Annual Report and Accounts 2012 - Scapa

24. Provisions continued
During the year to March 2012 the Group have received an updated report from Gnarus Advisers LLC to reconfirm its estimates of
Waycross’s total liability for asbestos claims. The report reconfirmed that the provision recognised is still within the ranges predicted
by the model. Sensitivities were applied to the model to determine the impact of changes to the key assumptions as noted below.
The results indicated that the provision recognised is within the sensitised range. The key assumptions made in assessing the
appropriate level of the provisions were as follows:
– the number of people likely to have been exposed to Waycross/SDFI’s products – almost exclusively paper mill workers who were
in active employment prior to 1980;
– the rate of claim filing (also known as ‘propensity to sue’);
– the rate of successful dismissal of claims filed;
– the average amount to pay in respect of successful claims;
– Waycross’s pending cases by type of disease claimed; and
– the future trend of legal costs
The first assumption is very favourable for Scapa. The products were sold to and used exclusively in a very narrow and well defined
set of circumstances. Scapa also has a full record of the customers, locations and dates of sales of the product in question – creating
a very high evidential hurdle.
The provision is discounted using a risk free rate of 3.35%; the unwind of the discount is applied to both the asset and the liability. The
provision and receivable are held in US Dollars and converted at the year end exchange rate. The provision covers the time horizon to
2053 which is the date when the Nicholson model predicts the last incidence of mesothelioma from any source at all in the USA.
As in any long-term projection of this nature (41 year estimation period) there remains significant uncertainty associated with the future
level of asbestos claims and the costs arising out of related litigation. There can be no guarantee that the assumptions used to
estimate the provision will result in an accurate prediction of the actual costs that may be incurred and, as a result, the provision may
be subject to potentially material revision from time to time if new information becomes available as a result of future events. However
the updated results support the carrying of the liability and it is the Board opinion that the liability on the Balance Sheet at 31 March
2012 is appropriate, with the only changes being for foreign exchange movements and discount unwind.
Product liability insurance asset
Based on work performed by Dickstein Shapiro LLP, a prominent Washington DC law firm with expertise in the field of evaluating
insurance coverage and the likelihood of recovery for asbestos-related claims, the Group has established the existence of insurance
coverage to a level of certainty sufficient to recognise an insurance asset equal to the provision.
It should be noted that there is a residual level of uncertainty around any insurance policy until such time it is actually drawn down
upon and therefore the actual value of all accessible insurance may differ from the evaluation above. Given that the value of insurance
policies is significantly in excess of any reasonable range of claims outcomes, the Board’s view is that this will not lead to any material
financial impact on Scapa. In addition, the Board is of the view that any potential asbestos liabilities are ring-fenced within the nontrading
sub-group of the North American business. This view is based on the principle of American law that a shareholder (including
a parent corporation) is generally not liable for a separate legal entity’s obligations.
Asbestos litigation costs
Under the terms of a cost-sharing agreement entered into in 1996 the Group’s primary insurance carriers provided 50% of the
defence costs associated with the asbestos-related claims. This share was renegotiated to 75% with effect from 1 April 2006.
The litigation provision of £5.5m (2011: £5.7m) represents Scapa’s forecast share of defence costs over the lifetime of this issue
and is consistent with the basis of calculation of the indemnity provision.
Reorganisation and leasehold commitments
The £2.5m (2011: £3.0m) reorganisation provision relates to dilapidations for leasehold property of £1.3m (2011: £0.9m), £0.7m
(2011: £0.7m) for a land value guarantee related to the Megolon disposal in 2007 and £0.5m (2011: £1.0m) in relation to
reorganisation costs.
Whilst the timing of the economic benefits relating to the non-current provisions cannot be ascertained with any degree of
certainty, the leasehold commitments are expected to take place within the next 1-2 years.
Environmental provisions
Environmental provisions relate to expected costs required to clean up environmental contamination of a number of sites in both
Europe of £0.2m (2011: £0.3m) and North America of £0.2m (2011: £0.3m). The Group expects the majority of the spend against
the environmental provisions to be incurred over the next three years.
Scapa Group plc Annual Report and Accounts 2012 63
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