. Hughes recommended that Grace extend its inventory (group)
settlements to additional plaintiffs’ law firms. We see why by looking at the results in Table 7,
which shows Grace’s average resolution costs, its average payment across all resolved claims
include those closed with $0 (in contrast to the settlement average that is calculated only among
claims that received some payment). Across all of the claims that it resolved, Grace saved a great
deal by resolving claims in groups rather than individually. Even though Grace was able to reject
W. R. Grace                                                                                       17




more claims when it reviewed and resolved claims individually, its average costs across all
resolved claims (whether settled with payment or rejected without payment) were greater for
these individually resolved claims, far greater for mesotheliomas, the most costly claims.
Conversely, Grace rejected few claims through group settlements, but overall resolved claims in
groups for much less money. As Grace recognized, group settlements represented its best means
for resolving its asbestos claims.


      Table 7: Grace’s Overall Costs by Resolution Approach, January 2000 to April 2001

                                                      Average Costs
                  Approach                    Meso     Lung    OthCan Nonmal

                  Group Resolution      $55,312      $15,883   $10,408     $2,954
                  Individual Resolution  94,460       18,820     7,728      3,943


Grace also used these group settlements to achieve controls that it could not otherwise obtain in
asbestos litigation, obtaining from plaintiffs’ law firms agreements to accept criteria that
restricted what claims would be paid, agreements to withhold filing of unimpaired claims, and
even moratorium agreements that stopped law firms from filing new Grace claims for periods of
years.
Grace understood and sought the savings and other benefits that group settlements provided. In
internal memos and letters to Grace’s insurers, Mr. Hughes, listed some of these benefits as part
of proposals for specific group settlements. Regarding a proposal to settle pending claims and
create ‘‘a private administrative settlement program’’ for ‘‘thousands of asbestos bodily injuries in
Louisiana State Courts’’ , Mr. Hughes wrote:
  ‘‘the proposed agreement inexpensively resolves unimpaired pleural claims (hopefully)
  removing an incentive for filing such claims’’ (Letter of June 24, 1997 to Thomas J. Quinn,
  Esq. counsel for Grace’s insurer, BOCAS 0000321. Parenthesis in original.)
  ‘‘future unimpaired cases would not be filed’’ (Memo of May 20, 1997 to R. H. Beber BOCAS
  0000341)
  ‘‘legal fees would be eliminated’’ (Ibid)
  ‘‘economic incentive for mass screenings would be eliminated’’ (Ibid)
Mr. Hughes described the benefits on another, earlier agreement with a New York law firm which
he proposed to continue:
  ‘‘the agreement allows Grace to resolve cases in a high cost jurisdiction for reasonable
  amounts’’ (Letter of June 24, 1997 to Thomas J. Quinn, Esq. counsel for Grace’s insurer,
  BOCAS 0000321)
  ‘‘Grace has settled far fewer claims than was anticipated at the time of the September, 1992
  agreement’’ (Ibid)
  ‘‘the generally favorable September, 1992 agreement’’ (Ibid)
In discussing a group settlement proposed by a Texas law firm, Mr. Hughes noted tactical
advantages to Grace by proposing even broader group settlements:
W. R. Grace                                                                                                        18




  ‘‘The Firm’s proposal is motivated by their own self interest, because of their inability to obtain
  trial dates in these courts.... [I]t might be in Grace’s interest to use this as an opportunity to
  settle a large number of cases in other counties in which Grace faces a more immediate trial
  risk’’ (Memo of May 20, 1997 to R. H. Beber BOCAS 0000342)
The rejection rates that Grace might have achieved after April 2, 2001 depended upon how
frequently it used each of these two alternative methods for resolving its liability, group or
individual resolutions. Grace’s historic payment percentages derived from its data (Table 4)
reflect a mix of both resolution strategies, resolving some claims individually and some through
group settlement agreements (entries for ‘‘Resolution Approach’’ in Table 5). If we were to apply
Grace’s historic payment percentage to the future, we would in effect assume Grace would
continue after April 2, 2001 with the same mix of resolution methods as it had in the past. But
Grace might have changed its strategies. The two most extreme changes, whose effects can be
measured by the comparison of resolution averages in Table 7, are:
 • Grace resolves every claim through group settlements, which in comparison to its historic
   mixed strategy, would have:
      − increased the number of claims that it resolved with payment by a little,
      − reduced the amount that it paid on average to each claimant who received payment
      − and, on balance, reduced its overall liability.
 • Grace resolves every claim individually, which in comparison to its historic mixed strategy,
   would have:
      − reduced the number of claims that it closed with payment,
      − increased the amount that it paid on average to each claimant who received payment
      − and, on balance, increased its overall liability.
Grace’s greater or exclusive use of individual resolutions would not only have significantly
increased its indemnity costs, but would also have greatly increased its defense costs, a parameter
that I have not estimated here but that would have contributed greatly to Grace’s costs of
resolving its asbestos claims.
In this bankruptcy case, Grace has asserted that its asbestos claims should be reviewed one-by-
one, suggesting a strategy to move toward increasing use of individual rather than group
resolutions, contrary to Grace’s past reliance on and recognition of its benefits from group
settlements. If Grace were now to evaluate and resolve claims individually, it would somewhat
reduce the percent of claims that it resolved with payment below its historic pre-petition rates, but
Grace would, in turn, pay higher values to those claims it paid. Note that while Grace suggests
this strategy within the bankruptcy (going toward estimation), movement toward individual
resolutions would have been disastrous in tort litigation, greatly driving up both its costs for
indemnity and for defense of claims. In effect, Grace proposes to evaluate asbestos claims within
the bankruptcy proceedings using an approach that was impossible in practice in tort litigation.
The trial experiences of Owens Corning (OC) and Grace both show why an aggressive trial
strategy, like that now asserted by Grace, is unworkable for asbestos defendants (Owens Corning
Estimation Hearing testimony, October 15, 2004). After OC left the Asbestos Claims Facility
consortium in 1988,14 OC began a program of aggressive defense against asbestos claims, trying


14.   The Asbestos Claims Facility (ACF) was a consortium of some asbestos defendants and their insurers between
      1985 and 1988. After the ACF broke up in 1988 many of its defendant members formed a second consortium,
      the Center for Claims Resolution that lasted until January 2001.
W. R. Grace                                                                                      19




more law suits than any other asbestos defendant. This strategy proved to be disastrously
expensive. OC suffered adverse plaintiff verdicts in 57 percent of these trials. Almost 1,400
plaintiffs received compensatory awards against OC totaling $714 million (189 also received
punitive damage awards totaling $207) in year 2000 dollars. OC’s share of compensatory
verdicts to cancer plaintiffs averaged over $1.1 million with a $272,465 average for plaintiffs with
nonmalignant disease. Across all verdicts, both those adverse and those favorable to it, OC’s
average was $297,842 in compensatory damages. OC’s defense costs added far more cost: during
just three years, 1990-1992 OC’s defense costs totaled a half billion dollars. Grace’s Senior
Litigation Counsel Jay Hughes looked at OC’s experience and then recommended that Grace ‘‘not
(attempt) an aggressive strategy of trying cases. The people who tried that were either in the
death throes, Celotex or others in the late ’80s, or Owens Corning proved it wasn’t a viable
strategy’’ (Jay Hughes Deposition, February 22, 2007, p. 254).
Grace tried fewer asbestos cases, but its results were just as bad as OC’s. Grace’s average share
of compensatory verdicts among the 31 cases that plaintiffs won was $799,769 (2001 dollars),
$1,442,920 million on average for each of the 13 plaintiffs with mesothelioma, $353,812 on
average for each of the 17 plaintiffs with asbestosis. While Grace won 59 percent of these trials,
a greater percent than OC, its average outcome across all trials that it won or lost was $330,571.
Its average among all trials of nonmalignant claims, won or lost, was $222,828, about 100 times
the average cost that Grace paid to dispose of claims through settlements. While Grace’s Counsel
Jay Hughes continued to recommend the importance of trying some cases as part of an overall
litigation defense strategy (Ibid), it is clear that an aggressive strategy now asserted by Grace in
these proceedings of discovery, review and necessarily a great number of trials would prove as
impossibly costly as OC’s experience had been. Section 7.3 shows that because of size of
compensatory damages that Grace would have to pay when it loses to plaintiffs, its estimated
asbestos liability would we far greater were it to pursue its now-asserted strategy of aggressive
litigation even it were wildly successful in dismissing claims before trial.
4.3.2.2. Broad Litigation Events that Affect Grace’s Payment Percent
As a second possible scenario, recent events in asbestos litigation might also have led to a
reduction in the percent of nonmalignant claims that Grace would pay after April 2, 2001. In
recent years, some defendants and courts have come to criticize certain doctors and medical
facilities who helped recruit and provided reports for some plaintiffs who have filed law suits
claiming nonmalignant asbestos diseases. Several asbestos trusts now refuse to accept medical
reports provided by the criticized doctors and facilities. In addition, there have been some limited
changes in substantive and procedural tort law in several jurisdictions that make it harder for
some plaintiffs to recover, especially for non-malignant claims.
Indeed, we expect and have already seen changes in asbestos litigation from these events.
Plaintiffs and their lawyers now avoid criticized doctors and medical facilities. Medical screening
operations have largely disappeared. New law suits have dropped sharply in some states that have
changed their laws to tighten venue or restrict suits for lesser injuries. New claims for
nonmalignant disease have fallen sharply. But the implications of these changes are not yet fully
evident. Contrary to the expectations of their sponsors, some of these changes may tend to
increase rather than decrease defendants’ liabilities.
The disappearance of criticized doctors and medical facilities will have mixed effects.
Defendants’ liabilities will decrease to the degree that we find a drop out of asbestos claimants
like those in the past who provided medical documentation only from doctors or medical facilities
of low credibility. However, Grace and other defendants will also find that by driving these
challenged doctors out of asbestos litigation, they will now have to pay more to resolve some
asbestos claims in which those doctors had or would have appeared, but which will now be
W. R. Grace                                                                                         20




supported by medical reports from more credible sources. Asbestos claimants who relied on
reports from criticized doctors suffered for that reliance. Asbestos defendants, such as Grace,
have long known the identities of challenged doctors and facilities and have discounted the values
of claims that rely upon documentation from these sources. To the degree that plaintiffs’ lawyers
respond now by substituting more credible documentation for reports from criticized doctors, they
will enhance the values of claims, increasing defendants’ liabilities.
Similarly, changes that have occurred in tort law in some states will have mixed effects. Legal
changes in states such as Texas will curtail filing of many asbestos claims. Some of these claims
may now be filed in other states, a change that we have seen in the past when laws or procedures
in one state are tightened, while other claims might go away, which will have the effect of
reducing asbestos defendants’ liability. But these legal changes will likely have other effects that
increase defendants’ liabilities. For example, both lawyers who defend asbestos claims and
plaintiffs’ lawyers have noted that many Texas lawyers responded to tightening of Texas’s laws by
expanding their practice to other, high value, jurisdictions, primarily Southern California. As a
result, defendants now face increased claims in California, substituting new claims in one high
value jurisdiction, California, for reductions in another, Texas. We saw this same effect after
earlier changes in Texas’s venue law that prevented new filings in Texas among nonresidents. To
make up for the loss of out-of-state claims, many Texas lawyers increased their practices in areas
of Texas that had not previously had substantial asbestos litigation, increasing the number of
claims filed against defendants. As another example, plaintiffs’ lawyers responded to newly
restricted venue rules that prevented law suits in particularly favorable courts in Southwest
Illinois, by moving existing and new law suits to Delaware, another favorable jurisdiction.
Criticisms and scrutiny of medical screening practices have clearly reduced filings for
nonmalignancy claims, but these changes may also be transitory. In the past, medical screenings
of asbestos exposed workers have been important sources for identifying persons who file law
suits and claims for asbestos-related disease. However, by the later 1990s bad medical and
diagnostic practices by several private medical businesses brought disrepute on medical screening
generally resulting in drastic reduction in the use of screenings to identify potential claimants and
in the number of newly filed claims for nonmalignant asbestos-related diseases. The noteworthy
problems at these criticized facilities do not characterize screenings as a whole. Medical
screenings are important for research and the medical care to persons exposed to asbestos.
Screenings were a primary tool used by Dr. Irving Selikoff and his colleagues at New York’s Mt.
Sinai Hospital in their seminal research on asbestos-caused diseases. Properly conducted medical
screenings have been used for decades by medical clinics, government agencies, unions, and
plaintiffs’ lawyers to identify persons who might have asbestos-related disease so that they can
receive medical care and compensation. For example, the Federal Agency for Toxic Substances
and Disease Registry (ATSDR), the Montana Department of Public Health and Human Services,
and W. R. Grace itself each conduct screenings for asbestos disease among persons who live or
work in Libby Montana. The ATSDR, the state of Texas and other agencies are conducting
screenings at other Grace vermiculite sites. Many observers of asbestos litigation, including
analysts who forecast asbestos liabilities and some plaintiffs’ lawyers, foresee a rebound in the
use of carefully conducted screenings and the claim filings they produce, but it is still unclear
whether and when they will resume.
While we expect mixed effects from the recent events in asbestos litigation, these events might
have two different effects that would reduce the number of nonmalignant claims that Grace will
pay. First, fewer nonmalignant claims might be filed in the future, an effect that we discuss and
that contributes to our forecast of substantial declines in nonmalignant claims as compared to
Grace’s historical level (Section 6.2.4). Second, as a result of these criticisms of medical
evidence sources and other developments in the tort litigation environment, Grace might have
W. R. Grace                                                                                                      21




come to reject a greater number of nonmalignant claims, particularly among claims pending on
the petition date, an effect that we forecast by estimating a lower payment percent for
nonmalignant claims.
We expect that instead of making payments in over 90 percent of resolved claims (Grace’s
historic payment rates), Grace would likely pay lower percentages of pending and future claims.
Because these events occurred after Grace’s bankruptcy petition, we cannot simply calculate how
much payment rates might fall. We use three alternative sets of estimates of payment
rates--historic, reduced, and lowest payment rate assumptions--that bound the likely range in
which Grace’s actual payment rates might fall.
The historic rates are simply Grace’s payment rates during 2000 and 2001. These set an upper
bound of Grace’s likely liability costs for asbestos claims, but we expect that now Grace will
likely reject more claims than it had historically. We discuss forecasts using Grace’s historic
payment rates in our sensitivity analyses, Section 7 of the report.
As our estimate for lowest payment rates, we assume that after April 2, 2001, Grace would
eliminate from payment 40 percent of nonmalignant claims that it would have paid in the past and
30 percent of cancer claims that it would have paid. To derive these alternative low rates we first
start with Grace’s payment rates during 2000-01 (i.e., payment rates used in the high rate
alternative) and then eliminate another 30 percent of cancer claims and 40 percent of
nonmalignant claims that would have been paid using Grace’s historic payment rates. By using
these two steps of eliminating claims, we assume that Grace would make payments in only 64 to
68 percent of cancer claims and 58 percent of nonmalignant claims.
The lowest payment rate assumptions are conservative and likely overestimate the number of
claims that Grace could resolve without payment, particularly among cancer claims (Table 8). I
used these 30 and 40 percent assumptions for my recent forecasts of asbestos liabilities for
Armstrong and USG. But payment rates for Armstrong and USG would fall for reasons that do
not apply to Grace. Both these defendants were members of the defendant consortium the Center
for Claims Resolution (CCR), whose strategy of settling claims on behalf of all CCR members
had somewhat inflated payment rates among its members,15 suggesting that payment rates for
Armstrong and USG would fall sharply after they left CCR. Grace was not a CCR member,
would not have had a post-CCR adjustment to its payment rates, and, therefore, would not likely
have seen as sharp drops in payment rates as we expect for these former CCR members.
To reflect these differences between the expected experience of Grace and CCR members USG
and Armstrong, we use a third, more likely assumption, a reduced payment rate assumption, that
assumes future payment rates for Grace half-way between the high and low payment rate
assumptions.
Table 8 shows the estimated Grace forecast payment rates for the historic, reduced and lowest rate


15.   By their mutual agreement, each CCR member would make payments for settled claims if it had been named in
      the claimant’s law suit so long as the claimant could show exposure to products of at least one CCR member and
      had evidence of an asbestos-related disease. Because of this agreement, the CCR did not insist on evidence of
      exposure by each member named in a law suit, but rather paid a claim if CCR determined that any one of its
      members had liability. Even though under this CCR arrangement each member likely contributed settlements for
      some claims that it would have avoided paying as a stand alone defendant, CCR members recognized that their
      asbestos liabilities were far lower under the CCR arrangement than if they had been standing alone. This
      arrangement dissolved with the CCR’s dissolution in January 2001. Now standing alone after the CCR’s
      dissolution, each former member had to assess whether or not there was some likelihood that claims could show
      exposure to its own products, assessments that would likely reduce the percent of claims that each former CCR
      member now closed with payment. But these changes do not apply to Grace, who was not a CCR member.
W. R. Grace                                                                                                        22




alternatives. I do not expect that Grace’s payment rates would be as great as the high alternative,
which assumes continuation of historic payment rates. Because Grace had not been a member of
CCR, I do not expect that payment rates would fall to the level of the low rate assumptions.
These two alternatives are useful primarily in setting upper and lower bounds of what Grace’s
payment rates would have been had it continued in asbestos litigation. Grace’s asbestos liability
would likely fall somewhere between the upper-bound of liabilities using its historic payment
rates and the lower bounds using our lowest payment rates, most likely at rates closest to the
reduced payment rate assumption. Using the reduced payment rate assumption, we forecast that
Grace would likely reject three to four times as many cancer claims as it had pre-petition,
rejecting about 20 percent of cancer claims in contrast to the 3.8 percent (8 percent for
mesotheliomas) that it rejected pre-petition.16 We forecast an even more dramatic change among
nonmalignancy claims: that Grace would now reject 11.5 times as many nonmalignancy claims as
it had pre-petition, rejecting 42.2 percent of nonmalignancy claims after April 2, 2001 compared
to the 3.8 percent that Grace rejected pre-petition. Because we forecast that Grace will now
receive many fewer nonmalignancy claims than it had pre-petition, this change is even more
profound.


                                   Table 8: Payment Percentage for Grace

                                                        Payment Rates
                             Payment
                             Rates           Meso         Lung OthCan Nonmal

                             Historic        92.1%       95.3%       96.7%       96.3%
                             Reduced         78.3        81.0        82.2        57.8
                             Lowest          64.5        66.7        67.7        57.8


4.3.3. Settlement Amounts
As is the case with payment rates, we cannot directly calculate the amounts Grace would pay to
settle asbestos claims after April 2, 2001. Unlike the number of claims pending against Grace at
the time of its bankruptcy filings, which can be calculated (with some uncertainty) directly from
the past data in Grace’s database, both the payment rates and average settlement amounts are
forecasts of future resolutions by Grace that cannot be determined directly by calculation from its
past data. One matter about Grace’s future settlement payments is clear, however: settlement
values paid by Grace would have increased after April 2, 2001 just as they had increased steadily
before that date. Grace acknowledged this in its 2000 Annual Report and the contemporaneous
history of settlements paid by other asbestos defendants demonstrates this. This section
summarizes the major reasons why the settlement amounts paid by Grace had increased prior to
its bankruptcy petition and why those amounts would have continued to increase after April 2,
2001.
4.3.3.1. Grace’s Historic Settlement Amounts and Trends
First, Grace’s actual experience showed that its per-case payments had been increasing for many
years and that this increase was particularly great in 2000 and 2001, the fifteen months preceding
its bankruptcy. Table 9 shows these trends in annual payments both for Grace’s average


16.   These are rejection rates among claims that actually resolve as an identified disease claim. We also assume that
      Grace would reject another 5.8 percent of claims as having no disease and that 6.4 percent of unresolved pending
      claims against Grace would be abandoned by claimants.
W. R. Grace                                                                                                       23




settlements (amounts paid to claims who receive a settlement) and average resolutions (average
cost to Grace for resolving all claims, both those that are paid settlements and those closed
without payment). The averages in Table 9 represent Grace’s several share of the full liability
cost of asbestos claims, what Grace itself actually paid. Typically plaintiffs have been exposed to
asbestos by many different companies and receive payments from many. Consequently, the full
compensation plaintiffs receive from all defendants is greater than Grace’s several share: in
2000-01 when Grace’s mesothelioma settlements approached $100,000, plaintiffs were receiving
around $2,000,000 in total from all defendants (testimony by Mr. Daniel Myers who negotiated
settlements for CCR and now for other asbestos defendants. May 23, 2006 Armstrong World
Industries Confirmation Hearing, A.M. Transcript, morning session pp. 25-27).
Amounts in Table 9 are adjusted for inflation to show increases in the real value of dollars beyond
increases that occurred solely because of inflation in the dollar. We show these as year 2001
dollars, the year of Grace’s bankruptcy petition. To understand these values in current (2007)
dollars, we would need to increase by about 16 percent representing inflation between 2001 and
2007. Using current dollars, Grace had been paying about $113,000 in 2001 to settle
mesothelioma claims.


           Table 9: Average Settlement Values and Resolution Costs, By Year and Disease

                         Settlement Averages                               Resolution Averages
      Settle
      Year       Meso         Lung      OthCan Nonmal               Meso         Lung     OthCan Nonmal

      1990     $28,498     $24,916       $5,736       $4,598 $13,804 $11,278               $2,677       $2,970
      1991      30,220       8,912        3,039        3,469  17,152   4,579                1,258        1,798
      1992      20,510      10,709        4,267        3,237  14,603   8,159                3,148        2,431
      1993      58,973       8,557        2,587        3,242  31,604   4,520                1,876          748
      1994      35,436       9,998        5,288        3,356  21,262   8,088                4,917        2,273
      1995      43,987       8,215        5,301        2,186  33,644   7,498                4,850        1,853
      1996      27,484       9,780        5,152        2,055  23,514   9,295                5,002        1,974
      1997      26,537       8,255        5,609        2,463  24,885   7,952                5,371        2,401
      1998      63,774      11,892        7,371        2,961  55,406  11,232                7,104        2,844
      1999      49,586      11,515        5,129        2,416  44,844  10,316                4,430        2,250
      2000      90,952      17,682        9,767        3,328  81,825  16,596                9,357        3,209
      2001      97,839      18,290       10,124        3,472  93,622  17,883                9,974        3,337

  Notes: Averages expressed in year 2001 dollars. Settlement averages include positive payments
  only. Resolution averages are calculated across all resolved claims, whether or not closed with
  payment.

For both mesothelioma (Figure 1) and lung cancer (Figure 2), the most expensive claims, Grace’s
average settlements had been increasing during the 1990s, a pattern common among other major
asbestos defendants. Then in 2000 and 2001 Grace’s average settlements increased greatly for
both diseases, doubling for mesothelioma and increasing by half for lung cancer.17
Figure 1 shows the sharply increasing trend in annual Grace’s settlement amounts paid to
mesothelioma claimants. Because of these increases, by the time of its bankruptcy petition,

17.   Grace’s $63,774 average for mesothelioma settlements in 1998 reflects its resolution of a large number of
      mesothelioma claims as part of a group settlements with the Baron and Budd law firm, a firm that succeeded in
      negotiating notably large values for its claims.
W. R. Grace                                                                                                           24




mesothelioma settlements accounted for about 34 percent of Grace’s payments to asbestos
claimants even though mesothelioma claims accounted for only two percent of all claims.
Similarly, as Table 9 shows, Grace’s settlement values for other diseases also increased through
2001.18 These trends are even clearer when we look at Grace’s resolution averages calculated
across all claims that Grace resolved, both with and without payments. Steadily over the decade
preceding its bankruptcy, Grace had to pay more and more to resolve its asbestos liabilities.
Together the long-term increases in Grace’s settlement amounts and the sharp increases in 2000
and 2001 portend that the trends would have continued had Grace not filed for bankruptcy
protection, as Grace itself recognized.

