2010 PLUS International Conference I Lost HOW Much? Emerging Trends In Financial Markets Regulation

2010 PLUS International Conference The Round-Up… MODERATOR: Cary Meiners, Practice Leader, Public Company Liability, Travelers PANELISTS: Ivan J. Dolowich, Esq., Partner, Kaufman Dolowich Voluck & Gonzo LLP Wendy Dowd, CFA, Vice President/Worldwide Manager, Asset Management, Chubb Specialty Insurance Atea Martin, Esq., Director of Claims, CNA Global Specialty Michael K. O’Connell, MBA, Managing Director, Aon Financial Institutions Practice

2010 PLUS International Conference Outline What Just Happened? Financial Securitization Dodd-Frank  Key Elements  Scope and Effect  Underwriting Challenges Insurance Impact Emerging Exposures and The Net Effect

2010 PLUS International Conference What Just Happened? Would More Regulation Have Prevented This?  Unemployment at 9.6%  Dow index down 22% from 2007 peak  S&P/Case-Shiller Index down 30% since 2006  4.7% of all mortgages in some state of foreclosure  1/3 of mortgage defaults related to second-home investment properties  A “foreclosure freeze” which could slow home sales

2010 PLUS International Conference Banking Woes Continue From only 3 bank failures Then - 25 failures in 2008, 140 in 2009, 139 YTD  2010 bank failures are smaller in size Bear Stearns collapse and Lehman Brothers bankruptcy filing in 2008 Big banks may have to now buy bad loans from investors: estimates range from $20-$134 billion

2010 PLUS International Conference What Just Happened? Are Things Getting Better? Two views:  Troubled Asset Relief Program (TARP) ♦ $700 billion initial infusion ♦ $340 billion expected cost in 2009 ♦ Recent estimates as low as $30 billion in cost  Freddie Mac and Fannie Mae ♦ Worst case now projected at $259 billion ♦ Moderate case now projected at $154 billion

2010 PLUS International Conference What Just Happened? Has Systemic Risk Really Declined? One Measure is the use of Credit Default Swaps (CDS) CDS: Financial Weapons of Mass Destruction  $2 trillion  $62 trillion  $25 trillion

2010 PLUS International Conference China Will Introduce CDS by Year End  CDS: “Neither evil nor good”  “No repackaging or restructuring of risk”  “We learned a lot from Europe and the U.S., but there were problems with some of the teachers” CDS: Benign or Still Very Risky?  The SEC and the Commodity Futures Trading Commission will decide this for all CDS players What Just Happened?

2010 PLUS International Conference Financial Securitization Current State of Securitization  $1 trillion in bond securitization loss possible  What is the future of securitization?  Has this impacted D&O/E&O underwriting?  Can D&O/E&O underwriting really address this exposure?

2010 PLUS International Conference Dodd-Frank and Regulatory Empowerment Regulators Muscle Up  SEC will issue 100 new rules for derivatives trading, credit rating companies, stockbrokers, hedge funds and corporate boards  The Federal Reserve will write 50 new rules to deal with systematic risk

2010 PLUS International Conference FDIC  Will set new capital rules for community banks  Will be responsible for liquidating troubled financial companies The Treasury Department  Will chair the Financial Stability Oversight Council  Forms a consumer protection bureau Dodd-Frank and Regulatory Empowerment

2010 PLUS International Conference Key Elements of Dodd-Frank  Systemic risk/increased regulatory oversight ♦ Too big to fail  SEC enforcement expansion and whistleblower provisions including: ♦ Aiding and abetting ♦ Morrison decision  Executive compensation  Hedge funds Dodd-Frank and Regulatory Empowerment

2010 PLUS International Conference Systemic Risk “Too big to fail” “Systemically important” financial firms to be regulated by the Federal Reserve  Large Interconnected Banks (>$50 billion assets)  Nonbank Financial Companies (TBD) Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) Stricter capital, liquidity and other restrictions New FDIC liquidation powers

