Navigating the D&O Market - NET

Navigating the D&O Market

Strategies to Guide Your Organization

June 18, 2020

Marsh & McLennan Agency LLC 1

Paul Larson

Senior Vice President,

Financial Institutions

& Management

Liability

CNA Insurance

Moderator

Dan Hanson, CPCU

Senior Vice President

Management Liability &

Client Experience

MMA Upper Midwest

Sam Stern, Esq

Senior Vice President,

Executive and

Professional Liability

Practice

MMA Southeast

Marsh & McLennan Agency LLC

What are you seeing in the Directors and

Officers and Employment Practices

Marketplace?


“Escalating litigation and regulatory risks present growing challengeswhile new, event-driven exposures have emerged” AM Best data and research 2/24/20

Financial LinesD&O US Public Market Update: All Industries 2017 to 2020

US Publicly Traded Insureds – Average Historical Rate (Price Per Million) ChangesQ3 2018 to 4Q 2019 and Jan / Feb 2020 - D&O and Side A Only Programs

Source: Marsh Analytics

2020 ResultsBy Month

3

Marsh & McLennan Agency LLC 4June 19, 2020

Directors’ and Officers’ Liability – Privately Held & NFPOverview Traditional Rate Analysis Changes at Renewal; Purchasing Trends Excluding QSG

Note layer structure changes are not contemplated in the price per million analyses.

Source: Marsh PlaceMAP


What factors have led to this change in

the marketplace?


Federal Filings By TypeJanuary 2010–December 2019

• 2019 Full Year: There was no change in new filings, with 433 securities class actions filed

• Rule 10b-5, Section 11, and/or 12

• Recent Developments in Federal Filings

• Merger Objection Suits

• Federal Filings and Number of Companies Listed in the United States

• Filings by Sector

Securities Litigation TrendsFrequency of Securities Claims

Note: This analysis is based on the FactSet Research Systems economic sector classification. Some of the FactSet economic sectors are combined

for presentation.


Securities Litigation TrendsSeverity of Securities Claims

Median Settlement ValueExcludes Settlements over $1 Billion, Merger-Objection Cases, IPO Laddering

Cases,and Settlements for $0 Payment to the Class

January 2010–December 2019

7

Source: NERA Economic Consulting: January 21, 2020

Median Settlement: The median value for 2019 was $12.4M, the highest median value since 2012 after adjusting for inflation. This is an indication that more cases have been settling for higher values in recent years than was the case between 2013 and 2017.


Federal Filings and Number of U.S. Listed Companies

8


IPO Pricing Activity and Number of Federal Class Action Lawsuits

Source: Renaissance Capital - manager of IPO-focused ETFs renaissancecapital.com/ipohome/press/ipopricings.aspxNERA, Recent Trends in Securities Class Action Litigation: 2019 Full-Year Review, January 2020

* As of 2/4/2020

9


Changing D&O Market ConditionsSummary

We are seeing unfavorable changes in the D&O market that have not existed for more than a decade. These changes are a result of the perfect storm effect of the following colliding conditions:

Inadequate insurer pricingfor risks assumed and a

push for material increases

DECLINING NEW CUSTOMERS

5,454 public companies in 2019 versus 7,994 in 2000

IPOs not making up for M&A consolidations and bankruptcies

LITIGATION AT AN ALL TIME HIGH

Traditional securities suits increasing in frequency and severity. Larger settlements on

previous accident years suggest the tail is longer than previously predicted

Large opt-out settlements are reemerging

Merger objection cases continue and are shifting from state to federal courts

Derivative actions are increasing in both frequency and severity, and most are not due to

bankruptcy

Event-driven litigation continues to expand in several areas: #MeToo, cyber breaches,

social media, privacy, wildfires, products, and safety. Effectively, any bad news can lead to

a claim

Aggressive and innovative plaintiff firms show no sign of relaxing

Supreme Court’s Cyan decision, Section 11 cases can be brought in both federal and

state courts. This affects not just IPOs, but any secondary offering

Enforcement actions in fiscal year 2019 remain at elevated levels with 862 enforcement

actions, the highest annual number since 2016. Two-thirds of actions included claims

against individuals; most often CEOs and CFOs

Whistleblower reports and payouts remained at record levels in fiscal year 2019, though

at a slight decline (1.3%) from 2018

YEARS OF WIDESPREAD PREMIUM REDUCTIONS AND BROADENING

COVERAGE“SOFT MARKET CONDITIONS”