                                          Figure 1: Grace Mesothelioma Settlement Values
                                 100000




                                            Averages
                                 80000
            Settlement Average
                                 60000
                                 40000
                                 20000




                                          1992         1994        1996         1998       2000

                                                              Settlement Year




18.   Prior to 1995 Grace settled relatively few claims each year. Over the entire five year period 1990-1994 Grace
      settled only 27,913 asbestos and pleural disease claims. By comparison Grace settled 112,920 asbestosis and
      pleural disease claims settled during the five years 1996-2000, more than 22,000 claims per year.
W. R. Grace                                                                                       25




                                        Figure 2: Grace Lung Cancer Settlement Values


                               18000
                               16000     Averages
          Settlement Average
                               14000
                               12000
                               10000
                               8000




                                       1992         1994        1996         1998       2000

                                                           Settlement Year



Grace’s Annual Report for 2000 acknowledged these sharp increases in claim values, observing
that ‘‘costs to resolve asbestos litigation were higher than expected for bodily injury and certain
property damage claims’’ (p. 12). Significantly, Grace foresaw that these costs would continued
to increase:
  ‘‘These developments and events (i.e., past increases in costs to resolve claims and bankruptcy
  petitions by five other asbestos defendants) have caused an environment that increases the risk
  of more claims being filed against Grace than previously projected, with higher settlement
  demands and trial risks. These developments and events also raised substantial doubt whether
  Grace would be able to manage its asbestos liabilities over the long term under the existing
  state court system’’ (pp. 12-13, parenthetical added to summarize discussion preceding quoted
  statement).
As Table 9 shows, Grace’s anticipation of increasing costs was confirmed already in 2001 when
settlement averages again increased for every disease.
As Grace’s 2000 Annual Report also described, asbestos claim filings, settlement demands, trial
results and its own settlement values would all have increased after April 2, 2001 due to the
bankruptcies of other asbestos defendants during 2000 and 2001. Between January 2000 and
December 2001, eight so-called ‘‘top-tier’’ asbestos defendants with historically very large
asbestos liabilities each filed for bankruptcy protection: Babcock & Wilcox (February 2000),
Pittsburgh Corning (April 2000), Owens Corning and Fibreboard (October 2000), Armstrong
World Industries (December 2000), GAF (January 2001), USG (June 2001) Turner & Newall and
the other Federal Mogul companies (October 2001). If Grace had continued in tort litigation
(which is assumed in determining its asbestos liabilities within its bankruptcy), it would have paid
more in the future simply because all the other big payers had gone into bankruptcy. After these
bankruptcies had removed the biggest sources for compensation of asbestos claims, plaintiffs and
their lawyers demanded and received greater settlement payments from those defendants who
remained in litigation. Asbestos plaintiffs and their counsel successfully demanded that the
W. R. Grace                                                                                                           26




remaining solvent defendants still in the tort system ‘‘pick up the share’’ of the defendants who
sought bankruptcy protection. Because of these bankruptcies both claims against Grace and the
amounts that it would have had to pay to resolve asbestos claims would have increased greatly.
Like Grace, other asbestos defendants described how these bankruptcy filings by other defendants
increased their own asbestos liabilities. USG described in its financial statements how these
bankruptcies among other asbestos defendants increased the settlement amounts that it had to pay
to settle asbestos claims:
  ‘‘In the first and second quarters of 2001, cash payments to resolve personal injury cases
  increased dramatically, primarily as a result of the bankruptcy filings of other defendants in
  asbestos personal injury lawsuits. As a result of these bankruptcy filings, plaintiffs
  substantially increased their settlement demands to the remaining defendants, including U.S.
  Gypsum, to replace the expected payments of the bankrupt defendants.’’
Mr. Daniel Myer resolves claims on behalf of asbestos defendants and has direct knowledge of
the settlement amounts paid by asbestos defendants before and since the time of Grace’s
bankruptcy petition and reasons for trends in those amounts. Mr. Myer settled claims for
members of the CCR as a senior claim person, continued to settle claims for some CCR members
after the CCR disbanded in January 2001 and now continues to settle asbestos claims on behalf of
Union Carbide, among other asbestos defendants. As Mr. Myer describes, the 2000 and 2001
bankruptcies of other asbestos defendants increased settlements among all asbestos defendants
and would have increased amounts that Grace would have to pay to settle claims in two ways.
First, by sharply increasing the total value of asbestos claims, particularly mesothelioma. Mr.
Myer estimated that the ‘‘total gross value’’ of mesothelioma claims (i.e., what a plaintiff might
expect to receive across all defendants) has doubled or tripled since 2000 so that the full value of
such claims today is ‘‘(w)ithin the range of probably between $5 and $8 million’’ compared to a
$2 million average at the time of Grace’s bankruptcy petition. (Armstrong Confirmation Hearing
testimony, May 23, 2006).19 Second, Grace (and each other remaining defendant) would assume
an even greater share of this now increased liability to make up for the shares previously paid by
the bankrupt defendants.
CCR’s dissolution in January 2001 added further pressure on Grace to increase settlement
payments. Because it settled claims and made payments on behalf of all 20 of its members, CCR
was among the largest single sources of payments to plaintiffs and the law firms that represented
them. CCR settled asbestos claims in large groups, saving plaintiffs’ law firms transaction costs
and generating large total payments to the firms and their clients. Again to make up for these
losses when CCR dissolved, plaintiffs’ law firms looked to other major defendants, like Grace, to
increase their settlement payments.
All of these specific causes of increasing settlement values--increasing verdict amounts, CCR’s
dissolution, the direct and indirect effects of bankruptcies of eight other primary defendants--have
been widely recognized. In the Armstrong and T&N bankruptcies attorneys and claims persons
who defended asbestos law suits against those companies as well as Union Carbide, recognized
and explained how the dissolution of CCR and the loss of the indemnity from now-bankrupt
defendants produced increasing settlement demands and payments on other defendants. In turn,
all of these specific causes are superimposed on sharp increases in plaintiffs’ trial verdicts (Table
1) and the broad increases in asbestos settlement amounts that had been occurring for years, that
were increasing on April 2, 2001, showing no signs of abating, and that continued beyond April
2001. Together all of these factors caused settlement levels to increase among all asbestos


19.   Mr. Myer’s testimony about increases in settlements is consistent with increases that occurred over this period in
      mesothelioma trial verdicts (Table 1). As verdicts go up, demands and settlements do too.
W. R. Grace                                                                                      27




defendants who remained in asbestos litigation. We can see these increases by looking at their
litigation experiences after 2000.
4.3.3.2. Recent Settlement Amounts and Trends Since Grace’s Bankruptcy
We get a clear picture of what would have been the continuing trends in Grace’s asbestos
liabilities by looking at the contemporaneous experience of other asbestos defendants. Figure 3
and Figure 4, and Table 10 show the sharp increases in settlement values among several asbestos
defendants for whom we have publicly available data and who continued in litigation to the time
of and after Grace’s April 2, 2001 bankruptcy petition date. The figures include trends in
settlement values from 1991 through their respective bankruptcy petition dates for three former
CCR members, USG, Quigley and Turner & Newall (T&N) as well as Owens Corning (OC) and
Grace. The 2001 values where much higher among defendants who remained in litigation into
2001. Trends over these periods show increases in settlement values for both mesothelioma and
lung cancer. Values typically increase in each succeeding year and exceptions usually have ready
explanations (i.e., Owens Corning began its NSP group settlement program in 1997 which
stabilized its values over the next several years; Grace’s higher 1998 mesothelioma values
resulted from its large group settlements with plaintiffs represented by the Baron and Budd law
firm, which commanded relatively high settlement values). As Figure 3 and Figure 4 show
clearly, until its bankruptcy, Grace’s increasing settlement costs closely tracked the trends for
other defendants and the absolute value of Grace’s settlements were comparable to or greater than
all of these comparable companies other than OC. By themselves these graphic comparisons
suggest that Grace’s settlements would have continued to increase like those of the other
companies had it not entered bankruptcy in early 2001. As I have discussed in Section 4.3.3,
Grace’s unique circumstances are consistent with this assumption that its settlement values would
have increased at least as much as those of USG, Quigley and T&N.
Among these five defendants, only Quigley continued to settle claims into 2004, when it entered
bankruptcy. The continued increase in Quigley’s mesothelioma settlements even after 2001 are
consistent with Daniel Myer’s description of growing settlement values for such claims--both
suggest that Grace would have had to pay even more in recent years than it paid in 2001 to settle
mesothelioma claims.
W. R. Grace                                                                                           28




                                  Figure 3: Trends in Mesothelioma Settlement Amounts


                         250000       Grace
                                      USG
                                      OC
                                      T&N
                         200000



                                      Quigley
        Avg Settlement
                         150000
                         100000
                         50000




                                  1992          1994   1996       1998      2000   2002        2004

                                                          Settlement Year



                                  Figure 4: Trends in Lung Cancer Settlement Amounts
                         50000




                                                                                          Grace
                                                                                          USG
                                                                                          OC
                         40000




                                                                                          T&N
                                                                                          Quigley
        Avg Settlement
                         30000
                         20000
                         10000




                                  1992          1994   1996       1998      2000   2002        2004

                                                          Settlement Year
W. R. Grace                                                                                              29




       Table 10: Trends in Settlement Averages for Grace and Other Asbestos Defendants

                            Meso                                                  Lung

Year     Grace      USG     Quigley        OC       T&N      Grace          USG       OC       T&N    Quigley

1996    $27,484   $21,794             $133,419   $33,563     $9,780     $5,389    $31,788   $12,767
1997     26,537    25,532   $20,036    195,135    50,700      8,255      7,269     30,291    13,609    $7,874
1998     63,774    36,072    20,927    185,353    50,812     11,892      7,303     36,451    12,646     5,684
1999     49,586    34,314    29,238    193,982    61,235     11,515      6,749     49,635    12,009     5,926
2000     90,952    59,856    46,857    214,403    86,022     17,682     10,286     49,179    14,274     8,288
2001     97,839   221,745   188,031              194,051     18,290     35,624               29,836    31,404
2002                        163,311                                                                    22,804
2003                        206,643                                                                    31,237
2004                        263,118                                                                    25,006


  Note: Entries in 2001 dollars.

Other publicly available information shows how asbestos liabilities increased among other
defendants after 2001. Financial statements for Union Carbide show that its asbestos litigation
costs steadily increased through 2004 (Table 11). Although Union Carbide’s asbestos litigation
costs fell during 2005 and 2006, its annual aggregate payments during those years were still three
to four times higher than its aggregate costs during 2001 and the two prior years, the last years for
which we have cost data for Grace. During 2002 to 2006, the five years since Grace entered
bankruptcy, Union Carbide paid $1.0 billion in indemnity costs to asbestos plaintiffs, an annual
average of $201 million, which is 515 percent of its annual average during 2001. Again, it is
likely that the increase in Grace’s liability during the five year period that has already passed
since its bankruptcy petition would be at least this great (even though we conservatively do not
forecast such sharp increases to assure that we will underestimate rather than overestimate
Grace’s liability).


              Table 11: Union Carbide’s Annual Asbestos Claims Resolution Costs

                                                           Indemnity +
                                   Year     Indemnity         Defense

                                   1999                               $44
                                   2000                                53
                                   2001            $39                 53
                                   2002            155                247
                                   2003            293                403
                                   2004            300                386
                                   2005            139                214
                                   2006            117                179

  Notes: Entries in millions of dollars in the year when paid. Prior to 2001, Union Carbide did
  not delineate indemnity and defense costs separately in its financial statements.

Beyond these matters that affected all asbestos defendants--CCR’s dissolution, the direct and
indirect effects of other bankruptcies, the decade-long increases in verdicts and claims
values--Grace faced unique and disastrous pressures that set out Grace from among all other
asbestos defendants. Prior to its bankruptcy Grace had suffered a media barrage that had been
more damaging than any directed at a defendant in recent times. Rather than abating, this highly
adverse publicity increased after Grace’s bankruptcy petition with release of a widely shown
W. R. Grace                                                                                                         30




documentary film about its alleged poisoning and cover-up at Libby, Montana and then a 2004
release of a lengthy book that sensationally and extensively documented Grace’s alleged
improprieties. Grace was subject to negative local media coverage at sites throughout the country,
as the EPA and other government agencies investigated and then remediated multiple sites around
the country where Grace’s asbestos-contaminated vermiculite had been transported, openly stored
and processed. Then in 2005 Grace was indicted for knowingly endangering its workers and
residents of Libby, Montana by exposing them to asbestos-contaminated vermiculite. In addition
to these waves of adverse publicity, plaintiffs and their lawyers obtained road maps for pursuing
large damages against Grace, from the indictment and the book. In the changed world of asbestos
litigation after April 2, 2001, Grace came to stand out as the most visible and highly disparaged
among all asbestos defendants. Grace would have been a prime target for plaintiffs and their
lawyers looking for defendants to make up for the compensation they had lost through the spate
of bankruptcies and CCR’s dissolution.
We look to all of these sources to conclude that Grace would also have continued to pay larger
settlements in 2001 than it had in previous years had it remained in tort litigation. But none of
this tells by how much Grace’s settlements would have increased after April 2, 2001. In the next
three sections, I present several alternative and conservative estimates of what Grace would have
had to pay to resolve its asbestos bodily injury claims.
4.3.3.3. Year 2001 Increases in Settlement Amounts
As shown in Figure 3 and Figure 4, during 2001 settlement values increased sharply among
asbestos defendants. Our first set of estimates look to this experience among other asbestos
defendants to forecast what Grace would have paid in average settlements had it continued in
asbestos litigation. Table 12 shows the 2001 settlement averages for each disease for Turner &
Newall, Quigley and USG. While there are differences between Grace and each of of these
defendants, T&N and USG in particular are good comparisons for Grace.20 All three companies
manufactured and sold asbestos-containing construction products. Both T&N and Grace were
dominant manufacturers of widely-used spray insulation and each also sold a wide range of other
asbestos-containing products. Like Grace, T&N also had particularly inculpating corporate
documents that had been explored in a recently published book, yet both companies had
maintained relatively low visibility in asbestos litigation until the late 1990s. Both of the books
about T&N and Grace were substantially documented accusations, but of the two books the
expose of Grace was far more damaging, discussing a broader set of alleged improprieties that
continued into the most recent period. Moreover, while the T&N book addressed that company’s
actions that occurred mostly in the United Kingdom or Africa, the Grace book addressed Grace’s
actions in the United States.




20.   T&N, Quigley and USG were all former members of the CCR. This former membership helped each to hold
      down its settlement values prior to 2001, but provides no reason to expect that 2001 settlement values would be
      artificially high.
W. R. Grace                                                                                                          31




                    Table 12: 2001 Settlement Amounts for Quigley, T&N and USG

                                                      Settlement Amounts
                         Defendant           Meso          Lung       OthCan         Nonmal

                         Quigley        $188,031        $31,404       $11,237         $5,231
                         T&N             194,051         29,836            NA             NA
                         USG             221,745         35,624        12,541          5,207

  Note: As explained by T&N’s defense counsel at the T&N estimation hearing, its settlements
  for other cancer and nonmalignant claims were unusual and unrepresentative ‘‘sick building
  syndrome’’ cases.

Among all four of these defendants, Grace would have seen the sharpest increase in its asbestos
liabilities. In multiple ways that would exacerbate its asbestos liabilities, Grace distinguished
itself from the other three defendants. Of the four, only Grace was the subject of a national
television feature and a documentary film about its production, release and alleged cover-up of
dangerous asbestos materials. Also, of the four, only Grace is the subject of a current criminal
indictment for its alleged asbestos exposures of workers and bystanders and a cover-up of the
dangers of those exposures. Only Grace became known as the source of poisoning of an entire
American town. Because Grace would likely have seen the sharpest increase in settlement values
among these four companies, the 2001 settlement levels for T&N, Quigley and USG provide
conservative estimates about amounts that Grace would have had to pay to settle its asbestos
claims.
Table 12 shows the 2001 settlement amounts for Quigley, T&N, and USG. These amounts are
remarkably similar. But because they differ somewhat we separately use the settlement values for
each company as a basis for three difference estimates of what Grace would pay to resolve
asbestos claims: the ‘‘Quigley values’’ estimate assumes that by year 2006 Grace’s settlements
would rise to the settlement amounts paid by Quigley in 2001; the ‘‘T&N values’’ estimate
assumes that by 2006 Grace would reach T&N’s 2001 settlement amounts;21 the ‘‘USG values’’
assume that by 2006 Grace would reach USG’s 2001 settlement amounts. We assume that only in
2006 would Grace’s settlement values have reached the levels that the other three defendants were
already paying in 2001; that Grace’s settlement values during each year prior to 2006 would
increase only gradually from Grace’s 2001 levels. We assume further that Grace’s settlement
values would not increase in real terms after 2006, but would increase only at the rate of inflation.
For each of these three alternative settlement value forecasts, Table 13 shows the settlement
amount that we forecast Grace would pay in each year from 2001 through 2006. For each
settlement value model we start with Grace’s actual settlements in 2001 and then increase those
values in five steps between 2002 and 2006 so that by 2006 the forecast Grace settlement value is
equal to the 2001 settlement amounts for each of the three other defendants. These three
alternatives are conservative estimates of what Grace would have to pay to resolve claims for at
least two reasons. First, because of its uniquely threatening litigation environment, Grace would
have likely been subject to greater increase than either three of these other defendants. Second,


21.   T&N’s 2001 settlements for other cancers and nonmalignant claims were unusual, almost exclusively ‘‘sick
      building syndrome’’ cases filed in Mississippi that alleged ‘‘premises’’ liability and do not provide a reasonable
      basis for estimating values for those diseases for T&N or any other defendant. Because we had no relevant, direct
      data on T&N settlements for those diseases during 2001, we took the average of settlement amounts for Quigley
      and USG for those diseases.
W. R. Grace                                                                                    32




these estimates forecast that Grace would pay less in settlements during 2002 through 2005 than
the other three paid during 2001, even though the litigation environment was far more threatening
for Grace than for Quigley or USG or even T&N.


                          Table 13: Forecast Grace Settlement Values

                                        Settlement Amounts, by Payment Year
  Alternative
  Estimates     Disease        2001        2002        2003       2004        2005        2006

  Quigley       Meso        $93,640 $107,650      $123,757    $142,273    $163,560   $188,031
  Comparable    Lung         17,912   20,041        22,422      25,087      28,068     31,404
                OthCan        9,891   10,147        10,409      10,678      10,954     11,237
                Nonmal        3,372    3,682         4,019       4,388       4,791      5,231
  T&N        Meso           $93,640    $108,331   $125,327    $144,989    $167,736   $194,051
  Comparable Lung            17,912      19,836     21,968      24,328      26,942     29,836
             OthCan           9,891      10,262     10,646      11,045      11,460     11,889
             Nonmal           3,372       3,680      4,016       4,382       4,782      5,219
  USG        Meso           $93,640    $111,260   $132,196    $157,071    $186,627   $221,745
  Comparable Lung            17,912      20,553     23,582      27,058      31,047     35,624
             OthCan           9,891      10,372     10,876      11,405      11,960     12,541
             Nonmal           3,372       3,678      4,012       4,376       4,774      5,207

  Note: T&N values for other cancer and nonmalignants were estimated by averaging values for
  Quigley and USG.

Figure 5 shows how conservative these three forecasts are. In each year until 2006 we forecast
that Grace (solid black line) would pay less to settle mesothelioma claims than USG and T&N
had paid in 2001 (dotted blue and purple lines), despite Grace’s likely exposure to higher
demands and pressures to pay more to settle claims. Because we have later data for Quigley,
Figure 5 shows the amount that Quigley actually paid in settlements of mesothelioma claims from
2001 through 2004. In each of those years Quigley paid more to settle asbestos claims than the
amounts that we forecast would have had to pay. To aid comparison Figure 5 shows dotted lines
to extend out the 2001 settlement amounts for T&N and USG Quigley’s 2004 settlement
amounts. For Grace the Figure shows the middle of the three models, the T&N Comparable
Model based on T&N’s 2001 settlements.
W. R. Grace                                                                                    33




                                     Figure 5: Forecast Trends in Settlement Amounts


                     250000           WRG Actual
                                      WRG Forecast
                                      Qui Actual
                                      Qui Extended
                     200000



                                      T&N Actual
                                      T&N Extended
                                      USG Actual
                                      USG Extended
                     150000
         Avg Value
                     100000
                     50000




                              1996        1998        2000          2002      2004     2006

                                                         Payment Year



4.3.3.4. Extending Increasing Trends in Grace’s Recent Settlement Values
We derived a fourth forecast of Grace’s settlement values solely from Grace’s own data by
extending from 2001 to 2006 its past increasing trends in settlement values for each disease. For
each disease we calculated the rates in increase in Grace’s settlements from the 1997 to 2001
using the following formula:
      2000-2001 average settlement ÷ 1997-1999 average settlement
We then projected this increase forward, forecasting that by 2006 Grace would be paying in
settlements the amounts that it had paid in 2000-2001 multiplied by the rate of increase that we
calculated using the formula above. This model assumes that over the 6 years 2001 to 2006
Grace’s settlement values for each disease would increase by the same rates that its settlements
had increased over the 4.25 year period preceding its bankruptcy. Again, we arrive at the 2006
values gradually: Over each of the five years after 2001 Grace’s settlements increase (on a
percentage basis) by one-fifth of the difference between its actual 2000-2001 settlement values
and the amounts we forecast for 2006. This produces the steady increase between 2001 and 2006
shown in Table 14.
W. R. Grace                                                                                      34




                            Table 14: Extending Grace Recent Trends

                                  Settlement Amounts, by Payment Year
         Disease         2001        2002        2003        2004        2005        2006

         Meso        $93,640 $107,964 $124,479 $143,520 $165,473 $190,785
         Lung         17,912   19,952   22,223   24,754   27,573   30,712
         OthCan        9,891   10,784   11,758   12,821   13,979   15,242
         Nonmal        3,372    3,548    3,733    3,929    4,134    4,350


By extending the increasing trends that Grace had experienced during the 4.25 years preceding its
bankruptcy, we derived a model that is remarkably similar to forecasts that are based on 2001
settlements by Quigley and T&N and slightly less than forecasts based on USG’s 2001
settlements.
4.3.3.5. Extending the Long-term Increasing Trends in Grace’s Settlement Values
Our fifth forecast of the settlement values that Grace would pay after April 2, 2001 uses linear
multiple regression analyses to determine trends in Grace’s past settlement values over the longer
period 1990 to 2001 and then extends these eleven-year trends over the same future period,
2001-2006. The multiple regression method offers some advantages. First, we can examine a
longer period of time than our forecast based on Grace’s 1997-2001 trends. Second, it provides a
more robust and general analysis that is not dependent on the particular settlement values for the
five specific years 1997 through 2001, but rather looks to the general rate of increase across more
than a decade of Grace settlements. Third, it takes into account how settlement amounts differed
across states by including filing jurisdiction as a variable in the analysis. This assured that our
observed trends were not simply a result of changes in the states from which the settled claims
came. Appendix B contains a brief description of the multiple regression method, as applied
here.
We carried out multiple regressions separately for each disease. The results of the analysis (and
the line shown for mesothelioma settlements in Figure 6) represent the best estimate of the past,
increasing trends in Grace settlements taking into account and statistically adjusting for whatever
differences there were from year to year in the states from which the settled claims came. We
included state of filing because it is a key determinant of the settlement amounts. Settlement
values for asbestos claims vary markedly among states, which is the second most important
predictor of settlement values after type of disease.
W. R. Grace                                                                                     35




           Figure 6: Regression-Based Forecasts of Mesothelioma Settlement Amounts


                     200000          Meso Actual
                                     Meso Forecast
                     150000
         Avg Value
                     100000
                     50000




                              1996       1998        2000          2002   2004   2006

                                                        Payment Year



To forecast settlement amounts that Grace would pay after April 2, 2001, we extended the
multiple regression trend line from 2001 through 2006 (Figure 6 and Table 15). Like our
forecasts based on Grace Recent Trends and the settlement experiences of Quigley, T&N and
USG, this forecast based on Grace Long Term Trends assumes a continued year-by-year
percentage increase in amounts that Grace would pay to claimants until year 2006 and then
assumes no further increase other than simple monetary inflation. The multiple regression of
long term trends again produced forecasts that are consistent with the four other forecasts and is
again conservative. By 2006 this analysis forecasts that Grace would pay $225,710 on average
(in 2001 dollars) to each settled mesothelioma claim, an amount that is only 1.8 percent more
than what USG had already paid in 2001 and 14.2 percent less than what Quigley had already
paid in 2004. The analysis forecasts that in 2006 Grace would pay $28,482 on average to settle
lung cancer claims, an amount that was 20 percent less than USG had paid in 2001. Similarly the
forecast that Grace would pay $3,741 on average to settle a nonmalignant claim is 28.2 percent
less than the $5,207 that USG had paid in 2001. Not only should we expect that Grace would
have to pay more to resolve its asbestos claims than Quigley or USG, given its negative publicity
and the discussion and distribution of damaging Grace documents, but we should also expect that
rates of increase in Grace’s settlements after April 2001 would have been significantly greater
than the rates of increase from 1990 to 2001 (the empirical basis for this forecast) before Grace
was subjected to such intense negative publicity and distribution of damaging documents. All
that the multiple regression can provide (which is the basis of this Long-Term Trend forecast), is
an analysis of what has happened in the past. During most of the period analyzed by the
regression analysis Grace faced neither the publicity or damaging documents that it now faces.
The increasingly threatening environment that Grace faced after April 2001 likely would have
greatly increased amounts that Grace would have to pay to settle claims, but neither the multiple
regression analysis, nor this Long-Term Trend forecast, nor any of the forecasts in this report
fully reflect this shift in Grace’s liabilities.
W. R. Grace                                                                                         36




                          Table 15: Extending Grace Long-Term Trends

                                  Settlement Amounts, by Payment Year
          Disease        2001        2002            2003          2004       2005      2006

          Meso        $90,780 $108,918 $130,681 $156,793 $188,122 $225,710
          Lung         16,819   18,688   20,764   23,071   25,634   28,482
          OthCan        9,936   11,088   12,373   13,807   15,408   17,195
          Nonmal        2,861    3,018    3,185    3,360    3,546    3,741

  Note: The 2001 values are predictions from multiple regressions, so differ slightly from the
  actual 2001 values shown in Table 9.

4.3.3.6. Summary of Five Settlement Value Forecast Parameters
Table 16 summarizes our five forecasts of settlement values that Grace would have had to pay to
settled pending and future asbestos claims over the first five years after its bankruptcy petition.
Dollar values are rounded to and shown as the nearest thousands of dollars to simplify
comparison. The table presents together each alternative forecast for the same disease (starting in
2001 with Grace’s actually settlement averages for the period 2000 to April 2001).


