Contingencies

Product Liability

The Company categorizes the product liability claims of its subsidiary MSA LLC into two main categories: single incident and cumulative trauma.

Single incident claims. Single incident product liability claims involve incidents of short duration that are typically known to us when they occur and involve observable injuries, which provide an objective basis for quantifying damages. MSA LLC works with an outside valuation consultant to review its single incident product liability exposure on an annual basis, or more frequently if changing circumstances or developments in existing cases make an interim review appropriate. The review process takes into account the number and composition of asserted claims, expected settlement costs for reported claims, and an estimate of costs for unreported claims (claims incurred but not reported or "IBNR"). The estimate for IBNR claims is based on experience, sales volumes, and other relevant information. Adjustments are made to the reserve as appropriate. The reserve for single incident product liability claims, which includes reported and IBNR claims, was $3.5 million at both June 30, 2017 and December 31, 2016. Single incident product liability expense was $0.2 million during the six months ended June 30, 2017 and $0.3 million during the six months ended June 30, 2016.

Cumulative trauma claims. Cumulative trauma product liability claims involve exposures to harmful substances (e.g., silica, asbestos and coal dust) that occurred many years ago and may have developed over long periods of time into diseases such as silicosis, asbestosis, mesothelioma, or coal worker’s pneumoconiosis. There are two types of cumulative trauma claims, asserted and unasserted (IBNR) claims. MSA LLC is presently named as a defendant in 1,472 lawsuits comprised of 2,831 asserted claims. These lawsuits mainly involve respiratory protection products allegedly manufactured and sold by MSA LLC or its predecessors. The products at issue were manufactured many years ago and are not currently offered by MSA LLC. Although there is year over year variability in the number and quality of asserted claims defended and resolved, MSA LLC’s aggregate spend for cumulative trauma product liability asserted claims (inclusive of settlements and defense costs) for the three years ended December 31, 2016, totaled approximately $150.9 million, substantially all of which was recorded as insurance receivables or notes receivable from insurance companies because the amounts are believed to be recoverable under insurance.

A summary of cumulative trauma product liability lawsuits and asserted claims activity follows:



	Six Months Ended June 30, 2017		Year Ended December 31, 2016
Open lawsuits, beginning of period	1,794		1,988
New lawsuits	232		379
Settled and dismissed lawsuits	(554	)	(573	)
Open lawsuits, end of period	1,472		1,794



	Six Months Ended June 30, 2017		Year Ended December 31, 2016
Asserted claims, beginning of period	3,023		3,779
New claims	269		843
Settled and dismissed claims	(461	)	(1,599	)
Asserted claims, end of period	2,831		3,023

More than half of the open lawsuits at June 30, 2017 have had a de minimis level of activity over the last 5 years. It is possible that these cases could become active again at any point due to changes in circumstances. In August 2017 prior to filing our second quarter Form 10-Q, MSA LLC agreed to resolve a substantial number of cumulative trauma claims as discussed below. The rollforward tables do not reflect this activity because they are current through June 30, 2017. The above tables will be updated as the individual claims are resolved and releases are obtained in the future.

Cumulative trauma product liability litigation is inherently unpredictable and our expense with respect to cumulative trauma claims, despite having settled a large number of our asserted claims, could vary significantly in future periods. Factors that can limit our ability to estimate potential liability include the lack of claims experience with applicable plaintiffs’ counsel, as claims experience can vary significantly among different counsel, low volume of resolution, lack of confidence with the consistency of claims composition, or other factors. With respect to the risk associated with any particular case, it has typically not been until very late in the legal process that it can be reasonably determined whether it is probable that any such case will ultimately result in a liability. This uncertainty has been caused by many factors, including consideration of the applicable statute of limitations, the sufficiency of product identification and other defenses. Complaints generally have not provided information sufficient to determine if a lawsuit will develop into an actively litigated case. Even when a case is actively litigated, it is often difficult to determine if the lawsuit will be dismissed or otherwise resolved until late in the lawsuit. Moreover, even if it is probable that such a lawsuit will result in a loss, it is often difficult to estimate the amount of actual loss that will be incurred. These actual loss amounts are highly variable and turn on a case by case analysis of the relevant facts, including the nature of the injury, the jurisdiction in which the claim is filed, the plaintiffs' counsel and the number of parties in the lawsuit. In addition, there are uncertainties concerning the impact of bankruptcies of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and case to case.

