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SCAS Risk Evaluation Models for Financial Institutions

Underwriting or Broking D&O for FI? The year 2008 was a challenging one for underwriters of publicly-traded Financial Institutions (FI). Many high (and low) profile FIs were subject to Securities Class Action Suits (SCAS). Advisen's Value-Investing Risk Tools (VRT) help claims dodgers, but we wanted to see how well VRT and its companion, Advisen's Total Accrual metric (ATACm) would have helped dodge 2008 FI claims. Users of these tools for FI's in 2008 were able to dodge a majority of the SCAS affecting these companies. See our results here.

SUMMARY

Testing Advisen's Value-Investing Risk Tools (VRT) and Advisen's Total Accrual metric (ATACm) against our library of Securities Class Actions (SCAS), demonstrated the historical effectiveness of these tools. This research indicates that these tools have historically been highly effective at identifying companies more likely to be subject to a Securities Class Action Suit. Given the challenges of underwriting FIs in 2008, we reviewed the results for suits filed in 2008 and found that it even outperformed prior years.

METHODOLOGY

We first looked at our overall scores to measure the effectiveness of each metric for dodging claims in the past, for all years of the study from 1996 to 2007. The test results for ATACm and VRT across all companies are impressive. For each tool, companies with high scores attracted a disproportionate percentage of SCAS. Displayed below is the percentage of suits against companies with the top 5%, 10% and 15% of each tool's score.

Percentage of SCAS, for All Companies With the Highest Scores

  • ATACm
  • Adjusted PE
  • Adjusted Positive Earn-to-CFO
  • Adjusted Loss-to-CFO
  • Adjusted Sales-to-CFO
  • Top 5% of Scores
  • 22%
  • 12%
  • 10%
  • 14%
  • 9%
  • Top 10% of Scores
  • 35%
  • 22%
  • 20%
  • 27%
  • 18%
  • Top 15% of Scores
  • 46%
  • 30%
  • 27%
  • 37%
  • 26%

When we focus our historical review on just Financial Institutions, the ATACm and VRT results demonstrate an even higher level of discrimination. A greater proportion of Financial Institutions with higher scores are subject to SCAS than the total universe.

Percentage of SCAS, for Financial Institutions With the Highest Scores

  • ATACm
  • Adjusted PE
  • Adjusted Positive Earn-to-CFO
  • Adjusted Loss-to-CFO
  • Adjusted Sales-to-CFO
  • Top 5% of Scores
  • 34%
  • 21%
  • 27%
  • 39%
  • 23%
  • Top 10% of Scores
  • 45%
  • 39%
  • 48%
  • 67%
  • 42%
  • Top 15% of Scores
  • 49%
  • 52%
  • 64%
  • 85%
  • 57%

We then wanted to see how the tools performed in 2008. Advisen examined how effectively these metrics anticipated the filings of SCAS against Financial Institutions in 2008. The 2008 results are generally consistent with prior years. For example, a strategy of avoiding Financial Institutions with the highest 5% of ATACm scores would have helped an underwriter to avoid 33% of the SCAS filed during 2008.

Percentage of 2008 SCAS, for Financial Institutions With the Highest Scores

  • ATACm
  • Adjusted PE
  • Adjusted Positive Earn-to-CFO
  • Adjusted Loss-to-CFO
  • Adjusted Sales-to-CFO
  • Top 5% of Scores
  • 33%
  • 18%
  • 56%
  • 47%
  • 40%
  • Top 10% of Scores
  • 59%
  • 31%
  • 58%
  • 59%
  • 43%
  • Top 15% of Scores
  • 70%
  • 43%
  • 63%
  • 59%
  • 47%

Time Period After FYE: ATACm - 12 to 24 months; Value Risk Tools - six to 18 months.

These results clearly show that underwriters who used these Advisen tools in 2008 would have experienced superior results in underwriting FI's.

HOW DO I ACCESS VRT and ATACm?

Select your company by name or ticker. Click on Analytics & Ratings. Choose either Value Investing Risk Tools or ATACm. This compares your company to all companies as well as just the relevant industrial sector, for each metric. For VRT, change the Value Investing Metric to Price-to-Earnings to match the example above or review Sales to Operating Cash Flow or even Negative Earnings to Operating Cash Flow.

CAN I PUT MY COMPANY'S TOOLS ON ADVISEN?

We developed VRT and ATACm by relating the SCAS cases in Advisen's Master Significant Cases and Actions database (MSCAd) to the various financial parameters for each company. This enabled us to develop these scoring systems. We also develop and host proprietary models for our underwriting and brokerage clients. If you would like to discuss how we can work with you to develop and host your proprietary scoring tools, please contact Jim Blinn at [email protected].

3,738 SECURITIES CLASS ACTIONS

Advisen's MSCAd contains 3,738 Securities Class Actions. MSCAd is Advisen's Large Loss database. MSCAd is a collection of over 35,000 loss events totaling $900 billion. It is searchable and sortable so that you can easily produce a list of Securities cases or just Securities Class Actions, Derivative Shareholder Actions, Ponzi Schemes, and others. Our clients continue to tell us that the easiest way to underwrite FI or support their coverage recommendations is to produce a short list of cases that illustrate similar losses at similar companies. Every case entry in MSCAd is linked to our entire company database, so each loss can be related to SIC codes, market caps, employee counts, and many more company breakdowns.

NEED ASSISTANCE?

To learn more about Advisen's VRT and ATACm and MSCAd, contact Advisen at [email protected]

Additionally, request a free copy of Advisen's three-page "ATACm & VRT Synopsis for FI Report" or our QuickStart Guide to MSACd via [email protected] as well.