                Table 16: Grace Settlement Values Used in Alternative Forecasts

                                                       Settlement Amounts, by Payment Year
 Disease Estimation Method                   2001           2002      2003      2004      2005     2006+

 Meso     Long-Term Grace Regression     $90,780 $108,918 $130,681 $156,793 $188,122 $225,710
          Shor t-Term Grace Ratios        93,640  107,964  124,479  143,520  165,473  190,785
          Increases--Quigley Rates        93,640  107,651  123,757  142,273  163,560  188,031
          Increases--T&N Rates            93,640  108,331  125,327  144,989  167,736  194,051
          Increases--USG Rates            93,640  111,260  132,196  157,072  186,627  221,745
 Lung     Long-Term Grace Regression     $16,819       $18,688      $20,764   $23,071   $25,634   $28,482
          Shor t-Term Grace Ratios        17,912        19,952       22,223    24,754    27,573    30,712
          Increases--Quigley Rates        17,912        20,041       22,422    25,087    28,068    31,404
          Increases--T&N Rates            17,912        19,836       21,968    24,328    26,942    29,836
          Increases--USG Rates            17,912        20,553       23,582    27,058    31,047    35,624
 OthCan   Long-Term Grace Regression        $9,936     $11,088      $12,373   $13,807   $15,408   $17,195
          Shor t-Term Grace Ratios           9,891      10,784       11,758    12,821    13,979    15,242
          Increases--Quigley Rates           9,891      10,146       10,409    10,678    10,954    11,237
          Increases--T&N Rates               9,891      10,261       10,646    11,045    11,459    11,889
          Increases--USG Rates               9,891      10,372       10,876    11,405    11,959    12,541
 Nonmal   Long-Term Grace Regression        $2,861      $3,018       $3,185    $3,360    $3,546    $3,741
          Shor t-Term Grace Ratios           3,372       3,548        3,733     3,929     4,134     4,350
          Increases--Quigley Rates           3,372       3,681        4,019     4,388     4,791     5,231
          Increases--T&N Rates               3,372       3,680        4,016     4,382     4,782     5,219
          Increases--USG Rates               3,372       3,678        4,012     4,376     4,774     5,207


The following four figures graphically present for each disease the same forecasts shown in Table
16, the values that Grace would have had to pay in settlements over the first five years after its
bankruptcy petition. Each of the figures describes historic data (in red) and our forecasts for each
of the different types of diseases. In some instances two or more models are so close that the
W. R. Grace                                                                                        37




trend line for one model lies on top of the trend line for another, obscuring one of the models.
This is the reason why the figures for mesothelioma and nonmalignancies appear to present
forecasts only for four and three models respectively.
Both the table and the figures show the close correspondence among these forecasts that are based
on three different methods--multiple regression, extrapolation from Grace’s recent history, and
comparisons to payments made by three different co-defendants--and data from four different
defendants. This close correspondence provides assurance about the robustness of each of the
forecasts. Whether we look at Grace’s likely settlement payments using one method or another,
its own historic trends or the actual recent trends of other defendants, our estimates of Grace’s
liability are highly similar.
The forecasts for mesothelioma, displayed in Figure 7, are most important both because
mesothelioma values are so much greater than settlements for other diseases and also because
mesothelioma claims have been and likely will continue to increase at rates greater than other
diseases. The alternative forecast models for mesothelioma settlement values are highly similar
despite being based on three different valuation methods and data from four defendants.

                                      Figure 7: Projected Mesothelioma Settlement Amounts


                                          WRG−Actual
                      200000




                                          WRG−Regression
                                          WRG−Ratio
                                          Quigley
                                          T&N
                                          USG
                      150000
          Avg Value
                      100000
                      50000




                               1996           1998         2000          2002    2004       2006

                                                              Payment Year



Our forecasts of settlement values of lung cancer are similarly robust, as shown by the
correspondence in values of lung cancer claims across the alternative methods and data (Figure
8).
W. R. Grace                                                                                     38




                                    Figure 8: Projected Lung Cancer Settlement Amounts


                     35000             WRG−Actual
                                       WRG−Regression
                                       WRG−Ratio
                     30000


                                       Quigley
                                       T&N
                                       USG
                     25000
         Avg Value
                     20000
                     15000
                     10000




                             1996          1998         2000          2002    2004       2006

                                                           Payment Year



There is more variability across the alternatives for other cancer and nonmalignant valued
forecasts. For both types of disease, forecasts based on USG and Quigley settlement values are
very close--these cannot even be distinguished for nonmalignancies (T&N values are calculated
as the average of the other two). When compared to the calculation based on USG’s and
Quigley’s 2001 settlement values, the two other methods that extrapolate from Grace’s past data,
multiple regression and the ratio increases over recent years, produce higher forecasts for other
cancers and lower forecasts for nonmalignancies. But even by the fifth forecast year, these
differences are not great. (Figure 9 and Figure 10).
W. R. Grace                                                                                       39




                                     Figure 9: Projected Other Cancer Settlement Amounts


                      16000             WRG−Actual
                                        WRG−Regression
                                        WRG−Ratio
                                        Quigley
                      14000



                                        T&N
                                        USG
                      12000
          Avg Value
                      10000
                      8000
                      6000




                              1996          1998         2000          2002     2004       2006

                                                            Payment Year



                                 Figure 10: Projected Nonmalignant Settlement Amounts
                      5000




                                        WRG−Actual
                                        WRG−Regression
                                        WRG−Ratio
                                        Quigley
                      4500




                                        T&N
                                        USG
                      4000
          Avg Value
                      3500
                      3000
                      2500
                      2000




                              1996          1998         2000          2002     2004       2006

                                                            Payment Year



4.4. The Inseparability of Payment Rates and Settlement Values
Because of uncertainties about how often Grace would have been able to close asbestos claims
without payment had it continued in litigation after April 2, 2001, our forecasts use three different
W. R. Grace                                                                                          40




estimates of what its payment rates would have been: historic rates--payments in over 90 percent
of resolved claims based on Grace’s history (forecasts that we include in our sensitivity analyses,
Section 7); lowest rates--payments in about 65 percent for cancers and 58 percent for
nonmalignant claims; and reduced rates, averaging the other two estimates. The average
settlement cost that Grace would have incurred would likely have differed depending upon which
of these payment rates it achieved. If Grace had been able to move from paying almost all claims
(the historic payment rate) to paying about 60 percent of claims (the lowest payment rate), it
would have paid many fewer claims, but it would have paid more on average for the fewer claims
that it did pay.
As I discussed above (Section 4.3.2), Grace might have been able to move toward lower payment
rates after some courts and legislatures placed barriers to litigation of the least serious claims and
after the credibility of some screening procedures and doctors came to be more vigorously
questioned. While we expect that these changes would have likely reduced the claims that Grace
would have had to pay by discouraging or eliminating many claims with relatively low values,
this would mean that the remaining claims that Grace had to pay would be of higher quality and
value than the cross section of all claims that it paid before bankruptcy (which had included weak
claims that we assume Grace would now be able to avoid).
Asbestos bodily injury claims vary in many ways that are related to their values. Some claims are
supported by highly credible doctors and laboratories, others by doctors or laboratories who have
come to have little credibility. Defendants understand these differences and pay larger
settlements for claims that are supported by highly credible doctors and less to claims whose
medical documents come from doctors or laboratories of low credibility. Similarly, Grace and
other defendants paid more to claimants who have strong product identification of its products
(Hughes Deposition, February 22, 2007, pp. 251-254). Defendants face lower risks and will pay
less in settlement to claimants who have minimal exposure evidence. Defendants pay less for
claims that are brought through questionable screening practices than those arising through
routine medical practices. Defendants pay more in high value jurisdictions and to plaintiffs
represented by proven counsel. If, in the future, Grace can avoid paying some claims, it will be
because those claims have poor exposure evidence, lack credible medical evidence, or otherwise
have features that make the claims both more likely targets for summary judgment.
Grace might lower the percent of claims that it pays (its payment rates) by moving from its pre-
petition strategy where two-thirds of claims were resolved through large group settlements to a
strategy in which it disputed, reviewed and settled claims individually. However, as I discussed in
Section 4.3.2, Grace’s own history shows that such a change would have been costly for Grace.
Grace described the low values that it was able to obtain through its group settlement agreements
as ‘‘settlement values that are extremely favorable to Grace’’ (Grace memo dated July 19, 2000;
Bates numbers 108-2481 in Sealed Air litigation). Grace could not continue to obtain such
‘‘extremely favorable’’ settlements if, instead of making payments in 90 percent of resolved
claims, it now moved to a strategy of challenging and requiring extensive proof before it paid
claims. Quite simply, the claims that Grace paid under such a revised regime would have been
those that satisfied its increased scrutiny, that had the more extensive proof that Grace required
and that were demonstrably strong and valuable claims. In short, while Grace might have
changed its strategies to increase the number of claims that it could avoid paying, its settlement
average among the more serious set of remaining claims would have been far greater. Its own
history shows this.
Moreover, this pattern holds up across defendants. Babcock and Wilcox, for example, reported
that it pursued a strategy of large group settlements with payments to most claims because it
allowed it to ‘‘negotiate claims at lowest values.’’ It described its ‘‘philosophy’’ of litigation as a
‘‘settlement strategy of standard agreements, meeting directly with plaintiff attorneys and settling
W. R. Grace                                                                                                         41




cases in advance of trial at discounted prices.’’22 Attorneys and claims persons representing
Owens Corning and the Center for Claims Resolution similarly describe their respective ‘‘NSP’’
and ‘‘SSP’’ programs as obtaining discounted settlement values through group settlements
negotiated with major law firms.
For short periods some defendants (including Owens Corning before its NSP program) have
instead used strategies that avoided group settlements in favor of individual reviews to weed out
claims. But in pursuing such strategies, they paid more on average to those claims that survived
their more thorough reviews. A defendant cannot get ‘‘discounted prices’’ for those claims which
the defendant itself has determined have no demonstrable value.
The more restrictive a defendant’s standards for review, the greater the values that are demanded
and received in settlements by plaintiffs whose claims pass such strict review. Ultimately, this
review is most complete and rigorous for claims that go all the way to verdict. For tried claims,
Grace suffered plaintiffs’ verdicts in 41% of all cases, 65% of mesothelioma claims (Exhibit 2,
Hughes deposition; Attachment 2, Snyder Expert Report and the Grace database). For these
cases, average values are $1,442,920 million for mesothelioma claims and $353,903 for
nonmalignant claims (2001 dollars).




22.   B&W’s description is remarkably similar to Jay Hughes’ description of his strategies in resolving Grace’s claims.
      See Section 4.3.2.1.
W. R. Grace                                                                                          42




5. Data for Asbestos Bodily Injury Claims Involving Grace
Grace maintained an electronic database for all asbestos bodily injury claims filed against it,
which was sent to us in May 2002. The database consisted of several related tables. The primary
claims table containing 505,608 records linked to several supplementary tables providing attorney
names, alleged diseases, claim status, relationship to injured party, various dates (birth, diagnosis,
filing, disposition), and disposition amounts.
Attempting to restrict our analysis to one claim for each injured person, we selected 342,974
claims that were labeled either as ‘‘plaintiff’’ (53,126 claims) or ‘‘co-plaintiff’’ cases (i.e., not a
named plaintiff in a law suit, 289,848 claims). We excluded cases identified as ‘‘consortium’’
(159,544), ‘‘third party’’ (1,538) or ‘‘party in a claim’’ (1,552). Because Grace’s database shows
that some of the selected claims appear multiple times in the database, we matched claims and
eliminated duplicates, reducing the database size to 328,658 unique claimant records.
In addition to Grace’s data we use asbestos claims data from the Manville Trust to understand
trends in asbestos claim filings since Grace’s April 2, 2001 petition date and to forecast claims
that would have been filed against Grace since that date. We also use Manville data to impute
diseases when disease is unspecified in the Grace database.
To estimate the amounts by which Grace’s settlement payments would have increased since its
petition date, we use settlement data for three comparable co-defendants: USG, Quigley, and
Turner & Newall (T&N).
W. R. Grace                                                                                       43




6. Estimation of Grace’s Asbestos Liability, April 2001
Grace’s asbestos liability is the sum of its liability for pending claims, its liability for future
claims and its costs for administering and defending those claims. I do not estimate its costs for
administering and defending asbestos claims in this report, but Grace’s costs would have been
considerable. Typically defense and administrative costs can range from 40 percent to 100 of
indemnity costs among defendants, like Grace, who process their claims independently and not as
members of organizations like CCR. If after April 2001 Grace had changed from relying
primarily on group settlements to an aggressive strategy of challenging and litigating claims, as it
now advocates in these proceedings, Grace’s defense costs would have been oppressive. While
following such an aggressive strategy, OC spent about a half billion dollars on defense costs in
just three years.
The following formula is the basis for estimating the total indemnity that Grace would pay to
resolve these claims:
   Number of Claims × Payment Rate × Average Settlement Cost = Forecast Indemnity
Here, counts of pending claims are drawn from Grace’s databases. I forecast counts of future
claims by drawing upon three sources: Grace’s claims databases, epidemiological forecasts of the
number of asbestos-related cancer deaths, and data for other asbestos defendants who continued
to receive claims to the time of and after Grace’s bankruptcy. In negotiating and settling
litigation, defendants are concerned with what a claim will likely cost them: the expected
resolution cost, which is a product of the probability of payment (i.e., payment rate) and average
settlement cost. While asbestos claims are negotiated and resolved primarily on the basis of this
unitary parameter, the potential cost of continued litigation, our forecasts separate the two
parameters of payment rates and average settlements so that we can look more precisely at each
component of resolution costs.
As discussed in Section 4.3.2, payment rate represents the percent of claims resolved by Grace
that received payment by settlement or verdict. Average settlement costs represent the costs paid
on average to claimants averaged across those who received payment (we use the term
‘‘settlement’’ to also include liabilities to plaintiffs who have trial judgments). Our alternative
estimates of average settlement costs that Grace would have paid after its bankruptcy date are
discussed in Section 4.3.3. Forecast settlement costs are derived from Grace’s historic costs in
resolving claims or more current costs that other similar asbestos defendants have paid since
Grace entered bankruptcy. The amounts that Grace was paying in settlements at the time of its
bankruptcy petition are gradually increased either at the historic rates of increase in its past
settlements or at rates that by 2006 would increase Grace’s forecast settlement costs to levels that
have already been paid by comparable defendants in 2001, five years earlier than we forecast for
Grace. We present two alternative estimates of settlement costs based on past and continuing
rates of increase in Grace settlements and three other alternatives based on the increased
settlement amounts paid by other asbestos defendants.
For better precision, we apply the formula above separately for each asbestos disease. For Grace
(and for every asbestos defendant), settlement costs vary among different asbestos-related
diseases. Table 9 above shows the average amount paid by Grace in each settled claim as well as
its average resolution costs, the average paid across all resolved claims, both those settled with
payments and those closed without payment (i.e., the product of the payment rate and average
settlement). Grace paid far more on average to resolve mesothelioma claims than any other
disease. Settlement costs differed among all other diseases. Because the mix of diseases among
pending claims may differ from the mix of diseases among claims previously resolved by Grace,
we cannot assume that Grace’s overall historic average resolution cost among all claims will be
appropriate for estimating the average value of pending claims. For example, if mesothelioma
W. R. Grace                                                                                      44




claims represent a greater percentage of pending than resolved claims, then use of Grace’s overall
historic average would underestimate the company’s liability for pending claims. By applying the
formula above separately for claims within each disease category, we control for differences in
disease distributions between pending and resolved claims.
6.1. Forecast Indemnity for Claims Pending on April 2, 2001
6.1.1. Number of Pending Claims
On April 2, 2001, when it filed for bankruptcy protection, Grace had resolved 193,468 claims but
still faced 135,190 unresolved asbestos bodily injury claims. Grace reports 18,520 claims in its
database that had been settled but had not been paid prior to the bankruptcy. We describe these as
‘‘liquidated’’ claims and use ‘‘pending claims’’ to describe those that had neither been resolved
nor liquidated. Both together constitute Grace’s unresolved claims.
Table 17 shows counts for each type of asbestos-related disease as identified in Grace’s historic
database among pending, liquidated, and resolved Grace claims. For resolved claims, Table 17
shows the disease identified in Grace’s database. Note that for 12,399 resolved claims, no
disease is identified. Almost all of these claims were resolved without payment or for very small
payments, suggesting that most claims in this category resolved-unspecified-disease either had no
asbestos-related disease or else were claims that were not pursued by plaintiffs to the point of
providing documentation of disease. We do not include any of these 12,399 claims in forecasting
Grace’s asbestos liability; they add no value to our forecast liability. Rather, we use these 12,399
claims to reduce our liability forecast for pending claims by assuming that when Grace resolves
its pending claims, 5.8 percent will turn out also to have no specific disease and will be resolved
without payment, the same percentage that the 12,399 constitute among all previously resolved or
liquidated claims (Section 6.1.4).


                    Table 17: April 2, 2001 Resolved and Unresolved Claims

                                                Number of Claims
           Claim
           Status            Meso       Lung    OthCan Nonmal         Unspec        Total

           Resolved          4,104      7,444      2,754   166,767     12,399   193,468
           Total Pending     1,545      2,397        692    48,922     81,634 135,190
             Liquidated        139        466        215    17,700          0  18,520
             Unresolved      1,406      1,931        477    31,222     81,634 116,670
           Total             5,649      9,841      3,446   215,689     94,033   328,658

  Note: Nonmalignant claims include claims classified as ‘‘asbestos-related’’ by Grace.

6.1.2. Results of the Bankruptcy Discovery (PIQs) and Bar Dates (POCs)
During the course of these bankruptcy proceedings, the Court has authorized Grace to conduct
discovery among pending asbestos bodily injury claims by submitting to each pre-petition
claimant a questionnaire and request for extensive documents (collectively the PIQ form or PIQ
process). The Court has also established an October 2006 bar date for pre-petition asbestos
bodily injury claims that have been liquidated but not fully paid, and a November 2006 bar date
for pending pre-petition claims. Claimants were required to submit proofs of claim (POCs or
POC process) and PIQ forms to Rust Consulting, which serves as the Debtor’s agent for the PIQ
process and the Court’s agent for the POC processes.
W. R. Grace                                                                                      45




As these data have become available, we have reviewed them and expect to analyze them further
when we have received completed data. I may discuss these several databases when submitting
my subsequent rebuttal-supplemental report. Because of its design and implementation and our
review to date, we do not expect that these data will significantly clarify or substantially reduce
uncertainties about Grace’s total liability for pending and future asbestos bodily injury claims.
The PIQ and bar date deadlines occurred in the middle of a long period when litigation and
development of these claims has been stayed, six years after the bankruptcy stay was entered, and
years before the claims will be submitted to the post-confirmation trust. Evidence for claims as
they are eventually reviewed for resolution by the trust may be very different from evidence now,
the time that information must be submitted for the PIQ and POC processes.
The PIQ and POC forms and databases cannot provide definitive information about medical
conditions among claimants for two reasons. First, because asbestos-related diseases are
progressive and have long latency periods, medical conditions will deteriorate for some claimants
and might deteriorate for any claimant before those claims are reviewed for allowance.
Unfortunately new asbestos-related cancers will strike some pending claimants. Second, any
claimant can, and many claimants will, acquire different medical evidence; even if a claim is
presently unsupported by any medical evidence in the PIQ process or is supported by medical
reports of doubtful credibility, this does not mean that the claim will lack credible medical
documentation of an asbestos-related injury at the time the claim is reviewed for purposes of
resolution.
Similarly, the PIQ and POC forms and databases cannot provide definitive information about
Grace’s exposures of claimants to asbestos. Because of the lengthy bankruptcy stay in this case,
claimants and their lawyers have not had opportunity over the last six years to conduct discovery
against Grace about specific facts that may be needed to document that Grace contributed to their
asbestos exposures. Moreover, because the bankruptcy stay has interrupted Grace’s payment of
asbestos claims, neither claimants nor their counsel have had incentives to undertake
investigations to determine additional instances of exposures created by Grace. As a result
neither the PIQ nor the POC processes are suited for allowing either parties’ experts or the Court
to value claims participating in those processes.
We do not know whether or not the POC process will lead to disallowance of claimants who do
not respond to the respective bar dates. If so, non-responding claims would have no value, but
even this would not assist estimation in this case, because we will then be left with no basis for
estimating the values of surviving claims that do respond to the bar dates. POC responding
claims constitute an unusual and unrepresentative subset of all pending claims, those that survive
a bar date, a bankruptcy process that has no counterpart in the procedures of tort litigation. We
cannot use Grace’s historic payment averages meaningfully to value these responding claims,
which will almost certainly be more valuable than those claims that did not respond. In short, it is
unlikely that either the POC or PIQ processes will be useful in valuing individual claims or in
determining the aggregate value of all pending claims.
Moreover, it is critically important to recognize that PIQ and POC data on Grace’s pending claims
cannot be generalized to the characteristics or values of future claims. For Grace and every
asbestos defendant who enters bankruptcy the set of claims pending at bankruptcy include
‘‘stale’’ or abandoned claims that have accumulated over time unresolved (Section 6.1.3). Many
of the claims that plaintiffs or plaintiffs’ lawyers have abandoned as having little or no value
simply stay on a defendant’s books without any resolution, increasing in number over time. In
contrast, those claims that plaintiffs actively pursue are resolved over time (most with payment,
but some not). As a result, the set of claims that were pending claims against Grace on its
petition date is statistically biased: because valueless, abandoned claims have accumulated, this
set of claims overcounts valueless claims. By themselves data on petition date pending claims do
W. R. Grace                                                                                          46




not represent the profile of all claims that have been filed against Grace to the time of its petition
and, most important, these biased data do not present a reasonable profile of claims that will be
filed in the future.
The bias in pending claims data is even more serious than stated above. Claims do not settle in
random order. The most valuable claims tend to be resolved more quickly. Many courts advance
trial dates for exigent (serious cancer) claims. Plaintiffs’ lawyers push harder to get their most
valuable claims paid. Similarly, defendants attempt to resolve quickly the most dangerous claims
(i.e., most costly, most valuable) before their values increase as trial dates approach. Grace’s
litigation attorney Jay Hughes explained how Grace settled claims selectively, targeting the most
valuable for earlier resolution (Section 4.3.2). Because more dangerous, more valuable claims
resolve faster, this means that, at any point in time, the profile of pending claims will appear less
serious, less valuable than the profile of all claims that have been filed in the past or that will be
presented in the future. That is why many experts do not attempt to estimate the characteristics,
values, or liabilities of an asbestos defendant’s future claims based only on the information about
its pending claims.
At most, the bar date in these proceedings would demonstrate that some of the pre-petition
unliquidated claims pending against Grace are claims that likely have little or no merit and would
have received little or no value had Grace continued in asbestos litigation. But these observations
are already clear. We do not need their demonstration through a bar date and PIQ process. We
know that some valueless pending claims have been abandoned by plaintiffs’ lawyers, the stale
claims that I discuss in the next section. We know that other claimants will lack proof of any
asbestos-related disease, like claims that Grace in the past has closed (mostly) without payment as
claims with an ‘‘unknown’’ disease (Section 6.1.4). Litigation events over the last five years
demonstrate that other nonmalignant asbestos claims will likely have little real proof of injury
(and perhaps exposure), little merit, and little value. Again, we already recognize this in our
forecasts of Grace’s liability for asbestos claims by assuming that, in continuing litigation, Grace
would now dismiss without payment a far greater number of nonmalignant claimants than it had
in the past, paying nothing to 40 percent of claims that would have been paid prior to its
bankruptcy petition. We assume further that Grace, in continuing litigation would pay no money
to many cancer claimants who Grace would have paid in the past, between 15 and 30 percent of
claims that it would have paid prior to its bankruptcy petition. In short, we anticipate that the bar
date and PIQ processes in this case might eliminate some portion of pending claims, but our
forecast for Grace’s pending claim liability already eliminates value for these claims.
6.1.3. Adjustment for Stale Claims
As a first step for forecasting pending claims, we eliminate ‘‘stale’’ claims that seem to have been
abandoned or withdrawn by plaintiffs but are still described as ‘‘open’’ in Grace’s historic
database. By this step, we eliminate 7,420 stale claims, 6.4 percent of all claims shown as open
and unliquidated in Grace’s historic database.
Figure 11 through Figure 14 show what percent of claims that were filed in various years have
been closed depending upon the length of time since the claims were filed (‘‘duration’’). The
figures show durations up to 11 years from filing and that, for example, within four years of filing
84.5 percent of mesothelioma claims filed in 1996-1997 were resolved (Figure 11, purple line),
but that it took nine years for claims filed in 1991-1992 to have 79.4 percent resolved (Figure 11,
green line). For claims filed in 1989-1990, the graphs level off, asymptoting at about 50 percent
even after 11 years. Very few mesothelioma claims filed in 1989 or 1990 were being paid in
recent years, suggesting that these claims are not now being actively pursued. In contrast,
mesothelioma claims filed in the later filings show much steeper trends of resolution over short
durations. Their curves will ultimately level off too, but the trends suggest they will level off
W. R. Grace                                                                                     47




much higher than claims filed in earlier claims. Figure 12 to Figure 14 show similar patterns, the
pre-1991 filings for each of the other diseases asymptote at levels well below the percentages of
resolutions among claims filed in later years.

                   Figure 11: Proportion of Mesothelioma Claims Resolved, by Age of Claim
                       100




                                 1989−1990
                                 1991−1992
                                 1993−1995
                                 1996−1997
                       80




                                 1998−1999
                       60
         Pct Settled
                       40
                       20
                       0




                             0       2         4           6        8          10

                                                    Duration
W. R. Grace                                                                                    48




                      Figure 12: Proportion of Lung Cancer Claims Resolved, by Age of Claim


                       100         1989−1990
                                   1991−1992
                                   1993−1995
                                   1996−1997
                       80



                                   1998−1999
                       60
        Pct Settled
                       40
                       20
                       0




                             0         2          4           6         8         10

                                                       Duration



                      Figure 13: Proportion of Other Cancer Claims Resolved, by Age of Claim
                       100




                                   1989−1990
                                   1991−1992
                                   1993−1995
                                   1996−1997
                       80




                                   1998−1999
                       60
        Pct Settled
                       40
                       20
                       0




                             0         2          4           6         8         10

                                                       Duration
W. R. Grace                                                                                      49




                   Figure 14: Proportion of Nonmalignant Claims Resolved, by Age of Claim


                       100       1989−1990
                                 1991−1992
                                 1993−1995
                                 1996−1997
                       80



                                 1998−1999
                       60
         Pct Settled
                       40
                       20
                       0




                             0       2         4           6        8          10

                                                    Duration



These analyses show that while many claims are resolved within two years of their filing, some
are not reported as being closed even many years after they were filed. In several ways Grace’s
historic data suggest that most still-open claims filed before 1991 are likely to be abandoned or
withdrawn. First, a relatively high number of these pre-1991 claims are still open 11 to 16 years
after filing. According to Grace’s database, between 9 and 20 percent of mesothelioma claims
and 10 and 30 percent of nonmalignant claims filed from 1985 through 1988 were still unresolved
at the time of its bankruptcy in 2001. Only a few mesothelioma or nonmalignant claims from this
era had been resolved recently. Because it seems unlikely that more than a few of the remaining
open claims filed before 1989 will ever be paid by Grace, we treat all claims from those years that
are still open as stale or abandoned claims. As Figure 11 and Figure 14 show, among claims filed
in 1989-1990, half the mesothelioma claims and one fourth of the nonmalignancies were still
open after 11 years. In the two years before Grace’s bankruptcy, only one or two percent of
claims filed between 1989 and 1990 were resolved annually. At that pace most of these old, still-
open claims would never be paid by Grace. Even though we expect that a few still-open claims
filed during 1989 and 1990 and prior years might still be paid, we expect that most will not. We
delete all of these claims from our forecast of Grace’s liability for pending claims.
The pattern is different among claims filed in later years. Even though they have had fewer years
to be resolved, 84 percent or more mesothelioma claims filed between 1991 and 1998 have
already been resolved. Among mesothelioma claims filed between 1993 and 1996, resolutions
rates already approach 90%. Resolution rates continue to increase annually and these higher
resolution rates among relatively recent filings would increase even more with the passage of
time. Even among the pre-1991 filed claims that we treat as stale, some claims continued to be
resolved five, ten or even more years after filings: 8 percent of mesothelioma claims filed in 1988
were resolved more than 10 years after filing; 8 percent of lung cancers and 19 of other cancers
filed in 1987 were resolved 10 years or more after filing. With resolution rates among claims
filed after 1990 already approaching 90 percent and additional resolutions likely in the future, it
appears that there will be relatively few among recently filed claims that will linger and become
W. R. Grace                                                                                        50




stale. The patterns for other diseases are similar among other diseases. We make no adjustments
for staleness among claims filed after 1990.
Based on this analysis we updated our database to identify as ‘‘stale’’ those unliquidated pending
claims with a filing date 1990 or earlier. Table 18 shows that this reduced our total number of
pending claims by 7,420.


