D&O and E&O - Is There Any Good News? John Lewandowski, FCAS, MAAA CNA Insurance Company 2004 Casualty Loss Reserve Seminar Las Vegas - September 13, 2004

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 2 D&O POLICY CHARACTERISTICS

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 3 Coverage/Profile - What is D&O and E&O? Directors & Officers Liability Policy – provides coverage for claims arising from the “wrongful acts” – i.e., any act, error or omission -- of insured persons while serving in their capacity as directors or officers. Expanded to included Entity coverage for “securities claims.” D&O coverage is simply a specialized type of Errors & Omissions coverage. D&O’s have liability for misrepresentations and omissions in a public offering registration statement filed with the SEC in connection with any purchase or sale of securities Errors & Omissions Professional Liability Policy – provides coverage for claims involving alleged “errors and omissions” arising out of professional services rendered by the insured, e.g. banks, investment advisors, insurance companies, mutual funds… D&O coverage often includes Employment Practices Liability.

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 4 Public cos. represent the largest share of the market By Ownership Type For Profit by Account Size Small: Assets < $100M Mid: $100M < Assets < $1B Large: $1B < Assets < $10B Very Large: Assets >10B Distribution of Insureds by Segment Make-up of D&O Market

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 5 Typical (Large Public Co.) D&O Program Structure Program size typically excess of $50 million, up to $200 million+ Limits offered range from $5 million to $25 million per carrier, many carriers on any one program Retentions range from $100K and up! Pricing varies widely from account to account, typically based upon : Sector/industry group Size –Market Capitalization, Assets Recent activities – IPO, M&A Financial Condition – consistent performance Financial Rating Corporate Governance – management quality, board independence

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 6 Some Past Drivers of D&O results ( ) Increasing Coverage/Reducing Premium Expanded capacity/larger limits offered Expanded coverage, entity coverage eliminated pre-set allocation Free/automatic Reinstatements Multi-Year contracts, with significant discounts and no re-underwriting Increasing Claim Costs – Frequency and Severity 2001 – IPO Allocation filings 2002 – Filings against Analyst and Investment Banks; Wave of Corporate Meltdowns Begins – Enron, MCI Worldcom, Tyco, Global Crossing Mutual Funds – Late Trading/Market timing M&A Activity – Banking, Insurance Deteriorating Investment Market

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 7 Historical Avg. Policy Limits - Public Co. D&O Limits in Thousands

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 8 Current State of the D&O market Through Year-End 2003 Market saw reduced capacity (limits), increased retentions More players on each program, pricing less competitive Large rate increases - more than 150% were common Coverage restrictions – eliminate investment banking, entity coverage Elimination of multi-year deals 2003/2002 Securities Class Action Lawsuits Decline by 22% 2003/2002 Market Capitalization Losses Decline by 72% And Beyond….. Once again, swift changes in the market in 2004……….

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 9 D&O CLAIM CHARACTERISTICS

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 10 Historical Legislation Impacting D&O Suits 1933/34 Securities Acts D&O Liability for misrepresentations, omissions in public offerings, statements 1995 PSLRA Intended to prevent abuses of securities class action lawsuits. Heightened Pleading Standard 2002 Sarbanes-Oxley Act Blackout trading barred CEO and CFO certifications. Faster insider trading disclosure Increased Audit Committee duties. Increased SEC review More criminal penalties and fines

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 11 D&O Securities Suits (Through August 2004) Source : Stanford Research

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 12 D&O Claims Characteristics Some interesting Public Company D&O statistics*…. Half of all suits against D&O’s are filed by Shareholders 24% of claims brought by employees 36% of all claims are class actions Low Frequency - average of 225 securities suits per year (excl IPO) High Severity – average settlement of $20 million Most active District Court is S.D. New York Most frequently sued Sector is Technology Most frequently sued Industry is Biotechnology & Drugs Most resolutions achieved through settlement, not judgment *Source : Tillinghast D&O Report and Stanford Research

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 13 Significant D&O Claims CompanySettlement Amount Cendant$3,527.0 Million Lucent$563.0 Million Bank of America$490.0 Million Waste Management II$457.0 Million Rite Aid$319.5 Million Oxford Health Plans, Inc.$300.0 Million 3Com$259.0 Million Waste Management I$220.0 Million MicroStrategy$192.5 Million Dollar General Corp$162.0 Million

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 14 Major Factors For D&O Claims 1.Scope of Policy – is it a claim, a wrongful act? 2.Ground-up Nature of the Claim 3.Possible Defenses – exclusions, warrants, application. 4.Policy structure, coverage and wording

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 15 Criteria Used to Establish D&O Claim Potential Alleged Damages - “Plaintiff-style” damages Length of Class Period – number of shareholders Insider Holdings Historical Stock Performance Underlying carriers – who is lead on Claim? Venue – circuit, pleading standards, judge Attorney firms – both Plaintiff and Defendant Industry – Telecomm., Pharm., Energy – any trends? Procedural steps – Consolidated complaint, motion to dismiss Lead Plaintiff - Institutional Investor Insured’s stamina/motivation

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 16 Key Takeaways Principal exposure is from Shareholders Class actions against Public Companies, Private Company litigation less common. Pricing for D&O must recognize Size and Sectors as important factors, but not sole factors – all are not equal. Last few years witnessed emergence of non-traditional claims (mega- torts) in addition to traditional issuer fraud cases. Settlements are not keeping pace with filings, there is a large backlog of cases.

D&O and E&O – Is There Any Good News? 2004 CLRS – Las Vegas 17 Is There Any Good News? Lessons Learned from the past…….. Keeping pace with the next possible mega-tort by identifying industries/markets in distress is critical. Reserving for D&O is multi-faceted and requires a continuous evaluation during the lifetime of the claim. Strong working relationship between Claims, Underwriting and Actuarial is important since traditional actuarial reserving methods do not work.