Management works with an outside valuation consultant and outside legal counsel to review its cumulative trauma product liability exposure on an annual basis, or more frequently if changing circumstances or developments in existing cases make an interim review appropriate. The review process takes into account the number and composition of asserted claims, outcomes of matters resolved during current and prior periods, and variances associated with different groups of claims and venues, as well as any other relevant information.

We recently obtained more information about a significant number of asserted claims, including the nature and extent of the alleged injuries, product identification and other factors, and agreed to resolve a substantial number of these cumulative trauma claims, including the Couch claim which has been disclosed in our previous Form 10-Q and 10-K filings, for $75.2 million, a portion of which were insured. Amounts in excess of our estimated insurance recoveries were recorded within Other operating expense in the Condensed Consolidated Statement of Income and did not have a cash impact on the quarter. MSA LLC will pay $25.2 million towards these settlements in the second half of 2017, with the balance expected to be paid ratably over 7 quarters beginning in the first quarter of 2018 and ending in the third quarter of 2019. As a result of these settlements, MSA LLC is now largely self-insured for cumulative trauma claims.

As a result of these developments, we adjusted MSA LLC’s cumulative trauma product liability reserve to cover all asserted cumulative trauma product liability claims including the asserted claims that had not been previously estimable. The total cumulative trauma product liability reserve, including the estimated reserve for asserted claims and settlements that have not yet been paid totaled $93.1 million and $11.1 million at June 30, 2017 and December 31, 2016, respectively. Of this reserve, approximately $75.2 million relates to cumulative trauma claims referenced above which in August 2017, MSA LLC agreed to resolve. The remaining $17.9 million reflects estimated indemnity for all other remaining asserted cumulative trauma product liability claims that are probable and estimable at June 30, 2017. At June 30, 2017, $57.3 million of the cumulative trauma product liability reserve is recorded in the Insurance and product liability line within other current liabilities in the Condensed Consolidated Balance Sheet and the remainder, $35.8 million, is recorded in the Other noncurrent liabilities line. All of the liability as of December 31, 2016 was recorded in the Insurance and product liability line within other current liabilities. To arrive at the estimated reserve, it was necessary to employ significant assumptions. In addition, the reserve does not include amounts which will be spent to defend the remaining claims covered by the reserve. These costs are recognized in the condensed consolidated statement of income as incurred.

The liability recorded does not take into account any cumulative trauma IBNR claims. We have worked with our outside valuation consultant and legal counsel and have concluded that we are unable to reasonably assess the probability and estimate the magnitude of potential losses due to lack of confidence in the consistency of claims composition and low volume of resolution. We are currently evaluating these potential claims based on our recent claims experience and will continue to work with our outside valuation consultant and legal counsel in the second half of 2017. If we are better able to assess the probability and estimate of the magnitude of potential losses, we may increase our reserve to include all or a portion of the cumulative trauma IBNR claims.

Because litigation is subject to inherent uncertainties, and unfavorable rulings or developments could occur, there can be no certainty that MSA LLC may not ultimately incur charges in excess of presently recorded liabilities with respect to claims included within the existing reserve that have not been settled or related to claims not included in the reserve. We will adjust the reserve for our liability relating to cumulative trauma claims from time to time based on the maturation of claims, developing facts and circumstances, and if actual experience differs from previous projections. These adjustments may reflect changes in estimates for claims currently included in the reserve, as well as estimated liabilities for IBNR claims. These adjustments may be material and could increase the year over year variability of our consolidated financial results or materially impact future periods in which a reserve is recorded.

Insurance Receivable and Notes Receivable, Insurance Companies

MSA LLC purchased insurance policies for the policy years from 1952-1986 from over 20 different insurance carriers that, subject to some common contract exclusions, provide coverage for cumulative trauma product liability losses and, in many instances, related defense costs (the "Occurrence-Based Policies"). As of April 1986, MSA LLC’s insurance policies have significant per claim retentions. Based on this, MSA LLC does not expect to be materially reimbursed for any claims alleging exposures that occurred entirely as of April 1986.

In the normal course of business, MSA LLC makes payments to settle product liability claims and for related defense costs and records receivables for the estimated amounts that are covered by insurance. Various factors could affect the timing and amount of recovery of the insurance receivable, including the outcome of negotiations with insurers and the outcome of the coverage litigation with respect to the Occurrence-Based Policies, and the extent to which the issuing insurers may become insolvent in the future. Insurance receivables are recorded at present value based on expected timing of receipts.

