The Impact of the Credit Crisis on the D&O/E&O Market

1. September 15, 2009 Credit Crisis Impact on D&O/E&O Market Jason IsraelSVP, Guy Carpenter Instrat

2. What is D&O? Who buys it and Why?

3. What is D&O? Basic Definition • Directors and Officers policies insure: • Directors and Officers • historically, only D’s & O’s, but broadened in soft market of 90’s to include some entity coverage • For wrongful acts • defined as any act, error or omission in their capacity as D&O • Usually includes Employment Practices Liability,but excludes “professional services” (E&O)

4. Who buys D&O? Companies that need their D&O’s to serve… • Bought by the Company • D&O Coverage is voluntary (not required by law)But almost all large Public firms and many private firms buy some • Primary for the benefit of the Directors and Officers (It’s expensive, but then so are other executive benefits!) • Coverage is voluntary, but few large companies go without • Multiple Towers are possible, but generally all the D&O’s share coverage and limits

5. How does D&O fit in with other Professional Liability coverages? Each covers a different type of wrongful act • Directors & Officers (D & O) • Management of Company • Errors & Omissions (E & O, aka “MPL”, LPL, BPL, etc.) • Professional service provided to customers • Employment Practices (EPL) • Employment issues (hiring, harassment, etc) • Fiduciary • Administration of benefits - health, life, 401k, etc • Fidelity/Crime • Often marketed with liability, but first party cover • Cyber Liability • Spinoff of E&O for computer related issues • Evolving liability for privacy, viruses, etc

6. Why buy D&O? Litigation, Litigation, Litigation! • Private Companies • Mostly Employment Litigation • Bondholders (if for profit) • More rarely Customers, Competitors or Regulators • Public Companies • Same as Private • Shareholder Litigation • Even options speculators can sue for stock fraud • Usually have separate EPL policy But shareholder litigation leads to >90% of the cost of D&OCoverage for government fines is usually restricted.

7. Shareholder LitigationThe Claims

8. Security Class Action Lawsuits - Legal StandardWhat plaintiffs need to prove • Defendants made material misrepresentations or omissions • Defendants acted intentionally or recklessly, not simply in error • Misrepresentations pertained to the purchase or sale of securities • Plaintiffs relied on the representations (directly or indirectly via share price) • Plaintiffs suffered economic loss • The fraud caused this economic loss • Interpretations have changed with laws and court rulings • PSLRA requires plaintiffs to show reliance on specific misrepresentations • Dura decision requires showing tying plaintiffs economic loss to the fraud, not merely that the fraud influenced the price.

9. Shareholder LitigationHow much Litigation is there? Source: Stanford Law School Securities Class Action Clearinghouse

10. Shareholder LitigationNumber of claims fairly steady – except when it isn’t…

11. Since 1996, there have been hundreds of settlements: More than 75 exceeding $100 Million. Nine of more than $1 Billion – incl. Enron, Worldcom, Tyco Settlements usually come first from D&O coverage, but large settlements can exceed all available limits.These can involve cash & non-cash company contributionsLarger cases can involve contributions by auditors Shareholder LitigationHow many dollars are at stake?

12. Shareholder LitigationWhat type of Allegations? * 2009 reflects claims through 9/4/2009, Annualized

13. Shareholder LitigationFocus of recent claims is shifting? Initial 2009 claims often alleged balance sheet issues – mostly financial firms failing to reveal asset impairment. Recent claims are more likely to involve weak earnings – management “knew or should have known” that their earnings forecasts were unrealistic.

14. Shareholder LitigationClaims no longer center around finance

15. Shareholder LitigationInvestor “Fear Index” calming down Source: Yahoo! Finance

16. Shareholder LitigationWhat’s new? • The ultimate exposure may depend more on national priorities: • FDIC is now looking to tap D&O insurance on banks that it seized • Will test exclusions for Insured vs. Insured and regulatory actions • Regulators testing use of “Control Person” Liability • - Avoids need to show involvement, knowledge or negligence • Political Climate is improving for defendants • - “Financial” element of Recession is receding from news headlines • Shift from Financial Reform towards “Stimulus” & Health Care Reform

17. Impact on the Market US D&O Results for 2003-2006 look favorable • Rates contained sharp increases from the 2001-2003 period • Lower frequency in 2005-2006 • Options Backdating (06-07) had minimal effect • Mutual Fund Timing (03-04) had minimal effect (on D&O) • Subprime claims arising from 2008 & late 2007 remain largely unsettled. • Auction Rate Securities claims may no longer be a major issue

18. Impact on the Market • Steady pricing declines since 2003 put pressure on D&O results • As Subprime spread, Financial rates began increasing in 2008. • Commercial D&O seeing rate increases in 2009

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