Securities Litigation
[00:00:00] Dan Wentz: [00:00:00] This is the placing you first podcast. I'm Dan Wentz. This podcast features news and insights from CRCs vast knowledge base of 2000 plus associates who write in excess of $8 billion in premium annually. And we're giving you insider access to what's happening in our company and the types of insurance we place on this edition of the podcast.
Jason Hegland: [00:00:22] What they have found is a way to make the economics work in their favor. If they can bring a number of these suits time and time again, but for relatively small dollar amounts, likely add or just below the cost to defend, it becomes a a scenario that defendants and their insurers are willing to. It's an except to that ultimately is what we are seeing driving securities litigation today.
Announcer: [00:00:47] This is the placing you first podcast podcast
Dan Wentz: [00:00:51] securities litigation is a hot area of insurance do partly to recent trends that show record numbers of lawsuits and increasing severity of [00:01:00] settlements.
Today we'll explore the past current and future of securities litigation from multiple angles to provide us an update on how this is playing out in the insurance world.
We're joined by Gary Koehn. Garrett, runs the Western us for CRC group, a region with around two point $5 billion in premium place annually. He's also a practice leader in the professional lines group. Which places in excess of one point $5 billion in premium annually. He's been working on public company DNO insurance since 1994 developed numerous models used for analyzing the insurance limits and exposures of publicly traded companies and over his career, he has placed DNO insurance and thousands of public companies in excess of 250 IPOs.
That's a lot. Welcome to the podcast, Garrett. How are you doing today? Great.
Garrett Koehn: [00:01:47] Great, thanks.
Dan Wentz: [00:01:48] And also to help us explore the legal issues surrounding securities litigation. We're joined by Mark , who is a partner at white and Williams LLP, multi-practice law firm with offices across the Northeast. Mark's [00:02:00] in the Wilmington Delaware office.
And his focus includes corporate governance, fiduciary obligations, director and officer disputes, shareholder rights, partnership conflicts, internal investigation, special committee representations, restrictive covenants, and security claims. A great resource for us here today. How are you doing, Mark?
Marc Casarino: [00:02:18] I'm doing well.
Thank you for having me.
Dan Wentz: [00:02:19] And finally, we're joined by someone who can give us a little in depth look at securities litigation data. Very interesting. Jason Haglin is a fellow at the Stanford law school. He's also a co founder, executive director of Stanford securities litigation analytics. It's S S L a for short.
They investigate the enforcement of security laws through public action and private litigation, and their database is a collection of thousands of security class action lawsuits, sec enforcement actions, and DOJ criminal actions filed since 2000 Jason, hopefully you'll share some of that with us today.
How are you doing?
Jason Hegland: [00:02:54] I'm doing well, thank you.
Dan Wentz: [00:02:55] Great. So let's start with, Garrett. It's widely known the D&O insurance, that the [00:03:00] d&O insurance market is hard right now. What has happened, and perhaps everyone can weigh in on the reasons why the market is hard right now, and some of the forces at play.
Garrett Koehn: [00:03:11] Yeah. So I'll get a quick backdrop and then obviously, Jason, since it's going to have a lot of data on what's, what's led to the backdrop. And Mark can certainly go in more depth than I can on the legal side. So the, the backdrop of the insurance marketplace is one where probably for like 13 years, the market was in decline.
So basically from 2005 or so to 2018 there were declines and the premium of that market that's maybe around 10% per year every year, year after year. And so there was this long trend of, of, you know, the cost of DNO insurance going down. meanwhile, the number of cases actually increased, defense expenses actually increased and these guys will get into a lot more of that data.
We saw a lot of the prominent carriers that were writing a primary, his primary means the [00:04:00] first layer of primaries. I actually experienced losses for for years. You know, one, one carrier told me that they had an underwriting losses for six years in a row. You know, out of that, there are some, you know, a logical affects that took place.
So you're starting to see higher returns, pensions, you're starting to see a carriers trying to decrease their capacity pricing increases. Obviously all of this has been compounded, or the loss centers are compounded sort of by events driven issues. Me too. Wildfires, and of course now we've got Corona as well as another adventure of an issue.
So that's the overall insurance, DNO backdrops. It's kind of led to where we are today. These guys, I watch a lot more depth on the data surrounding the issue surrounding.
Dan Wentz: [00:04:45] Jason, can you give us some background with what is happening with securities litigation and the data you're seeing. Right now.
Jason Hegland: [00:04:50] Yeah.
I'd love to, to piggyback on what Garrett was saying, as the insurance market was seeing decreases in premiums, they were [00:05:00] in a way a little bit caught off guard because there was a very steady increase in new filings that began. It really started coming out of the financial crisis around 2000 it's an 11 we had hit a historic low in terms of number of filings, and then we saw the filings volume.