                      Table 18: April 2, 2001 Description of Pending Claims

                                                 Number of Claims
          Claim
          Status              Meso        Lung    OthCan Nonmal         Unspec        Total

          Stale                 284        450         79      5,687        920     7,420
          Liquidated            139        466        215     17,700          0    18,520
          Not Liquidated      1,122      1,481        398     25,535     80,714   109,250
          Total               1,545      2,397        692     48,922     81,634 135,190

  Note: Nonmalignant claims include claims classified as ‘‘asbestos-related’’ by Grace.

6.1.4. Imputation of Disease
Next, we addressed incompleteness and possible bias in how Grace’s historic database classifies
claimants’ asbestos-related disease. Based on Grace’s experience, as reported by its historic
database, we eliminate another 6,329 pending claims which we assume will likely have no
asbestos-related disease.
Table 17 shows that 94,033 claims in the Grace database have an ‘‘Unknown’’ disease, 28.6
percent of all filed claims. This is typical in claims databases that are maintained and used by
asbestos defendants. In many states plaintiffs’ law suits need allege only general descriptions of
disease, such as ‘‘asbestos-related disease’’ or ‘‘asbestos lung disease’’ without alleging a specific
type of disease. Defendants learn about disease as claims progress over time through
communications from plaintiffs’ counsel or through discovery. While Grace might update its
database at the time of settlement to add a specific disease (Hughes February 22, 2007
Deposition, p. 362), its database would still classify disease as ‘‘unknown’’ or ‘‘unspecified’’ until
it made such updates.
Grace’s data do show that it learned and updated the disease variable in its database during the
process of reaching settlements that paid asbestos claimants. Among claims that were settled and
paid by Grace, only 1 percent had ‘‘Unknown’’ disease in the Grace database. Similarly, none of
the 18,520 liquidated and unpaid claims had an unspecified disease. In contrast, Grace often did
not update disease when it resolved claims without payment. Grace resolved 12,399 claims that
had no disease specified in its claims database mostly resolving resolutions without payment.
Again, this is a pattern that we see repeatedly in asbestos defendants’ databases. Plaintiffs’
counsel withdraw claims or defendants reject claims before the parties have moved to discussion
of alleged disease or else because the claim did not present any asbestos-related disease. Because
these 12,399 claims have no information and no value we excluded these rejected-‘‘Unknown’’
claims in making our Grace forecasts, essentially treating them as if they had not been filed.
While Grace will likely see similar information-less claims in the future, we assume that Grace
would continue to reject these claims in the future as they have in the past. Even if filed in the
future, they will have no impact on Grace’s liability nor on our forecast.
W. R. Grace                                                                                                          51




However, the 80,714 pending claims with unknown disease (that are neither stale nor liquidated)
must be treated differently. As Grace addresses these 80,714 claims it would learn disease for
most. Therefore, we impute a distribution of diseases among these claims in order to value
pending claims and forecast future claims. Analysts who forecast asbestos liabilities routinely
perform imputations to fill in missing diseases and standard methods have evolved for such
imputation. We used two steps, both standard imputation methods that used data from the
Manville Personal Injury Settlement Trust.
First, we were able to identify diseases for many pending claims with ‘‘Unknown’’ disease by
linking the Grace and Manville Trust databases (August 2005 extract). Each of these linked
claims represents the same person who had claims against both Grace and the Manville Trust. We
found that Manville had an identified disease for 38,187 of the 80,714 pending Grace claimants
who had no disease specified in Grace’s database. We then used diseases that the Manville Trust
had determined after its review for these 38,187 claims instead of the ‘‘Unknown’’ disease
appearing for that claim in the Grace database. After this process, 42,527 pending Grace claims
(down from 80,714) still had an ‘‘Unknown’’ disease.
To impute diseases for these remaining 42,527 claims, we used a second imputation step. To
carry out this step we derived a transition matrix, a term of art describing a table that represents
how alleged disease designations in the Grace database correspond to evaluated disease in the
Manville Trust database for the same individuals based on every person whose claim can be
linked in the two databases. Table 19 shows this transition matrix for 53,421 linked claims that
were pending in Grace and that were evaluated by Manville. Each row shows diseases as reported
in the Grace database; each column shows the disease in the Manville matrix. The table shows,
for example that among the 739 mesothelioma claims in the Grace database matched to Manville
(first row of table, total number at far right of the row), 682 were also categorized as
mesothelioma by Manville and 18 are reported as lung cancer claims in the Manville database.
As Table 19 shows, mostly there is high correspondence in the disease categorizations between
the two database, but there are also a modest number of differences.23




23.   This pattern--high agreement with modest differences--occurs in every transition matrix. Differences might
      reflect differences in timing, e.g. Manville’s categorizations were as of 2005 but Grace’s as of 2001. Such timing
      differences occur because asbestos diseases progress, because some claimants develop second, more serious
      diseases and because documentation becomes more complete over time. Differences may also reflect who is
      making the categorization: for many of the claims in Grace’s database the category represents the claimants
      disease allegation, while for Manville we use the Trust’s determination of the disease.
W. R. Grace                                                                                                    52




               Table 19: Grace - Manville Trust Transition Matrix: Numbers of Claims

                                         Manville Trust Classification
                Grace
                Disease          Meso        Lung OthCan Nonmal Unspec                      Total

                Meso               682          18          2         33            4        739
                Lung                18         791         35         77           25        946
                OthCan               1          20        136         90           16        263
                Asbest              24         172         66      6,904          145      7,311
                Pleural             11          35         14      1,358           12      1,430
                Asbrel             105         259         59      4,042           80      4,545
                Unknown            748       1,529        391     34,691          828     38,187
                All Claims       1,589       2,824        703     47,195        1,110     53,421


Table 20 takes the transition matrix shown in Table 19 and computes percentages within rows to
show how claims in the Grace disease categories are distributed over Manville’s evaluated disease
categories. Among the 739 claims that Grace’s data classified as mesothelioma, 92.3 percent
were also classified as mesothelioma by Manville; 2.4 percent were classified as lung cancer by
Manville. In using this transition matrix to impute diseases among the 42,527 Grace claims that
were still unknown after the match to Manville, we still want to retain some of these claims as
‘‘unknown’’ in order to replicate Grace’s past experience that 5.8 percent of the claims that it
resolved remained with an ‘‘unknown’’ disease and almost all of these claims were closed without
payment. To replicate this past result, we adjusted the ‘‘Unknown’’ row so that the overall
percentage of ‘‘Unspecified’’ diseases among pending claims would equal the percent
‘‘Unspecified’’ among claims that Grace has already resolved: 5.8 percent. Setting the proportion
of ‘‘Unknown’’ claims that become ‘‘Unspecified’’ to 11.7 percent achieved the 5.8 percent
target, after which the remaining entries in the row were rescaled to sum to 100. Note that this
adjustment is again conservative, leaving more Grace claims in the Unspecified disease category
than we would see without the adjustment.24


            Table 20: Grace - Manville Trust Transition Matrix for Allocation of Claims

                                              Manville Trust Classification
           Grace
           Disease                    Meso        Lung OthCan Nonmal Unspec                      Total

           Meso                      92.3%        2.4%       0.3%        4.5%        0.5%     100.0%
           Lung                       1.9        83.6        3.7         8.1         2.6      100.0
           OthCan                     0.4         7.6       51.7        34.2         6.1      100.0
           Asbest                     0.3         2.4        0.9        94.4         2.0      100.0
           Pleural                    0.8         2.4        1.0        95.0         0.8      100.0
           Asbrel                     2.3         5.7        1.3        88.9         1.8      100.0
           Adjusted Unknown           1.8         3.6        0.9        82.0        11.7      100.0




24.   Among the matched claims, only 2.2 percent of claims in Grace’s ‘‘Unknown’’ disease category have an
      unspecified disease in the Manville data, instead of the 11.7 percent that we assume in order to match the
      percentages of ‘‘Unknown’’ claims between pending and resolved claims. This assumption reduces the number
      of compensable diseases in each category, as shown in Table 21.
W. R. Grace                                                                                       53




We made a second use of this transition matrix. We assume, first, that diseases in Grace’s
database for pending claims primarily represent plaintiffs’ allegations rather than Grace’s own
confirmation of disease and, second, that after further review Grace would reclassify some claims
with alleged disease. We use the transition matrix in Table 20 to estimate how these alleged
diseases among all pending claims will likely change to the distributions of diseases that would
eventually be determined by Grace, the bases for their resolutions of those claims. Because Table
20 primarily compared plaintiffs’ disease allegations (the rows are categories in Grace’s database)
to the diseases confirmed by the Manville Trust (the columns), the table is an example about how
plaintiffs allegations differ from defendants’ conclusions about disease. By using the
transformation matrix in Table 20 we can estimate how defendants such as Grace would
categorize diseases among pending Grace claims after review of the claims. These provide more
appropriate bases for forecasting Grace’s liabilities than use of disease categories that are derived
primarily from plaintiffs’ allegations.


              Table 21: Disease Distributions After Imputation for Pending Claims
                                and Elimination of Stale Claims

                                         Distribution of Claims
           Description       Meso        Lung    OthCan Nonmal           None       Total

           Number
            Resolved          4,104     7,444      2,754 166,767        12,399 193,468
            Liquidated          139       466        215  17,700             0  18,520
            Unresolved        2,885     5,346      1,325  93,365         6,329 109,250
            Total             7,128    13,256      4,294 277,832        18,728 321,238
           Percent
            Resolved          2.1%       3.8%       1.4%     86.2%       6.4%     100.0%
            Liquidated         .8        2.5        1.2      95.6         .0      100.0
            Unresolved        2.6        4.9        1.2      85.5        5.8      100.0
            Total             2.2        4.1        1.3      86.5        5.8      100.0


Table 21 shows our estimate of the number of active, pending (and unliquidated) claims in each
disease category after imputation of unspecified disease claims and use of the Manville matrix to
transform allegations to confirmed disease categories. We estimate that Grace will never
determine the specific diseases for 6,329 pending claims and will resolve those claims without
payment. We show these claims under the ‘‘None’’ column to reflect that they would be rejected
without determinations of disease.
6.1.5. Calculation of Indemnity for Pending Claims
In the next sections I describe our forecast for the 102,921 pending asbestos claims against Grace
that have not been liquidated (there are 18,520 liquidated claims according to Grace’s database),
that are not claims that we assume to be inactive stale claims (7,420 claims) and that are not
claims that we assume will lack an asbestos-related disease (6,329 claims). Table 22 shows these
three steps for winnowing down the number of pending claims that we forecast Grace would have
to consider for payment. In response to a bar date in this case approximately 38,953 claimants
say they have liquidated, unpaid claims. If this is correct, we would forecast that Grace would
face approximately 82,488 pending, unliquidated claims. However, following standard
forecasting practices we base our forecast on Grace’s historic asbestos claims database, rather
than on the problematic data generated by the PIQ and POC processes in this case.
W. R. Grace                                                                                       54




    Table 22: Estimated Number of Pending, Unliquidated, Active, Asbestos-Disease Claims

                                              Historical Expected
                       Pending Claim Category Database Responses

                       Total Pending Claims           135,190       135,190
                       Liquidated Claims               -18,520       -38,953
                       Inactive, Stale Claims           -7,420        -7,420
                       No-disease Claims                -6,329        -6,329
                       Total                          102,921         82,488


Accepting values for the 18,520 liquidated claims in the Grace database, Grace has a liability of
$62.5 million for these claims (2001 dollars).
6.1.5.1. Forecasts of Grace’s Payment Rates
As I discussed in Section 4.3.2 and Section 4.3.3, we use two payment parameters to forecast how
much Grace would have to pay to resolve these claims: (1) payment rate--the percents of claims
in each disease category that Grace will resolve with payment and (2) average
settlement--amounts that Grace would pay to claims in each disease category when it makes a
payment (i.e., the average excluding claims closed without payment).
As with all asbestos defendants, Grace resolved some asbestos claims without payment, from 4 to
8 percent (varying among disease types) during 2000 and 2001. We use these past rates for one
of our three alternative payment rate assumptions, historic payment rates. We use this alternative
primarily to show what Grace’s liability would be if we were to assume that its past experience
would continue. However, for the reasons described in Section 4.3.2, we assume that Grace’s
payment rates would have dropped sharply and abruptly after April 2, 2001 had Grace not filed
for bankruptcy protection and that much greater percentages of claims would be resolved without
payment. We use two alternative estimates of how much payment rates might fall. Our lowest
payment rate assumption follows assumptions of our liability analyses for the two former CCR
members Armstrong and USG. The low payment assumption is that instead of making payments
in over 90 percent of resolved claims (Grace’s historic payment rates), Grace would make
payments to only 64 to 68 percent of cancer claims and 58 percent of nonmalignant claims (Table
23). These forecast assumptions are taken from our earlier liability forecasts for former members
of the CCR and reflect our expectations about changes in how former CCR members would
review and settle claims after leaving CCR: that because of a CCR policy that members contribute
to settlements in every case where named in a law suit, we would see particularly sharp drops in
their payment rates after leaving CCR (Section 4.3.2). Because Grace had not been a CCR
member so that its past claim filings and payment rates had not been inflated by CCR policies, we
expect that it would not be able to achieve as sharp drops in its payment rates among cancer
claims as we forecast for CCR members. Like our historic payment rate assumption, our lowest
payment rate assumption is a lower bound estimate (particularly among future claims where we
forecasts reduced filings with a drop off in poorer quality claims) rather than a forecast that we
view as likely. To reflect the likely differing changes in payment rates between Grace and the
former CCR members, we derived our third reduced payment rate assumption. This model uses
rates that are midway between Grace’s historic rates and those of our lowest payment rate‘‘
forecast. As shown in Table 23, this assumption is that Grace would pay 78 to 82 percent of
cancer claims and 58 percent of nonmalignant claims. We regard forecasts based on the reduced
payment rates as more likely. We do not expect that Grace’s liabilities would be great as those
forecast using its historic payment rates or as low as liabilities forecast using the sharply reduced
W. R. Grace                                                                                                           55




lowest payment rates among cancer claims, but would be near liabilities forecast using our
reduced payment rates. In resolving pending nonmalignant claims, we assume that Grace could
achieve far more success in closing those claims without payment. Therefore, we assume for
both our reduced and lowest forecast models that Grace could close 42 percent of nonmalignant
claims without payment, compared to its historic experience of rejecting only 4 percent.


                                  Table 23: Payment Percentages for Grace

                             Payment                 Payment Percentages
                             Rate
                             Definition        Meso        Lung OthCan Nonmal

                             Historic         92.1%       95.3%        96.7%       96.3%
                             Reduced          78.3        81.0         82.2        57.8
                             Lowest           64.5        66.7         67.7        57.8


6.1.5.2. Forecasts of Grace Settlement Amounts
For all of the reasons discussed in Section 4.3 and Section 4.4 above, we forecast that Grace’s
average settlement values would have continued to increase after April 2001 as they had been
increasing in the past, either at the same rates that Grace’s settlement values had increased since
1997 (short-term trend) or since 1990 (regressions results for Long-Term Trend) or else at one of
three slowly increasing rates that would leave Grace’s settlement values in 2006 equal to amounts
paid in 2001 among the three other comparable asbestos defendants: USG, Quigley, and T&N.
Each of these alternatives forecast that average settlement values would increase gradually over
five years from 2002 through 2006. Because we forecast that Grace would have settled all
pending claims between 2001 and 2003, we do not use the increased 2006 values as estimates of
what Grace would pay pending claims.25 Instead we use Grace’s 2002 average settlement values
for each of our five alternative value models shown in Table 13 through Table 15, values that in
each alternative model are only modestly greater than Grace’s settlement averages for 2000 and
2001 (Table 24).




25.   We assume that one-third of pending claims would be settled and paid in each year 2001, 2002 and 2003,
      essentially equivalent to assuming that all pending claims would settle at the average settlement value for 2002.
W. R. Grace                                                                                             56




                              Table 24: 2002 Settlement Values Forecast

                                                     Settlement Values
                  Average Settlement       Meso          Lung    OthCan          Nonmal

                  2000-2001 Average      $93,640      $17,912        $9,891        $3,372
                  Long Term Grace       $108,918      $18,688    $11,088           $3,018
                  Shor t Term Grace      107,964       19,952     10,784            3,548
                  Quigley                107,651       20,041     10,146            3,681
                  T&N                    108,331       19,836     10,261            3,680
                  USG                    111,260       20,553     10,372            3,678

  Note: Payment amounts are expressed in 2001 dollars.

We forecast that pending mesothelioma claimants who receive settlements would be paid 15 to 19
percent more in settlement than the 2000-2001 pre-petition settlements for such claims, but that
pending nonmalignant claims who receive settlements would be paid at most 9 percent more and
possibly 10 percent less than nonmalignant claims that settled in 2000-2001.26
In contrast to our forecast of five-year gradual increases in average settlement values, we forecast
that Grace’s payment rates would drop immediately and sharply in 2002 (Table 23) when it would
reject without payment 3 to 6 times as many cancer claims and 11 times as many nonmalignant
claims as it had before its bankruptcy.
Table 25 shows our forecasts of both settlement parameters for pending claims, average
settlements and payment rates by disease, for ten combinations of two alternative payment rate
assumptions and five alternative settlement average assumptions. The table also shows Grace’s
historic payment rates and settlement averages for each disease.


                          Table 25: Payment Parameters for Pending Claims

                                         Payment Rates                           2002 Payment Amount
Payment
Rates   Average Settlement      Meso      Lung     OthCan   Nonmal       Meso        Lung    OthCan    Nonmal

Historic   Historic             92.1%    95.3%      96.7%    96.3%     $93,640     $17,912    $9,891   $3,372
Reduced    Long Term Grace      78.3%    81.0%      82.2%    57.8%    $108,918     $18,688   $11,088   $3,018
Reduced    Short Term Grace     78.3     81.0       82.2     57.8      107,964      19,952    10,784    3,548
Reduced    Quigley              78.3     81.0       82.2     57.8      107,651      20,041    10,146    3,681
Reduced    T&N                  78.3     81.0       82.2     57.8      108,331      19,836    10,261    3,680
Reduced    USG                  78.3     81.0       82.2     57.8      111,260      20,553    10,372    3,678
Lowest     Long Term Grace      64.5%    66.7%      67.7%    57.8%    $108,918     $18,688   $11,088   $3,018
Lowest     Short Term Grace     64.5     66.7       67.7     57.8      107,964      19,952    10,784    3,548
Lowest     Quigley              64.5     66.7       67.7     57.8      107,651      20,041    10,146    3,681
Lowest     T&N                  64.5     66.7       67.7     57.8      108,331      19,836    10,261    3,680
Lowest     USG                  64.5     66.7       67.7     57.8      111,260      20,553    10,372    3,678


  Note: Payment amounts are expressed in 2001 dollars. T&N values for other cancer and
  nonmalignants were estimated by averaging values for Quigley and USG.

Taken together these assumptions--sharply lower payment rates and modest increase in settlement
values--mean that we forecast that Grace would pay less to resolve pending claims than it had
paid to resolve claims before its bankruptcy petition. Table 26 shows the size of these predicted
W. R. Grace                                                                                    57




reductions in Grace’s costs for resolving pending claims for each disease, comparing the average
resolution cost (the product of multiplying the average settlements times payment rates) for each
forecast with Grace’s average resolution cost among claims it resolved in 2000-2001. Our
reduced payment rate assumption means that Grace’s costs for resolving pending mesothelioma
claims would be about the same as it paid before bankruptcy, but that it would resolve all other
pending claims for less than it had paid before bankruptcy. Our most conservative lowest
payment rate assumption means that Grace’s costs for resolving pending claims would be less
than it paid before the bankruptcy for every disease and every settlement average assumption.
Despite the much greater risks that Grace would have faced in its asbestos litigation after April
2002, we forecast conservatively that it would be able to resolve pending claims more
successfully than it had in the past.


                         Table 26: Forecast Resolution Costs for Pending Claims
                         Are Lower than Grace’s 2000-2001 Resolution Averages

                                                           Resolution Costs
              Payment
              Rates   Average Settlement           Meso      Lung    OthCan Nonmal

              Historic      Actual 2000-2001     $86,258   $17,070    $9,567      $3,248
              Reduced       Long Term Grace      $85,282   $15,138    $9,116      $1,744
              Reduced       Short Term Grace      84,535    16,162     8,866       2,051
              Reduced       Quigley               84,290    16,234     8,341       2,127
              Reduced       T&N                   84,822    16,068     8,436       2,127
              Reduced       USG                   87,116    16,648     8,527       2,126
              Lowest        Long Term Grace      $70,232   $12,467    $7,507      $1,744
              Lowest        Short Term Grace      69,617    13,310     7,301       2,051
              Lowest        Quigley               69,416    13,369     6,869       2,127
              Lowest        T&N                   69,854    13,232     6,947       2,127
              Lowest        USG                   71,743    13,711     7,022       2,126

  Note: T&N values for other cancer and nonmalignants were estimated by averaging values for
  Quigley and USG.

6.1.5.3. Grace’s Liability for Pending Claims
We use these numbers and values to complete the formula for our forecast of Grace’s liability for
pending claims.
   Number of Claims × Payment Rate × Average Settlement Cost = Forecast Indemnity
Results shown in Table 21 (Section 6.1.4, above) provide the number of pending claims within
each disease category. Results shown in Table 25 (section immediately above) show the payment
rates and average settlements for each forecast and each disease. For example, one of our
estimates for the value of pending unliquidated mesothelioma claims, assuming the reduced
payment rate and long-term Grace settlement average, is calculated as follows:
   Number of Claims × Payment Rate × [Settlement Value × Inflation] = Forecast Indemnity
      2,885 × .783 × [$108,918 × 1.025] = $252,191,882,
where Average Settlement Cost is the product of Grace’s average settlement value times one
year’s inflation (assuming that pending claims would have settled on average in 2002). Table 27
W. R. Grace                                                                                       58




shows the results of the forecasts using the alternative estimates for average settlements and
payment rates (including one year’s inflation for payments that will be made in 2002). As that
table shows, we forecast that Grace’s liability for the indemnity of claims pending at the time of
its bankruptcy petition was between $516 and $627 million (including $63 million in liquidated
but unpaid settlements). All ten of our alternatives forecast that Grace’s liability will be
substantially below what its liability would have been had it continued to settle claims at its
payment rates and average settlement values that obtained during 2000 and 2001, $735 million
(including liquidated claims).


                          Table 27: Forecast of Indemnity for Pending Claims

                                                                Forecast Indemnity
 Claim         Payment
 Status        Rates   Average Settlement           Meso      Lung OthCan Nonmal              Total

 Liquidated                                           $10        $7         $1       $44       $63
 Unresolved    Historic      Actual 2000-2001        $255       $94        $13      $311      $672
 Unresolved Reduced Long Term Grace                  $252       $83        $12      $167      $515
 Unresolved Reduced Short Term Grace                  250        89         12       196       547
 Unresolved Reduced Quigley                           249        89         11       204       553
 Unresolved Reduced T&N                               251        88         11       204       554
 Unresolved Reduced USG                               258        91         12       203       564
 Unresolved    Lowest        Long Term Grace         $208       $68        $10      $167      $453
 Unresolved    Lowest        Short Term Grace         206        73         10       196       485
 Unresolved    Lowest        Quigley                  205        73          9       204       491
 Unresolved    Lowest        T&N                      207        73          9       204       492
 Unresolved    Lowest        USG                      212        75         10       203       500

  Note: Millions of 2002 dollars. Pending claims are assumed to settle in 2002 and are given one
  year’s inflation at 2.5 percent.

