Nessim Mezrahi

In the following guest post, Nessim Mezrahi reviews the ways in which the current surging stock market affects the potential exposures of publicly traded companies and the implications for the D&O insurance industry. Nessim is co-founder and CEO of the data analytics firm SAR LLC. SAR previously published a version of this article as a client alert. I would like to thank Nessim for allowing me to publish this article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to the site’s readers. Please contact me directly if you would like to submit a guest post. Here is Nessim’s article.

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Authoritative judicial vigilance of the securities class action arena by the Supreme Court is duly warranted as the U.S. equity markets top $55 trillion dollars.[1]  In the wake of the Goldman saga and Macquarie’s complexitythe Justices have agreed to hear three questions implicating directors and officers of two mega cap companies – Meta and Nvidia – for alleged violations of the federal securities laws under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5.[2][3]

Data indicate that a buoyant U.S. equity market fomented an increase in the magnitude of alleged market capitalization losses per alleged stock drop in private Rule 10b-5 claims filed during the first half of 2024.[4] During the first half of the year, the average market capitalization per U.S. issuer has increased by approximately 16.1% as the number of listed companies declined.[5]  During the salient period, aggregate market capitalization losses claimed against U.S. issuers for alleged fraud-on-the-market increased by approximately 14.7%.[6] 

The increase in Rule 10b-5 private securities-fraud litigation exposure during a record-setting stock market is driven by a notable increase of approximately 30% in market capitalization losses per alleged fraud-related stock drop of defendant U.S. issuers.[7]  At the tail end of the loss equation, actual settlements on observed fraud-on-the-market claims increased by approximately 9%.[8] 

The ‘Negative’ outlook assigned by AM Best in the D&O insurance segment is not surprising based on both increases in securities litigation exposure on newly filed Rule 10b-5 securities class action lawsuits, and actual loss severity on settled claims during the first half of 2024.[9] 

Publicly available insurance data indicate that securities litigation exposure of U.S. issuers is trending in an opposite direction to observed pricing in the public D&O insurance segment.[10] Moreover, our data indicate that settlements on older vintage claims are increasing as the D&O rate environment remains depressed due to abundant capacity and increased competition.  Our data also indicate with a high degree of certainty that the surviving cohort of recently filed Rule 10b-5 securities class actions carry greater potential loss severity due to the rising magnitude of the alleged stock drops.[11] 

The current D&O market dynamics, where ample capacity may restrict warranted rate increases on insureds that demonstrate a higher frequency and greater magnitude of adverse corporate events, may improve with more thoughtful D&O policy limits management.  Higher market capitalizations are in fact leading to greater claim complexity with significantly greater settlement losses and defense costs.  For example, according to public records, Under Armour has spent $100 million in litigation defense costs; over 20% of the recent $434 million securities class action settlement in the U.S. District Court of Maryland.[12] 

Conclusion

An increase in loss severity of recently settled Rule 10b-5 securities class actions, plus the increase in exposure from newly filed lawsuits, warrants more thoughtful analysis around D&O policy limits for issuers that exhibit a higher frequency and greater magnitude of adverse corporate events.  According to AM Best, with “[a]n increase in loss frequency or severity, D&O underwriters may need to quickly amend underwriting, pricing, claims handling, and legal strategies to maintain the favorable performance of the past couple of years.”[13]  The interplay between record-setting market capitalizations and increasing securities litigation exposure will test D&O insurance limits management during the current soft market. 

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Nessim Mezrahi is co-founder and CEO of SAR LLC, a data analytics company specializing in securities litigation risk management solutions.

[1] S&P Global Market Intelligence.

[2] “Supreme Court Agrees to Take Up Facebook User Data Disclosure Case,” The D&O Diary, Kevin LaCroix, June 10, 2024.

[3] “Supreme Court Agrees to Take Up Nvidia Securities Suit On Pleading Standards Issues,” The D&O Diary, Kevin LaCroix, June 17, 2024.

[4] SAR SCA Rule 10b-5 Exposure Report 2Q 2024, SAR, July 10, 2023.

[5] S&P Global Market Intelligence.

[6] Id.

[7] SAR SCA Rule 10b-5 Exposure Report 2Q 2024, SAR, July 10, 2023.

[8] During the second half of 2023, 17 observed claims settled for an aggregate of $904.05 million. During the first half of 2024, 14 observed claims settled for an aggregate of $811.85 million.

[9] Best’s Special Report: US D&O Pricing Softens as Premiums Continue to Decline, AM Best, June 20, 2024.

[10] Id.

[11] SAR SCA Database, June 28, 2024.

[12] Under Armour, Inc. Form 8-K, June 21, 2024, 5:15 p.m. EST.

[13] Best’s Special Report: US D&O Pricing Softens as Premiums Continue to Decline, AM Best, June 20, 2024.