Philips 2006 Annual Report Download - page 214

Philips Annual Report 2006214
related personal injury claims to provide a projection of the
subsidiary’s liability for pending and unasserted potential future
asbestos-related claims for the period from 2006 through 2016.
The methodology used to project the subsidiary’s total liability for
pending and unasserted potential future asbestos-related claims relied
upon various assumptions and factors, including the following:
An analysis of the subsidiary’s pending cases, by type of injury,
and an allocation of unknown injuries based on the empirical
experience of the subsidiary;
An analysis of data generated from a conventional model used to
project future asbestos claims for mesothelioma and lung cancer;
An analysis of the correlations between lung cancer fi ling rates and
the rates for other cancers and non-malignancy claims;
Epidemiological studies estimating the number of people likely to
have developed asbestos related diseases;
An analysis of average claim payment rates and mean payment
amounts by injury for claims closed in 2005 and 2006;
An analysis of the period over which the subsidiary has and is likely
to resolve asbestos-related claims against it in the future; and
An assumed infl ation rate of 2.5%, reduced by 1.5% to refl ect lower
claim valuations due to the aging of the claimant population.
According to the study prepared by the Third Party Expert, as of
September 25, 2006, the estimated cost of disposing of pending and
estimated future asbestos-related claims fi led through 2016, excluding
future defense and processing costs, totaled USD 507 million (EUR 396
million) on an undiscounted basis. The study also found that estimates
based upon other calibration metrics, none of which were considered
more reliable than the metrics used, were narrowly grouped within 6
percent in excess of this projection. Approximately 19 percent of the
estimated liability relates to pending claims and approximately 81
percent relates to future claims. As a result, in accordance with IAS 37,
the subsidiary increased its accrual for loss contingencies related to
asbestos product liability to EUR 313 million, which represents the
discounted estimate of indemnity costs for claims asserted through
2016, without taking account of any potential insurance recoveries.
This resulted in a pre-tax charge to earnings of EUR 252 million for
2006 (a pre-tax charge of EUR 18 million and EUR 54 million was
recorded in 2005 and 2004, respectively). At December 31, 2006, the
subsidiary’s recorded accrual for loss contingencies for asbestos
product liability amounted to EUR 299 million, which is refl ected in
the Company’s consolidated balance sheet.
The estimate of the subsidiary’s liability for pending and unasserted
potential claims does not include future litigation and claim
administration costs. During 2006, the subsidiary incurred asbestos
litigation and claim administration costs totaling EUR 12 million
(EUR 12 million in 2005 and EUR 10 million in 2004).
The Company believes that it and its subsidiaries have a substantial
amount of insurance coverage for asbestos product liability. In prior
years, a subsidiary commenced legal proceedings against certain third-
party insurance carriers who had provided various types of product
liability coverage. During 2004 and 2005, agreements were reached
with certain insurance carriers resolving disputes with respect to the
interpretation and available limits of the policies, amounts payable to
the subsidiaries and terms under which future settlements and related
defense costs are reimbursable. Pursuant to these settlements,
insurers paid EUR 34 million in 2006 (EUR 20 million was paid in 2005
and EUR 19 million was paid in 2004) for asbestos-related defense and
indemnity costs. At December 31, 2006, the subsidiary recorded a
receivable from insurance carriers, for which settlement agreements
have been reached, in the amount of EUR 72 million (EUR 48 million
in 2005 and EUR 24 million in 2004) for the reimbursement of
incurred defense and indemnity costs as well as for probable recoveries
of accrued projected settlement costs with respect to pending and
future claims, which is refl ected in the Company’s consolidated balance
sheet. Insurance recoveries included in pre-tax earnings amounted to
EUR 70 million in 2006 (EUR 38 million in 2005 and EUR 44 million in
2004). At December 31, 2006, an additional EUR 23 million, for which
a receivable has not been recorded, is payable to the subsidiary over
the next two years, provided asbestos legislation in a certain form is
not passed by the US Congress by certain dates. The subsidiary has
not recorded a receivable from non-settling insurance carriers.