This narrow range of forecasts demonstrates again the robustness of our forecasts of Grace’s
liability for pending claims. The ten alternative forecasts all assume that Grace would reject a
much greater percentage of claims compared to its pre-petition resolutions, but use two
substantially different estimates of the percent of claims that Grace would reject without payment.
Within each of these two different levels of forecast payment rates, we use five alternative sets of
settlement values based on three different forecasting methods and four different sets of
settlement data--Grace’s own historic experience and more recent experience for three other
asbestos co-defendants. Across all of these different alternatives, the highest and lowest forecasts
differ by only 11 percent above and below the average across all ten forecasts. Almost all of
these differences arise from the two alternative payment rate assumptions. The five different
assumptions about settlement values make almost no difference in our pending claims forecasts.
Figure 15 compares graphically Grace’s forecast total costs among pending claims indemnity for
each type of asbestos disease for reduced payment rate / long-term dollar values assumption: 63
percent of Grace’s liability is for cancer claims that were pending on its petition date. For the low
payment rate assumption, 59 percent of the liability is for cancer claims (Figure 16).
W. R. Grace                                                      59




               Figure 15: Indemnity Amounts for Pending Claims
              (Reduced Payment Rates, Long-Term Dollar Values)


                                          Meso
                                          262




                  Lung
                    90



                     OthCan
                         13
                                                 Nonmal
                                                 211




              Figure 16: Indemnity Amounts for Pending Claims
              (Lowest Payment Rates, Long-Term Dollar Values)


                                            Meso
                                            218




                  Lung
                    75



                  OthCan
                      11



                                            Nonmal
                                            211
W. R. Grace                                                                                     60




6.2. Projections of Number And Timing of Future Claims
Like other major asbestos defendants, Grace saw substantial increases in asbestos claim filings
over the twelve years leading up to its bankruptcy, 1990-2001 (Figure 17). By the beginning of
this decade asbestos defendants faced extraordinarily increased burdens--increasing claim filings,
increasing settlement values (Section 4.3.2), and prospects of greater future increases in
both--which led to bankruptcy filings for each defendant shown in Figure 17 and more than a
dozen others who have filed since 2000 (Manville filed in 1982; but these litigation pressures
affected the Manville Trust as well which led to its tightened claims allowance processes and the
lower payment percentage that it adopted in 2002). Grace’s claim filings reached their highest
level in 2000 at 46,861 claims; its 33,653 claims in the first quarter of 2001 would annualize to
134,612 claims if filings continued at the first quarter rate for the rest of the year (we
conservatively estimate instead that annualized claims filings for all of 2001 would be 68,683,
using Grace’s average claims filing rates between January 1999 and March 2001). This pattern
was not unique to Grace. The Manville Trust received about 85,000 claims in 2001 and USG,
which like Grace was a manufacturer of asbestos-containing building products, received claims in
2001 at an annualized rate of about 60,000 before it entered bankruptcy in June. The experiences
of all of these companies are particularly relevant to Grace, because asbestos liabilities for each
company arose primarily from manufacturing of asbestos-containing construction or insulation
products or, like Grace, both types. Manville and T&N were also like Grace in having highly
unfavorable asbestos-related corporate histories.
W. R. Grace                                                                                          61




                                Figure 17: Claim Filings for Major Asbestos Defendants, 1990-2001
                     80000



                                      Grace
                                      USG
                                      T&N
                                      OC
                                      Manville
                                      AWI
                     60000
  Number of Claims
                     40000
                     20000




                             1990         1992        1994          1996         1998         2000

                                                              Filing Year


      Note: Grace’s 2001 entry based on annualizing filings. The USG and OC entries are
      annualized for bankruptcy year.

In this section I consider how Grace’s increasing claim filing trends would have continued into
the future, presenting our forecasts of future claims that would be filed after Grace’s bankruptcy
petition date. We forecast Grace’s future claims using the standard ‘‘Nicholson’’ forecasting
method. In making these forecasts, we look to the effects of recent changes in the litigation
environment which cause us to adjust and reduce our forecast of the number of future
nonmalignancy claims that would be filed against Grace (Section 6.2.4).
The number, timing and types of future claims against Grace will depend both upon the number
of people in each future year who develop diseases that are asbestos-related (the incidence of
diseases) and also the fraction of those people who will pursue claims against Grace (its
‘‘propensities to sue’’).
This section describes how the historic propensities to sue Grace for cancer are calculated and
used to forecast future cancer claims. Inputs to these calculations are (1) epidemiological models
of the incidence of asbestos-related cancer deaths, and (2) historic data on the number of cancer
claims filed against Grace and (3) data on cancer claims filings against other defendants both
before and since Grace’s petition date.
6.2.1. The Incidence of Asbestos-Related Cancers
Medical research by epidemiologists provides projections of the incidence of asbestos-related
cancers. Projections differ somewhat among epidemiologists, but most agree on the relative
W. R. Grace                                                                                                            62




changes in cancer deaths over time--increasing until late in the twentieth century followed by a
slow decrease in the following years. Because of this general agreement on changes over time,
projections of future claims will be generally similar even when based on differing projections of
incidence.
Figure 18 shows epidemiological projections of the annual number of asbestos-caused deaths
between 1967 and 2027 from each of three asbestos-related cancers--mesothelioma, lung cancer
and other (primarily gastro- intestinal) cancers--among workers exposed before 1980 in major
asbestos-using industries.27 The figure represents the results of work by Nicholson, Perkel and
Selikoff (1982) which is generally recognized as the most comprehensive and reliable forecast of
asbestos-related cancer deaths (Appendix Table C1). The peak year of forecast deaths differs
among the three types of cancers because the latency periods, i.e., the time from first asbestos
exposure to the occurrences of cancer, differ among the three diseases. Because the latency
period is longest for mesothelioma, the risk of that disease increases for a longer period and the
incidence of mesothelioma peaks later than for other asbestos-related cancers. The patterns of
asbestos diseases among exposed workers and, therefore, the patterns of legal claims, have been
changing over time with these changes in the relative incidences of each type of cancer. In past
years lung cancer has been the most frequent cancer among occupationally exposed workers and
the most frequently claimed cancer. However, now and in each future year approximately the
same number of workers will suffer mesothelioma and lung cancer.




27.   Forecasts for lung and other cancers are excess deaths, i.e., the number of additional deaths that will occur
      because of asbestos exposures that are in addition to cancer deaths that would otherwise have occurred without
      asbestos exposure. Asbestos exposure is the only know cause of mesothelioma.
W. R. Grace                                                                                       63




                                            Figure 18: Nicholson Cancer Projections



                                   Meso
                     5000




                                   Lung
                                   OthCan
                     4000
  Number of Deaths
                     3000
                     2000
                     1000
                     0




                            1970        1980           1990         2000       2010   2020

                                                              Death Year


6.2.2. Accuracy of Epidemiological Projections
Epidemiologists’ projections, like those of Nicholson, et. al., have their own uncertainties, but can
be tested by comparing projections for past years with data on mesothelioma deaths in those same
years collected by the National Cancer Institute’s SEER (Surveillance, Epidemiology and End
Results) cancer registry. The SEER program collects comprehensive data on the incidence,
treatment and end results (including deaths) for all types of cancers at seventeen different sites in
the United States. SEER generates cancer rates from these sites that can then be used to estimate
the incidence of each type of cancer for the United States as a whole. The SEER program is
highly sophisticated and recognized as the state of the art for such programs throughout the world
and its results are widely used in medical research and planning.
Because SEER collects data continually, its counts provide estimates of the annual national
incidence of each type of cancer over many years. SEER’s annual estimates of the national
incidence of mesothelioma provide the means to test epidemiological forecasts of mesothelioma
deaths. Asbestos is the only known cause of mesothelioma and so epidemiologists’ forecasts of
asbestos-related mesothelioma deaths should tend to correspond to the annual SEER national
incidence counts for all mesothelioma deaths. While the SEER national incidence measures are
themselves estimates based on the sample of SEER sites that have their own uncertainties, over
many years an accurate epidemiological forecast of mesothelioma deaths should track trends in
the SEER estimates of actual mesothelioma deaths.
SEER collects its data from a limited number of major sites around the country (e.g. two sites are
Los Angeles-Long Beach and the entire state of Iowa). It is impossible to make a random
selection of such sites, but SEER has attempted to select a cross section of sites that will closely
W. R. Grace                                                                                    64




mimic key demographic characteristics of the U.S. as a whole. In recent years the SEER program
has expanded its number of sites both to provide more data and better matches to the country as a
whole. SEER’s counts of sites went from 9 before 1992, to 13 between 1992 and 1999, and now
17 sites since 2000.
Estimates of the national incidence of cancers are enhanced because SEER provides rates of
cancer broken down by key demographic variables so that national estimates can take into
account differences in rates by age and other characteristics. These age rates are particularly
important for estimating national incidences of mesothelioma and other diseases whose incidence
is strongly related to age.
SEER’s counts of 2000 to 2003 national mesothelioma deaths based on its most comprehensive
17 sites are remarkable close to Nicholson’s forecasts of mesothelioma incidence (Table 28).
Nicholson forecast 12,173 mesothelioma deaths for this four year period, within 233 of the SEER
national counts of 12,406 mesothelioma for those years. This is less than a 2 percent difference.
This correspondence supports the conclusion that Nicholson’s forecasts, made almost 25 years
ago, remain remarkably accurate even today.


                      Table 28: Comparison of Nicholson Projections with
                      SEER-17 Site Estimates of Mesothelioma Incidence

                                Death Nicholson        SEER-17
                                Year Projections      Estimates

                                2000          3,024        3,172
                                2001          3,042        3,124
                                2002          3,060        3,125
                                2003          3,048        2,985
                                Total       12,173        12,406
W. R. Grace                                                                                            65




                     Figure 19: Epidemiological Projections Confirmed by SEER’s Mesothelioma Counts
                    3000



                                  Nicholson
                                                                             = SEER−17 Values
                                  KPMG
                                  SEER 9
                    2500
                    2000
 Number of Deaths
                    1500
                    1000
                    500
                    0




                                1980          1990   2000         2010    2020      2030        2040

                                                            Death Year


While SEER’s 9-sites provide a somewhat less comprehensive view of national cancer rates than
its 17-sites, the availability of 31 years of data from these 9 sites provides an opportunity to
compare the long-term correspondence between Nicholson’s forecasts and the SEER data.
Nicholson and his colleagues published their forecasts in 1982. Since then and through the most
recent years of data, the Nicholson forecasts closely track the 9-site SEER estimates of annual
mesothelioma deaths. SEER’s 31-year trends are shown in Figure 19 and, as Figure 19 shows,
the Nicholson et. al. forecasts correspond remarkably well to SEER’s 9-site estimates of actual
mesothelioma deaths up through 2000, where Nicholson is higher by only 1.4%.
Subsequently, the 9-site numbers dip considerably, but data from SEER’s 17-sites show that there
continues to be close correspondence between Nicholson and SEER after 2000 despite divergence
between Nicholson’s forecast and the 9-site SEER estimates. The difference between the 17-site
and 9-site SEER estimates suggest that differences in the two SEER curves may be due to
uncertainties in estimating national incidence data from SEER.
Because lung cancer and the other asbestos-related cancers have causes other than asbestos
exposure, the SEER estimates of those cancer deaths will exceed and cannot be used to test the
epidemiological forecasts for those other cancers. But because Nicholson’s forecasts for all types
of cancers are based on the same methods and the same estimates of the number of exposed
workers and the extent of their asbestos exposures, the strong confirmation of Nicholson’s
forecast for mesothelioma provides confidence for Nicholson’s epidemiological forecasts for each
type of cancer.
Figure 19 also shows a second forecast of asbestos-related mesothelioma deaths made by analysts
at KPMG-Peat Marwick in 1992 as part of their work as experts in the bankruptcy proceedings of
W. R. Grace                                                                                        66




National Gypsum. Dr. Tom Vasquez and his colleagues at KPMG-Peat Marwick attempted to
update the 1982 forecasts made by Nicholson, et. al., using more recent U.S. Labor Department
statistics on the populations of workers in asbestos exposed industries, more recently formulated
medical models of the risk of mesothelioma and lung cancer from asbestos exposure and several
alternative assumptions (KPMG’s annual forecasts are reproduced in Appendix Table C2). As
Figure 19 illustrates, the shape of KPMG forecasts (i.e., their trends) are very similar to those
made by Nicholson et. al. a decade previously and, as a result, claims forecasts that are based on
the two alternative epidemiological forecasts are only slightly different.
The close correspondence between KPMG and SEER before the 1990s is not a validation of the
KPMG forecast. KPMG derived its revised forecasts in part by fitting the forecasts to the SEER
data through the 1980s. The curves correspond not because KPMG was forecasting
mesothelioma incidence before the 1990s but because the KPMG estimates were made to fit to
SEER’s estimates by the KPMG researchers. Figure 19 shows that over the subsequent eight-year
time period 1993 to 2000 the original Nicholson projections more closely fit the SEER data on
actual mesothelioma deaths than do the KPMG forecasts. Since 2000, estimates of national
mesothelioma incidence derived from the 9-site SEER fall between the Nicholson and KPMG
forecasts, but national estimates derived from the SEER-17 sites more closely validate the
Nicholson than the KPMG forecasts.
6.2.3. Propensities to Sue Grace
Data and forecasts of the incidence of asbestos-related diseases describe the potential for liability
against Grace. As long as asbestos-related cancers occur, it is likely that some claims will be
filed. We compare Grace’s data on past claim filings to Nicholson’s incidence forecasts for past
years to see how much of this potential for asbestos cancer claims was directed against the
company in the past: Among all the potential asbestos-related cancer claims in the U.S. what
fraction resulted in Grace claims? We formalize these comparisons through our propensity to sue
calculations shown in the next paragraph. Grace’s claims data also show trends in claiming
against the company, whether the propensities to sue had increased, decreased or stabilized in
recent years. The historic levels and trends in propensities to sue document the past behavior by
claimants and plaintiffs’ lawyers in pursuing possible claims for asbestos-related cancers.
We look to this past history of claiming against Grace--past propensities to sue and trends in the
propensities to sue--as well as information about claiming against other asbestos defendants to
forecast future claiming against Grace. We forecast the number of claims for each type of cancer
in each future year by multiplying the number of deaths projected by Nicholson for that year
times our forecast of the propensity to sue for that cancer in that year. The calculations that are
used first to derive propensities to sue and second to forecast future claims based on these
propensities to sue are stated below.


  Calculation of Propensity to Sue:
     Number of Claims ÷ Incidence = Propensity to Sue


  Forecasting Future Claims from Propensity to Sue:
     Propensity to Sue × Incidence in Future Year = Projected Claims in Future Year


We base our forecast of future propensities to sue Grace primarily on the number of cancer claims
filed in the past against Grace and its trends in past annual filings. Table 29 shows the annual
W. R. Grace                                                                                       67




number of asbestos bodily injury claims filed against Grace for each type of asbestos-related
disease after the imputation of unspecified disease claims, as described in Section 6.1.4. Claim
filings against Grace continued at high levels until Grace filed for bankruptcy protection in April
2001. It received over 33,000 claims in the first quarter of 2001. The 2001 filings during one
quarter cannot be compared meaningfully to the annual filings for prior years. To permit
meaningful comparisons, Table 29 also shows annualized filings for 2001, using Grace’s claim
filings during 1999 through March 2001 to fill in the last three quarters of 2001 filings. Overall,
Grace saw a sharp increase in annual claim filings over the decade of the 1990s. This trend too
was shared with other major asbestos defendants.


  Table 29: Number of Filings Against Grace, By Filing Year and Disease (After Reallocation)

                                               Number of Filings
            Filing
            Year            Meso       Lung    OthCan Nonmal            None       Total

            1980-               2          0          1         3           0         6
            1981                1          0          1        10           0        12
            1982                5          0          3        23           2        33
            1983                9          6          4       164          88       271
            1984               12         12          7       311          43       385
            1985               34         33         13       531           3       614
            1986               68         69         40     1,516          32     1,725
            1987               99        181         53     2,327         392     3,052
            1988              131        168         95     5,377         489     6,260
            1989               86        173         57     4,201         370     4,887
            1990              152        315        126     5,047         350     5,990
            1991              322        499        133    13,085       1,293    15,331
            1992              437        923        296    15,574       1,128    18,358
            1993              346        884        327    15,340       1,457    18,355
            1994              571      1,041        339    18,030         984    20,966
            1995              594      1,367        527    29,219         678    32,386
            1996              652      1,574        550    34,454       2,176    39,407
            1997              634      1,238        361    23,651         914    26,797
            1998              574        887        292    18,302       1,258    21,313
            1999              675      1,114        313    20,295       2,180    24,576
            2000            1,159      1,690        463    40,079       3,471    46,861
            2001 (1/4)        566      1,082        293    30,292       1,420    33,653
            2001 (Ann)      1,366      2,377        649    60,514       3,777    68,683
            Total           7,129     13,256      4,294 277,831       18,728    321,238

  Notes: Entries for 2001 (in red) are filings only through the first quarter before Grace’s April 1,
  2001 petition. Entries for 2000(Ann) (in green) are annualized filings using filing rates over
  the 27 month period January 1999-April 1, 2001, for the last three quarters of 2001

Figure 20 provides graphic representations of these increasing trends in Grace filings for each of
the three types cancers. To provide the most meaningful information about Grace’s filings that
closely preceded its petition, we average filings over the period January 1999 to April 2001 to
obtain annualized rates for 2001. Note that the instability in claim filings between 1996 and
1998, the sharp increases in 1996 and declines in 1997-1998 are results of the moratoria
agreement that Grace negotiated with major plaintiff’s law firms.
W. R. Grace                                                                                      68




                                   Figure 20: Number of Cancer Filings Against Grace



                                  Meso
                                  Lung
                    2000




                                  OthCan
                    1500
 Number of Claims
                    1000
                    500
                    0




                           1980            1985          1990             1995         2000

                                                           Year


     Note: Grace’s 2001 filings are annualized across the period from January 1999 to April 1,
     2001.

Figure 21 compares Nicholson’s forecast of mesothelioma deaths between 1990 and 2001 with
the number of mesothelioma claims filed against Grace in those years. As Figure 21 shows,
during the three years before its bankruptcy, mesothelioma claims against Grace had increased
sharply, growing closer to the incidence of mesothelioma deaths that Nicholson forecast. But
even with these increases, the number of mesothelioma claims against Grace remained well below
the number of mesothelioma incidences occurring in the country each year and below the number
of mesothelioma claims filed against the Manville Trust.
W. R. Grace                                                                                            69




                                         Figure 21: Nicholson Meso Forecasts vs Grace Actuals
                           3000
                           2500
 Number of Deaths/Claims
                           2000
                           1500




                                         Nicholson
                                         Grace−Meso
                           1000
                           500




                                  1990      1992         1994         1996         1998         2000

                                                                   Year


       Note: Grace’s 2001 filings are annualized across the period from January 1999 to April 1,
       2001.

We used the standard Nicholson Method for forecasting future claim filings for each cancer, a
method based on Grace’s historic propensities to sue. To illustrate with mesothelioma filings:
forecasts of future mesothelioma claim filings are based on a calculation of the relationship
between past claims to the past incidence of the disease. This calculation, the ‘‘propensity to
sue,’’ is derived by dividing the number of claims for mesothelioma in a year (the lower, blue line
in Figure 21) by the number of mesothelioma deaths projected for that same year (the higher red
line in Figure 21). This establishes the historic claiming rate for mesothelioma against Grace,
what percent of persons getting mesothelioma in each past year have filed a claim against Grace.
Propensities to sue Grace for lung cancer and for other cancers are calculated similarly, by
dividing the number of claims for each type of cancer in a year by the Nicholson forecast of the
number of asbestos-related deaths from that cancer in the same year.
Table 30 below shows the annual propensities to sue Grace calculated for each of the three types
of asbestos-related cancers for each year since 1990. From the early 1990s the number of cancer
claims filings have increased steadily for most asbestos defendants, but this pattern differed
somewhat for Grace. Propensities to sue Grace were relatively low and flat during the early
1990s and before, but these increased in the mid-1990s as Grace became more prominent in the
litigation and jumped even more in 2000 and 2001 as other target asbestos defendants entered
bankruptcy and with Grace’s extensive bad publicity. Grace’s filings in the late 1990s were
affected by major law firms’ agreement to a moratoria in those years as a term in their inventory
settlements with Grace. These plaintiffs’ law firms agreed to file no claims (but for a few
W. R. Grace                                                                                       70




exceptions) for several years. The filing moratoria reduced filings during the last years of the
1990s, pushing some filings forward into the earlier years in which the agreements were signed
and pushing other filings later. If Grace had not been able to implement these moratoria, its filing
trends preceding its bankruptcy would have shown a smoother and steadier increase.
Furthermore, Grace itself concluded that even after they ended the moratoria continued to
suppress its claim filings through the time of Grace’s bankruptcy petition (Hughes Deposition,
February 22, 2007, pp. 81-82), artificially reducing both the filings in the two years preceding the
petition and also liability forecasts that are based on filings during those years.


                   Table 30: Propensities to Sue Grace, by Disease: 1990-2001

                                              Type of Cancer
                               Filing
                               Year       Meso      Lung OthCan

                               1991      12.0%      9.1%       8.9%
                               1992      15.9      16.8       19.8
                               1993      12.4      16.2       22.1
                               1994      20.1      19.3       23.1
                               1995      20.6      25.5       36.3
                               1996      22.3      29.7       38.2
                               1997      21.4      23.5       25.3
                               1998      19.2      17.2       21.0
                               1999      22.5      22.1       22.9
                               2000      38.3      34.3       34.7
                               2001      74.4      90.1       89.8
                               00-01     45.6      45.3       45.5
                               99-01     35.4      34.8       35.3

  Note: 2001 propensities to sue are annualized based on filings and incidence for one quarter.
  00-01 annualized rates are over 15 month period from January 2000 to April 1, 2001. 99-01
  annualized rates are over 27 month period from January 1999 to April 1, 2001.

Forecasts of future Grace claims must take two matters into account: (1) the most recent level of
claiming shown by the propensities to sue during years preceding Grace’s bankruptcy filing and
(2) the fact that cancer filings and propensities to sue had increased sharply as of April 2001.
Together these matters not only establish a starting point for forecasting future Grace cancer
claims based on the most recent propensity to sue, but also suggest that propensities to sue Grace
would continue to increase and exceed the levels of the base period. Although Grace did not
discuss claim filing trends in terms of propensities to sue, it too acknowledged that its future
claims filings would increase in its 2000 Annual Report (Section 3.2 above). Moreover, asbestos
cancer claim filings have increased since Grace filed for bankruptcy in 2001. Because it is now
six years since Grace’s petition, we have the opportunity to examine subsequent claims filings
against other asbestos defendants over the past six years and to use these as guides to what would
have happened to Grace’s claim filings had it continued in asbestos litigation after April 2001, as
I discuss below.
Despite the evidence that claim filings would have continued to increase after its petition date,
and Grace’s and our expectations of such increase, our forecasts here are more conservative. We
forecast, first, that the number of future nonmalignant claims filed against Grace would not have
increased at all, but would have begun by falling sharply in 2002 after Grace’s petition date and
W. R. Grace                                                                                        71




would decline for thereafter year-after-year in the future. Second, we forecast that the number of
cancer claim filings also would not have increased, but rather would have remained essentially
stable over the five years following Grace’s bankruptcy. We forecast that Grace’s cancer filings in
2002 would fall sharply from filing rates at its petition date and would then have increased slowly
for five years. Only by 2006, would cancer filings finally approach Grace’s pre-petition levels in
2000 and 2001. Overall, cancer filings over this five year period (2002-2006) would be lower
than cancer filings at the time of Grace’s bankruptcy. We forecast that then, beginning in 2007
and in all future years, Grace’s cancer filings would drop slowly but steadily year-after-year in
parallel with the gradually declining disease incidence.
In addition to annual rates, Table 30 shows propensities to sue Grace for two periods: 2000-2001,
the fifteen months immediately preceding Grace’s bankruptcy petition, that shows the level of
claiming against Grace at its petition date. Because claims filings against Grace and other
defendants were trending upward at the time of its bankruptcy petition, these most recent
propensities represent the best assumption about the starting point for forecasting the continuing
trends in claim filings against Grace. The second period shown in Table 30, 1999-2001, is longer,
including the earlier year 1999 when claims filings against Grace were markedly lower than the
fifteen months preceding its bankruptcy. Use of this longer propensity to sue period (1999-2001
rather than 2000-2001) results in a forecast that is lower than Grace’s claim filing trends at the
time of its bankruptcy. Rather than forecasting a continuing increase in claims filings, the
1999-2001 propensities to sue produces forecasts that Grace claim filings would have dropped
sharply after April 2001 to filing rates averaged over the 1999-2001 that are lower than Grace’s
actual filing rates in 2000-2001, the time of its petition. Although propensities to sue based on
this longer 1999-2001 period are less consistent with Grace’s filing experience before bankruptcy,
we use the 1999-2001 base period in this report in order to produce conservative forecasts that
will be most likely to underestimate, rather than overestimate Grace’s asbestos liabilities. Our
sensitivity analyses, presented in Section 7, show forecasts based on the alternative and likely
2000-2001 base period.
The rates of change that we forecast in propensities to sue Grace between 2001 and 2006 are rates
of increase that actually occurred for the Manville Trust over the very period for which we
forecast ‘‘future’’ Grace claims, i.e., from 2001 through 2006. We base our forecasts on the
Manville Trust’s actual propensities to sue for three reasons. First, we have Manville data about
claim trends that are exactly contemporaneous for the ‘‘future’’ period that we need to forecast for
Grace. Second, because Manville data are universally regarded as the most comprehensive data
on asbestos claims filing and have been used repeatedly by analysts in forecasting liabilities for
other defendants, they are appropriate for forecasting Grace’s liabilities. Third, the Manville data
are remarkably ‘‘clean,’’ current, and free of problems such as the need to impute diseases among
claims that do not have specific disease (see discussion of this issue in Section 6.1.4 above).
Manville’s mesothelioma claim filings continued to increase after Grace’s bankruptcy filing in
early 2001. Figure 22 and Figure 23 show respectively the number of mesothelioma and lung
cancer claims filed annually against Grace and against Manville. On each figure we continue
Manville filings after Grace’s bankruptcy filing and through 2006. The figures show Manville’s
filings for 2003 through 2006 averaged over those years, because claim filings over those years
were distorted by 2003 changes to Manville’s claims procedures. When the Manville Trust
announced it 2002 that it would adopt new, stricter claims procedures in 2003 many claimants
‘‘accelerated’’ their filings; claims that would otherwise have been filed in these later years were
filed instead in 2003. Consequently, Manville’s claim filing trends for the four years from 2003
through 2006 are best represented by averaging its claims across those years as shown in Figure
22 and Figure 23, below.28
W. R. Grace                                                                                                                          72




                     Figure 22: Trends In Grace and Manville Mesothelioma Claims (2003-2006 Smoothed)
                      2000



                                         Manville Meso
                                         Grace Meso
                      1500
  Number of Claims
                      1000
                      500




                             1990                         1995                          2000                          2005

                                                                        Filing Year


      Note: Grace filings in 2001 are annualized over the 27 month period from January 2000 to
      April 1, 2001. Manville 2003-2006 filings are averaged over that four year period.




