The Dilemmas in the D&O Market

1. The Dilemmas in the D&O Market Where do We Go From Here?

2. CFRA At A Glance • Established Leader Since 1994 • Leading provider of forensic accounting research, founded by Dr. Howard Schilit • CFRA is the first mover in this space, with over 4,000 publications in our archives • Trusted Partner • Our stated mission is to provide insightful, timely, unbiased and high-impact information that helps clients mitigate risk and make the most responsible business decisions possible • Rely on us for accounting research, due diligence and proprietary Bespoke Service • Clients include institutional investors, insurers, corporates, lawfirms, and regulators. • Accounting Research Innovator • Unique forensic accounting lens zeroes in on quality of a company’s reported financial and operational results • Proven track record as an early warning indicator of operational deterioration and class action suits. • Talented Team • Performance-driven, passionate analysts with deep industry expertise • A team of over 20 including numerous MBAs, CPAs, CFA Charterholders and MAccs

3. Schedule P – “Other Liability” Claims MadeLeading D&O Liability InsurersStatutory Gross Accident Year Combined Ratio(Assumes 23% Expense Ratio for All Companies) Source: A.M. Best, CFRA

4. Schedule P – “Other Liability” Claims MadeLeading D&O Liability InsurersGross Premium Earned vs. Gross Losses & LAE/Underwriting Expenses(Assumes 23% Expense Ratio for All Companies)(In Millions) Source: A.M. Best, CFRA

5. Net Insurer vs. Reinsurer Accident Year Ceded Loss and LAE Ratio Source: A.M. Best, CFRA

6. Schedule P – “Other Liability” Claims MadeLeading D&O Liability Insurers Key Takeaways • While seemingly improved, recent accident years are unseasoned and subject to deterioration as pending litigation unfolds. As the average duration on cases is about three years, the 2002 through 2004 years are still relatively immature. • During 1998 – 2002, the industry experienced roughly $4 billion of net adverse loss reserve development, averaging about 20 loss ratio points per year. The 2002 underwriting year has already exhibited meaningful adverse development through 2004 of nearly $800 million or 13 loss ratio points. • During 1998 – 2001, ceded loss & LAE ratios exceeded net by 44 points on average, reflecting that reinsurers paid a significantly disproportionate share of soft market losses. • Recent premium growth trends reversed in 2005, with an expectation for a moderate decline of roughly 10% for the year, which reverses the trend seen from 2002 and 2003. In those years growth in gross premiums exceeded 35% in both 2002 and 2003.

7. Schedule P – “Other Liability” Claims MadeLeading D&O Liability Insurers Key Takeaways • In part as a result of pricing strength in 2003 and 2004, there appears to be improvement in recent gross accident year results with combined ratios of roughly 90%. However, it is unclear if the trend of adverse development exhibited in accident years 1998 – 2002 has abated and if 2003 and 2004 will ultimately prove to be profitable • One factor which gives us pause about the ultimate loss development is that through the first ten months of 2005, there were 971 financial restatements as compared to 619 for the full year in 2004. It’s possible that class action suits could follow. • Finally, overall results for D&O could in fact be worse than shown. The data is skewed by the inclusion of other specialty classes in “other liability” claims made section in the convention statements. Had these other lines been excluded, the combined ratio for just the D&O only line would have been worse.

8. Key Discussion Points to be Reviewed By Panel With Regard to CFRA Schedule & Review • Discussion by reinsurers of their results as compared to the CFRA analysis. • Discussion by cedant company panelist as to their specific results compared to CFRA numbers. • What are the factors that produce significantly different underwriting results when comparing insurer to reinsurer? • How are they rationalized between the reinsurers loss ratios and CFRA loss ratios?

9. Key Discussion Points to be Reviewed By Panel With Regard to CFRA Schedule & Review • Canunderwriters truly produce a better loss ratio with the free flow of capital that exists in the insurance market today? • Will the insurance market ever have 10-12% return on investment with the free flow of capital the way it is today or are we doomed to underperforming results?

10. If Underwriting Management Liability Insurance is such a losing proposition, Why Do Insurers and Reinsurers Remain in the Business? • If both the cedant companies and reinsurers results in management liability business are so poor why would anyone remain in this line of insurance? Is there cause for concern that result is this line of insurance being non-lucrative will result in a lack of interest on the part of insurers in the future? • Over the last two years reinsurers conservative underwriting approach has differed vastly from cedant companies more liberal underwriting of the same business – where does that put our industry? • Why would reinsurers continue to reinsure books of business that are not profitable? • A discussion of the availability of insurance in the management liability arena and the potential players today versus those players in the year 2000.

11. Has Sarbanes Oxley Changed the Landscape of Doing Business? Are There Other Implosions in Management Liability Business Yet to Occur? (i.e. Mutual Funds, IV Banking, Insurance Industry Meltdown) • Has Sarbanes Oxley and the slow down in the newly filed security cases had a significant impact on the projected losses in the management liability business? • Is there a new wave of issues to be dealt with or are better times ahead of us relative to losses in management liability insurance? • Are there are new undefined issues ahead of us and what are they? • Do these new issues still to be dealt with mean there are better times ahead relative to losses?

12. Is there any way to make a profit? • With the issues behind us and ahead of us in the management liability business is there any way we can construct a business model where underwriters can make money? • As a cedant company has the free flow of capital in the insurance business ruled out any possibility of a decent return on investment for investors in the insurance industry? Is our business doomed? • As a reinsurer has the free flow of capital in the insurance business ruled out any possibility of a decent return on investment for investors in the insurance industry? Is our business doomed?

13. Hit and Run?