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The subsidiary plans to pursue its litigation against non-settling
insurance carriers and continue settlement discussions with
various insurance carriers in 2007.
Projections of future asbestos costs are subject to numerous variables
and uncertainties that are diffi cult to predict including the number of
claims that might be received, the type and severity of the disease
alleged by each claimant, future settlement and trial results, future
claim dismissal rates, uncertainties surrounding the litigation process
from jurisdiction to jurisdiction, and the impact of potential changes
in legislative or judicial standards. Accordingly, actual claims asserted
against the Company’s subsidiaries and related settlement amounts
may in fact be lower or higher than the amount currently estimated.
As a result of its limited asbestos claims experience and the inherent
uncertainties involved in long-term forecasts, the Company does not
believe it can reliably forecast indemnity costs that may be incurred
for claims asserted after 2016. The Company intends to continue to
evaluate the subsidiary’s asbestos-related loss exposure and the
adequacy of its reserves periodically in order to identify trends that
may become evident and to assess their impact on the range of
liability that is probable and reliably estimatable. If actual experience
differs signifi cantly from the assumptions made in forecasting future
liabilities, if the assumptions used to determine the estimate prove to
be erroneous, if the costs of settling claims asserted after 2016 are
signifi cant, or if insurance coverage is ultimately less than anticipated,
the Company’s consolidated fi nancial position and results of
operations could be materially affected.
MedQuist
As announced earlier, MedQuist, in which Philips holds 70.1% of
the common stock and which is consolidated in Philips’ fi nancial
statements, is conducting a review of the company’s billing practices
and related matters.
MedQuist has not been able to complete the audit of its fi scal years
2003, 2004, and 2005, and has postponed the fi ling of its reports
covering the fi scal years 2003 to 2005 and fi rst three quarters of 2006.
As previously announced, the MedQuist board has stated that the
company’s previously issued fi nancial statements included in its annual
report for fi scal year 2002 and its quarterly reports during 2002 and
2003, and all earnings releases and similar communications relating
to those periods, should no longer be relied upon. MedQuist also has
stated that it was unable to assess whether the results of the review
of its billing practices and related litigation would have a material
impact on its reported revenues, results and fi nancial position.
During 2004, various plaintiffs, including current and former customers,
shareholders and transcriptionists, fi led four putative class actions
arising from allegations of, among other things, inappropriate billing
by MedQuist for its transcription services. These litigations all are in
various preliminary stages and are being defended by MedQuist. All of
these actions remain pending and, on the basis of current knowledge,
Philips’ management has concluded that potential future losses cannot
be reliably estimated. A previously fi led putative shareholder derivative
action brought on behalf of MedQuist against, among others, several
MedQuist board members and Philips, was dismissed in September
2005. The plaintiff fi led an appeal from that decision, which appeal
remains pending.
MedQuist also is the subject of an ongoing investigation by the U.S.
Securities and Exchange Commission relating to its billing practices
and has received a subpoena from the U.S. Department of Justice
relating to these practices and other matters.
During 2006, MedQuist continued its previously announced program
of offering accommodations to customers potentially affected by the
billing issues under review. MedQuist’s board authorized the company
to make accommodation offers to certain customers in an aggregate
amount of USD 65 million to resolve any issues concerning prior
billing by MedQuist to those customers. As of December 31, 2006,
MedQuist has paid or credited an aggregate of USD 50.8 million as an
accommodation to those customers, which represents 78% of the
USD 65 million authorized amount. Also, in the third quarter of 2006,
to resolve concerns over billing related issues, the MedQuist board
authorized the company to establish an accommodation program
for certain other customers that involves the issuance of credits
112 Group fi nancial statements 172 IFRS information
Notes to the IFRS fi nancial statements
218 Company fi nancial statements