Current Trends in
D&O Insurance
CAS Annual Meeting
November 13, 2000
Bernard R. Horovitz, ACAS, MAAA
Deteriorating
D&O Profitability
D&O
(2000)
D&O
(1995)
Higher Claim Frequency
• Increasing securities lawsuits -- even in a bull
market
• Increasing regulatory scrutiny
• Increasing cases alleging accounting fraud
• Increasing financial restatement cases
• Increasing M&A activity
• Increasing securities lawsuits alleging insider
trading -- +56% post-Reform Act
Stronger Stock Market Should
Result in Fewer Lawsuits...
Average Number of
Securities Lawsuits
Filed per Month
Historically, Number of Federal Securities Lawsuits
Declines When Stock Market Performance Improves
20
19
18
16
16
15
14
12
10
Less than 0% Return
0% to 4% Return
Over 4% Return
1991 through May 1999 Two Month Return
on Wilshire 5000 Index
Source: National Economic Research Associates, a Marsh & McLennan Company
...However, Lawsuits Are More
Common Post-Reform Act
Publicly traded companies:
Federal securities lawsuits:
1995
11,688
194
1999
12,149
216
Change
3.9%
11.3%
Increased likelihood of being sued:
7.1%
The Wall Street Journal, 3/3/1997
Regulators Say Market’s Bullishness
Has Led to Big Rise in Securities Fraud
Despite the 1995 Reform Act, the strong economy,
and the bull market, the likelihood of being sued
has still increased 7.1% since 1995
Source: National Economic Research Associates, a Marsh & McLennan Company
Increasing Regulatory Scrutiny
Trends in Cases Alleging
Accounting Fraud
Accounting cases are increasing in frequency
Accounting Cases Have Increased
as a Percent of All Class Actions
Number of Accounting Cases
Exhibits an Upward Trend
100%
Num ber of Accounting Cases
160
146
140
80%
120
100
91
77
80
60
65
68
40%
58
55
54%
60%
88
40
35%
39%
36%
40%
55%
55%
1998
1999
48%
36%
20%
20
0
0%
1991
1992
1993
1994
1995
Year of Filing
1996
1997
1998
1991
1992
1993
1994
1995
1996
Year of Filing
Source: National Economic Research Associates, a Marsh & McLennan Company
1997
Financial Restatement Cases
Show a High Rate of Growth
Source: National Economic Research Associates, a Marsh & McLennan Company
Increased M&A Activity...
• $2.7 trillion of transaction value to date
in 2000
Up 14.6% from the same period last year
• $3.4 trillion in 1999
• $2.5 trillion in 1998
• Hostile takeover deals
$487 billion of transaction value in 1999
$108 billion in 1998
Historical hostile deals success rate is 16%
…Resulting in More Lawsuits...
• M&A transactions have resulted in an increasing
number of post-transaction (non-injunctive)
securities lawsuits
• Impacts both run-off policy and surviving
company’s ongoing policy
…Lawsuits Like These
•
•
•
•
•
•
•
Cendant (HFS acquisition of CUC)
Mattel (acquisition of Learning Company)
Tyco (acquisition of US Surgical, AMP, and others)
McKesson/HBOC (acquisition of HBOC)
Baker Hughes (acquisition of INTEQ)
3Com (acquisition of US Robotics)
Adobe Systems (acquisition of Frame Technology)
Claims Are More Severe
• Exploding market capitalization leading to
higher settlement dollars
• Increasing settlements due to allegations of
accounting fraud and inclusion of accounting
firms as codefendants
• Broader policy coverage including, but not
limited to, entity coverage for securities
claims
Exploding market capitalization
Higher $ drop in market cap
Higher investor losses
Higher settlement dollars
Pricing vs. Exposure
Average Market Cap Growth
600%
NASDAQ 100: +1100%
400%
DOW: +305%
200%
RUSSELL 2000: +105%
0%
1995
1996
1997
1998
PRICING: DOWN 35%
Source: Donaldson, Lufkin & Jenrette
1999
2000
Accounting Issues
• Allegations of accounting fraud on the rise since the
Reform Act
• Inclusion of accounting firms as codefendants adds
80% to settlement value...However, accounting
codefendants pay an average of only 32% of the
settlement
• Allegations of accounting fraud increases average
settlement by 37%
• Settlements are 106% higher when there is a finding of
accounting irregularities
Source: National Economic Research Associates, a Marsh & McLennan Company
Settlement Size Increases with
Presence of Auditor Codefendants
Source: National Economic Research Associates, a Marsh & McLennan Company
Increase in Allocation for
Public D&O Securities Claims
THEN
(PRE-1995):
NOW
(SINCE 1995):
50-80%
100%
(directors and
officers primarily
covered)
(directors and
officers and entity
covered)
= 25-100%
increase in
insured
loss for
securities
claims*
*Securities claims make up approximately 67% of all D&O loss dollars
Case Resolution Slows
Post-Reform Act
Resolution of Securities Class Action Suits
Total Dispositions
250
225
200
150
136
159
177
195
202
196
171
110
100
50
0
1991
1992
1993
1994
1995
1996
1997
Source: National Economic Research Associates, a Marsh & McLennan Company
1998
Jun-99
Examples of Settled
Post-Reform Act Lawsuits...
…With Plenty in the Pipeline
…In the Pipeline...
…and More Pouring In
Other Sources
•
•
•
•
•
•
•
•
AON 1999 Insurance Market Overview
Bloomberg News
Business Wire
Jury Verdict Research
PR Newswire
Securities and Exchange Commission (SEC)
Stanford Law School
Tillinghast-Towers Perrin 1999 Directors & Officers
Liability Survey