2009 D&O Symposium Symposium Bailouts, Bankruptcy & D&O Panelists David Bradford, Advisen V.J. Dowling, Dowling & Partners Securities Stephen Guglielmo, HCC Global Mike Karmilowicz, Hartford Financial Products David Lynders, Axis Insurance Christine Montelbano, Travelers Jeremy Perler, RiskMetrics Group Salvatore Pollaro, Zurich Management Solutions Moderated by Marc London, Marsh USA

Bailouts, Bankruptcies and D&O Underwriting MODERATOR: Marc London, MBA, Senior Vice President, Marsh USA PANELISTS: David Bradford, MBA, Executive Vice President & Editor-In-Chief, Advisen, Ltd. Vincent J. Dowling, Jr., Managing Partner, Dowling & Partners Securities, LLC Stephen R. Guglielmo, Lead Underwriter, HCC Global Financial Products Michael Karmilowicz, Vice President, Hartford Financial Products David Lynders, MBA, Vice President, Axis Capital Christine S. Montelbano, MBA, Regional Vice President, Travelers Bond & Financial Products Jeremy Perler, CFA, CPA, Co-Head of CFRA Accounting Research, RiskMetrics Group Salvatore Pollaro, MBA, Executive Vice President, Zurich North America, Specialties`

2009 D&O Symposium Symposium Bankruptcies and Securities Class Action Suits Dave Bradford Executive Vice President Advisen Ltd.

Forecast U.S. Bankruptcies and Debt Defaults Commercial Bankruptcies 2008 (est): 41, (forecast): 62,000 (Source: Euler Hermes) “By various estimates, U.S. companies are poised to default on $450 billion to $500 billion of corporate bonds and bank loans over the next two years.” (Wall Street Journal, Feb. 13, 2009)

Commercial Bankruptcy Filings Source: U.S. Bankruptcy Courts

Bankruptcies & SCAS All Commercial Bankruptcy Filings All Securities Class Action Suits Filed Sources: Advisen MSCAd, U.S. Bankruptcy Courts

Bankruptcies & SCAS Large Public Bankruptcy Filings All Securities Class Action Suits Filed Sources: Web BRD, Advisen MSCAd

Bankruptcies & SCAS Large Public Bankruptcy Filings Large Public SCAS Filed Sources: Web BRD, Advisen MSCAd

Bankruptcies & SCAS Large Public Bankruptcy Filings Large Public SCAS Filed Sources: Web BRD, Advisen MSCAd 77% of Companies Sued!

Who Has Failed? Large Public Company Bankruptcies Sources: Web BRD, Advisen AMF

Who Has Been Sued? Large Public Company Bankruptcies and SCAS Sources: Web BRD, Advisen AMF, Advisen MSCAd

Predicting and Pricing Bankruptcy Risk Credit Default Swap Spreads Sources: CMA Datavision, Advisen

Other Source of Bankruptcy D&O Exposure Critical supplier Major customer Bank Counterparty Joint venture partner Minority interest investment

Economy Under Stress! Auto sales, industrial production, consumer spending, and confidence measures at, or near, record lows S&P 500 down 38% in million U.S. jobs lost U.S. economy to contract 0.5% - 1.3%

New York City ~ February 25 & 26, 2009 The New World Vincent J. Dowling, Jr. Dowling & Partners Securities

Capital Lost In 2008 The Net Result = We Estimate Of $55-75BB Of Capital Lost in ‘08 Investment Losses 50-75% Of Excess Capital Lost During 2008

Industry Surplus Growth

Industry ROS vs. YOY ∆ In Surplus

Rating Agencies= De-facto Regulator *Includes National Indemnity & General Re

Rating Agencies= De-facto Regulator

Positive Outlook Negative Outlook Watch Negative

2007 Other Liab. Claims Made Vs. Total Industry

Other Liab. Claims Made Soft vs. Hard Block

New York City ~ February 25 & 26, 2009 Underwriting D&O: Key Accounting Issues for 2009 Jeremy Perler, CFA, CPA RiskMetrics Group

Valuation and Impairment What are assets worth? In order to assess the risk of significant charges, you must understand the assets. How are charges taken for devalued assets? Securities Trading: Mark-to-market AFS/HTM: “Other than Temporary” Impairment Receivables / Loans Estimate loss provisions (historical % and specific ID). Inventory Estimate obsolescence (historical % and specific ID). Goodwill / Intangibles Impairment test – Value? Life? Deferred Tax Asset Impairment test – Will it be used? Derivatives Ineffective hedging / speculation – immediate earnings impact

Valuation and Impairment What are assets worth? Snapshot of an Average Bank’s Balance Sheet Intense focus on M2M securities (12.5%) distracts from the bigger problem: Loans (48%) are in bad shape.

Valuation and Impairment What are assets worth? Understand the business! What is happening in the loan portfolio? Credit quality is deteriorating: Reserves are increasing, but not enough to cover nonperforming loans:

Valuation and Impairment What are assets worth? Understand the assets! Breakdown of Microsoft’s $30B in cash and investments (6/08):

Opacity / Disclosure What is hiding? Bad news: We are still battling opacity Good news: Many new helpful disclosures are coming this year.  Look for them! Ask about them! Off-Balance Sheet Entities (VIEs, SIVs, QSPEs) Consolidation is near (2010) New disclosures beginning this quarter! Complex Investing/Financing/Dealings New disclosures on the horizon: Financial Instruments: quarterly fair value disclosures Off-balance sheet Loan loss reserves Derivatives Pension plan assets Contingencies Debt Covenants Poor disclosure across the board

Opacity / Disclosure What is hiding? Debt covenants: Essential to assessing liquidity, yet disclosure is usually minimal.  Are covenants unclear? Is earnings/cash flow suffering? Examples Weak disclosure (common): “The credit facility contains certain restrictive covenants, including maintenance of consolidated leverage and fixed charge coverage ratios. The credit facility also contains covenants typical of unsecured facilities. As of December 31, 2008, we were in compliance with all covenants under this credit facility” Good disclosure (uncommon): “…The Company is required to maintain a consolidated leverage ratio of consolidated funded indebtedness to earnings before interest, taxes, depreciation and amortization ("EBITDA") of no more than 2.5 times. At November 30, 2008, the Company maintained a consolidated leverage ratio of.54 times EBITDA….Under the most restrictive fixed charge coverage ratio, the sum of EBITDA and rental expense less cash taxes must be at least 1.50 times the sum of interest expense, rental expense, dividends and scheduled funded debt payments. At November 30, 2008, the Company maintained such a fixed charge coverage ratio of 2.68 times…. At November 30, 2008, the Company was in compliance with all covenants.”

2009 Results What will you see? Undue pressure from pension plans I/S: Earnings/margin pressure from higher pension expense 72% of companies had lower pension expense in H1’08 B/S: Lower book value as funded status drops Debt covenants? Rating? Dividend? SCF: Cash payments to make up the difference  What is the impact of pensions on earnings, book value and cash flow? Increased Metrics Management New “key performance metrics” Changing definitions of metrics Adjusting accounting policies  Is management using new metrics/policies? Why?