Widespread premium reductions and abundant capacity

More coverage for less price (coverage kicking in sooner): i.e. Shareholder Derivative Demand sub-limits; Pre-Claim Inquiry Cost Coverage; Investigations Coverage

New Insurers Not Aggressively Seeking to Grow Market Share by Undercutting Premiums


Key Trends

(at Year-End)

Loss Development What’s Happening

2.6

0.6 0.1

(0.5)

3.5

(0.4) (0.3)

(7.3)

(4.5)

0.3

(8.0)

(6.0)

(4.0)

(2.0)

-

2.0

4.0

6.0 PA: Moderating frequency, some severity

movement

WC: Frequency plunging

D&O: Securities litigation explosion (event

driven)

EPLI: #Metoo

GL: Social inflation

CA: Social InflationIndustrywide Loss

Development: $6 billion favorable

Source: Insurance Information

Institute (III.org)


Why has this market stayed firm longer

than normal?


Upward pressure on pricing has pushed rates back to the 4th Quarter of 2010 levels.

Financial LinesD&O US Public: D&O Index Q1 2009 to Q4 2019

Source: Marsh Analytics 13

D&O Pricing Index Base Year: 2009 = 1.00

Index LevelBack to Q4 2010

Baseline = 1.00


Anticipated threats to book?


Privacy

Greater focus by regulators into the privacy of data that a company has gathered.

May 2018 - General Data Protection Regulation (GDPR) June 2018 - California Consumer Privacy Act of 2018

Recent Examples: Facebook (Cambridge Analytica)

Neilson Holdings

#MeToo Movement:

Greater accountability to hold boards and corporate management who permitted the behavior or turned a blind eye responsible. There have now

been a number of management liability lawsuits filed in the wake of revelations of sexual misconduct, and continuing revelations suggest there

may be more to come.

Recent Examples: 21st Century Fox ($90M settlement for Derivative Lawsuit funded by D&O

Insurance) Wynn Resorts

CBS Corporation Nike

Google

Product:

X

Recent Example: Tesla (Elon Musk)

California Wildfires

In November, after the devastatingCalifornia wildfires, plaintiff shareholdersFiled securities lawsuits against EdisonInternational and, separately, against

PG&E after news reports that thecompany’s facilities may have caused

the wildfires

Cyber Breach

During the time frame 2014 to 2016, there were a number of shareholder derivative lawsuits filed against companies that had experienced data breaches.

These lawsuits were largely unsuccessful. In 2017, there were several more data breach-related D&O lawsuits filed. By contrast to the earlier lawsuits, which were

filed as shareholder derivative lawsuits, these later lawsuits were filed as securities class action lawsuits.

Recent Examples: Yahoo Equifax

Social Media Communication:

The recognition that companies could use social media for company announcements has raised the possibility that an investor could later claim that a

company statement on Twitter or Facebook or another social media network could be the basis of a securities class action or SEC investigation. Using social media

does involve certain risks.

Recent Example: Tesla (Elon Musk)

Products

In recent years there has been a wave of product related failures across a multitude of industries which has resulted in D&O litigation.

Recent Examples: Boeing 737 Max (fatal crashes)

Volkswagen (diesel emissions-cheating scandal) Johnson & Johnson (personal injury cases regarding baby powder)

Intel (security flaws in its microchips) General Motors (emission test devices)

Source: Marsh Research

Securities Litigation TrendsEvent Driven Litigation

15


Social Inflation

A Good Definition

“a fancy term to describe rising litigation costs and their impact on

insurers’ claim payouts, loss ratios, and, ultimately, how much

policyholders pay for coverage.”