Uptake every year, year over year until 2019 where we hit our record high. It's definitely for 2020 even though we do have, so I'm a big disruption to the economy and to the market because of Corona virus, current pace, we still expect to see about 234 cases filed this year. Assuming that. That pace doesn't need to drop off, or what I would expect actually is to pick up.
So what I've got here is now just a slide showing the, the filing volume since 2014 because really around that time, we start to see an inflection point around the business strategy and the activity by the plaintiff's bar. That as an industry are the ones that bring lawsuits against [00:06:00] publicly traded companies.
Hi, first off, we have this, the phenomenon caused by, the cyan decision and let up before the same decision of cases getting filed in state court where it could relate cases involving federal securities laws. The exclusive forum is supposed to be federal courts. Well, because of some or word choice in, there's a lot open the doorway for some of the more enterprise, you mean just firms to file in state court and see what sticks.
And what they found is that California became a very hospitable place for them. New York was a very inhospitable place. and so we saw more and more filings and probably not a shock correlating to number of IPOs coming out of Silicon Valley, getting filed in California state court in particular. And so that also helped drive the, the increasing volume.
Well, they're driving the increase in volume, if you were to look at our data and we'll get into in a little bit, is. Is actually a very dispersed plaintiffs bar and more and more [00:07:00] plaintiffs firms attempting to enter into the space and be able to kind of peach and get cases. If you're going to have more and more plaintiffs firms working in the space, unless they're going to start sharing and divvying up what's already there.
There, you're going to have to create more supply, and that is effectively what we seem to play in the sport do. Before we get into that though, I wanted to show, because IPO is, is a, is a hot topic, especially here in Silicon Valley. The litigation against IPOs in general has really increased dramatically besides just outclassing, but a filing volume against a.
More mature public company. And so this slide represents the, is the IPO classes 2014 through 19 and what we're going to see is by 2019 just under 20% of IPOs. Have been sued or are expected to be sued. That's a huge number because if you look at just the mature public companies, the the number of public companies that get sued in any given year is about 7% of U S listed companies.
So 18% [00:08:00] is three acts. It's a very disproportionate filing volume. A lot of that is driven by the most of these who's going to be subject to section 11 claims, which has a lower pleading standard than your typical case. The court system, which specifically in state court allows for section 11 claims to be filed.
And so it became a perfect way for the plaintiff's firms to create inventory. It also became a nice way to avoid competing with one another for beauty, the council appointments, because there are not the federal notice requirements in state litigation. So if you're a plaintiff's term, you file a case in federal court, you actually have to provide public notice and there's a time allowed for other investors to come forward, but their own counsel and a attempt to or move to be appointed lead plaintiff's counsel that doesn't exist in state court.
And so you can be more a sin, if you will. In terms of filing your cases, especially if you could do so in your more obscure court and avoid that competition with [00:09:00] other plaintiff's firms. We can also see that just in terms of the targeting of the companies by market cap, more than half of the companies are in the, the mid cap, small cap micro range.
It is. Much less common today than it was, say, 10 years ago to see a larger mid cap or a large cap or a mega cap company subject to a shareholder lawsuit. Disproportionately the lion's share now is targeting smaller companies. That's being driven by companies in the technology sector. Healthcare, particularly biotechs and some of the, more recent to market consumer products when they get sued.
of course, there are a myriad of reasons why shareholders might alleged they've been misled. But bottom line, for the most part, about 75% of these cases have nothing to do with any sort of accounting. Fraud or accounting violation. And in fact, the vast majority of them simply pertained to miss earnings.
So your performance projections fell short of the Mark. So about 75% of cases file now are not [00:10:00] accounting related. No accounting fraud or financial misconduct. And so what they really come down to our cases alleging poor guidance or or knowingly misleading guidance in terms of future earnings or future performance prospects that then shall fall short of the Mark.
Or it's a product problems and clinical trial misstatements in particular to most heavily by, by a significant margin targeted industries. Right now, are it. And the healthcare in particular, biotech and pharmaceutical companies. And so we expect to see a lot of clinical trial related litigation. Another trend that we've noticed though over time is that the settlement sizes themselves are actually dropping, especially if you control for damages.
So this chart simply shows the distribution of settlements sizes between 2014 2019 there's a median of 8 million to me. He was about 43 million. But that's, that's including all securities class actions, whether it's filed by [00:11:00] more established birds who have a history and reputation of bringing. Larger scale and arguably more meritorious cases.
