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© 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO

Directors and Officers Liability Insurance

CANE Spring Meeting

April 2012

Bernie Horovitz

CEO XL Global Professional Insurance

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Summary of Presentation

•Primer on Directors and Officers Liability Insurance

•Discussion of recent D&O trends

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Purpose of D&O Insurance

• Indemnity provided under D&O insurance allows companies (entities) to attract qualified directors and officers (insureds) who will otherwise be reluctant to work for the company because of the risk of being sued for alleged wrongful acts committed in their capacity as directors and officers.

3



D&O Exposure for Publicly Traded Companies

• Shareholders are main claimants.

• Most common drivers are:• Misleading/Inadequate/erroneous/fraudulent

disclosure and financial reporting

• Earnings restatements, write offs

• Stock or Public offering of securities

• Bankruptcy

• Mergers, acquisitions and restructurings

• Regulatory Investigations

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D&O Exposure for Private and Not for Profit Companies

• Employment practices liability is the main exposure for claim frequency• Wrongful termination, discrimination,

harassment, breach of contract

• D&O claims drive severity

• Common D&O allegation are:• Self-dealing and misuse of funds

• Restraint of trade and other anti-trust related complaints

• Failure to fulfill fiduciary obligations

• Patent, copyrights, trademarks and other intellectually property related disputes

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Insuring Agreements in a typical D&O policy

• Side A, Direct Coverage

• Side B, Corporate Reimbursement Coverage

• Side C, Entity Coverage

• Recent Coverage Enhancements Investigative Costs Coverage

Crisis Coverage

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D&O Policy Exclusions

• Fraud and deliberate dishonesty

• Fines and Penalties

• Disgorgement

• Insured versus Insured

• Prior and Pending Litigation (burning building exclusion)

• Pollution, bodily injury, property damage, defamation and other claims not considered D&O claims (eg assault and battery)

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• Fraud and Dishonesty Exclusion

• Stanford case is a good example of exclusion

• Ponzi scheme with estimated investor losses of $7 billion

• Stanford sued insurers to provide coverage under D&O policy

• Convicted on 13 out of 14 charges of fraudulent behavior at Stanford Financial

• Upon Stanford’s conviction, Insurers denied coverage under D&O policy

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D&O Summary of Current Trends

• Frequency and Mix of SCA Filings

• Severity of SCA Filings

• Pricing

• Hot Topics: Dodd Frank Act

Foreign Corrupt Practices Act (FCPA)

Private D&O

European Sovereign Debt

Mergers and Acquisitions

Chinese Companies

Regulatory Investigations

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Public D&O Current Trends

Frequency of Federal SCA Litigation is flat

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Type of SCA Claim Mix has changed significantly

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Type of SCA Claim Mix has changed significantly

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Average and Median size of SCA settlement decreased in 2011

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D&O Current Trends

Price Trends (Quarterly Index of D&O Pricing)

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D&O Current Trends

Subprime and Credit Crisis

• 40 Settlements in total as at early 2012

• Aggregate settlements: $4.4billion (Wachovia Bondholders $627m, Countrywide Shareholders $625m, Merrill Lynch $475m, Lehman Brothers $417m)

• Average settlement: $110m1

• FDIC Failed Bank Lawsuits2

• 49 suits authorized against financial institutions with 23 filed so far

• Aggregate damage claims of at least $7.8 billion

• Bulk of lawsuits expected to be filed by year-end due to 3 year statute of limitation

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1. Significant portion of settlements not covered by D&O2. Statistics pulled from Kevin LaCroix D&O Diary


Current Trends

Dodd-Frank Act (Enacted July 2010)

• Expected to increase D&O loss exposure because:

• Act doubles the SEC’s budget

• Bounty provisions for whistleblowers

• Allows whistleblowers to be annonymous

• Requires “clawback” of incentive compensation to D’s and O’s in the event of a restatement of financial statements

• Allows SEC to seek penalties in administrative proceedings

• Lowers standard of proof for “aiding and abetting” securities fraud from “actual knowledge” to “recklessness”

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Current Trends

Foreign Corrupt Practices Act (FCPA)

• SEC created a specialized unit in 2010 to enhance enforcement of act.

• Enforcement actions and related follow-on suits are expected to increase significantly.

• 21 total cases from 1978 to 2004. 15 cases each for 2010 and 2011.

• Largest SEC settlements under FCPA have all happened in recent yearsKBR/Halliburton (2009) $579m

BAE (UK) (2010) $400m

Snamprogetti (2010) $365m

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Current Trends

Private D&O

• EPL and Shareholder suits remain the 2 largest source of claims.

• EPL and Shareholder suits can be emotional and protracted.

• Claim frequency has increased in recent years due to economic conditions.

• EPL suits increase with increasing layoffs.

• Shareholder/Investor suits increase with company bankruptcies

• FCPA, employee piracy and shareholder related suits are increasing

• Financial results have been weak driven by low rates on line, expanding terms of coverage and deteriorating loss trends

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Current Trends

European Sovereign Debt

• Has the potential to be a clash event in the D&O arena.

• Exposure is not limited to only European financial institutions because of counter party risk faced by American financial institutions.

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Predictions and Questions

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Documents

© 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO Yellow R= 255 G= 255 B= 0 Orange R= 244 G= 121 B= 32 Magenta R= 236 G= 0 B= 14-