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  1. 1. D&O and E&O - Is There Any Good News? John Lewandowski, FCAS, MAAA CNA Insurance Company 2004 Casualty Loss Reserve Seminar Las Vegas - September 13, 2004
  2. 2. 2 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas D&O POLICY CHARACTERISTICS
  3. 3. 3 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas Coverage/Profile - What is D&O and E&O? Directors & Officers Liability Policy – provides coverage for claims arising from the “wrongful acts” – i.e., any act, error or omission -- of insured persons while serving in their capacity as directors or officers. Expanded to included Entity coverage for “securities claims.” D&O coverage is simply a specialized type of Errors & Omissions coverage. D&O’s have liability for misrepresentations and omissions • in a public offering registration statement filed with the SEC • in connection with any purchase or sale of securities Errors & Omissions Professional Liability Policy – provides coverage for claims involving alleged “errors and omissions” arising out of professional services rendered by the insured, e.g. banks, investment advisors, insurance companies, mutual funds… D&O coverage often includes Employment Practices Liability.
  4. 4. 4 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas Public cos. represent the largest share of the market Not for Profit 10%For Profit Private 10% For Profit- Public 80% By Ownership Type For Profit by Account Size Very Large 20% Large 25% Mid- Market 30% Small 25% Small: Assets < $100M Mid: $100M < Assets < $1B Large: $1B < Assets < $10B Very Large: Assets >10B Distribution of Insureds by Segment Make-up of D&O Market
  5. 5. 5 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas Typical (Large Public Co.) D&O Program Structure Program size typically excess of $50 million, up to $200 million+ Limits offered range from $5 million to $25 million per carrier, many carriers on any one program Retentions range from $100K and up! Pricing varies widely from account to account, typically based upon : • Sector/industry group • Size –Market Capitalization, Assets • Recent activities – IPO, M&A • Financial Condition – consistent performance • Financial Rating • Corporate Governance – management quality, board independence
  6. 6. 6 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas Some Past Drivers of D&O results (1997-2002) Increasing Coverage/Reducing Premium Expanded capacity/larger limits offered Expanded coverage, entity coverage eliminated pre-set allocation Free/automatic Reinstatements Multi-Year contracts, with significant discounts and no re-underwriting Increasing Claim Costs – Frequency and Severity 2001 – IPO Allocation filings 2002 – Filings against Analyst and Investment Banks; Wave of Corporate Meltdowns Begins – Enron, MCI Worldcom, Tyco, Global Crossing 2003 - Mutual Funds – Late Trading/Market timing M&A Activity – Banking, Insurance Deteriorating Investment Market
  7. 7. 7 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas Historical Avg. Policy Limits - Public Co. D&O 5,000 7,000 9,000 11,000 13,000 15,000 17,000 Policy Year Policy Limit 8,300 10,000 14,500 16,000 16,250 17,650 15,000 10,000 9,750 1995 1996 1997 1998 1999 2000 2001 2002 2003 Limits in Thousands
  8. 8. 8 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas Current State of the D&O market Through Year-End 2003 Market saw reduced capacity (limits), increased retentions More players on each program, pricing less competitive Large rate increases - more than 150% were common Coverage restrictions – eliminate investment banking, entity coverage Elimination of multi-year deals 2003/2002 Securities Class Action Lawsuits Decline by 22% 2003/2002 Market Capitalization Losses Decline by 72% And Beyond….. Once again, swift changes in the market in 2004……….
  9. 9. 9 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas D&O CLAIM CHARACTERISTICS
  10. 10. 10 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas Historical Legislation Impacting D&O Suits 1933/34 Securities Acts D&O Liability for misrepresentations, omissions in public offerings, statements 1995 PSLRA Intended to prevent abuses of securities class action lawsuits. Heightened Pleading Standard 2002 Sarbanes-Oxley Act Blackout trading barred CEO and CFO certifications. Faster insider trading disclosure Increased Audit Committee duties. Increased SEC review More criminal penalties and fines
  11. 11. 11 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas D&O Securities Suits (Through August 2004) Source : Stanford Research
  12. 12. 12 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas D&O Claims Characteristics Some interesting Public Company D&O statistics*…. • Half of all suits against D&O’s are filed by Shareholders • 24% of claims brought by employees • 36% of all claims are class actions • Low Frequency - average of 225 securities suits per year (excl IPO) • High Severity – average settlement of $20 million • Most active District Court is S.D. New York • Most frequently sued Sector is Technology • Most frequently sued Industry is Biotechnology & Drugs • Most resolutions achieved through settlement, not judgment *Source : Tillinghast D&O Report and Stanford Research
  13. 13. 13 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas Significant D&O Claims Company Settlement Amount Cendant $3,527.0 Million  Lucent $563.0 Million  Bank of America $490.0 Million  Waste Management II $457.0 Million  Rite Aid $319.5 Million  Oxford Health Plans, Inc. $300.0 Million  3Com $259.0 Million  Waste Management I $220.0 Million  MicroStrategy $192.5 Million  Dollar General Corp $162.0 Million
  14. 14. 14 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas Major Factors For D&O Claims 1. Scope of Policy – is it a claim, a wrongful act? 2. Ground-up Nature of the Claim 3. Possible Defenses – exclusions, warrants, application. 4. Policy structure, coverage and wording
  15. 15. 15 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas Criteria Used to Establish D&O Claim Potential • Alleged Damages - “Plaintiff-style” damages • Length of Class Period – number of shareholders • Insider Holdings • Historical Stock Performance • Underlying carriers – who is lead on Claim? • Venue – circuit, pleading standards, judge • Attorney firms – both Plaintiff and Defendant • Industry – Telecomm., Pharm., Energy – any trends? • Procedural steps – Consolidated complaint, motion to dismiss • Lead Plaintiff - Institutional Investor • Insured’s stamina/motivation
  16. 16. 16 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas Key Takeaways •Principal exposure is from Shareholders Class actions against Public Companies, Private Company litigation less common. •Pricing for D&O must recognize Size and Sectors as important factors, but not sole factors – all are not equal. •Last few years witnessed emergence of non-traditional claims (mega-torts) in addition to traditional issuer fraud cases. •Settlements are not keeping pace with filings, there is a large backlog of cases.
  17. 17. 17 D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas Is There Any Good News? Lessons Learned from the past…….. •Keeping pace with the next possible mega-tort by identifying industries/markets in distress is critical. •Reserving for D&O is multi-faceted and requires a continuous evaluation during the lifetime of the claim. •Strong working relationship between Claims, Underwriting and Actuarial is important since traditional actuarial reserving methods do not work.

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