And then, what we call a, originally we called emerging firms. Now there's a second wave. So we call the emerging firms original disruptors. Now they came in, really approach the market with a whole new strategy, and it had success. And be a firms that have traditionally focused in on MNA objection seats.
I've seen that success, and now they're following on the coattails and bringing more traditional securities class actions. So what we've seen now is a very steep decline over the last 15 years of the market share, originally held or enjoyed by established firms. That's eroded away significantly. We're now.
Yeah, well, probably original disruptors, just three plaintiff's law firms have a disproportionate share of total securities litigation, and in fact, you can see here just by simple case volume, [00:12:00] Robin scaler still leads. Absolutely. But Rosen law, who is we'll see, is probably. Most prone towards filing less meritorious actions at lower dollar values.
They're number two. ransom Glancy though they're, they're not that far behind and they're, their strategy really isn't all that different either. Whereas the, in my opinion, from your plaintiffs, from Bernstein liquids, it tends to bring very careful, very well thought through, action. They're there at a fraction of the market share that they used to have.
Now, despite the, the fact that firms have been able to either retain as much of their case load as they can or increase their case load as much as they can. Over the last five years, we've seen across the board, there is still a reduction in the number of cases that are. Ultimately settle versus get dismissed for drop.
But that biggest reduction is among the emerging firms. And then these, what we call the next wave of firms in their haste and their speed to bring more actions. [00:13:00] It seems like they are taking more of a spaghetti against the wall approach and we'll just see what sticks. meanwhile, the, the declared damages, and this is based on settlements, because that's the only place in Winchester.
Just information disclosed. We can see that there's a huge discrepancy in the size of cases based on the damage demand from the plaintiff's firms. So Bernstein LeWitt's is at the top 320 million is the, the median declared damages in their case, compared to Rosen law is 30 million or very, very tiny case.
So this is going to become relevant. You'll see in a moment, and settlement sizes you would expect, of course, are going to correspond to damages. That's, that's not a big surprise. But what's really interesting is when you look at the recovery, so Robin's gallery leads with 22% recovery. So for every, dollar only alleged damages, they're receiving back for shareholders 22 cents.
Garrett Koehn: [00:13:52] Yeah. Interesting. Now is Bernstein just, they're just getting bigger cases or like what's,
Jason Hegland: [00:13:57] so they do have much bigger cases as we saw [00:14:00] in, in the. Slide showing damages. They're about a 345 million, I believe it was in damages compared to say, Roseanne lost 30 million. Did you get big cases? However they then, it's surprisingly consistent over the last 10 years in terms of the number of cases that get dismissed.
Very few, 18% versus a number of cases that settle. How often they will litigate all the way through into discovery before they reach a settlement agreement, and then their recovery is very consistent even amongst all of their settlements. Can you perform at an outsize level, at least in absolute dollar terms?
No. It's worth noting that Robin scaler has a. Was a meeting in recovery 22%, which is quite a bit better than even Bernstein.
Garrett Koehn: [00:14:48] What's the average settlement size overall right now? Or medium or,
Jason Hegland: [00:14:51] and the average is 43 million. Right now. The meeting is about seven and a half, 8 million. And to highlight, you know, what's really interesting about the shift, as we see [00:15:00] cases being funny, more and more frequently or higher volumes, we do see that settlement, the, the presenters, the cases.
To settle less frequently. So here we can look at Roseanne law cases 2010 to 14 they actually settled nearly 70% of their cases, whereas in the most recent years and only settled 43% however, and this is what's really interesting, when they litigate a case through to a final ruling on a motion to dismiss where the judge is going to decide if the case has some facial merit or it does not.
They lose 67% of the time. In other words, so you reach a ruling on a motion to dismiss, the judge is going to toss the case 67% of the time. However, if you look at number of cases settled, 43% plus 67 does not equal a hundred so then the difference is. Where it's in cases that are settling before really not a motion to dismiss.
And as you can see, it went from 11% in a, in the first five years to 37% in the last five [00:16:00] years. Cases that settled before a judge has made even an initial ruling on a motion to dismiss. Really what's driving that is we saw the cases that the amount of damages declared for demand are significantly lower.
The settlement sizes are significantly lower. What they have found is a way to maybe economics work in their favor. If they can bring a number of these suits time and time again, but for relatively small dollar amounts, likely add or just below the cost to defend, especially when you adjust for the potential risk.
If you lose on a motion to dismiss, it becomes a, a scenario that defendants stand their insurers. Are willing to, that's it, except day in and day out. So that ultimately is what we are seeing driving securities litigation today. It's relatively weak cases, relatively small demands that result in relatively small settlements that are at least more palatable to the defendants and [00:17:00] to insurers until you start aggregating them.
