September 15, 2009
Credit Crisis Impact on
D&O/E&O Market
Jason Israel
SVP, Guy Carpenter Instrat
www.guycarp.com
What is D&O?
Who buys it and Why?
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)
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2
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
Guy Carpenter
3
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
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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.
Guy Carpenter
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Shareholder Litigation
The Claims
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.
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Shareholder Litigation
How much Litigation is there?
Source: Stanford Law School Securities Class Action Clearinghouse
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Shareholder Litigation
Number of claims fairly steady – except when it isn’t…
SCA Frequency by Filing Quarter (excl. laddering)
80
70
60
50
40
exAnalyst
30
20
ex-Subprime
& Impairment
10
Guy Carpenter
09
08
07
06
05
04
03
02
01
00
99
98
97
96
0
9
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
Guy Carpenter
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Shareholder Litigation
What type of Allegations?
Type of Allegation
Accounting/Revenue
Expectations/Future Results
Mergers & Acquisitions / Offerings
Options Backdating
Inappropriate Conduct
Subprime / ARS (Auction Rate)
Madoff & Other Direct Fraud
Other
Grand Total
2006
33
31
14
21
5
0
2
12
118
Filing Year
2007
2008
30
34
75
68
13
6
8
3
5
4
29
91
2
9
13
3
175
218
2009*
18
49
7
0
12
67
25
4
183
* 2009 reflects claims through 9/4/2009, Annualized
Guy Carpenter
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Shareholder Litigation
Focus of recent claims is shifting?
Allegations
Expectations/Future Results
Accounting/Revenue
Mergers & Acquisitions / Offerings
Inappropriate Conduct
Subprime (direct & passthrough)
Subprime (indirect)
Subprime (ARS & ARS-indirect)
Subprime (Contrarian Fund)
Madoff & other direct fraud
Other
Grand Total
2009Q1
7
5
1
2
6
16
2
9
1
49
2009Q2
7
2
2
3
2
9
1
6
2
34
2009Q3
19
5
2
3
3
1
3
2
2
Weak results
Restatements
Non-Accounting issues
Lenders, Subprime/Alt-A
Impaired Balance Sheets
Funds didn't hedge
40
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.
Guy Carpenter
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Shareholder Litigation
Claims no longer center around finance
Sector
Basic Materials
Capital Goods
Conglomerates
Consumer Goods
Energy
Financial
Healthcare
Services
Technology
Transportation
Utilities
Grand Total
Finance Subtotal:
Banks & Financial
Insurance
Mutual Funds
Guy Carpenter
2006
2
4
09Q1
3
118
10
4
42
26
46
35
1
2
175
2008
8
7
2
12
5
109
23
19
28
2
3
218
5
8
1
29
11
1
91
12
5
26
4
2
9
2
14
19
27
39
2
2007
2
7
09Q2
1
09Q3
2
1
1
1
33
3
5
2
2
1
3
21
3
4
2
12
11
7
4
49
1
34
40
21
7
4
1
13
Shareholder Litigation
Investor “Fear Index” calming down
VIX - CBOE VOLATILITY INDEX
60
50
40
30
20
10
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Source: Yahoo! Finance
Guy Carpenter
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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
Guy Carpenter
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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
Guy Carpenter
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Impact on the Market
 Steady pricing declines since 2003 put pressure on D&O results
US Public D&O Rate levels
Rate Level
(PY 2003=1.00)
1.10
Financial
Institutions
1.00
0.90
Commercial
Risks
0.80
0.70
0.60
2002
2003
2004
2005
2006
2007
2008
2009
 As Subprime spread, Financial rates began increasing in 2008.
 Commercial D&O seeing rate increases in 2009
Guy Carpenter
17
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