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Asbestos Causes New Panic, But True Picture Unknown

Nov 4, 2002 | Wall Street Journal

A building material banned for 20 years and all but extinct in towns and cities still has the power to frighten stock markets: asbestos.

The carcinogenic material reared its head again Friday, causing the share prices of no fewer than six major European companies to fall on fears of exposure to claims from victims.

Another two companies issued denials, fearing harsh investor reaction if they didn't. The issue has flared up on fears that companies linked to asbestos - from troubled Swiss-Swedish engineer ABB Ltd. to the U.K.'s Royal & Sun Alliance Insurance Group PLC will need to take provisions during the third-quarter results reporting season.

The challenge facing companies now is establishing the size of future liabilities for people who may not yet have contracted life-threatening diseases such as mesothelioma, a cancer caused by breathing in asbestos fibers or dust.

That will be tough. Because asbestos can make people sick many years after they were exposed to it, the true level of outstanding liability may never be known.

Dominic Hemsi, a lawyer specializing in industrial disease at U.K. personal injury firm Leigh Day & Co., told Dow Jones Newswires Friday that litigation may stretch out for years.

"The prevalence of mesothelioma, which is caused almost exclusively by exposure to asbestos, is unlikely to reach its peak in Europe until 2020," he said.

"There is a latency period of up to 50 years before the disease may be diagnosed," he added. Hemsi pointed out that one issue arising out of the Sept. 11 attacks in the U.S. was the risk to fire-fighters from dust inhalation from asbestos-ridden buildings.

There's also the psychological impact of having worked with asbestos, invented as a cheap means of fireproofing buildings but withdrawn in the late 1970s after a number of deaths were linked to it.

"In the U.S. successful claims are being made by people suing for compensation for worrying over asbestos-related disease with no existing asbestos injury evident," said Allan Gore, personal injury barrister at Kings Bench Walk in London. One of the problems is not knowing how much U.S. juries will award as compenstion.

The biggest stock market casualty Friday was Sweden's Alfa Laval AB (S.ALF), whose shares fell almost 30%, initially after a local investment bank published negative research on the sector's asbestos exposure.

The company had disclosed Thursday that about 40 asbestos-related lawsuits have been filed against its U.S. subsidiary, which made asbestos decades ago. It planned a Friday afternoon press conference to discuss the situation, but later cancelled it, saying it would make a statement Monday.

The engineering equipment maker floated on the Stockholm bourse in May. Since then, shares have tanked.

"Of course, the very mention of asbestos is not in the favor of investors," said a broker with a major Swedish bank. He added that confidence in Alfa Laval's management has suffered as the IPO document didn't reveal its potential exposure to asbestos lawsuits going forward.

In its research note, investment bank D. Carnegie & Co. said the risk going forward for Alfa Laval is that the number of claims could escalate. Four settled claims existed at the time of the IPO and were recognized in the due diligence process, but they were deemed immaterial and weren't included in the IPO prospectus, Carnegie said.

Shares in Swedish industrial conglomerate Trelleborg AB (S.TRL) also sank Friday, but recovered after the company outlined its asbestos position.

Trelleborg said its U.S.-based Goodall Inc. distribution unit has been the target along with hundreds of other companies of numerous class-action lawsuits since the early 1990s related to the handling of asbestos products from the 1930s and 1940s.

However, it said more than 90% of the claims had already been rejected, with courts ruling that Goodall was unconnected to any alleged injuries. Trelleborg said it hadn't yet made any settlements with plaintiffs.

Fellow Swede Sandvik AB (SAND.ST) said Friday that it's the target of 19 asbestos-related legal claims in Pennsylvania, but said it has asked to be dismissed from the cases because the claims concern mining equipment that it neither manufactured nor sold.

In 1989, Sandvik Tamrock acquired part of U.S. company Eimco. But Sandvik said the Eimco operations it took over weren't involved in the asbestos exposure. Sandvick shares fell 2.3%.

Meanwhile, ABB (Z.ABB) dropped 6.5% on more fears of asbestos claims for past manufacturing in the U.S., where it's already earmarked $1 billion to pay victims.

Ratings agency Moody's Thursday downgraded ABB's debt rating to junk, citing its deepening financial troubles. The downgrade was primarily linked to ABB's profit warning, though it also "factors in the uncertainties around the resolution of the company's exposure to asbestos litigation," Moody's said.

ABB confirmed late Friday it's discussing filing for Chapter 11 bankruptcy procedure for its U.S. combustion engineering unit. It added it's in talks with U.S. asbestos plaintiffs to try to resolve the dispute.

In the U.K., Royal & Sun shares dropped 12% Friday on fears that an ongoing asbestos court case will eat into its depleting reserves.

Investors took fright and dumped the stock, even though the true level of compensation that Royal & Sun faces may be minor if there is a case to answer at all.

The British insurer is facing a lawsuit brought by former U.K. asbestos producer Turner & Newall on behalf of its former employees.

Turner & Newall, bought by U.S. Federal-Mogul Corp. (FDMLQ) five years ago, is now in administration. Turner & Newall's inability to meet huge claims over asbestos-related disease led to its declaration of insolvency.

It says Royal & Sun is liable for claims under an employer liability policy it underwrote in the 1960s and 1970s. The Financial Times reported Friday that there were some 1,000 claims.

A Royal & Sun spokesman declined to outline the details of the case, saying legal proceedings are ongoing. However, a person familiar with the situation said that Royal & Sun's insurance cover for T&N excluded asbestos, which was a legal product not known to be dangerous at the time.

More annoying for Royal & Sun: it has already more than doubled its reserves for asbestos claims, raising them by GBP371 million. The question remains whether that's enough should a court order huge payouts.

In Switzerland, cement company Holcim Ltd. (Z.HOL) Friday said no asbestos-related lawsuits have been filed against it, adding its asbestos problem is limited to a small Swiss unit.

"So far, there has been no lawsuit concerning asbestos, neither against the holding nor against any of our companies worldwide," Holcim spokesman Roland Walker told Dow Jones Newswires.

He added that the company doesn't expect to be sued in the U.S. Holcim has never made or distributed asbestos products, but it does have its share of problems tied to the fiber. Swiss construction material company Eternit AG processed asbestos before it was acquired by Holcim in the mid-1990s.

Thursday, French building materials company Lafarge SA (LG.P) confirmed that it is so far free from external claims related to asbestos, though it faces internal claims from employees.

"In the context of recent rumors, Lafarge confirms it hasn't received any claims related to the production or sale of products which would have contained asbestos, either in North America or in the rest of the world," it said in a statement.

In Ireland, building materials group CRH PLC (CRHCY) shares slid all week on fears that some of its U.S. operating companies face big bills for asbestos.

CRH said in late September that companies in its U.S distribution group were named in 244 pending cases involving a total of 251 claimants.

The cases allege personal injury due to asbestos exposure in products manufactured by other firms and distributed by these companies before they were bought by CRH.

CRH said it believes the claims are without merit, adding that "the companies involved and the relevant insurance carriers are co-operating to defend these cases and to settle only on a minimal, pragmatic basis."

A CRH spokesman told Dow Jones Newswires that when it finalizes its year-end accounts, it will decide whether to make provisions for asbestos claims.

"We don't believe the group has any material exposure but in completing our accounts we will see if provisions are necessary, but I don't think anything material will be made," the CRH spokesman said.

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