Actuarial Interpretation

“Excessive inflation in claims.”

• Occurs when development defies key assumption: Loss Development is RV about stable mean

Coming to Terms


Why Is It Happening?The Changing Legal Environment

Sources: Swiss Re Economic Insights, Burford Capital.

“Jackpot Justice” Litigation Financing

27.7030.74

41.75

54.33

0

10

20

30

40

50

60

2014 2015 2016 2017

$ m

illio

ns

Median, 50 Largest Jury Verdicts

7%

36%

0%10%20%30%40%

2013 2017

% of US Law Firms Using Litigation

Financing

Litigation is a financeable asset.

- 68% of US Law Firms


How has COVID-19 Affected the

Marketplace?


COVID-19’s Impact

Unprecedented Spread of Loss, Deterioration of Exposure

Source: Willis Towers Watson, Insurance Information Institute..

Exposure Impact

Investment

Potential Loss Impact

2.0

0.6

0.3

0.7

0

0

0.2

22.7

4

2.6

27

1.7

0.8

92

0 20 40 60 80 100

BI

D&O

EPLI

GL

Mortgage

Political risk,…

Workers…

Billions of US$

Loss estimates range from $30B (≈ bad hurricane) to $140B (2-3 Katrinas)

$10.5B auto premium

Employment related

exposures (GL, WC)

Stock prices, bond yields

plunging

Lloyd’s estimate: $96B in

investment losses


What Are Some Things Underwriters

Want to Understand?


Employment Practices• Have there been, or will there be, any layoffs, staff reductions, or

facility closings in the preceding or next 12 months relating to Covid-19?

• Has outside legal counsel been used for laid off or furloughed employees?

• What are the employer’s plans to bring back laid off or furloughed employees?

• Has the employer established updated protocols, practices or policies regarding worker safety to combat the spread of COVID-19?

• If yes, has the employer established protocols or processes for determining if individual employees are safe to return to work?

21


Financial/Operational• Describe any changes to operations resulting from Covid-19.

• Has the company accessed available funds from the local government or federal government such as the Paycheck Protection Program?

• Are you accounting Covid-19 into your 2020 financial projections and beyond, and what do they look like?

• Any disruptions to their supply chain? What are they doing to shore up their supply chain?

• Does the company anticipate any issues in complying or staying in compliance with debt covenants? If so, has the company been in communication with its lenders regarding short-term waivers or amendments?

• What steps are you taking to ensure you have enough liquidity to maintain your operations over the next twelve months?

22


How can clients position themselves for

upcoming renewals?


What have been the client concerns?


Tips or Tricks to Manage Costs?


Claims Frequency: IDEAL

26

• 90th percentile means that 90% of the time, the settlement will be

below $19.10M, but there is a 10% chance it could be higher

• ABC Company’s ABC limit of $20M is on the 92.2nd percentile

• The probability of a settlement exceeding retention of $2,500,000

is 65%

Average $8,416,582

Median $4,003,992

60th Percentile $5,452,682





Average is the: 72.9th Percentile

Securities Retention $2,500,000

ABC Limits $20,000,000

Total Limits $30,000,000

Distribution Stats

Program Structure

ABC Company’s Current Total ABC Limit Stats

Limit is $20M on the 92.2th Percentile

Probability of Settlement Exceeding Retention

$2,500,000 65.00%

ABC Program $2.5M Retention / $20M Total Limits


What industry sectors are most

affected?


Are we seeing limitations in coverage?


Speed Round: Any Takeaways?

MarshMMA.com

This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency, LLC shall have no obligation to update this publication and shall have no liability to

you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as

actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affective if any underlying

assumptions, conditions, information or factors are inaccurate or incomplete or should change. Copyright © 2019 Marsh & McLennan Insurance Agency LLC. All rights reserved.

Documents

Navigating the D&O Market - NET