And it's still, you put it into the context of, as Karen was explaining, a 10 year trend of reductions in premiums to cover those losses.
Garrett Koehn: [00:17:11] Well, the defense expense stories that I've heard, you know, and there's not great data published on how
Marc Casarino: [00:17:17] much
Garrett Koehn: [00:17:17] people spend on the right, that's not public information, but the anecdotal, the anecdotal stories that I've heard are pretty material, right?
Like. Carriers are telling me like, Oh, we just settled the case. The settlement was like $8 million, but we spent $15 million on the fence. and I'm hearing more and more of that type of scenario as well. That's obviously impacting. Sure.
Jason Hegland: [00:17:40] Yeah.
Garrett Koehn: [00:17:40] Maybe the solid, it wasn't big, but the it cost to get there was, was arduous.
Jason Hegland: [00:17:46] That's exactly right. And, we're actually working on a project right now in collaboration with a number of carriers who are in fact sharing their defense costs and your claims data with us. Unfortunately carriers, even though they all like share space in a [00:18:00] DNO tower, you don't often have a lot of visibility beyond their own layer.
And so they're not able to really make use of this defense data that they have. So instead we're working with them. We're aggregating now a defense cost data from the four major primaries at the moment, plus several access layer carrier, so that we can start analyzing and taking a look at, you know, in the grand scheme of things.
How much is defense cost playing a role. In addition, we can, we'll also be able to take a look at how much are, available insurance limits, driving settlement values as well, because there's interplay between all of these considerations. So it will be interesting, but I can say anecdotally, looking at the limited data that we've got so far put together, I have seen a number of scenarios in which.
It depends. Class, when it's 50% on hundred percent, 125% of what it costs to settle the case. That is,
Garrett Koehn: [00:18:54] yeah. And that's it. And that's a big change in trend, right? I mean, when sort of the first limits [00:19:00] modeling and cost modeling, models were made around securities litigation, people used to use kind of like a small.
Percentage of this whole cost to me, you know, your
Marc Casarino: [00:19:08] litigation is going to be
Garrett Koehn: [00:19:08] 10% or 20% or something like that. So obviously the, you know, that math has kind of been thrown out the window if, if your defense expenses
Jason Hegland: [00:19:19] right.
Garrett Koehn: [00:19:20] And also makes it trickier to figure out what, what like limits we would suggest to somebody, you know,
Marc Casarino: [00:19:24] how do you set a limit when you're, when you're.
Yeah.
Garrett Koehn: [00:19:28] A high variability.
Jason Hegland: [00:19:31] Yeah. You know, one of the exciting, prospects with this defense cost data is that we'll be able to take a look and quite a bit of detail. How much does it cost to litigate through a really, how much did they cost to file a class certain motion, or excuse me, to defend a class certain motion or to file a summary judgment.
And what is the potential, the risk and the potential settling costs. In the event that your, your attempts to get the case costs are [00:20:00] not successful, then you can start doing a little bit more at least informed analysis along your legal strategy when you're in a claim situation. Just say, well, does it make sense?
Should we file this motion for summary judgment or is it going to cost us a lot more in the long run if we're not successful? The other thing is we'll be able to track, and this will enable carriers to keep better, track of the defense. And how many attorneys are involved in the case, of course, how much are they charging the Google hours?
But it will give them a lot more. Insight and hopefully a little bit more, if not a lot more ability to at least advocate for something that is, makes economic sense and their interests while also protecting and advocating for their insurance. I think right now it's system stance. There's a lot of just power asymmetry in carriers seem to be along for the ride.
Dan Wentz: [00:20:52] I appreciate that. Jason, we should bring Mark into the conversation to, to focus on the legal angle of things here and Mark you, [00:21:00] her, Jason's data, a lot of really good stuff there. Can you give us a little bit of the legal viewpoints, what you're seeing as far as trends go and, and the legal backdrop to all of this.
Marc Casarino: [00:21:09] Of course. Yeah. And thank you to Jason for that. his work is, is excellent as always. and as, as he points this out, and it should come as no surprise to us who are defending these cases, what we're seeing in record volume of securities litigation in recent years. and from my perspective, I don't see that abating anytime soon because the market factors that are driving that volume continue to exist and likely are going to continue to exist for the foreseeable future.
And those include things like stock market volatility, MNA activity, and the amplification factors of social media. When you combine all those things together, that drives case volume. creates the scenarios that Jason was describing in terms of attractiveness cases for plaintiff's counsel to file these volumes, run up defense costs.
