The federal and NSW governments may have to top up the James Hardie compensation fund for those injured through contact with asbestos, it was revealed this week, despite the company remaining profitable. Shareholders before sufferers, or sane and shrewd? Tim Binsted and Simon Evans peer through the dust.
Q. Why is the fund backed by a taxpayer-guaranteed loan?
A bit of background first. The Asbestos Injuries Compensation Fund is a separate entity from James Hardie. The fund was established in 2006 after an agreement between James Hardie and the federal and NSW governments. Under its terms, James Hardie pays 35 per cent of its annual operating cashflow into the fund, which compensates victims suffering from asbestos-related diseases such as asbestosis and mesothelioma.
KPMG publishes an annual actuarial report tracking the fund's liabilities and estimated future liabilities in light of the number, types, and size of claims.
The possible drawdown on the government loan came to light after Andrew Scott, an investment analyst from Malaysian bank CIMB, crunched the numbers and forecast that the fund would be short $82 million in 2015-16 and faces deficits for a number of years.
None of the official bodies comment on the possible use of the government loan and there are estimates at play here. But Scott is a well-respected analyst and his warning carries weight.
Q. Has James Hardie remained profitable since the fund was established?
Yes. During the global financial crisis its profits took a big hit, but housing markets are recovering and so are earnings. In the past two years, James Hardie has rewarded its shareholders with $592 million worth of dividends and its stock has soared. Its Louis Gries is one of the most handsomely paid chief executives of an Australian-listed company. His total pay packet for the 2013-14 year was $12.9 million, up from $8.7 million. In Gries' defence, he has done a good job. Still, the massive dividends and lucrative executive compensation present something of a PR nightmare for James Hardie if the fund does end up drawing on the loan.
Q. How have the fund's operations been going - are claimants and payouts increasing?
The past year saw a surprising spike in claims from men and women sick with mesothelioma, which is the most expensive claims category. The jump prompted actuaries KPMG to raise the fund's long-term projected liability by 10 per cent to $1.9 billion. Total claims last year were also higher than expected at 608. In July, James Hardie paid $120 million into fund. The fund also has other sources of income including cross-claims for liability, as well as insurance and investment income. Scott's numbers have the fund balance at $66 million heading for an $82 million shortfall.
Since 2001 James Hardie has spent more than $1 billion on asbestos compensation, medical research and awareness campaigns. Of that $1 billion, the fund has received $721 million.
Q. As the GFC recedes and the US housing market is turning around, why might the loan provisions be triggered now?
The US housing market – the main driver of James Hardie's earnings - is not soaring into the sunset but it is improving. In the darkest depths of the GFC, house building slumped to 554,000 a year. It is now about 1 million dwellings a year and momentum is building. James Hardie is spending $US200 million ($219 million) a year expanding its plants in the US to meet anticipated demand: clearly the GFC is over. The unexpected surge in expensive claims is really what is challenging the fund. James Hardie's latest quarterly result was also hugely disappointing, so the slower-than-expected pace of the US housing recovery will have an impact. At the end of the day, though, no one can predict how many sick people will come forward to make claims.
Q. Is the company trying to shrug off its responsibilities on to the taxpayer?
No. In the wake of the GFC when the world's financial markets were in a spin, share prices had plunged and the world's main economies were under severe pressure, the NSW and the federal governments agreed to provide a loan of up to $320 million for the Asbestos Injuries Compensation Fund if the financial contributions from James Hardie weren't enough. The measure was put in place during extraordinary times and recognises that James Hardie's earnings jump around with the business cycle. It has been used twice by James Hardie but it paid the funds back quickly, so it is playing by the rules.
Q. Is the government support for the scheme a result of poor drafting of its terms, or prudent risk management?
It was prudent risk management, but what has changed is the number of claimants which has been rising and is expected to continue to rise. Some critics say the original deal in which James Hardie pays 35 per cent of its operating cash flow to the fund was not generous enough, and it should have paid more - 45 or 50 per cent. But this in turn may have put pressure on the company's viability. James Hardie's commitment extends to 2045, so the company needs to be able to grow to keep paying victims.
Q. What do victims of asbestos want?
Victims of asbestos-related disease need James Hardie to remain financially strong and viable in the long term so that the payouts from the fund continue as long as possible. If James Hardie folded it would be a disaster for victims. They are still furious with James Hardie and fearful that future management or directors might change jurisdictions and put the company into Chapter 11 bankruptcy in the US, then start afresh without the future payout liabilities hanging over the company.
