Securities Class Action Study

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”



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)



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)



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



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):



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



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


"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?


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


"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


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


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%


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

Documents

Securities Class Action Study