[00:22:00] And create scenarios where it brings a volume of settlements that drives the expenses that Garrett was talking about. So since 2018 we've all experienced a lot of wild fluctuations in the stock market. And then in my experience, what I see in the allegations are that market downturns lead to dissatisfied stockholders.
Who in turn are resorting to litigation to recoup at least a portion of their market losses. Transaction activity since 2018 and through 2019 continue to be robust and that transaction volume offers more opportunities for securities litigation and particularly striped suits. Negative news events are amplified.
By social media attention and the 24 seven news cycle, I think hardly a day goes by without us seeing some negative news event that affects that target stock price. And that reminds me of the phrase to a hammer. Everything looks like a nail and to dismantle the stockholders, everything that's negative news seems like a securities law violation.
So that tends to drive that one follows the other.
Garrett Koehn: [00:22:58] Is it being driven more by the, [00:23:00] by the the firms Jason was mentioning chasing an inventory or is it actually being driven by. Legitimately upset shareholders.
Marc Casarino: [00:23:08] I think it's being driven by the firms who are convincing shareholders that they should be upset, good marketing by those firms, great interest in stockholders who are disgruntled or playing on that disgruntled stockholder to pursue.
And action that that stock holder may not have otherwise pursued. So I think it's a little bit of both. It's a combination
Jason Hegland: [00:23:28] of all those factors. So Mark's point about that, we, we've not published any data on this yet, but we started to notice an uptake in the frequency in which plaintiff incentive awards are sought in settlement is, are these, instead of awards, they are meant to allow an investor to recoup lost time and wages.
And personal out of pocket expenses as a result of serving as a, class leader. however, if you looked at settlements from about 10 years ago, it was used 30% of the time. Maybe we have seen though, that explode [00:24:00] to the point now where among the emerging firms in particular, a hundred percent of the time, and we're seeing incentive award requests, 5,000, ten thousand fifteen thousand dollars.
Her individual investor. I'm not even the institutional investors, and we're even seeing that in instances where a settlement was reached before even a consolidated complaint gets filed. You have to wonder, I'm sure there's a correlation. I'm sure with more time looking at the data, it will actually have a more solid explanation, but right now there is absolutely the appearance that not only are being marketed too aggressively, but they're being incentivized implicitly.
Probably not explicitly.
Marc Casarino: [00:24:40] Absolutely. And, and so that's, we're seeing that as well, in real time, in the cases. and they're exploiting that. Also the plaintiff's firms, particularly the more recent entries to the market in the merger objection scenario, to utilize that as a lever to potentially disrupt the timing of the merger.
Or to sell a quick settlement, and the [00:25:00] preclusive effect of that settlement to get, you know, quick money, relatively lower settlement value. But nevertheless, in the aggregate, they add up. And in the event driven cases, you know, things from cyber breaches and whatnot, we're seeing very quick. He used to, Lee.
Prepared. It appears complaints being filed because speed to the court is getting them first in line for a quick settlement. Again, for those reasons too, to preclude or have a reclusive effect, perhaps on more meritorious suits. So
Garrett Koehn: [00:25:30] all those factors
Marc Casarino: [00:25:32] together with what Jason was describing, I think our contributing to this increased volume over recent years of cases.
And again, since all of those factors continue to exist, there is no reason in my mind to think that that will abate any time soon. In terms of trends that we're seeing, I would say that despite there being a larger volume over all of cases, the merger, objection, objection. Filings are a smaller subset, diminishing subset of those folks.
Filings after [00:26:00] sign is more state and parallel filings. Merger objections are the maybe outlier to that. They, they tend to be bucking that trend and being filed more in federal court and state court. I suspect the rationale for that is the Delaware state courts at least have largely made known that a disfavor
Garrett Koehn: [00:26:18] award
Marc Casarino: [00:26:19] of attorney's fees for disclosure only settlements.
Federal courts haven't quite caught up with that. Obviously. We hope that the federal courts will come together, at least in Delaware, come together and have a more unified approach to that because I think that they follow that playbook from the Delaware state courts that will eliminate a lot of those strikes suits.
The reality is though this high volume, and we talked about it earlier, near requires defense costs, and I think that, you know, we should be more efficient and how we defend and staff these cases. On the defense side, and we can do that, and that will help lower those costs. But as of right now, the trend is that, candidly, it's just very expensive to defend these cases.
[00:27:00] The plaintiff's firms know that, and they're using that as leverage, as Jason pointed out in his statistics to, to get very early settlements, relatively nominal settlements compared to the damage requests in many instances. But nevertheless, again, in the aggregate, the sheer volume of these filings impacts the market.