28.                  David Austern, CEO of the Manville Trust, reported to Judges’ Jack B. Weinstein and Burton R. Lifland: ‘‘As
                     you may recall, the deadline to file claims pursuant to the original (1995) TDP was in late 2003 and law firms
                     accelerated the filing of many claims to meet that deadline that, in the ordinary course, would not have been filed
                     until 2004 or later’’ (Letter of February 28, 2006). Because of these temporal disturbances, we know that some
                     of Manville’s 2003 claims would have been filed later had the Trust not made and announced its changes, but we
                     cannot know how many filings were accelerated. As a result, we can attach no significance to the different levels
                     of filings across these four years.
W. R. Grace                                                                                            73




                     Figure 23: Trends In Grace and Manville Lung Cancer Claims (2003-2006 Smoothed)
                     3000



                                   Manville Lung
                                   Grace Lung
                     2500
                     2000
  Number of Claims
                     1500
                     1000
                     500




                            1990                   1995                      2000          2005

                                                               Filing Year


      Note: Grace filings in 2001 are annualized over the 27 month period from January 2000 to
      April 1, 2001. Manville 2003-2006 filings are averaged over that four year period.

Table 31 shows our calculation of the rates of increase in Manville’s propensities to sue for each
cancer between 2000 and 2003-2006. Because Nicholson’s forecasts of asbestos-related lung
cancer deaths falls during the period 2000 through 2006, propensities to sue Manville’s for lung
cancer remained stable from 2000 to 2006 even though claim filings were falling during these
years.


                                    Table 31: Rates of Increase in the Propensity to Sue

                                                                  Current
                                                          Disease Manville

                                                          Meso       1.305
                                                          Lung       1.006
                                                          OthCan     1.291


Table 32 shows our forecast of the rates of annual increases in cancer propensities to sue (which
are trivial for lung cancer): how we spread Manville’s actual rates of increase in propensities over
the 2002-2006 period for our forecast of Grace propensities to sue during 2002-2006, the first five
years of ‘‘future’’ claims. The ‘‘rate of increase’’ for 2002 is 1.00, i.e., no change from
W. R. Grace                                                                                       74




propensities to sue obtaining during the 1999-2001 base period that we use for forecasting
propensities to sue, but lower than Grace’s actual propensities to sue during 2000 and 2001. We
then forecast that beginning in 2003 Grace’s propensities to sue would increase at rates parallel to
Manville’s from as shown in Table 32 so that by 2006 Grace’s propensities to sue would have
increased by amounts equal to the Manville increases shown in Table 31. As Table 32 shows, we
forecast that the Grace propensities will increase gradually at the same rate of increase in each
year from 2003 through 2006. After 2006 we forecast that propensities to sue Grace will remain
unchanged at their 2006 levels. Because incidences of asbestos-related cancers are forecast to
decline for each cancer after 2006, this means that we forecast decreasing numbers of cancer
claims in each year after 2006.


                       Table 32: Rates of Increase in the Propensity to Sue

                                                Rates of Increase
                   Disease     2002     2003      2004    2005      2006    2007+

                   Meso        1.000    1.076     1.153   1.229     1.305   1.305
                   Lung        1.000    1.002     1.003   1.004     1.006   1.006
                   OthCan      1.000    1.073     1.146   1.218     1.291   1.291


Table 33 shows the results of applying the Manville increases to forecast Grace propensities
between 2002 and 2006. We start in 2002 with Grace’s propensities to sue during the 1999-April
2001 base period. The propensities to sue for each year after 2002 is calculated by multiplying
the 1999-2001 base period propensities (shown as the 2002 propensities) times the rate of
increase for that year shown in Table 32. As Table 33 shows, the resulting propensities increase
gradually over the first five ‘‘future’’ years for Grace, but these do not represent an increase over
Grace’s propensities to sue before its bankruptcy. Rather, by 2006 when our forecast propensities
peak, they are equivalent to Grace’s actual propensities at the time of its bankruptcy petition, the
period 2000-2001 (shown in red in Table 33). Among asbestos defendants, the Grace forecasts
after 2001 would not represent high propensities to sue. Even in 2006, we forecast that less than
half of mesothelioma victims will file claims against Grace, well under Manville’s recent 80
percent propensities for mesothelioma and well under Grace’s own experience in the first quarter
of 2001. Only one third of asbestos-related lung cancers and less than half other cancers caused
by asbestos result in claims against Grace, rates that are again lower than recent rates for Manville
and Grace itself in 2001. Finally, we forecast that after 2006, Grace’s propensities to sue will
remain fixed at the 2006 rates shown in Table 33.
W. R. Grace                                                                                      75




                  Table 33: Actual and Forecast Propensities to Sue for Cancers

                         Actual                                Forecast
     Disease     1999     2000     2001     2002     2003     2004     2005    2006    2007+

     Meso       22.5% 38.3% 74.4% 35.4%            38.0%    40.8%    43.4%    46.1%    46.1%
     Lung       22.1  34.3  90.1  34.8             34.9     34.9     35.0     35.0     35.0
     OthCan     22.9  34.6  89.8  35.3             37.9     40.5     43.0     45.6     45.6

  Notes: Propensities to sue in 2001, shown in red, are based on one quarter year. Forecast 2002
  propensities are Grace’s propensities averaged over the period 1999-2001.

Our forecasts of future filings against Grace are strongly conservative. Even though the
environment of asbestos litigation in the early 2000s caused most observers, including Grace and
us, to expect increases in future claim filings, our liability forecasts assume no such increase in
Grace claim filings. Figure 24 shows graphically our forecast of mesothelioma claim filings for
each year after Grace’s bankruptcy petition. The vertical bar at year 2001 represents the time of
Grace’s bankruptcy filing. To the left, the upper curve shows the annual Nicholson forecast of
mesothelioma incidence (in green) and the lower curve the number of mesothelioma claims filed
against Grace (in red), the two parameters that are used to calculate the Grace propensity to sue.
Forecast claims are to the right of vertical bar, with the Nicholson incidence forecast again the
upper curve and our forecast of future mesothelioma filings the lower curve (in blue). In each
future year the forecast number of mesothelioma claim filings is calculated by multiplying the
Nicholson incidence for that year (the upper curve) times the propensity to sue for that year. As I
discussed, forecast mesothelioma filings start in 2002 well below actually Grace filings in 2000
and 2001, remain below through 2005 and then approach the 2000-01 level only in 2006.
Thereafter, mesothelioma filings fall slowly as deaths from mesothelioma slowly decline.
W. R. Grace                                                                                            76




                                  Figure 24: Nicholson Meso Forecasts vs Grace Actuals
                    3000



                                                                                   Actual−Grace
                                                                                   Forecast−Grace
                                                                                   Nicholson
                    2500
                    2000
 Number of Claims
                    1500
                    1000
                    500
                    0




                           1990       2000           2010              2020       2030          2040

                                                         Filing Year


Figure 25 shows the context of our forecast of Grace’s future mesothelioma claims comparing
both past and forecast future claims for Grace from 1990 through 2006 with the number of
mesothelioma claims received by Manville over the same period (again averaging Manville’s
2003-2006 filings because of the 2003 accelerated filings). Note that mesothelioma filings
against each defendant were roughly parallel prior to Grace’s petition date. Our conservative
forecast does not assume continuing parallelism after April 2001. Rather, we forecast a much
greater gap between the filings against each: that Grace’s claims fall in 2002 while Manville’s
increased and a gap that is never reduced in later years.
W. R. Grace                                                                                            77




                    Figure 25: Trends In Grace and Manville Mesothelioma Claims (2003-2006 Smoothed)
                    2000



                                  Manville Meso
                                  Grace Meso Actual
                                  Grace Meso Forecast
                    1500
 Number of Claims
                    1000
                    500




                           1990                1995                    2000               2005

                                                         Filing Year
W. R. Grace                                                                                            78




                     Figure 26: Trends In Grace and Manville Lung Cancer Claims (2003-2006 Smoothed)
                     3000



                                     Manville Lung
                                     Grace Lung
                                     Grace Lung Forecast
                     2500
                     2000
  Number of Claims
                     1500
                     1000
                     500




                            1990                   1995                     2000               2005

                                                              Filing Year


We carry out similar calculations for lung cancers and other cancers. For each cancer, we forecast
fewer annual claim filings than Grace received before its petition date. Figure 26 compares Grace
and Manville filings and trends for lung cancer claims. Again for lung cancer as for
mesothelioma, we forecast that the parallelism in filings against each defendant that had obtained
before Grace’s bankruptcy would change after April 2001. Our forecast of a sharp decrease in
Grace lung cancer filings for 2002 introduces a much wider gap than we saw in comparing filings
for the two defendants in prior years. Because we forecast that Grace lung cancer filings continue
to decrease after 2002, this sharply widened gap is never reduced in future years.
Table 34 shows the total number of future claim filings that we forecast for each type of cancer
through year 2039, the end of our forecast period.


                               Table 34: Number of Forecast Cancer Claims Filed After April 2001

                                                           Forecast Cancer Claims
                                       Model         Meso       Lung OthCan          Total

                                       Nicholson    29,268     26,086       8,765   64,119


6.2.4. Projection of Future Nonmalignancy Claims
To forecast the number of asbestosis and pleural claims that will be filed against Grace in future
W. R. Grace                                                                                      79




years we do not use the same method that we use to forecast Grace’s future cancer claims. First,
there are no published, peer-reviewed epidemiological projections for the incidence of
nonmalignant asbestos-related diseases that are like the Nicholson cancer forecasts and no
epidemiological forecast of nonmalignant asbestos-related disease has been tested and confirmed
by actual experience as have the Nicholson cancer forecasts. Second, the disease processes for
asbestos-related cancers and asbestos-related nonmalignant diseases differ. Unlike the asbestos-
related cancers, which become known to victims abruptly through the rapid onset of symptoms
and diagnoses, nonmalignant diseases are insidious. Asbestosis and pleural diseases are
progressive diseases that develop gradually over time with the accumulation of scarring of the
lungs or pleura. Because dyspnea (shortness of breath) and other effects of these disease increase
over time, victims of these diseases may be unaware of the earliest onset of symptoms or may
attribute breathing problems to their increasing age or other possible causes. So unlike the
asbestos-related cancers, which become known to victims by a signal event--the diagnosis of a
grave disease--that will be most likely to trigger claim filing, victims of nonmalignant asbestos
diseases may become aware of their diseases gradually or they may be made aware by a medical
diagnosis of asbestosis or pleural disease that could be made earlier or later in the progression of
the disease. Consequently, filings of claims for asbestosis and pleural disease cannot be predicted
from epidemiological evidence in the same manner as can filings of asbestos-related cancers.
Based on our analyses of claims data for Grace and many other defendants we have seen that
across all past years there has been an historically stable relationship between the number of
cancer and nonmalignant filings against Grace. This is shown in Figure 28: the past trend in
annual filings of nonmalignant claims against Grace is similar to its trends for cancer claims
(filings are placed on different scales to demonstrate this parallelism). Like cancer filings, the
Georgine class action suppressed filings of nonmalignant claims during the mid-1990s, but filings
rebounded greatly after the U.S. Supreme Court rejected the Georgine class action in mid-1997
and, as with cancer filings, nonmalignancy filings remained at these new, higher levels until the
time of Grace’s bankruptcy. Figure 27, below, shows Grace’s annual nonmalignant claim filings.
W. R. Grace                                                                                     80




                                   Figure 27: Annual Nonmalignant Claims Against Grace



                                   Nonmal
                    50000
                    40000
 Number of Claims
                    30000
                    20000
                    10000
                    0




                            1980            1985           1990            1995          2000

                                                            Year


     Note: Grace’s 2001 entry based on annualizing filings over the 15 months from January 2000
     through March 2001.
W. R. Grace                                                                                                                                   81




                                                 Figure 28: Comparison of Nonmalignant and Cancer Claim Counts
                                  60000



                                                      Nonmal
                                                      Cancer
                                  50000




                                                                                                                 4000
  Number of Nonmalignant Claims
                                  40000




                                                                                                                 3000

                                                                                                                        Number of Cancer Claims
                                  30000




                                                                                                                 2000
                                  20000




                                                                                                                 1000
                                  10000
                                  0




                                                                                                                 0
                                          1980             1985           1990           1995           2000

                                                                            Year


Claims filing trends for nonmalignant and malignant asbestos-related diseases corresponded
closely because those filings are generated by similar sets of social, institutional and behavioral
determinants. As Figure 28 demonstrates, in the past, filings of asbestos nonmalignant claims in
a year could be predicted well from filings of cancer claims. The stable relationship between
filings of cancer and nonmalignant claims has been one of the most common patterns in asbestos
litigation, not only for Grace, but for other asbestos defendants as well.
Now, however, recent changes in the litigation environment have disturbed this historic stability
between cancer and nonmalignancy filings. While cancer filings have increased or continued at
high rates in the last few years, filings of nonmalignant claims have fallen. Some of the decrease
in nonmalignant filings results from the U.S. Senate’s extended consideration of asbestos
legislation that would create a national compensation fund and eliminate asbestos litigation (‘‘We
attribute the comparatively low rate of claim filings in 2004 to three factors ... 3) the uncertainty
surrounding the national asbestos litigation,’’ February 28, 2005 letter from David Austern to
Judges Jack B. Weinstein and Burton R. Lifland). The possibility of such legislation has broadly
affected asbestos litigation, resulting in fewer settlements of asbestos law suits and reduced filings
of new law suits. Given uncertainties about whether or not newly filed law suits would ever result
in payment, plaintiffs’ lawyers have become unwilling to spend the work and money required to
prepare new cases, particularly nonmalignant claims. The possibility of national legislation
particularly suppressed nonmalignant claim filings which are more likely than cancer claims to be
generated by law firms’ entrepreneurial activities and whose filings are more easily deferred
because they are less subject to statutes of limitations. This suppression of claim filings resulting
from the Senate’s legislative considerations will likely be transitory, with a likely rebound in
filings should the prospect of legislation disappear.
W. R. Grace                                                                                       82




However, other developments suggest that filings of nonmalignant claims may never rebound to
their great numbers of several years ago. First, several states that have been centers of much
asbestos litigation have adopted new statutes that will limit the number of new law suits for
nonmalignant claims in those states, primarily by establishing medical criteria that plaintiffs must
establish in order to bring suit. Second, as I discussed above, courts and defendants have
documented the troubling practices of some medical providers who have examined and prepared
documents to support many plaintiffs’ claims for nonmalignant injuries. While fewer recent
claims have depended upon documentation by doctors subject to these criticisms, in the past a
significant fraction of law suits for nonmalignant diseases have presented medical documents
from doctors or medical facilities who have been criticized. This criticism and attention will
likely reduce the number of future law suits for nonmalignant claims. Third, some plaintiffs’ law
firms have redirected their efforts in recruiting and filing asbestos injury claims, concentrating
increasingly on more valuable and less controversial cancer claims. If this redirection by law
firms continues, it could reshape asbestos litigation.
For all these reasons we expect that the historically stable pattern between the number of cancer
and nonmalignant claims will change and that nonmalignant claim filings will decrease in future
years, both relative to cancer filings and in absolute numbers. Although nonmalignant claim
filings increased after 2000 among defendants who continued to receive asbestos claims, we
forecast instead that after April 2001 future nonmalignant claims against Grace would decrease
steadily from their levels immediately before Grace’s bankruptcy. To forecast Grace’s future
nonmalignant claim filings, we start with the level of nonmalignant claims that it received during
or after January 2000 then forecast that future claims will decrease at a rate parallel to the
Nicholson forecast of the incidence of future asbestos-related cancers, i.e., at a constant
relationship to the projected number of asbestos-related cancers. Medical researchers have
suggested that trends in the incidence of cancers, like those forecast by Nicholson, represent the
best means for estimating asbestos disease generally among exposed workers.
Figure 29 shows our long term forecast of future Grace claims. The figure shows the number of
claims filed against Grace annually prior to the bankruptcy, showing separately our forecasts for
cancer and nonmalignant claims: cancer claims appear at the bottom and nonmalignant claims
appear above. In contrast to our forecast that Grace’s cancer filings would be stable from 2002
through 2006, we forecast that Grace’s future nonmalignant filings would drop immediately and
greatly in 2002, nonmalignant filings in all of 2002 would be no more than the number it received
in the first three months of 2001. Grace’s nonmalignant filings in 2002 would be barely half of its
annualized filings in 2000 and 2001. We forecast that nonmalignant filings would then decrease
further in each year after 2002.
W. R. Grace                                                                                       83




                                     Figure 29: Actual And Projected Filings
                     60000



                                                                                Cancer−A
                                                                                Nonmal−A
                     50000




                                                                                Cancer−F
                                                                                Nonmal−F
                     40000
  Number of Claims
                     30000
                     20000
                     10000
                     0




                             1990   2000         2010           2020           2030        2040

                                                        Year


The following two figures (Figure 30 and Figure 31) show past and forecast future claims
separately for cancers and nonmalignancies in order to better demonstrate the differing forecast
trends in filing for each type of disease claim. For cancers we forecast five years of reduced but
generally stable filings, an immediate drop in 2002 followed by short-term increases through
2006 that reflect the experiences of other defendants between 2001 and 2006 and that would
restore Grace filing levels about to their pre-bankruptcy level by 2006. But nonmalignant filings
simply drop, according to our forecast, sharply at first and continuously forever. For both types
of diseases, we forecast lower claims filings against Grace in the future than in its past, despite
many strands of evidence and opinion (including Grace’s) that claims filings would have
increased after April 2001. Our forecasts are conservative in order to assure that we do not
overestimate Grace’s future filings.
W. R. Grace                                                                                                   84




                                      Figure 30: Actual And Projected Cancer Filings



                                                                                        Past−Filings
                    4000




                                                                                        Fcst−Filings
                    3000
 Number of Claims
                    2000
                    1000
                    0




                            1990       2000           2010           2020              2030            2040

                                                             Year


                                   Figure 31: Actual And Projected Nonmalignant Filings
                    60000




                                                                                        Past−Filings
                                                                                        Fcst−Filings
                    50000
                    40000
 Number of Claims
                    30000
                    20000
                    10000
                    0




                            1990       2000           2010           2020              2030            2040

                                                             Year
W. R. Grace                                                                                          85




In order to understand the significance of these trends, how highly conservative all of our forecast
assumptions are, it is important to recall that we also forecast sharp increases in the percent of
claims that Grace will reject without payment. For each type of cancer and for nonmalignancies,
we forecast that Grace will pay a far smaller fraction of filed claims than it did prior to 2001. In
contrast to the fewer than 10 percent of claims that Grace rejected pre-petition, we forecast that
Grace would now reject 42 percent of nonmalignant claims and would reject as many as 35
percent but at least 20 percent of the reduced number of cancer claims that we forecast for the
future
When we combine these two sets of conservative assumptions--that in the future Grace will
receive far fewer claim filings and then reject a greater percent of them--we forecast that Grace
would pay far fewer claims after April 2001 than it has in the past. Despite all of the reasons to
expect otherwise, in effect we assume that Grace would be far more successful in its asbestos
litigation in the future than it had been before its bankruptcy.
The following figures show the dramatic turn-around that we forecast for Grace. We forecast that
Grace will now pay a lower percentage of cancers (area in red in Figure 32), than it had in the
past (area in gold in Figure 32). and a much lower percentage of nonmalignant claims (area in
red in Figure 33) than it had in the past (area in gold in Figure 33). Our forecast of the total
number of nonmalignant claims that Grace would compensate starts in 2002 at 41.3 percent of the
number it paid in the year (January 2000-April 2001, annualized) before the bankruptcy and
drops thereafter. We expect some amount of drop in compensated nonmalignant claims both
because of Grace’s possible turn to a more individualized process for reviewing and resolving
claims and also because of the important recent changes in asbestos litigation--criticisms and
increased scrutiny of medical documentation of nonmalignant claims, statutory and judicial
changes in the legal treatment of nonmalignant disease claims, changes in the practices among
plaintiffs’ law firms. But we forecast such steep drops out of conservatism, to assure that we do
not overestimate the number of claims that Grace will now pay.
W. R. Grace                                                                                          86




                                    Figure 32: Past and Projected Cancer Filings
                    4000



                                                                               Past−Compensable

                                                                               Past−Filings

                                                                               Fcst−Compensable
                    3000




                                                                               Fcst−Filings
 Number of Claims
                    2000
                    1000
                    0




                           1990   1995       2000         2005        2010         2015       2020

                                                          Year
W. R. Grace                                                                                                    87




                                       Figure 33: Past and Projected Nonmalignant Filings
                    60000



                                                                                         Past−Compensable
                    50000




                                                                                         Past−Filings

                                                                                         Fcst−Compensable
                    40000




                                                                                         Fcst−Filings
 Number of Claims
                    30000
                    20000
                    10000
                    0




                            1990        1995        2000            2005       2010          2015       2020

                                                                    Year


6.2.5. Forecast Number of Future Claims
Table 35 shows the results of the forecast. Appendix Table C3 shows the forecast filings for each
disease for each year from 2001 to 2039.


                                   Table 35: Number of Forecast Claims Filed After April 2001

                                                              Forecast Claims
                                   Model        Meso        Lung     OthCan Nonmal           Total

                                   Nicholson   29,268      26,086      8,765   520,183    584,302


6.2.6. Estimating Liability for Forecast Future Claims
To value future claims we used the same values that I discussed in presenting our forecasts for
pending claims, the average settlement values and payment rates shown in Table 25 above. Our
forecast average resolution values are obtained by multiplying settlement values and payment
rates for each disease.
In forecasting the values of future claims, we assumed that payments would be adjusted for future
inflation at a rate of 2.5 percent per year. This rate was being used by the Congressional Budget
Office at the time of Grace’s bankruptcy and is close to the rate of inflation since then. Table 36
shows the value of future claims adjusting future inflation.
W. R. Grace                                                                                         88




                 Table 36: Forecast Indemnity for Future Claims after April 2001

                                                          Forecast Indemnity
       Payment
       Rates   Average Settlement            Meso       Lung    OthCan Nonmal            Total

       Reduced     Long Term Grace          $7,491       $817       $170     $1,580   $10,058
       Reduced     Short Term Grace          6,356        881        152      1,838     9,227
       Reduced     Quigley                   6,266        900        113      2,196     9,475
       Reduced     T&N                       6,463        857        119      2,191     9,630
       Reduced     USG                       7,366      1,016        126      2,186    10,694
       Lowest      Long Term Grace          $6,169       $673       $140     $1,580     $8,562
       Lowest      Short Term Grace          5,234        725        125      1,838      7,922
       Lowest      Quigley                   5,160        741         93      2,196      8,190
       Lowest      T&N                       5,322        706         98      2,191      8,317
       Lowest      USG                       6,066        837        103      2,186      9,192

  Notes: Millions of dollars of the year when paid. Future claims are assumed to settle 2 years
  after filing. Indemnity is inflation adjusted at 2.5% per year. T&N values for other cancer and
  nonmalignants were estimated by averaging values for Quigley and USG.

The results in Table 36 estimate the value that we forecast for future claims in terms of the dollars
of the year when claims will be paid. However, these do not represent the present value of
Grace’s liabilities. Since these liabilities will mostly arise in future years, they must be reduced to
present value to account for the time value of money. Table 37 shows the estimated present value
of these liabilities, based on a discount rate of 5.11%.


                 Table 37: Present Value (PV) of Future Claims as of April 2001

                                                        Forecast Indemnity PV
        Payment
        Rates   Average Settlement           Meso       Lung OthCan Nonmal              Total
        Reduced Long Term Grace             $3,520       $434        $89     $810      $4,853
        Reduced Short Term Grace             2,996        467         79       942      4,484
        Reduced Quigley                      2,954        477         59     1,121      4,611
        Reduced T&N                          3,045        455         63     1,119      4,682
        Reduced USG                          3,464        538         66     1,116      5,184
        Lowest      Long Term Grace         $2,899       $357        $73     $810      $4,139
        Lowest      Short Term Grace         2,467        385         65       942      3,859
        Lowest      Quigley                  2,433        393         49     1,121      3,996
        Lowest      T&N                      2,508        375         52     1,119      4,054
        Lowest      USG                      2,853        443         54     1,116      4,466

  Notes: Millions of 2001 dollars. Future claims are assumed to settle 2 years after filing.
  Indemnity is inflation adjusted at 2.5% per year. Discount rate is 5.11%. T&N values for other
  cancer and nonmalignants were estimated by averaging values for Quigley and USG.

6.2.7. Estimating Liability for Pending and Forecast Future Claims
Finally, we add our forecast liabilities for pending and future claims. Table 38 shows forecast
W. R. Grace                                                                                    89




indemnity as dollars of the year in which they will be paid. Table 39 shows the present value of
those liabilities.


          Table 38: Forecast Indemnity for Pending and Future Claims after April 2001

                                                       Forecast Indemnity
       Payment
       Rates   Average Settlement          Meso       Lung   OthCan Nonmal           Total

       Reduced    Long Term Grace         $7,753      $907       $183    $1,791   $10,636
       Reduced    Short Term Grace         6,616       977        165     2,078     9,837
       Reduced    Quigley                  6,525       996        125     2,444    10,091
       Reduced    T&N                      6,724       952        131     2,439    10,247
       Reduced    USG                      7,634     1,114        139     2,433    11,321
       Lowest     Long Term Grace         $6,387      $748       $151    $1,791     $9,078
       Lowest     Short Term Grace         5,450       805        136     2,078      8,470
       Lowest     Quigley                  5,375       821        103     2,444      8,744
       Lowest     T&N                      5,539       786        108     2,439      8,872
       Lowest     USG                      6,288       919        114     2,433      9,755

  Notes: Millions of dollars of the year when paid. Future claims are assumed to settle 2 years
  after filing, present claims in 2002. Indemnity is inflation adjusted at 2.5% per year. T&N
  values for other cancer and nonmalignants were estimated by averaging values for Quigley and
  USG.



