Credit Crisis Impact on D&O/E&O Market September 15, 2009 Jason Israel SVP, Guy Carpenter Instrat

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

2 Guy Carpenter 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)

3 Guy Carpenter 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

4 Guy Carpenter 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

5 Guy Carpenter 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&O Coverage for government fines is usually restricted.

Shareholder Litigation The Claims

7 Guy Carpenter Security Class Action Lawsuits - Legal Standard What plaintiffs need to prove 1. Defendants made material misrepresentations or omissions 2. Defendants acted intentionally or recklessly, not simply in error 3. Misrepresentations pertained to the purchase or sale of securities 4. Plaintiffs relied on the representations (directly or indirectly via share price) 5. Plaintiffs suffered economic loss 6. 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.

8 Guy Carpenter Shareholder Litigation How much Litigation is there? Source: Stanford Law School Securities Class Action Clearinghouse

9 Guy Carpenter Shareholder Litigation Number of claims fairly steady – except when it isn’t…

10 Guy Carpenter Shareholder Litigation How many dollars are at stake?  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 contributions Larger cases can involve contributions by auditors

11 Guy Carpenter Shareholder Litigation What type of Allegations? * 2009 reflects claims through 9/4/2009, Annualized

12 Guy Carpenter Shareholder Litigation Focus 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.

13 Guy Carpenter Shareholder Litigation Claims no longer center around finance

14 Guy Carpenter Shareholder Litigation Investor “Fear Index” calming down Source: Yahoo! Finance

15 Guy Carpenter Shareholder Litigation What’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

16 Guy Carpenter Impact on the Market US D&O Results for look favorable – Rates contained sharp increases from the period – Lower frequency in – 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

17 Guy Carpenter Impact on the Market  Steady pricing declines since 2003 put pressure on D&O results  As Subprime spread, Financial rates began increasing in  Commercial D&O seeing rate increases in 2009