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Securities Class Action Study. Background Securities Class Action (SCA) claims make up about 70% of losses for a public company D&O book Given the small number of SCA claims, a detailed analysis is essential to improving “traditional” approaches - PowerPoint PPT Presentation
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CLRS Chicago - September 9, 2003
Securities Class Action Study
Background Securities Class Action (SCA) claims make up about
70% of losses for a public company D&O book Given the small number of SCA claims, a detailed
analysis is essential to improving “traditional” approaches
Traditional approaches rely on inherently volatile loss development patterns and implicitly give all claims “equal weight”
CLRS Chicago - September 9, 2003
Securities Class Action Study
Methodology SCA claims are independently identified by daily
reviews of the Stanford and PWC websites Potential claims, in some instances, are identified
before clients give notice The Claims Department estimates the expected loss
amount and assigns an estimate strength Estimate strengths are closed, “strong”, “weak”, or
“none” (i.e. not enough info available to assess)
CLRS Chicago - September 9, 2003
Securities Class Action Study
Methodology Strong or closed claim estimates are considered
accurate assessments of ultimate value For weak or no estimate claims, older years’ estimates
are extrapolated using a 12.5% trend per year Each claim’s limit, attachment point and SIR (the
policy profile) are factored in To account for the policy profile by claim, the ILF
curve underlying the cessions factors is used to calculate a relative exposure to loss (REX)
CLRS Chicago - September 9, 2003
Securities Class Action Study
Methodology For example, Low Att. Pt. Inc. and Higher Att. Pt. Inc.
are both SCA’s during 2002:
Claims Made Date Insured Name SIR Limit
Attachment Point
Relative Exposure to
Loss (trended 12.5%/yr)
02/13/02 Higher Att. Pt. Inc. 500,000 10,000,000 20,000,000 0.78
11/15/02 Lower Att. Pt. Inc. 250,000 5,000,000 5,000,000 1.09
In the case above, Lower Att. Pt. Inc. is 40% riskier than Higher Att. Pt. Inc. (1.09/0.78 – 1), all else being equal
CLRS Chicago - September 9, 2003
Securities Class Action Study
Methodology This calculation is applied to each claim for each year.
For instance, for the immature accident year, the average REX, reflecting that year’s policies’ profiles, is 1.03
Since the REX builds in 12.5% per year ground-up severity trend, the 0.99 REX for the mature AY shows a large movement away from loss
To derive the estimated severity for those claims deemed weak or no estimates, the REX of the W/N claims is compared to the REX from a prior year (e.g. immature AY):
CLRS Chicago - September 9, 2003
Securities Class Action Study
Relative Estimated SelectedAccident Exposure to Loss Ult Trended Ultimate
Year Counts trended @ 12.5% Severity Severity
Mature 36 1.03 3,693Closed Cases 23 0.91 2,557Strong Ests 10 1.46 6,936Weak Ests 1 0.83 2,025No Ests 2 0.32 1,371
Immature 35 0.99 4,132Closed Cases 0 NA 0Strong Ests 8 0.45 4,018Weak Ests 10 1.60 5,749 5,749No Ests 17 0.90 3,234 3,234
693,31.03
1.605,749
CLRS Chicago - September 9, 2003
Securities Class Action Study
Methodology The same approach is applied to derive estimated
severities by bringing other accident years forward The final selected immature severity is a weighted
average of the severities from the mature years Non-class action ultimates are derived using a
conventional frequency/severity method
CLRS Chicago - September 9, 2003
"2001 was a year to forget for many investors ...resulted in an all-time high of 487 securities class action filings in 2001, a 105% increase from 2000…..”-Risk and Insurance, March 1, 2002
Thirty-One Percent More Securities Class Action Suits Filed in 2002 Than in 2001“Federal securities class action litigation suits increased by 31 percent between 2001 and 2002, rising from 171 to 224 filings.”-Stanford Law School, Cornerstone Research March 13, 2003
Revealing Headlines?
CLRS Chicago - September 9, 2003
39
108
173
241204 214
0
50
100
150
200
250
300
350
400
450
500
1996 1997 1998 1999 2000 2001 2002 2003
Post PSLRA Securities Class Action Frequency
*
*Extrapolated – from www.securities.stanford.edu
266
489
241227
39
219
22
40
317
40
172
Analyst Cases
55
262
172
227
39
Analyst CasesIPO Laddering Cases
Cost of IPO Claims
22
219
55
262
227
CLRS Chicago - September 9, 2003
"2001 was a year to forget for many investors ...resulted in an all-time high of 487 securities class action filings in 2001, a 105% increase from 2000…..”-Risk and Insurance, March 1, 2002
Federal Securities Class Action Cases Filed and Defendant Market Cap Losses Surge in 2001-Stanford Law School, Cornerstone Research March 15, 2002
Thirty-One Percent More Securities Class Action Suits Filed in 2002 Than in 2001“Federal securities class action litigation suits increased by 31 percent between 2001 and 2002, rising from 171 to 224 filings.”-Stanford Law School, Cornerstone Research March 13, 2003
Revealing Headlines?
"average settlements have increased from $7.8 million for pre-PSLRA cases to $24.9 million for post-PSLRA cases…..”-Policy Limitations on Coverage, by John E. Black Jr. and Ellen D. Jenkins - April 2003
CLRS Chicago - September 9, 2003
Analysis of Settlements(Dollars in Thousands)
Total # of # of Avg SettlementSettle Cash Cases Cases for casesYear Dollars Average Median $ % $ % Total >$50M b/t $2-$50M
1996 749,504 4,234 2,250 89,250 11.9% 116,750 15.6% 177 1 7,010 1997 914,823 6,727 3,050 112,600 12.3% 148,600 16.2% 136 1 9,121 1998 2,249,719 16,185 3,750 1,143,500 50.8% 1,245,631 55.4% 139 5 10,697 1999 1,558,404 11,131 2,550 561,500 36.0% 696,100 44.7% 140 6 8,878 2000 4,364,100 25,081 2,688 3,297,500 75.6% 3,380,000 77.5% 174 3 9,824 2001 1,788,760 11,321 3,775 384,250 21.5% 459,250 25.7% 158 5 12,178 2002 2,544,402 18,988 3,725 947,000 37.2% 1,109,000 43.6% 134 9 10,822
2003(4/03) 798,035 11,240 4,500 290,000 36.3% 340,000 42.6% 71 2 10,986
Source: Securities Class Action Alerts
Top 2 Top 3
CLRS Chicago - September 9, 2003
D&O Loss Trend
Median Settlement as of/Cumulative Count of Cases
Filing Year 12 24 36 48 60 72 841996 - 1,200 2,150 2,500 2,800 2,950 3,000
7 27 48 73 93 102 105
1997 - 1,600 2,750 3,155 3,250 3,155 4 24 65 100 125 138
1998 3,500 2,500 3,000 3,333 4,250 3 39 96 122 157
1999 - 156 3,250 3,350 6 34 80 112
2000 - - 2,000 9 48 80
2001 - 1,500 4 21
Trends 36 48 6096-97 28% 26% 16%97-98 9% 6% 31%98-99 8% 1%99-00 -38%
Average 2% 11% 23%Selected 12.5%
CLRS Chicago - September 9, 2003
Analysis of Settlements
Headlines and average settlements continue to be driven by a handful of cases each year These “mega” cases are trending materially higher, but
are 5% of the cases The remaining 95% of all cases have single to low
double-digit trend over the last five years
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