2010 PLUS International Conference SEC Enforcement Expansion Whistleblower Provisions SEC Enforcement Issues  Lack of credibility (i.e., Madoff, Stanford)  New enforcement tools under Dodd-Frank ♦ Penalties can be assessed at administrative level ♦ Aiding and abetting  Standard changed from “knowing” to “reckless” ♦ Control person liability ♦ Standards of conduct for broker-dealer

2010 PLUS International Conference Morrison Decision  Implications for companies that issue shares on foreign exchanges  Defense strategies  Response from the plaintiff’s bar  Impact of Dodd-Frank SEC Enforcement Expansion Whistleblower Provisions

2010 PLUS International Conference Whistleblower Provisions  Protection and monetary rewards for voluntary suppliers of information to the SEC  The resultant fine or penalty must exceed $1M  Information must be independent and original  Reward within SEC discretion but ranges from 10-30% of monetary sanctions  Protection from public exposure or employer reprisals SEC Enforcement Expansion Whistleblower Provisions

2010 PLUS International Conference Executive Compensation Executive Compensation Disclosure:  Pay vs. Performance: SEC review compares 5-year stock performance  Compensation Ratio: CEO versus Median of “Rank & File” Compensation Committee  Defined independence  SEC review of member consultants/advisors Shareholder Voting Rights  More frequent proxy/authorization Clawbacks  Delisting of non-compliant issuers  Accounting restatements

2010 PLUS International Conference “Say-on-Pay” Incentive-based compensation Independent compensation committee Clawbacks Executive Compensation Form

2010 PLUS International Conference Hedge Funds and Advisers Two objectives:  Systemic risk  Investor protection New adviser registration requirement New reporting and record-keeping requirements “Statistically important” firms? Changes to definitions “accredited investors” and qualified client” Volcker rule New study – feasibility of forming SRO to oversee private funds

2010 PLUS International Conference Dodd-Frank Scope and Effect A Closer Look at Key Provisions  How far-reaching is this legislation?  Does this legislation regulate “the unregulated”?  Did compromise affect this bill too much?  Any glaring weaknesses that should be fixed?  How will insured procedures and behavior change?

2010 PLUS International Conference Dodd-Frank Underwriting Challenges Coverage and Policy Language  Key concepts to focus on  Exclusionary language  New coverages needed?

2010 PLUS International Conference Dodd-Frank and Regulatory Empowerment Backers Cite These Positives:  Requires full and fair disclosure to credit consumers  Mechanism for failed-bank receivership  Requires more disclosure of derivative securities  Banks must be “well-capitalized” and “well-managed” ♦ Debate about this?  Amends SOX to allow small-company exemption  Empowers the Financial Stability Oversight Council to seek solutions to “systemic risk”

2010 PLUS International Conference Critics note the following:  No reinstatement of Glass-Steagall  Banks can have hedge and equity operations to a certain threshold  Executive compensation limitations are modest  Leverage ratios are not effectively addressed  No new regulation on credit agencies Dodd-Frank and SEC Empowerment

2010 PLUS International Conference Pre-Dodd/Frank Regulatory Environment Effect and Underwriting Impact Was regulation pre-Dodd/Frank effective? Did previous regulation dampen investor confidence? If global companies avoided listing on the U.S. Exchanges before, what will the response be now? Were underwriters really thinking about regulation until now?

2010 PLUS International Conference The Net Effect: Problems and The Regulatory Fix Will Dodd-Frank change D&O/E&O underwriting? Can plaintiff attorneys find new niches? Could claim trends emerge slowly over time? How will the foreclosure freeze impact insurance? Are policy changes or refinement needed? What is the market impact?

2010 PLUS International Conference Questions & Answers

2010 PLUS International Conference Many Thanks To… Cary Meiners Ivan J. Dolowich Wendy Dowd Atea Martin Michael K. O’Connell