Insurance receivables at June 30, 2017 totaled $108.6 million, of which, $7.4 million is reported in prepaid expenses and other current assets and $101.2 million is reported in insurance receivable and other noncurrent assets. Insurance receivables at December 31, 2016 totaled $159.9 million, of which $2.0 million was reported in prepaid expenses and other current assets and $157.9 million was reported in insurance receivable and other noncurrent assets. As discussed above, only a portion of our recent settlements of cumulative trauma liability claims is expected to be covered by existing insurance policies, with the remaining amounts self-insured. We are now largely self-insured for cumulative trauma claims.

A summary of insurance receivable balances and activity related to cumulative trauma product liability losses follows:



(In millions)	Six Months Ended June 30, 2017			Year Ended December 31, 2016
Balance beginning of period	$	159.9		$	229.5
Additions	68.0			29.2
Collections and settlements converted to notes receivable	(119.3		)	(98.8		)
Balance end of period	$	108.6		$	159.9

Additions to insurance receivables in the above table represent insured cumulative trauma product liability losses and related defense costs. Collections and settlements primarily represent agreements with insurance companies to pay amounts due that are applicable to cumulative trauma claims. When there are contingencies embedded in these agreements, we apply payments to the undiscounted receivable in the period when the contingency is met.

In some cases, settlements are converted to formal notes receivable from insurance companies. The notes receivable are recorded as a transfer from the insurance receivable balance to the note receivable, insurance companies (current and noncurrent) in the Condensed Consolidated Balance Sheet. In cases where the payment stream covers multiple years and there are no contingencies, the present value of the payments is recorded as a transfer from the insurance receivable balance to the note receivable, insurance companies (current and long-term) in the Condensed Consolidated Balance Sheet. Provided the remaining insurance receivable is recoverable through the insurance carriers, no gain or loss is recognized at the time of transfer from insurance receivable to notes receivable from insurance companies.

Notes receivable from insurance companies at June 30, 2017 totaled $78.0 million, of which $14.2 million is reported in Notes receivable, insurance companies, current and $63.8 million is reported in Notes receivable, insurance companies, noncurrent. Notes receivable from insurance companies at December 31, 2016 totaled $67.3 million, of which $4.2 million was reported in Notes receivable, insurance companies, current and $63.1 million was reported in Notes receivable, insurance companies, noncurrent.

A summary of notes receivable balances from insurance companies is as follows:



(In millions)	Six Months Ended June 30, 2017			Year Ended December 31, 2016
Balance beginning of period	$	67.3		$	8.7
Additions	34.2			95.6
Collections	(23.5		)	(37.0		)
Balance end of period	$	78.0		$	67.3

The collectibility of MSA LLC's insurance receivables is regularly evaluated and we believe that the amounts recorded are probable of collection. These determinations are based on analysis of the terms of the underlying insurance policies, experience in successfully recovering cumulative trauma product liability claims from our insurers under other policies, the financial ability of the insurance carriers to pay the claims, understanding and interpretation of the relevant facts and applicable law and the advice of MSA LLC's outside legal counsel. We believe that successful resolution of insurance litigation with various insurance carriers over the years, as well as the recent trial verdict against North River, which resulted in a favorable outcome, demonstrate that we have strong legal positions concerning MSA LLC's rights to coverage. The trial verdict is described below.

Total cumulative trauma liability losses were $97.6 million for the six months ended June 30, 2017. Uninsured cumulative trauma product liability losses, which were included in Other operating expense on the condensed consolidated statement of income, were $29.6 million for the six months ended June 30, 2017 and $0.3 million for six months ended June 30, 2016.

Insurance Litigation

MSA LLC is currently involved in insurance coverage litigation with three insurance carriers, including The North River Insurance Company (North River), regarding its Occurrence-Based Policies.

In 2009, MSA LLC (as Mine Safety Appliances Company) sued North River in the United States District Court for the Western District of Pennsylvania, alleging that North River breached one of its insurance policies by failing to pay amounts owed to MSA LLC and that it engaged in bad-faith claims handling. MSA LLC believes that North River’s refusal to indemnify it under the policy for product liability losses and legal fees paid by MSA LLC is wholly contrary to Pennsylvania law and MSA LLC is vigorously pursuing the legal actions necessary to collect all due amounts. A trial date has not yet been scheduled.

