Ceo Chairman Peer Exchange Presentation

Directors & Officers Liability:

What Steps Can You Take to Improve Your Coverage and Process?

Dennis Gustafson,SVP & Financial Institutions Practice Leader

Bank Chairman/CEO Peer Exchange

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Agenda

• Introduction of A H & T

• A snapshot of the same tools D&O underwriters use to evaluate your bank

• D&O Renewal Process & 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 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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Sample Bank Analysis- snapshot

Carriers would like to see the

total CRE + construction <

300%, some even < 200%

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Sample Bank Analysis- capitalization

> 5%

> 6%

> 10%

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Sample Bank Analysis- balance sheet

Loan/ Deposit <

100%

>1%

10 - 15%

3 - 4.5%

<80%

Safest

Riskiest

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Sample Bank Analysis- loan & asset quality

<4%

>1%

<100%

90+ days past due + nonaccrual loans

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Sample Bank Analysis- liquidity

Short term assets / total loans

% of Securities as collateral

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Sample Bank Analysis- enforcement actions

Other factors not shown on the snapshot: % of Brokered Deposits (< 5%) OREO

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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:

* 54 more in January & February 2012

• FDIC updated their Professional Liability Lawsuits page (www.fdic.gov/bank/individual/failed/pls/index.html) to reflect that the number of authorized lawsuits has 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 - 24 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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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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Sample Renewal Process: Timeline

Date Action

- 4 months Renewal Strategy Meeting: Review current program, limits benchmarking, carrier quality and renewal recommendations

- 3 months Information gathering & Initial submission to D&O markets: Send blank applications along with copies of last years completed application (as reference) Send conglomeration of publicly available information (submission) to 20-25 Insurance carriers (A.M. Best rated A-

or better)

- 5 to 7 weeks Coordinate/Host carrier meetings/call: You would provide a similar presentation as you would for an analyst. The call begins with a general overview of the company operations, recent results and any changes in the past 12 months. At the end the underwriters would ask any questions they feel they need more details. The benefits of this meeting include, but are not limited to:

Generate a personal connection with the underwriting community so they are underwriting not just on what they read in the filings. This would also be good in the event of a claim.

Limit the underwriters ability to ask for additional information in their quotes thus streamlining the binding process. Take advantage of the competitive influences in the marketplace as the underwriter will see their competitors across

the proverbial table.

- 1 month Follow-up communication to carriers: Obtain primary premium indications and resolve any open questions/issues. Coordinate Excess options

- 2 to 3 weeks Final Renewal Presentation Meeting & Binding orders: Ensure expectations have or will be met. Discuss the need, if any, of premium financing.

Expiration EXPIRATION DATE – Confirm binder obtained from all carriers.

+1 – 2 Confirmation of insurance, include invoice and confirmation letter

+5 Confirmation that all subjectivities have been met

+14 – 20 Confirm payment received. Or down payment, if financed.

+60 Policy Issuance- Primary policy

+120 Policy Issuance- Excess policy. 3 Ring Binder including all layers

+90, +180, +270 Quarterly contact meeting. Discuss: Possibility of mid year strategy meeting or underwriter visit Claims management Litigation activity or claims trends in the industry sector

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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

INDUSTRY: Banks RANGE: Assets $0 - $1BTIME PERIOD: Trailing 12 MonthsRESPONDENTS: 52

Limits Purchased Percentage

> 150M 0.00%

100M - 150M 0.00%

75M - 100M 0.00%

50M - 75M 0.00%

30M - 50M 0.00%

20M - $30M 1.92%

10M - $20M 9.62%

5M - 10M 19.23%

2M - 5M 46.15%

>1M - 2M 19.23%

1M 3.85%

<1M 0.00%

100%

0.00% 10.00% 20.00% 30.00% 40.00% 50.00%

> 150M

100M - 150M

75M - 100M

50M - 75M

30M - 50M

20M - $30M

10M - $20M

5M - 10M

2M - 5M

>1M - 2M

1M

<1M

Advisen/RIMS Database

Peer Benchmarking: Advisen

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Peer Benchmarking: Carrier Breakout

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Directors & Officers Coverage discussion

Top 10 D&O Coverage enhancements

– Named Insured = Holding Company

– Civil Money Penalties

– 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]

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