Garrett Koehn: [00:27:18] Mark, I also heard from a one carrier I was talking with about, just the, the rates of inflation amongst defense attorneys and saying that the hourly rates,
Marc Casarino: [00:27:27] you know, the guy that used
Garrett Koehn: [00:27:28] to be 600 an hour, which was a lot, he knows now like 1500 an hour. I'm not going to ask what you're charging. it seems pretty good.
is that becoming more common? Are the race just going up?
Marc Casarino: [00:27:39] There is a, here's to be rate inflation. Again, myself, speaking for myself and my colleagues here at our firm, we try to be efficient and economical, but a, that is not always a view shared by everyone. Understand, and I do see some of these, you know, fee requests, come across my desk, in, in various cases.
And I'm some, sometimes I have to, you [00:28:00] know, it's jaw dropping sometimes. So that is something that needs to be addressed going forward because it's just not a trend that can continue. It's just not economically sustainable. Did to continue in that with that trajectory. So. That is something that I do think we need to get, as a collective on the defense side, working together with the DNO carriers to get our arms around, because that is a significant factor that needs to be addressed.
Volume of cases, they're being rewarded with quick and relatively lucrative settlements. which is only going to encourage a higher volume of cases. And if the defense expense keeps going up on the other side, I mean, these, these metrics are all heading in the wrong direction and they're not good for the industry.
Dan Wentz: [00:28:37] And what about covert 19? how do you see covert 19 affecting things?
Jason Hegland: [00:28:41] Well, for us to
Marc Casarino: [00:28:42] see that having probably the largest impact is going to be, not necessarily with, the, the existing disclosures, unless it's a company that's already experienced. Something like
Garrett Koehn: [00:28:53] from SARS or
Marc Casarino: [00:28:54] some other pandemic type event because I think it would be very difficult even for the craftiest [00:29:00] of plaintiff's lawyers to right.
A genuine complaint that says that company management should have foreseen this pandemic and made adequate disclosures. So they'll probably make generalized arguments that the company has generally didn't have sufficient safeguards in place. But where I see probably the next trend coming is if the medical data that we're hearing proves accurate, and we all hope it doesn't for a variety of reasons, that there's going to be consecutive waves of coven related illnesses and pandemic continues, then disclosures.
We'll have to be updated and kept current to reflect that. And if they're not, then I think that might give some traction, two plaintiff's firms to exploit that going forward. So that is one area where I see the potential for a direct Cove in 19 impact.
Garrett Koehn: [00:29:51] Okay, so how many, how many cases are there now?
Jason Hegland: [00:29:53] Yeah, so, right now there are only five coded related , and in my opinion, one of the, has he been debatable [00:30:00] because arguably zooms issues as they came out, they would have come out as a just gained market share anyway, so their, their disclosures were not specific to.
On like their pandemic readiness, et cetera. But there are five right now. There's one derivative action and there's one sec enforcement action. It will be interesting to see if the plaintiffs from, you know, they'll have to strike a very careful balance if they did want to pursue potential claims. Just.
Taking advantage of the fact that there's a abroad market, drop because you know, they're going to risk, of course, infuriating the courts, insurers, events, bar, et cetera. However, you know, it, it may also still be the opportunity where you can find a, a claim that has, you're on the right side of economics and it's still just cheaper to settle.
so it will be interesting to see. I don't, I don't think that we'll see a massive psych as a result of that. I do think though, that we'll see [00:31:00] the plaintiff's bar very carefully watching statements today and going forward in terms of how a company is weathering the pandemic and how they expect to ultimately emerge from the pandemic and they will be ready to file the moment that there's a misstep.
and then of course, you, because so many more companies are financially distressed. If they are, there are more debt offerings involved. And I think that chance of a securities act claim it's going to go up, certainly a, a good time then to look at, adding some, Language on, on forum selection, and, and changing the byline so that you can at least shelter yourself from the state cases because, it's, it's otherwise going to be an area that's ripe for litigation.
Dan Wentz: [00:31:42] Okay. So, we got some data from Jason. We got the legal backdrop from Mark, and now, We go to Garrett, I had to kind of help us put this all together and how that plays into the current insurance marketplace. Garrett, can you get us up to date on that and what you're feeling?
Jason Hegland: [00:31:57] Yeah,
Garrett Koehn: [00:31:57] sure. So, you heard the backdrop [00:32:00] of the insurance marketplace at the beginning of our call, so I'll get a kind of the current status now.
So they're, they're around, and these are rough numbers. They're around 40 markets who participate in public DNS. Of those. And then we're a wholesale broker, so I'll explain some of that for those. who might be listening to this that aren't directly in the insurance business. Of those 40, around 10 of them, or either wholesale only or a whole sale focus, insurance carriers, and looking at what, what the different carriers are willing to write.