In 2010, North River sued MSA LLC (as Mine Safety Appliances Company) in the Court of Common Pleas of Allegheny County, Pennsylvania seeking a declaratory judgment concerning their responsibilities under three additional policies. MSA LLC asserted claims against North River for breaches of contract for failures to pay amounts owed to MSA LLC. MSA LLC also alleged that North River engaged in bad-faith claims handling.

On October 6, 2016, a Pennsylvania state court jury found that North River breached the three contracts at issue in the case, and that North River also violated common law standards of bad faith in handling MSA LLC's clams. As a result of the jury's findings, the court entered a verdict in favor of MSA LLC and against North River for $10.9 million, the full amount of the contractual damages at issue in the case. The $10.9 million, which is comprised of previously recorded payments to settle product liability claims and related defense costs, is part of MSA LLC's insurance receivable. In addition to the claims decided by the jury, MSA LLC also presented a claim under Pennsylvania's bad faith statue, which is decided by the court. Following the jury verdict, the court also issued a verdict finding that North River had acted in bad faith. In December 2016 and January 2017, the Pennsylvania state court heard evidence regarding the extent of damages awardable as a result of the statutory bad faith claim. In an order dated February 9, 2017, the Court of Common Pleas of Allegheny County awarded MSA LLC an additional $46.9 million in damages related to this statutory bad faith claim. The $46.9 million award was comprised of $30.0 million in punitive damages, $11.8 million in attorneys' fees, and $5.1 million in pre-judgment interest, each of which is authorized by a Pennsylvania statute covering bad faith claims handling matters. In April 2017, the court denied North River’s motions for post-trial relief.

In the first quarter 0f 2017, MSA LLC received payments of approximately $80.9 million (the "Payment") pursuant to insurance policies issued by North River. The Payment reflects amounts previously invoiced to North River for reimbursement on cumulative trauma product liability claims and therefore was recorded as a reduction to the insurance receivable. North River has reserved its rights to recover from MSA LLC any portion of the Payment that may later be judicially determined is not owed MSA LLC under the relevant policies. The Payment does not constitute a full and final settlement from North River regarding its coverage obligations owed to MSA LLC. MSA LLC continues to seek additional amounts due from North River, including those amounts relating to the awards referenced above, which were not part of the Payment.

In July 2010, MSA LLC (as Mine Safety Appliances Company) filed a lawsuit in the Superior Court of the State of Delaware seeking declaratory and other relief concerning the future rights and obligations of MSA LLC and its excess insurance carriers under various insurance policies. Due to the settlements referenced below, and by mutual agreement of the three remaining, unsettled parties, the trial previously set for April 24, 2017 did not occur. In the third or fourth quarter of 2017, information submitted by the remaining unsettled parties, including MSA LLC and North River, will be reviewed and the court will decide outstanding disputed legal issues.

During April 2017, MSA LLC resolved through negotiated settlements its coverage litigation with Travelers Insurance Company ("Travelers") and Wausau Indemnity Company ("Wausau"). Travelers and Wausau have agreed to make cash payments in 2018; those amounts were recorded as a transfer from the insurance receivable balance to the note receivable, insurance companies (current) in the second quarter of 2017. Travelers also has agreed to pay a percentage of future cumulative trauma product liability settlements as incurred on a claim-by-claim basis. As part of both settlements, MSA LLC dismissed all claims against Travelers and Wausau in the above-referenced coverage litigation in the Superior Court of the State of Delaware.

Through negotiated settlements, MSA LLC has reached resolution with the majority of its insurance carriers regarding its Occurrence-Based Policies. Assuming satisfactory resolution, once disputes are resolved with each of the three remaining carriers, including North River, MSA LLC anticipates having commitments to provide future payment streams which should be sufficient to satisfy its presently recorded insurance receivables due from insurance carriers.

Even if insurance coverage litigation is generally successful, the amount of our reserve exceeds our estimate of potential insurance coverage at June 30, 2017 and MSA LLC is largely self-insured for costs associated with the cumulative trauma product liability claims included in our reserve as well as future claims. MSA LLC expects to still obtain some limited insurance reimbursement from negotiated coverage-in-place agreements (although that coverage may not be immediately triggered or accessible) or from other sources of coverage, the precise amount of insurance reimbursement available at that time cannot be determined with specificity at this time.