          Table 39: Present Value (PV) of Pending and Future Claims after April 2001

                                                     Forecast Indemnity PV
        Payment
        Rates   Average Settlement         Meso       Lung OthCan Nonmal            Total
        Reduced    Long Term Grace        $3,769      $520      $102     $1,011    $5,401
        Reduced    Short Term Grace        3,243       558        91      1,171     5,063
        Reduced    Quigley                 3,200       569        71      1,357     5,196
        Reduced    T&N                     3,293       546        75      1,355     5,268
        Reduced    USG                     3,718       632        78      1,352     5,779
        Lowest     Long Term Grace        $3,106      $429        $84    $1,011    $4,629
        Lowest     Short Term Grace        2,672       461         75     1,171     4,379
        Lowest     Quigley                 2,637       470         59     1,357     4,523
        Lowest     T&N                     2,714       451         62     1,355     4,581
        Lowest     USG                     3,064       522         64     1,352     5,001

  Notes: Millions of 2001 dollars. Future claims are assumed to settle 2 years after filing,
  present claims in 2002. Indemnity is inflation adjusted at 2.5% per year. Discount rate is
  5.11%. T&N values for other cancer and nonmalignants were estimated by averaging values
  for Quigley and USG.
W. R. Grace                                                                                        90




7. Sensitivity Analyses
Forecasts of asbestos liabilities are inherently uncertain. Our forecasts have strong
bases--epidemiological forecasts of asbestos diseases that have been tested and confirmed by
twenty years of SEER counts of mesothelioma deaths, Grace’s own recent claims history,
contemporaneous data and trends concerning claim filings and payments for defendants whose
experience we believe is relevant to Grace’s liability, and conservative assumptions about future
claim filings, settlement values and dismissal rates. However our forecasts of Grace’s future
liability would differ somewhat if we had made different assumptions about epidemiology,
propensities to sue, payment amounts, or other factors in future years. This section examines how
forecasts would have differed under different assumptions.
We define and then report on the results of systematically varying 8 types of parameters:
 • the choice of epidemiological projections: (a) Nicholson, (b) KPMG
 • base years for the cancer propensity to sue: (a) 1999-2001, (b) 2000-2001
 • changes in cancer propensities to sue: (a) Manville Trust’s rates of change through 2006, (b)
   no changes
 • payment rates: (a) reduced, (b) lowest, (c) Grace’s historic rates
 • settlement values: (a) increases at Grace’s past rates and rates among other defendants, (b)
   Grace’s historic payments
 • timing of changes: (a) immediate drop in payment rates but gradual increases in settlement
   values, (b) immediate changes in both payment rates & settlement values
 • use of an alternative inflation rate assumption
 • use of alternative discount rates
We first define these alternatives, then we present the results from their systematically variation.
Our analyses and reported results are for present value of total liability based on the alternative
assumptions examined in the sensitivity analyses.
Finally, we also include a sensitivity based on the much different approach to valuing Grace’s
liability asserted by the Debtors in this case: What would be the liability if Grace succeeded with
its aggressive litigation strategy, disallowing almost all claims but trying those that it could not
reject?
7.1. Alternative Parameter Selections
7.1.1. Alternative Epidemiological Models
In 1992, the consulting firm KPMG-Peat Marwick adjusted the Nicholson epidemiological
forecasts as part of their engagement in the bankruptcy proceedings of National Gypsum. KPMG
retained most elements of the Nicholson forecasts but used more recent Labor Department data
and alternative medical models to estimate the incidences of mesothelioma and lung cancer. As
shown in Figure 8, above, the KPMG forecasts are a reasonable, although less preferable,
alternative to the original Nicholson forecasts of asbestos related cancer deaths. Nicholson’s
forecasts are superior because they have been more closely confirmed by subsequent SEER data
on annual mesothelioma deaths. To examine the effects of using the specific Nicholson
epidemiological forecasts of future cancer deaths, we also forecast future claims and liabilities
using the KPMG forecasts.
W. R. Grace                                                                                         91




7.1.2. Alternative Propensities to Sue
Throughout this report we have presented forecasts based on assumptions that propensities to sue
for cancer claims would start in 2002 at their averages over the period 1999-March 2001, well
below propensities for the most recent period 2000-April 2001, and then increase slowly for
mesothelioma and other cancer again reaching the approximate levels of Grace’s 2000-2001
propensities by 2006. In this section we vary these assumptions in two ways: (1) we compare
forecasts using two different base periods for calculating propensities to sue, 1999-March 2001
(used throughout the report) and 2000-March 2001 and (2) for both base periods we make two
different assumptions about changes in propensities to sue during the period 2002 to 2006,
changes based on Manville Trust’s experience in these same years (used throughout the report)
and no changes. We estimate Grace’s liabilities using all four combinations of these alternative
assumptions.
The assumptions of our report (1999-March 2001 and Manville increases for 2002-2006) are
conservative, forecasting fewer cancer claims during 2002-2006 than Grace was actually
receiving at the time of its bankruptcy petition. One alternative (1999-March 2001 and no
change) is even more conservative, assuming that beginning in 2002 and in all subsequent years
propensities to sue Grace for cancer would be markedly lower than they were at the time of
Grace’s petition. This alternative is unlikely and inconsistent with changes in the litigation
environment that would have subjected Grace to at least as many cancer filings in the future as it
had at the time of its bankruptcy. While unlikely, we present the alternative to show what Grace’s
liability would have been had it achieved unexpectedly good success and luck in the litigation. A
second alternative (2000-March 2001 and no change) is also conservative. It continues Grace’s
experience at the time of its bankruptcy petition, but ignores what happened to filings during 2002
to 2006, the first years of Grace’s post-petition experience but years for which have filing data
from the Manville Trust. The third alternative (2000-March 2001 and Manville increases for
2002-2006) best describes the state of asbestos litigation both at the time of Grace’s petition
(using its then current propensities to sue) and also after its petition (Manville’s propensities
through 2006). But while this third alternative seems the most likely, it is not conservative--it is
not structured to assure that the forecast will underestimate rather than overestimate the number
of cancer claims that would be filed against Grace in future years.
Table 40 contrasts the rates of change in propensities to sue for each of these four alternatives
compared to Grace’s propensities to sue at the time of its bankruptcy petition.
W. R. Grace                                                                                         92




                         Table 40: Alternative Cancer Propensities to Sue

                                                   Type of Increase
                      Filing 1999-2001 1999-2001              2000-2001 2000-2001
              Disease Year     Manville No Change               Manville No Change

              Meso       2002          0.776         0.776          1.000         1.000
                         2003          0.835         0.776          1.076         1.000
                         2004          0.894         0.776          1.153         1.000
                         2005          0.953         0.776          1.229         1.000
                         2006          1.012         0.776          1.305         1.000
              Lung       2002          0.769         0.769          1.000         1.000
                         2003          0.771         0.769          1.002         1.000
                         2004          0.772         0.769          1.003         1.000
                         2005          0.772         0.769          1.004         1.000
                         2006          0.774         0.769          1.006         1.000
              OthCan     2002          0.776         0.776          1.000         1.000
                         2003          0.833         0.776          1.073         1.000
                         2004          0.889         0.776          1.146         1.000
                         2005          0.945         0.776          1.218         1.000
                         2006          1.002         0.776          1.291         1.000

  Note: Base case is shown in red. Entries are propensities to sue for each model divided by
  propensities to sue Grace for the same disease in 2000-March 2001.

7.1.3. Alternative Payment Rates
I present forecasts using two different sets of payment rates throughout the report, reduced and
lowest. The presentation of two sets of payment rates is a sensitivity offering to the Court, two
assessments of liabilities using a likely level of claims rejection by Grace, the reduced payment
rates, and a lower bound of liability assuming unexpectedly good success by Grace in rejecting
claims (payment rates that are particularly unlikely among the reduced number claims that we
forecast will be filed more selectively after April 2001). In this section I present a third
alternative to show what Grace’s liability would be if it continued to reject pending and future
claims at the same rates it had achieved pre-petition.
7.1.4. Historic Settlement Amounts
For both the reduced and lowest payment rates that I present in the report, I use five alternative
estimates of the amounts that Grace would pay to those claimants who receive some payment.
Again, these alternatives provide sensitivities showing how Grace’s liability would varying
depending upon the method and data used to estimate the values of claims after April 2001. As a
further sensitivity in this section I forecast Grace’s liability assuming that it could have continued
to pay claims in the amounts that it paid before its bankruptcy. It is unlikely that Grace could
have accomplished this. Its settlement payments had gone up in value for many years before its
bankruptcy; values paid by other defendants continued to increase after Grace’s petition and
events in asbestos litigation would have put pressure on Grace to continue its vast increases in
settlement payments.
We use two different periods in which to calculate Grace’s settlement values at the time of its
bankruptcy, 2000-2001 and 2001 alone. For each set of values we use three different estimates of
payment rates. First, we estimated Grace’s liability using both its historic payment averages and
its historic payment rates (8 percent among mesotheliomas, less than 5 percent for all other
W. R. Grace                                                                                                93




diseases) in order to show what Grace’s liabilities would have been had it continued resolving
claims at the time of bankruptcy. Second, we used the reduced payment rates. These rates
assume that Grace would reject many claims that it would have paid pre-petition, rejecting 15
percent of cancer claims that would have been paid before and 40 percent of nonmalignant claims
that would have been paid. To estimate Grace’s historic payment solely among the claims that it
would now pay after these additional rejections, we calculated its historic average payments after
excluding the lowest 15 percent of cancers and the lowest 40 percent of nonmalignant claims that
it had paid in the past. Third, we used the lowest payment rates, which make the unlikely
assumptions that Grace could reject 30 percent of cancers and 40 percent of nonmalignant claims
while not increasing the amounts that it paid to resolve claims. Again we calculated Grace’s
historic average payments after excluding claims that it would not pay according to the lowest
payment rate assumption, the lowest 30 percent of cancers and 40 percent of nonmalignant claims
that it had paid pre-petition.
This analysis yields six alternative estimate of liabilities for our sensitivity analyses as shown in
Table 41. The table shows the settlement values and payment rates for each alternative. As I
discussed in Section 4.4, settlement values and payment rates are inversely related. As our
assumptions attribute increasing success to Grace in rejecting claims, its payment rates decrease,
it eliminates weaker claims and leaves a more valuable residue of claims that have higher values
and that would receive larger settlements.


                    Table 41: Alternative Settlement Values and Payment Rates

Settlement                                     Forecast Settlement Value                  Payment Rates
Value                 Payment
Basis                 Rates                  Meso      Lung    OthCan Nonmal      Meso     Lung   OthCan Nonmal

Historic 2000-2001   historic pay rates    $93,640   $17,912    $9,891   $3,372   92.1%   95.3%    96.7%    96.3%
Top 85% of 2000-2001 reduced pay rates     108,292    20,203    11,099    4,552   78.3    81.0     82.2     57.8
Top 70% of 2000-2001 lowest pay rates      126,959    23,455    12,918    4,552   64.5    66.7     67.7     57.8
Historic 2001         historic pay rates   $97,839   $18,290   $10,124   $3,472   95.7%   97.8%    98.5%    96.1%
Top 85% of 2001       reduced pay rates    113,724    20,516    11,239    4,689   81.3    83.1     83.7     57.7
Top 70% of 2001       lowest pay rates     124,144    23,082    12,713    4,689   67.0    68.4     69.0     57.7



7.1.5. Restoring the Timing of Payment Rates and Settlement Averages
The next sensitivity reestablishes the expected relationship between settlement values and
payment rates that be ignored in our primary analysis of this report in an effort to provide
conservative forecasts. As I discussed in Section 4.4, we forecast that in the future Grace would
reject more claims, but would pay more on average to the more valuable claims that Grace could
not reject. This pattern is consistent with Grace’s understanding of its own experience in
resolving asbestos claims and with asbestos litigation generally,. However, our assumptions for
decreases in Grace’s payment rates and increases in its settlement values occur over different time
periods. We assume that Grace would immediately achieve greater success in rejecting claims;
we assume lower payment rates for pending claims and for all future claims including those that
would have been filed right after Grace’s April 2001 petition date. In contrast, we assume that
Grace’s settlement values would increase slowly between 2002 and 2006. These matters of
timing contribute to conservatism in our forecasts: change that lowers liability is assumed to
occur immediately, change that increases liability is assumed to occur slowly over five years. But
this non-correspondence in timing is unlikely for two reasons: one, it does not recognize the
important relationship between payment rates and settlement averages and, two, it is inconsistent
with the sharp increases in claims values for Quigley, T&N and USG that occurred in 2001.
W. R. Grace                                                                                         94




While we assume that Grace’s settlement averages would rise to the levels of these three other
defendants, we assume conservatively that it would take five years longer for Grace to reach those
levels.
We examine the effects of these conservative assumptions about timing, through an alternative
sensitivity analysis forecast that makes changes in both payment rates and settlement values
immediately after Grace’s petition date.
7.1.6. Alternative Inflation Rates
The primary analyses of our report use a 2.5 percent inflation rate. At the time of the bankruptcy,
CBO was assuming 2.5 percent in its analyses, and the rate of inflation over the years 2000 to
2005 was actually 2.5 percent. Now, however, CBO is assuming 2.2 percent, so we examine the
effect of this assumption on our projections. It is plausible that the real rate of return (the
difference between discount rates and inflation rates) will remain constant. Nevertheless, we
examine the effect of inflation holding the discount rate constant.
7.1.7. Alternative Discount Rates
The financial analyst for the Future Claimants has suggested a discount rate of 5.11 percent. We
examine the sensitivity of bracketing this at (a) 4.61 percent and (b) 5.61 percent.
7.2. Results of Alternative Parameter Selections
Table 42 displays the sensitivity results for all variations described above, contrasting the net
present value of total liability with the base case.
W. R. Grace                                                                                                      95




                         Table 42: Sensitivity Analysis Results: Net Present Value

                                                                            Estimated Total Liability

   Parameter             Variation                                 Meso      Lung OthCan Nonmal          Total

   Epidemiology          Nicholson                                 $3,769    $520      $102    $1,011   $5,401
                         KPMG                                       3,495     521       102       958    5,075
   Propensities to Sue   1999-2001 base & Manville Changes         $3,769    $520      $102    $1,011   $5,401
                         1999-2001 base & No Changes                3,051     518        85     1,011    4,664
                         2000-2001 base & Manville Changes          4,788     650       127     1,284    6,848
                         2000-2001 base & No Changes                3,862     647       106     1,284    5,898
   Payment Rates         Reduced                                   $3,769    $520      $102    $1,011   $5,401
                         Lowest                                     3,106     429        84     1,011    4,629
                         Historic                                   4,433     610       119     1,657    6,819
   Settlement Values     Long-Term Grace Regression                $3,769    $520      $102    $1,011   $5,401
                         Historic 2000-2001, historic pay rates     2,031     428        75     1,575    4,109
                         Top 85% of 2000-2001, reduced pay rates    1,997     410        72     1,284    3,762
                         Top 70% of 2000-2001, lowest pay rates     1,928     393        69     1,284    3,674
                         Historic 2001, historic pay rates          2,203     448        79     1,617    4,347
                         Top 85% of 2001, reduced pay rates         2,177     428        74     1,317    3,996
                         Top 70% of 2001, lowest pay rates          1,958     396        69     1,317    3,741
   Timing of Changes     Immediate pay rates & gradual values      $3,769    $520      $102    $1,011   $5,401
                         Immediate pay rates & values               4,152     576       110     1,062    5,901
   Inflation Rate        2.5 Percent                               $3,769    $520      $102    $1,011   $5,401
                         3.0 Percent                                4,010     544       107     1,061    5,722
                         2.2 Percent                                3,634     506        99       983    5,222
   Discount Rate         5.11 Percent                              $3,769    $520      $102    $1,011   $5,401
                         4.61 Percent                               4,005     544       107     1,060    5,716
                         5.61 Percent                               3,554     498        97       966    5,114


  Note: Base case is shown in red.

7.3. Trial Verdict Settlement Values
Some debtors or creditor groups in previous bankruptcies of asbestos manufacturers have asserted
strategies like the Debtors in this case: that the Court should reject estimations based on Grace’s
own past settlement strategy but instead should value claims based on what Grace would have to
pay were it to resort to thorough discovery and evaluation of each claim now pending against
Grace coupled with Grace’s aggressive pursuit of pretrial dismissals of law suits and then trials of
those law suits that survived its motions to dismiss. Credit Suisse asserted a version of this
strategy in the Owens Corning bankruptcy proceedings, arguing unsuccessfully that the court
there should have mandated extensive discovery for a sample of claims followed by litigation
about medical issues in those cases with its hope that many claims would be dismissed.
Whatever the success in eliminating some asbestos claims, the strategy proposed by the Debtors
here, by Credit Suisse in the OC proceedings and similar proposals in other bankruptcies would
still require valuation of claims that survived aggressive pretrial litigation over the qualification of
claims. Historic settlement values could not be used to value these surviving claims, both
because claims that survive aggressive pretrial litigation would be far stronger than average
settled claims and also because these surviving claims would have answered all liability
challenges in contrast to settled claims where issues of liability were uncertain and compromised.
The surviving claims could only be valued through trials of damages issues or else estimated by
looking to values that have been placed historically on claims that have prevailed in litigation
about liability, i.e., the amounts of past verdicts.
W. R. Grace                                                                                       96




To understand how pursuit of such an aggressive litigation strategy would have effected
estimation of Grace asbestos bodily injury claims, I estimated how much Grace might have to pay
pending asbestos claimants as the result of employing such a strategy. I made the exceptionally
conservative assumption that Grace could eliminate 90 percent of its 102,921 pending claims
through aggressive challenges to the medical conditions and great success in its legal challenges.
While there is no reason to expect such extraordinary success under an aggressive Grace litigation
strategy, I use the 90 percent rate to illustrate what would be an exceptionally good outcome of
Grace under the strategy. This would have still left Grace with 10,921 pending asbestos claims
that would have legally verified injuries and liability, claims that are analogous to plaintiffs who
won the first stage of a bifurcated trial with the amount of damages being the only remaining
issue.
To determine values of such claims I looked to Grace’s actual trial history. The average verdict
against Grace in all trials won by plaintiffs is $799,769 in year 2001 dollars (an average of
$1,442,920 million for mesothelioma trials and $353,812 among nonmalignancy trials). To
provide an even more conservative analysis, I used Grace’s $330,571 average verdict over all
plaintiffs in trials with verdicts, both verdicts won by Grace and those won by the plaintiff (an
average of $937,896 to mesothelioma plaintiffs and $222,828 to nonmalignancy plaintiffs. This
results in an estimated liability of $3.4 billion in year 2001 dollars just for pending claimants
(10,292 x $330,571 = $3,402,236,732). This is approximately 8 times the liability for pending
claims that we forecast in this report.
Even if the Grace could have been successful in eliminating 95.8 percent of all of its pending
claims (assumed 90 percent pretrial plus another 5.8 percent based on Grace’s historic percent of
wining 58 percent of trials) through aggressive litigation like that it proposes in these proceedings
it would face liability of $3.2 billion simply for claims that were pending against Grace at the
time of its bankruptcy petition. Under these conservative assumptions Grace’s liability would
increase almost 7-fold over its liability based on our assumptions in this report. We forecast that
Grace faces a liability of about $500 million for pending claims. An aggressive litigation posture
would add about $2.7 billion more.
Extrapolating these analyses to all asbestos claims, both pending and futures, Grace would incur a
liability of $30 to $40 billion through its proposed approach of aggressive challenges and trials of
those claims.
W. R. Grace                                                                                       97




8. Rule 26 Disclosures and Signature
DATA CONSIDERED: In reaching the opinions and conclusions set forth in this Report, I have
considered the following information: my background, training, experience and knowledge of the
asbestos litigation developed over the past 25 years, the items of data explicitly identified in the
report, publicly available sources of information concerning inflation rates, publicly available
documents about Grace including its 10-Ks and 10-Qs, publicly available data from the National
Cancer Institute’s SEER registry, discount rates provided by Joe Radecki, Piper Jaffrey, and items
identified in Exhibit 3 attached to this report.
EXHIBITS: The exhibits which summarize my opinions are included in the graphics and tables
in the report and in the appendices to the report.
QUALIFICATIONS: My qualifications to perform this analysis and provide expert testimony are
set forth in my C.V., a copy of which is attached as Exhibit 1.
PUBLICATIONS: Any publications I have authored within the past ten years are set forth in my
C.V.
COMPENSATION: My compensation for services rendered in this case is set forth in the fee
applications Legal Analysis Systems files on a regular basis with the Bankruptcy Court. At
present, my hourly rate is $700.
PRIOR TESTIMONY: A listing of all cases in which I have testified as an expert at either trial or
deposition within the past four years is attached as Exhibit 2.
I reserve the right to modify this report as new information becomes available between now and
the time of trial. I anticipate that I will review the expert witness reports of opposing expert(s)
and offer my opinions about their analyses and conclusions in rebuttal testimony.


                                                        /s/ Mark A. Peterson
                                                ____________________________________
                                                       Mark A. Peterson, J.D., Ph.D.
                                                       LEGAL ANALYSIS SYSTEMS
W. R. Grace                                                                                       A-1




       Appendix A - Settlement Status of POC Filers


The Court could visit and resolve the settlement status for each of the 38,953 POCs filed as
settled claims, but this would likely provide little help in clarifying Grace’s overall asbestos
liability. The total liability for these 38,953 claims would be unlikely to differ much whether they
are treated as liquidated or as unliquidated claims and so resolution of their status will likely have
little effect on estimates of total Grace liability. Most of the 38,953 claims appear to assert that
they were settled as part of several large group settlement agreements between Grace and certain
law firms. The settlement values for such group settlements are typically less than amounts paid
when claims are not settled outside of such groups (Section, 4.3.2.1). Consequently group
settlement values are less than settlements averaged across all settlements, both group and non-
group. Grace’s database confirms that settlement values for these liquidated-but-unpaid claims
are low. The database reports that among the 18,520 liquidated-but-unpaid claims identified in
the database, average settlement values are only about 60 percent of the averages for those settled
claims that have been paid. So if we assume (or the Court confirms) that all 38,953 were settled
claims, then 100 percent of the 38,953 would have a settlement value, but they would have
relatively low average settlement values. We would have 38,953 claims with low average values.
If, on the other hand, we assume (or the Court finds) no settlements among the 20,195 claims in
dispute (38,953 liquidated claim POCs - 18,520 claims where Grace reports a liquidated
settlement), these 20,195 claims would have neither the high payment percentages (100 percent)
or low values that a characterize the 18,520 unpaid claims where Grace reported a settlement.
Some of 17,500 would have no value but the remainder would have higher average values than if
they were treated as liquidated claims (using the historic average settlements calculated across all
claims whether or not settled as part of groups). In other words, there are either (a) 38,953
already-settled claims with relatively low average settlement amounts or else (b) something less
than 38,953 already-settled claims and among the remaining claims that are not settled some will
have no settlement values, but others will have higher values (greater than the averages among
liquidated-but-unpaid claims). So these two alternative outcomes will tend to wash out: to the
extent that some of the 38,953 claims are treated as unsettled, then fewer claims would receive
more on average. Total liability for the 38,953 claims under either alternative will not be far
different. While there is no way to tell now with certainty whether the aggregate values of these
38,953 claims would be a bit greater or less under either alternative, that difference in value
among these claims would be modest when compared to the total liability across all present and
future claims and would not materially reduce the inherent uncertainty of this or any asbestos
forecast. Finally, if the Court should choose not to determine the settlement status for all 38,953
claims, then disagreements about the settlement status of these claims can be resolved by the
post-confirmation trust, as has been done in most other bankruptcy plans.
W. R. Grace                                                                                       B-1




              Appendix B - Linear multiple regression


We used multiple regression to fit a trend line to the logarithm of settlement values We fit
separate models for each disease over the period 1991 through 2001, and included variables to
control for state of filing. The analysis provides an equation we can then extend into future years.
Multiple regression requires that the data fit certain requirements, one being that the dependent
variable (here, settlement amounts) is approximately normally distributed (i.e., show a ‘‘bell-
shaped’’ curve). But neither the distributions of settlements for Grace nor for any other defendant
are normally distributed; rather, they are skewed, with many cases getting relatively low
settlements and some claims getting very high values. Because we cannot properly run multiple
regression on such a skewed variable, we transform the distribution by taking the logarithm of
each settlement amount. This transformation produces an approximately normal distribution for
the log of settlement values. After running the analysis, we then reverse the logarithmic
transformation so that our forecasts estimate the mean (arithmetic average) for each year. This is
a standard statistical approach to running regression analyses on skewed data. The effect of these
steps is to somewhat reduce the impact of very large values, large settlements or verdicts that
occur infrequently but regularly in tort litigation. Because large settlements and verdicts would
have continued to occur had Grace stayed in litigation, these steps are necessary for using
multiple regression.
While the logarithmic linear regression produces a straight line that best fits the logarithms of the
settlement data, this becomes a slightly curved line after we transform the log results
(accelerating slightly upward). This seems appropriate because Grace’s settlement amounts
increased most sharply in recent years. We only use the regression results to forecast settlement
values through 2006 and assume that thereafter values will remain at their real value levels in
2006, increasing amounts in future years solely for forecast inflation. By stopping the forecast
increase in 2006, we minimize the effects of using a non-linear trend compared to using a linear
trend.
W. R. Grace                                                                                C-1




          Appendix C - Year by Disease Projections


This appendix provides the year by disease projections of Nicholson and KPMG (cancer
incidences) and LAS projections of Grace filings as of April 2001).


