Aoba 2012 Conference Presentation

Directors & Officers Liability:

What You Need to Know

Dennis Gustafson,SVP & Financial Institutions Practice Leader

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Agenda

• Introduction of A H & T

• D&O Risk Profiles and Claims/Litigation trends related to– Regulatory Exposures

– Mergers & Acquisitions

• D&O Limits benchmarking

• D&O ‘top 10’ coverage enhancements

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About A H & T Insurance

• A H & T was established in 1921 with headquarters in the DC metro, Seattle, and NJ.

• Privately held, Employee owned and Independent full service insurance brokerage and risk management consultant.

• AH&T has also been recognized as one of the "100 Largest Brokers of U.S. Business" and “Best Places to Work in Insurance” as ranked by Business Insurance magazine and “top ten D&O insurance brokers in the nation” in the independent Tillinghast Towers-Perrin Directors & Officers Liability insurance report.

• The Financial Institutions Practice at AH&T Insurance focuses on providing Management Liability solutions for community and regional banks with three basic principals:

– Knowledge: With years of experience in the underwriting, brokerage, claims, and legal fields we have assembled a team of subject matter experts obtaining the best-in-class terms and conditions.

– Leverage: We obtain the most competitive pricing by leveraging the volume of placements with the Insurance Carriers that focus on the asset size and specialization of our clients.

– Responsiveness: As an employee owned company for over 90 years, every AH&T employee is completely vested in providing unparalleled responsiveness and professionalism.

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D&O Claims TrendsRegulatory exposure

• Regulatory risk continues to be the single largest concern for D&O underwriters although we see an interesting data inflection:

• FDIC updated their Professional Liability Lawsuits page (www.fdic.gov/bank/individual/failed/pls/index.html) to reflect that the number of lawsuits that it has authorized has been increased. While FDIC has up to 3 years for tort claims and 6 years for breach of contract claims, the site states that most investigations are completed within 18 months.

2008 2009 2010 20110

20

40

60

80

100

120

140

160

180

Class Action Filings related to the Credit CrisisFailed Banks

Time Period # of FDIC D&O Defendents

Total Damage Claims (000,000)

2000 - Q3 2010 53 $1,360

2010 Q4 56 $1,130

2011 Q1 49 $1,083

2011 Q2 80 $3,187

2011 Q3 56 $464

2011 Q4 79 $376

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Bank Failure trends

2007 2008 2009 2010 2011 2012f0

20

40

60

80

100

120

140

160

180Actual Low Hi

Sources: FDIC, Trepp LLC

> 105 to 103 to 51 to 30

Bank DistressBank Failures per Year — Current Cycle

Future FailuresHigh Risk Bank Counts by State, 3Q 2011

Source: Trepp Bank Navigator

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When is a Bank considered a ‘Regulatory Risk’

• Formal Written Agreement

• Consent Order

• C&D

• MOU (relating to asset quality, earnings, or capital, not so much for Bank Secrecy)

• Severe degradation of asset quality following a regulatory exam or audit where the expectation would be a regulatory restriction on the following exam. (Classified Assets > 75% or Tier 1 capital ratio <6%)

• Qualities of an institution taken off the Regulatory risk category include, Removal of regulatory restriction, positive ROA 3 quarters, Classified loans/Capital <= 40%

• D&O Policy considerations:– Lack of Regulatory Exclusion– Named Insured = Holding Company– Side A Non-Rescindable language– Insured vs. Insured Carve-backs

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D&O Claims TrendsM&A

• Stanford Securities estimates 188 Securities Class action lawsuits in 2011, 39 of which were related to Chinese reverse mergers or U.S. listed Chinese companies.

• Of the 149 non-Chinese related suits, we count 53 M&A related cases or approximately 36%. This represents a significant increase from 24% in 2010. M&A claims can relate to perceived improper pricing/valuations, going private transactions, management buyouts, and/or allegations of proxy violations.