You know, there may be seven to 10, the right primary. Jason mentioned earlier that he's talking to kind of the four big ones. You know, the point of all that is there aren't a whole lot of carriers that are willing to write that first layer. And I think if you've heard the background of the data, you kind of get wide, right?
Like a lot of these things, high defense expenses, often low settle on values. So you know, if you're below 20. You're kind of in a, in a hotspot. there's maybe 20 carriers who, you know, have that 41 right. Anything below, twice. So that's, you know, another [00:33:00] factor. So there's a pretty limited supply as you start building a DNO program of, of carriers that are willing to participate.
I'm going to take a second to explain like the wholesale marketplace, cause I think, you know, for, if you're a CFO or you listened. Or maybe have a lawyer, you might not understand why exists. So the wholesale markets and charismic focused on the wholesale distribution channel. Do so for a few weeks. So if you think about it this way, and a wholesaler just means we distribute products to resell brokers.
So from a carrier standpoint, let's pretend you're an insurance company. You've hired a DNO team
Marc Casarino: [00:33:34] and you
Garrett Koehn: [00:33:34] now need to distribute your insurance products. There's approximately 40,000 us retail brokers in the United States. And of those, how many might wind up working on a DNO account. If you're trying to be an insurance underwriter, you don't really want to try to open yourself up to 48,000 different different brokers.
So we trade with those. We have people that have expertise in DNR, so we can kind of get things to underwriters by trading with those brokers and bringing in deals that [00:34:00] kind of make more sense for retail brokers, we deal with two different types really. There's lots of other types, but generally speaking, some of them have big professional liability teams.
They've got DNO teams. And we fill one role for them. which can relate to market access, potentially Marcus, they don't have, so some of the ones that are wholesale only they can relate to market clouds. So who actually has a better relationship with a carrier relate to no, just capacity issues. You know, you're trying to place your program and people have capacity and you need more than, than you seem to be able to get.
Yeah. With your relationships. the other brokers we trade with, often will outsource to us and we have contents. We have expertise who got access to every market. So depending on the type of retail broker, we'll be filling different roles for buyers. The benefits are that, you know, you get access to more markets than you would have otherwise, and it's pretty material right now.
It's just some data on that you might get more cloud, you know, we are a big company where. We place more professional liability than most most companies. So if you want to leverage our relationships, you can, we have claims [00:35:00] assistance with lawyers, incident to a buyer, and there's no additional costs.
Sometimes that kind of gets misspoken, but you know, if we're replacing an access layer on your accounts and our price is 10,000 cheaper than the market price, you know, we're saving you $10,000. so there's not a, there's no direct cost to it. So a buyer to be working, have your retail broker working with a wholesaler.
That's kind of the background of why we existed, but with the market shift, it's caused a big shift into these wholesale markets from wholesale focus markets. So sharing some of our data, we saw growth in 2019 in the public Dino's space of 75% showing that a lot of businesses. Shifting into the wholesale wholesale markets and sells also brokerages and quarter one.
It's been 120% growth so far, year over year. So it's indicative of kind of like what's, you know, the value that I think we're adding at the moment. Carrier rates, I, I did, again, a quick poll of a couple of carriers. Carrier rates are obviously going up right now. So you know, the impacts of what they're [00:36:00] doing are not surprising.
They're Kati. Like I said before, the kind of limits they're increasing the raising retentions. I switched to a legacy carrier that's has been playing, as a major player for a long time. they said in 2019, the public DNL increase was 45%, and so far for quarter one, so 40% as a rate increases. Sure for me is one that kind of wasn't in the public marketplace so much and his race have risen.
They come back at, they actually gave really similar numbers as a, as a rate increase. So they said 2019 was a 40% increase. They got a 35% increase in quarter one. Anecdotally was something that's common for us to see right now is, is. I'm at 10 million later by a carrier being cut to five of four or 5 million layer by carrier being cut to two and a half, where we really have to kind of piece together programs that used to be,
Marc Casarino: [00:36:49] you
Garrett Koehn: [00:36:49] know, a handful of carriers.
So that's a new change. So from a rate
Marc Casarino: [00:36:53] standpoint,
Garrett Koehn: [00:36:53] I'm just making these up, but you know, it's not weird to see something in 2018 a layer, maybe five in excess of [00:37:00] 20 million of other insurance. You know that in 2018 might've been 70,000. 2019, it could be 120,000 for that same five, and this year it might be split in two layers and have a combined cost of like 200,000 and so something that used to be 70 with one carrier is now, you know, 200,000 or two carriers.