                      Table C1: Nicholson Epidemiological Projections

 Death             Disease             Total       Death              Disease              Total
 Year      Meso       Lung   OthCan Cancers         Year      Meso       Lung    OthCan Cancers

 1970      1,010     2,909        963     4,882      2005     3,023      4,230     1,143      8,396
 1971      1,046     3,098        998     5,142      2006     3,011      4,075     1,099      8,185
 1972      1,082     3,286      1,034     5,402      2007     2,999      3,921     1,055      7,975
 1973      1,151     3,502      1,065     5,718      2008     2,931      3,734     1,006      7,672
 1974      1,219     3,719      1,096     6,034      2009     2,864      3,547       958      7,369
 1975      1,288     3,935      1,128     6,351      2010     2,796      3,361       909      7,066
 1976      1,356     4,152      1,159     6,667      2011     2,729      3,174       861      6,763
 1977      1,425     4,368      1,190     6,983      2012     2,661      2,987       812      6,460
 1978      1,495     4,505      1,227     7,228      2013     2,545      2,811       762      6,119
 1979      1,565     4,643      1,264     7,472      2014     2,429      2,635       713      5,778
 1980      1,635     4,780      1,302     7,717      2015     2,314      2,460       663      5,436
 1981      1,705     4,918      1,339     7,961      2016     2,198      2,284       614      5,095
 1982      1,775     5,055      1,376     8,206      2017     2,082      2,108       564      4,754
 1983      1,900     5,138      1,400     8,438      2018     1,965      1,937       519      4,421
 1984      2,024     5,222      1,424     8,670      2019     1,847      1,766       474      4,088
 1985      2,149     5,305      1,447     8,901      2020     1,730      1,596       430      3,755
 1986      2,273     5,389      1,471     9,133      2021     1,612      1,425       385      3,422
 1987      2,398     5,472      1,495     9,365      2022     1,495      1,254       340      3,089
 1988      2,468     5,477      1,495     9,440      2023     1,379      1,132       307      2,819
 1989      2,538     5,482      1,495     9,515      2024     1,264      1,011       274      2,549
 1990      2,608     5,487      1,494     9,589      2025     1,148        889       242      2,279
 1991      2,678     5,492      1,494     9,664      2026     1,033        768       209      2,009
 1992      2,748     5,497      1,494     9,739      2027       917        646       176      1,739
 1993      2,792     5,449      1,480     9,722      2028       827        575       157      1,558
 1994      2,836     5,402      1,466     9,705      2029       740        508       138      1,386
 1995      2,881     5,354      1,453     9,687      2030       657        446       122      1,225
 1996      2,925     5,307      1,439     9,670      2031       579        388       105      1,072
 1997      2,969     5,259      1,425     9,653      2032       507        336        92        935
 1998      2,987     5,146      1,395     9,528      2033       443        316        79        837
 1999      3,005     5,033      1,365     9,403      2034       383        246        67        696
 2000      3,024     4,919      1,334     9,277      2035       332        208        57        596
 2001      3,042     4,806      1,304     9,152      2036       282        174        47        503
 2002      3,060     4,693      1,274     9,027      2037       240        144        38        423
 2003      3,048     4,539      1,230     8,817      2038       201        117        32        351
 2004      3,036     4,384      1,186     8,606      2039       169         94        26        290

  Note: Nicholson’s projections run through 2030. LAS extended those to 2039 using the year
  by disease rates of decline derived from the KPMG projections, below.
W. R. Grace                                                                           C-2




                      Table C2: KPMG Epidemiological Projections

 Death            Disease             Total    Death               Disease             Total
 Year     Meso       Lung   OthCan Cancers      Year     Meso         Lung   OthCan Cancers

 1970       861     3,234    1,196    5,291     2005     2,347       3,638      990     6,975
 1971       931     3,592    1,130    5,653     2006     2,294       3,474      945     6,713
 1972     1,003     3,721    1,171    5,895     2007     2,234       3,311      900     6,445
 1973     1,079     3,846    1,211    6,136     2008     2,173       3,149      857     6,179
 1974     1,157     3,974    1,251    6,382     2009     2,105       2,989      813     5,907
 1975     1,237     4,147    1,305    6,689     2010     2,034       2,831      769     5,634
 1976     1,308     4,278    1,165    6,751     2011     1,960       2,674      728     5,362
 1977     1,386     4,428    1,204    7,018     2012     1,880       2,520      686     5,086
 1978     1,465     4,577    1,246    7,288     2013     1,798       2,371      644     4,813
 1979     1,545     4,728    1,287    7,560     2014     1,713       2,224      604     4,541
 1980     1,628     4,897    1,333    7,858     2015     1,627       2,083      566     4,276
 1981     1,708     5,042    1,371    8,121     2016     1,538       1,942      528     4,008
 1982     1,789     5,158    1,403    8,350     2017     1,447       1,808      492     3,747
 1983     1,869     5,261    1,432    8,562     2018     1,357       1,677      457     3,491
 1984     1,949     5,338    1,452    8,739     2019     1,269       1,553      422     3,244
 1985     2,030     5,401    1,469    8,900     2020     1,180       1,434      390     3,004
 1986     2,102     5,431    1,478    9,011     2021     1,094       1,317      358     2,769
 1987     2,173     5,441    1,480    9,094     2022     1,009       1,206      328     2,543
 1988     2,242     5,441    1,480    9,163     2023       928       1,101      300     2,329
 1989     2,306     5,433    1,478    9,217     2024       850         998      272     2,120
 1990     2,367     5,410    1,472    9,249     2025       775         902      245     1,922
 1991     2,418     5,362    1,458    9,238     2026       703         811      221     1,735
 1992     2,459     5,293    1,440    9,192     2027       634         724      197     1,555
 1993     2,493     5,218    1,420    9,131     2028       571         643      175     1,389
 1994     2,521     5,135    1,397    9,053     2029       510         567      154     1,231
 1995     2,538     5,037    1,370    8,945     2030       452         497      136     1,085
 1996     2,546     4,928    1,341    8,815     2031       398         431      117       946
 1997     2,547     4,807    1,307    8,661     2032       348         373      101       822
 1998     2,543     4,682    1,273    8,498     2033       303         346       87       736
 1999     2,534     4,550    1,238    8,322     2034       262         271       74       607
 2000     2,522     4,414    1,201    8,137     2035       226         228       62       516
 2001     2,497     4,265    1,159    7,921     2036       192         190       51       433
 2002     2,469     4,110    1,117    7,696     2037       163         157       42       362
 2003     2,433     3,955    1,076    7,464     2038       136         127       35       298
 2004     2,393     3,798    1,033    7,224     2039       114         102       28       244
W. R. Grace                                                                           C-3




        Table C3: Forecasts of Number of Grace Filings, by Year, Model, and Disease

                                                  Forecast Filings
         Filing          Payment
         Year            Year       Meso      Lung    OthCan Nonmal          Total

         Liquidated    2002           139       466       215    17,700  18,520
         Unliquidated 2002          2,885     5,350     1,325    93,361 102,921
         Total Pending 2002         3,024     5,816     1,540   111,061 121,441
         2001 (3/4)      2004         809     1,239       341    22,064    24,453
         2002            2004       1,079     1,652       454    29,419    32,604
         2003            2005       1,160     1,584       466    28,567    31,777
         2004            2006       1,237     1,532       480    27,887    31,136
         2005            2007       1,313     1,480       492    27,208    30,493
         2006            2008       1,389     1,428       501    26,528    29,846
         2007            2009       1,384     1,374       481    25,849    29,088
         2008            2000       1,352     1,309       459    24,868    27,988
         2009            2001       1,321     1,243       437    23,888    26,889
         2010            2012       1,290     1,178       414    22,908    25,790
         2011            2013       1,259     1,112       392    21,928    24,691
         2012            2014       1,228     1,047       370    20,947    23,592
         2013            2015       1,174       985       348    19,842    22,349
         2014            2016       1,121       924       325    18,737    21,107
         2015            2017       1,067       862       302    17,631    19,862
         2016            2018       1,014       800       280    16,525    18,619
         2017            2019         961       739       257    15,420    17,377
         2018            2010         906       679       237    14,341    16,163
         2019            2011         852       619       216    13,262    14,949
         2020            2022         798       559       196    12,183    13,736
         2021            2023         744       499       175    11,104    12,522
         2022            2024         690       440       155    10,025    11,310
         2023            2025         636       397       140     9,149    10,322
         2024            2026         583       354       125     8,273     9,335
         2025            2027         530       312       110     7,398     8,350
         2026            2028         476       269        95     6,523     7,363
         2027            2029         423       226        80     5,647     6,376
         2028            2020         382       201        71     5,061     5,715
         2029            2021         341       178        63     4,499     5,081
         2030            2032         303       156        56     3,979     4,494
         2031            2033         267       136        48     3,481     3,932
         2032            2034         234       118        42     3,037     3,431
         2033            2035         204       111        36     2,719     3,070
         2034            2036         177        86        31     2,262     2,556
         2035            2037         153        73        26     1,937     2,189
         2036            2038         130        61        21     1,633     1,845
         2037            2039         111        51        18     1,375     1,555
         2038            2040          93        41        15     1,140     1,289
         2039            2041          78        33        12       942     1,065
         Total Futures             29,269    26,087     8,767   520,186   584,309
         Total                     32,293    31,903    10,307 631,247     705,750
                EXHIBIT B




DLI-6330265v2
                              UNITED STATES BANKRUPTCY COURT
                                   DISTRICT OF DELAWARE

                                                           :
In re:                                                     : Chapter 11
                                                           :
SPECIALTY PRODUCTS HOLDING                                 : Case No. 10-11780 (JKF)
CORP., et al.,1                                            :
                                                           : Jointly Administered
         Debtors.                                          :
                                                           :

           DECLARATION OF JOHN A. FLEMING IN SUPPORT OF DEBTORS'
             MOTIONS FOR SUBMISSION OR PRODUCTION OF ASBESTOS
              LIABILITY-RELATED INFORMATION PURSUANT TO RULE
            2004 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE

         I, John A. Fleming, declare as follows:
         1.       I am over the age of 21, have never been convicted of a crime, and am otherwise

competent to make this declaration. I have been the corporate designee for Bondex International,

Inc. ("Bondex") for more than 10 years, have reviewed thousands of pages of corporate records

of both Specialty Products Holding Corp. ("SPHC") and Bondex, and have been an employee of

Bondex since 1973. I am currently the President and Treasurer of Bondex and have held those

positions for more than ten years. Specifically, I became Treasurer of Bondex in 1978, Vice

President of Operations in 1990 and then President in January 2000. My knowledge of the

matters contained in this declaration is based both on my personal knowledge and on my review

of corporate records and documents of both Bondex and SPHC (collectively, the "Debtors"). To

the best of my knowledge, the matters stated in this declaration are true and correct.

The Debtors' Purported Asbestos Liabilities

         2.       The purported asbestos-related liabilities of the Debtors derive principally if not

exclusively from the acquisition of the Reardon Company in March 1966. The Reardon

1
         The Debtors are the following two entities (the last four digits of their respective taxpayer identification
         numbers follow in parentheses): Specialty Products Holding Corp. (0857) and Bondex International, Inc.
         (4125). The Debtors' address is 4515 St. Clair Avenue, Cleveland, Ohio 44103.



DLI-6330891v2
Company manufactured and sold certain joint compound and related home patch and repair

products containing asbestos, and the Debtors continued to sell such products following the

acquisition. The Debtors ceased selling asbestos-containing joint compound products in 1977

and halted sales of other asbestos-containing products in the early 1980s. In addition to the

Reardon Company products, SPHC sold certain asbestos-containing roofing products and

sealants until 1972.

        3.      The Debtors have faced thousands of asbestos-related lawsuits since as early as

1980, primarily precipitated by the acquisition of the Reardon Company and production and sale

of its line of products. Since 1980, Bondex has received over 20,000 such lawsuits, and,

beginning in 1992, SPHC has been named in over 8,000 such lawsuits. Bondex is a

wholly-owned subsidiary of SPHC.

Involvement and Role in Resolution of Asbestos Claims

        4.      Bondex ceased operations on December 31, 1999. Since that time, I have been

responsible for coordinating and administering Bondex's defenses in asbestos litigation. In that

role, I have consulted extensively with national coordinating counsel and local defense counsel

across the country to evaluate, defend, and, when appropriate, settle asbestos lawsuits filed

against Bondex and have been involved in all aspects of such litigation. Among other tasks and

duties, I have been responsible for (a) overseeing maintenance of Bondex documentation and

records relevant to asbestos litigation; (b) coordinating with counsel to formulate defense

strategies and respond to discovery requests; (c) evaluating discovery obtained from plaintiffs;

(d) working with experts in defense of asbestos claims; (e) determining potential settlement

values in consultation with counsel; (f) reporting information relating to asbestos liabilities to

Bondex’s parent company, SPHC; and (g) making decisions regarding settlement of asbestos



DLI-6330891v2                                    -2-
claims. Given my extensive knowledge of the history and nature of the manufacture of

asbestos-containing products by Bondex and its predecessors, I have frequently testified, in

depositions or at trial, in connection with asbestos lawsuits against Bondex.

Bondex's Approach to Addressing Asbestos Claims

        5.      Bondex has traditionally followed a rather systematic approach to evaluating and

resolving asbestos claims. After a complaint was filed, and following an initial review of the

filing, Bondex and its counsel would undertake to obtain the necessary information, through

formal or informal discovery, to evaluate the claim. Such information would typically include,

among other things, the specific disease or diseases asserted; diagnoses received; age and

occupational history of the claimant; details, if any, of alleged exposures to Bondex products as

well as exposure or potential exposure to other sources of asbestos; alleged basis for causation;

and supporting documentation for diagnoses, including test results and x-rays. Once all relevant

information had been obtained, Bondex would undertake an evaluation of the claim in

consultation with counsel.

        6.      There are a number of factors that Bondex routinely took into account in

assessing the litigation risk of a particular lawsuit. As with any tort claim, the jurisdiction in

which the claim was made, the identity of plaintiffs’ trial counsel, the severity of the disease

alleged, the credibility of the diagnosis, the age of the claimant, the strength and accuracy of the

specific Bondex product identification asserted, the duration and intensity of alleged exposure to

Bondex asbestos-containing products (i.e., whether it is likely that Bondex products played a

substantial role in causing the alleged injury), the presence of an alternative exposure or factor,

including smoking and other medical conditions, that could be a substantial contributing factor,

other settlements in the case, the degree of exposure at trial, and the costs of defense/trial, were



DLI-6330891v2                                     -3-
important considerations. In particular, as noted above, Bondex would evaluate, in consultation

with counsel, the extent to which the alleged exposures did or did not fit within the confines of

products Bondex manufactured during the specific periods of time at issue as well as what

exposures the plaintiff had or may have had to other asbestos-containing products. Other factors

of material significance to the risk assessment were the number and identity of co-defendants and

the possibility of claim recoveries from other parties (including contribution claims by Bondex).

        7.      The number and identity of co-defendants were significant to Bondex's

assessment of the risk and potential settlement value of a particular claim for a number of

reasons. First, the more co-defendants that had been sued, and especially if those co-defendants

were manufacturers of widely utilized asbestos-containing products over an extended period of

time, the more likely the plaintiff would obtain significant settlements from such parties. It has

been my experience that, in those situations, plaintiffs are more inclined to focus their efforts on

those defendants, which in most cases are much more likely to have contributed to the plaintiff’s

alleged injuries, than on Bondex. In addition, it has always been my understanding that Bondex

would be entitled to offset against any verdict any amount or amounts that the plaintiff received

from co-defendants, and if the plaintiff had not reached any such settlements with co-defendants,

Bondex's share of any verdict against multiple defendants would likely be much lower.

Accordingly, Bondex routinely considered the number and identity of co-defendants in any

particular litigation as an important factor in assessing what Bondex might be willing to pay to

settle the claim.

        8.      Transaction costs were also often an important factor Bondex considered when

deciding how to address specific asbestos claims. In fact, over the years, Bondex often settled

claims that it believed had little or no merit solely because the attorneys' fees, expert fees and



DLI-6330891v2                                    -4-
management time otherwise associated with litigating the claim exceeded the amount for which

the claim could be settled.

Issues Related to Bondex's Asbestos Litigation

        9.      I am aware that certain law firms have stated that for at least a decade the Debtors

"thwarted" the discovery process in state court by concealing the extent of their products that

contained asbestos. (D.I. 509, ¶ 9.) These allegations are categorically not true.

        10.     The Debtors never concealed the extent to which their products contained

asbestos, whether in interrogatory answers, requests for production of documents or otherwise.

To the contrary, the Debtors responded to all discovery requests honestly and completely based

on the information available to them at the time. Moreover, in the mid-1970s, Bondex placed a

warning on products as suggested by OSHA, and appeared at the request of the Consumer

Product Safety Commission in the 1970s to support the ban on asbestos-containing compounds.

        11.     The Debtors have produced thousands of pages of documents and records to

plaintiffs' counsel through the years. Contrary to the allegations of certain law firms, at no time

did the Debtors attempt to conceal information from plaintiffs or otherwise act improperly in

state court litigation.




                          [The remainder of this page is intentionally blank.]




DLI-6330891v2                                     -5-
        I declare under penalty of perjury that, to the best of my knowledge, information and

belief, the foregoing is true and correct.

Executed on this 8th day of November 2010.


                                             /s/ John A. Fleming_____________________
                                             John A. Fleming




DLI-6330891v2
                EXHIBIT C




DLI-6330265v2
                EXHIBIT D




DLI-6330265v2
         .,'"   '




                               UNITED STATES BANKRUPTCY COURT


•
     1
                                     DISTRICT OF DELAWARE
    2

    3       IN RE,                                Chapter 11
    4       W.R. GRACE & CO., et al.,             Case No. 01~01139(JKF)
                                                  Jointly Administered
     5                   Debtors.
                                                  June 27, 2005 (12,12 p.m.)
    6                                             Wilmington

    7
                                   TRANSCRIPT OF PROCEEDINGS
                          BEFORE THE HONORABLE JUDITH K. FITZGERALD
    8                        UNITED STATES BANKRUPTCY COURT JUDGE
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                     Proceedings recorded by electronic sound recording;
    23
                        transcript produced by transcription service.



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     1                THE COURT:     I said nothing about a bar date.   I

     2   said a claim form.        And the reason for the form is that the

    3    debtor's view as to how an estimation hearing is going to

     4   take place and the rest of the world's view is very

     5   different.     I want to see what comes out of the claim forms.

     6   The debtor has the right to discovery to know what the

     7   current claims are, and that will be a much better basis for

    6    estimation of current claims and possibly future claims then

    9    anything else.     So, let's get it done.     Let's find out what

    10   the claims are, what people say they have by way of claims.

    11   That number may turn out to be some astronomical number which

    12   is meaningless, but it may also, if counsel does their job



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         right, be a legitimate basis for figuring out what the claims

         are.

                      MR. HURFORD,    Your Honor, that was the same track

    16   that was taken in USG and Judge Wolin decided was not

    17   fruitful.

    16                THE COURT:     I don't care what the other judges have

    19   decided.     This is this case, this is how we're going to do

    20   it.    So, go work on a claim form that you can live with,

    21   folks, you're going to get one.        If you can't work on one

    22   that you can live, I'm going to do it, and you know a whole

    23   lot more about it than I do.




•   24                MR. HURFORD,     I understand, Your Honor, but this

    25   exact issue is pending briefing.       The debtors' motion for
                EXHIBIT E




DLI-6330265v2
                   UNITED STATES BANKRUPTCY COURT
                        DISTRICT OF DELAWARE

IN RE:                        .     Case No.   01-1139 (JFK)
                              .
                              .
  W.R. GRACE & CO.,           .    Courtroom A, 54th Floor
                              .    U.S. Steel Tower
                              .    Pittsburgh, PA
                    Debtor.   .
                              .    July 19, 2005
. . . . . . . . . . . . . . . .    8:42 a.m.

                         TRANSCRIPT OF HEARING
                BEFORE HONORABLE JUDITH K. FITZGERALD
                 UNITED STATES BANKRUPTCY COURT JUDGE


APPEARANCES:

For the Debtors:                  Pachulski, Stang, Ziehl, Jones &
                                  Weintraub, P.C.
                                  By: DAVID CARICKHOFF, ESQ.
                                  919 North Market Street, 16th Fl.
                                  Wilmington, Delaware 19899

                                  Kirkland & Ellis LLP
                                  By: DAVID BERNICK, ESQ.
                                       MICHELLE H. BROWDY, ESQ.
                                       JANET BAER, ESQ.
                                       BARBARA HARDING, ESQ.
                                  200 East Randolph Drive
                                  Chicago, Illinois 60601


Audio Operator:                   Cathy Younker

 Proceedings recorded by electronic sound recording, transcript
               produced by transcription service.
_______________________________________________________________

                    J&J COURT TRANSCRIBERS, INC.
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               (609) 586-2311   Fax No.   (609) 587-3599
                                                                         241
 1 side.   You can do your own questionnaire.       If you want to come

 2 up with one, or you want to go through yours, the one you've

 3 submitted in lieu of the debtors, if that's what you want by

 4 way of evidence, we'll go through it.        If there's a different

 5 one you want, propose a different one.        This is the debtor's

 6 discovery.    Overruled.     Please, let's go.

 7              MR. LOCKWOOD:    In the attestation instruction, part

 8 five, paragraph I --

 9              THE COURT:    I'm sorry.    Part five?

10              MR. LOCKWOOD:    Excuse me.    Part eight.   I miss --

11              THE COURT:    Okay.

12              MR. LOCKWOOD:    It's the second sentence.    It says,

13 "You are further attesting and swearing that you have not

14 omitted any requested information, the inclusion of which would

15 have a material effect on any right to assert a claim against

16 the debtor's estates."       I'm not aware of any provision of law

17 that enables the debtor to have that sort of a jurat on a claim

18 form or anything else.

19              THE COURT:    I'm not either, Mr. Bernick.    I think

20 that needs to be stricken.         If you want to put in a --

21              MR. BERNICK:    I am striking it out as we speak.

22              THE COURT:    All right.

23              MR. BERNICK:    True and accurate is good enough.

24              MR. LOCKWOOD:    Item J, part nine, second sentence.

25              THE COURT:    Actually, I don't think that the claimant

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                                                                    242
 1 has to fill this out by -- through their lawyer.   Do they?

 2           MR. BERNICK:    Well, the lawyer -- the claimant has

 3 got to fill it out, and but then the lawyer also signs off, and

 4 that is absolutely critical.

 5           MR. LOCKWOOD:   I would note that in the normal

 6 interrogatory responses in the Federal Rules of Civil

 7 Procedure, Your Honor, there's no provision for having a lawyer

 8 sign his client's interrogatory answers.

 9           MR. BERNICK:    It absolutely blinds the realities of

10 this litigation, and it's absolutely critical that we obtain

11 the information.   If you want to put your clients to the task

12 of learning all that will be mounted in support of their

13 claims, so that they personally can attest to it, that's fine.

14 But generally speaking, we know exactly how this is going to

15 take place.   The clients will know relatively little.   It's the

16 lawyers that know everything, and it's the lawyers from whom we

17 need the information.

18           MR. LOCKWOOD:   So basically, Your Honor, we're in a

19 situation in which every time Mr. Bernick wants some

20 information he says it's required by the Federal Rules of Civil

21 Procedure, but when he wants some information that isn't

22 required by the Federal Rules of Civil Procedure, he says he

23 wants it because he has to have it, because otherwise bad

24 things will happen to him.   I don't think that's quite fair.

25           MR. BERNICK:    It's required by the Federal Rules of

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 1 Civil Procedure that when discovery responses are made, there

 2 has to be a reasonable inquiry.    We've been through this a

 3 thousand times.

 4           MR. LOCKWOOD:     I repeat, if you look at the rules on

 5 interrogatories, Your Honor, you will not see any requirement

 6 they be signed by a counsel or attested to by a counsel.     It

 7 just doesn't exist.

 8           THE COURT:   Actually, I don't see in part nine a

 9 place where the lawyer is -- oh, it says, "To be completed by

10 the legal representative.    I swear that the information is true

11 and accurate."

12           MR. BERNICK:    I would say I would modify that and

13 delete the next sentence.    I'd say, "True, accurate, and

14 complete to the best of my knowledge."     That's what it says, to

15 the best of my knowledge.    All of the information is true,

16 accurate, and complete.   That would delete the next sentence.

17           THE COURT:   Okay.   It seems to me that Part J in the

18 instructions can simply be directed to the legal representative

19 and say to the legal representation if you are the legal

20 representative of the injured person, you must sign part nine,

21 and strike all the rest of it.

22           MR. BERNICK:    Fine.

23           MR. LOCKWOOD:     I'm sorry.   Excuse me, Your Honor.

24 I'm -- oh, okay.

25           THE COURT:   And then part nine should be amended as

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 1           MR. LOCKWOOD:   -- and it is -- or the federal system

 2 and is -- I don't understand the relevance of it, but

 3 whatever --

 4           THE COURT:    Well, actually --

 5           MR. LOCKWOOD:   -- Owens-Illinois may or may not have

 6 paid somebody to settle a claim --

 7           THE COURT:    The recent cases actually are saying that

 8 it is discoverable even if it's not admissible under the

 9 Federal Rules of Evidence.

10           MR. LOCKWOOD:   That may be.   I'm not arguing

11 necessarily the whole thing on -- a lot of -- the question is

12 what's the relevance.   I mean if you got paid money from Owens-

13 Illinois on a claim against Owens-Illinois, and you've

14 disclosed that you filed a lawsuit against Owens-Illinois, and

15 you --

16           THE COURT:    Well, it could be a significant issue.

17           MR. LOCKWOOD:   -- said that a settlement agreement

18 was reached against it, what -- are we going to be having

19 contribution and indemnification cross claims in this --

20           THE COURT:    No, but it could --

21           THE CLERK:    Use the mike.

22           THE COURT:    It could be an issue, Mr. Lockwood, with

23 respect to whether or not -- if it was a huge settlement, then

24 that seems to indicate that maybe the claim against Grace,

25 which has been filed after this case was filed not before, for

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