• Underwriting considerations include % of shareholder votes against the M&A in addition to evaluation of dissenting shareholders

• D&O Policy considerations:– Mid-term acquisition threshold %– Discovery provisions– Change of Control provisions– Cancellation provision– Existence of an M&A exclusion– Typically no prior acts for acquired company

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Peer Benchmarking: D&O Survey results

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Peer Benchmarking: D&O Survey results

$0 - $100M

$0 - $100M

$100M - $250M

$100M - $250M

$250M - $500M

$250M - $500M

$500M - $1B

$500M - $1B

$500M - $1B

$500M - $1B

$1B - $2.5B

$1B - $2.5B

$1B - $2.5B

$1B - $2.5B

$1B - $2.5B

$1B - $2.5B

$1B - $2.5B

$2.5B - $5B

$2.5B - $5B

$2.5B - $5B

$2.5B - $5B

$2.5B - $5B

>$5B

>$5B

>$5B

>$5B

>$5B

>$5B

>$5B

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

$80,000,000

Bank Detail- by asset size

ABC Limits A Side limits?

Asset Size

Limits

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Peer Benchmarking: Carrier Breakout

Travelers (25%)Chubb (23%)

ABA (fka Progressive) (16%)

Zurich (10%)

Cincinnati (10%)

ACE Insurance (4%)

Houston Casualty (HCC) (4%)

Chicago Underwriting Group (4%)

XL (4%)

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Directors & Officers Coverage discussion

Top 10 D&O Coverage enhancements

– Named Insured = Holding Company

– Civil Money Penalties (state specific)

– Limit Definition of Application to filings for just the past 12 months.

– Update Definition of Claim to include informal investigations

– Investigative Costs sub-limit

– Order of Payments

– Side A Non-Rescindable language and limit the imputation of knowledge (severability)

– Update definition of Company to include Debtor-in-Possession

– Insured vs Insured carve-backs for: • Creditor Committee, Bankruptcy Trustee• FDIC• Whistleblower, prior Board member, foreign equivalent

– Limit when Insurance carrier can cancel policy

– Limit the threshold of the conduct exclusions (fraud & personal profit) to the ‘final adjudication’ standard.

POLICY

A B C

RetentionNo

RetentionYes

RetentionYes

Claim AgainstIndividuals

Claim AgainstIndividuals

Claim AgainstThe Company

Responds WhenCompany is unable

to financiallyor legally

indemnify it'sindividuals

Responds WhenCompany has satisfied it's

policy retentionfor indemnifiable

loss againstindividuals

Responds WhenCompany is named

in a SecuritiesClaim

Personal AssetProtection

Balance SheetProtection

Balance SheetProtection

Side A Insurance protects the individual Directors & Officers for claims where the Insured company can not indemnify the D&O’s in scenarios such as insolvency and derivative actions.

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Primary ContactDennis Gustafson, SVP & Financial Institutions Practice Leaderp: 973.286.3572c: 917.846.5548e: [email protected]

P&C Practice LeaderPeter Dean , Principalp: 703.669.1135c: 603.380.2557e: [email protected]

Secondary ContactsMichael Tomasulo, SVP & Directors & Officers Practice Leaderp: 973.286.3570 e: [email protected]

Account ManagerJonathan Maiop: 973.286.3571e: [email protected]

Claims DirectorRick Hirschoff, MA, MSW, SCLA p: 703.737.2259e: [email protected]

Contact Information

Contact us when… You receive notice of a claim

Circumstances occur that may give rise to a claim

Mergers or acquisitions occur

A subsidiaries or spin-off is created

Secondary, follow-on or debt offerings are planned

The SEC initiates an investigation of the Company or individuals

Asking employees to sit on the board of for profit companies

20% or more of the Company’s stock will change hands

A bad news disclosure occurs

Reviewing limits of liability and scope of coverage

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Q&A