It's just, it's just a much different environment. Jason mentioned the losses and certain classes, and so obviously there's a lot of scrutiny around those classes that you know, that the parallel is, is data. Right? So. Pharma, life sciences technology, there's always been less interest overall in financial institutions.
And so there's fewer players who are playing on those. And arguably that's a tough space right now. Corona. And then a couple of initiators are kind of tough sometimes too, right? So we talked, crypto can be tough depending on what they're doing. The Krone related issues are material right now, and not surprisingly, so the, I heard the acronym.
Beach, which is like looking center attainment airlines. Let's [00:38:00] see, forgetting what C is. and he goes hotels, the beach industries, and then of course like retail. And our writers are really uncomfortable as right now whale and gas. And then when I heard yesterday schools, I guess schools are becoming a big problem because I'm canceling schools.
We want the money back. And so that's kinda, that's the current backdrop. Now we've got, yeah, 40 carriers that are kind of participating, not that many are participating below 20. The wholesale markets and the wholesale focus markets are pretty major participants now as a percent of the marketplace. And that's kind of the way the world looks today.
Jason Hegland: [00:38:31] It
Dan Wentz: [00:38:31] seems like these are very trying times for purchasers of DNO insurance. Can you tell us what the best practices for approaching a market on behalf of clients is right now?
Garrett Koehn: [00:38:41] Yeah. You know, and I think for us, as I mentioned before, we, you know, we trade with retail brokers and kind of do it in two different ways.
So one, one where we're. I'm doing, doing the majority of the placement with the markets or all of it. And then second, where we're, we're dividing markets, with the retail brokers. So in those cases, you need to be, you need to be prepared to set up underwriting [00:39:00] calls. You need to be prepared for questions that may come up, you know, certain right now around issues like.
You know, what are your disclosures around Krone man? How does your continuity plan working as your cash? You have supply chain issues. These are all good things to prep for into scenarios when we're dividing the market with the retail broker. So like I mentioned, there's, you know. There's 40 total markets, so there's, you know, 10 of them are so little wholesale focused or wholesale friendly, know we have a lot of market cloud in relationships with certain carriers.
And so when I see, you know what, what I would say is as a good practice, we have pretty Frank conversations with the resell brokers about who can approach each market best, who has the most clouded that market, who intimately can get the best thing done for that client. At that. At that carrier. Then we decided who was going to go where.
And, and, and we dovetail that together. And, as you go to the marketplace, you have kind of a combined approach and you've got your client prepped and ready to go and you start participating on all the calls kind of right at the beginning [00:40:00] of the process. You know, that that approach works, works very well, I would say.
Yeah. As the mortgage started getting hard, we saw more frequently. People kind of like go to market fully on their own, get stuck, come to us at the last minute. You know, flail a little bit, you know, Hey, can you help me on this thing? I need help fast. You know, that's obviously not probably the best way to approach things right now.
And if you're a buyer, you know, it's probably not the best for you. You might not know that's going on behind the scenes, but, but it might be. so it's really much better to sort of like really take a pragmatic approach to beginning and figure out like, how are we really going to get the best for our clients and this type of marketplace.
Dan Wentz: [00:40:35] Okay. Thank you very much to our guests today. That was Mark partner. White and Williams LLP. Mark, what's the best way to get ahold of you guys? White and williams.com.
Marc Casarino: [00:40:45] Sure. I'm at what? berms.com. Last name, first initial@whiteandwilliams.com.
Dan Wentz: [00:40:50] Great. And Jason Haglin, who's a fellow at Stanford law
Jason Hegland: [00:40:53] school, his
Dan Wentz: [00:40:54] information of course on LinkedIn, stanford.edu website.
And also you can check [00:41:00] out the SSLI project where, what's the best way to get to that there, Jason?
Jason Hegland: [00:41:04] It's a sla@lawdotstanford.edu.
Dan Wentz: [00:41:08] Okay. sla.la.stanford.edu and finally, Garrett Kane, who, of course, it's on LinkedIn, CRC group.com, along with our national network of brokers who specialize in many different industries and types of insurance.
Garrett, we appreciate you joining us today and helping to set this whole thing up. It's been a great conversation. Thank you all very much.
Jason Hegland: [00:41:29] Thanks, Ron. So placing you first
Dan Wentz: [00:41:31] podcast. A quick note. CRC group is hiring and we want you to join our team. CRC is expanding nationwide, opening new offices and hiring at all levels.
Join one of the nation's leading wholesale brokers today by finding the careers page on CRC group.com also, stay up to date with everything CRC by following us on LinkedIn. We'd love to start a conversation with you there and make sure you subscribe to the tools and Intel newsletter. We send out our latest white papers and reports to our subscribers and [00:42:00] all we need is your email address.
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