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The PLUS D&O Symposium

Annual meeting analyzes and dissects the D&O market

By Phil Zinkewicz

More than 1,400 people—insurers, risk managers, lawyers and consultants—attended the two-day annual Professional Liability Underwriting Society’s (PLUS) Directors’ and Officers’ Symposium in late January/early February. Those who came to the Marriott Marquis Hotel in New York did not come to play. They were there to work. Trends in the D&O market were analyzed and dissected, and attendees were challenged to participate, not only through the Q&A sessions that usually accompany panel segments, but also as participants in a mock life cycle of a fictitious company whose D&O coverage was coming up for renewal.

It was interesting to note that a good many sessions either centered around or touched upon securities litigation as an area of concern to corporate directors and officers. This seems to be true, even though Keith M. Thomas, senior vice president, commercial markets, management solutions group for Zurich, New York, who moderated a panel titled “New Issues in D&O Underwriting: What Lies Ahead,” pointed out that class action securities lawsuits appeared to be down by 38% last year. “Will this downward trend continue?” he asked rhetorically, then answered, “No one knows.”

Thomas’s panelists were Martin F. Baumann, deputy director, Public Company Accounting Oversight Board in New York; Tom Contiliano, accounting consultant, Bloomberg News, Chicago; Marc Siegel, global director of research, CFRA in Rockville, Maryland; and Jonathan Weil, managing director and editor of Financial Research, Glass Lewis & Co., Bloomfield, Connecticut.

Panelists agreed that future class action litigation against directors and officers would likely come in the areas of corporate earnings restatements, executive compensation and accounting issues. Weil said that in 2005 there were 1,254 company restatements involving 1,158 companies and that in 2006 there were 1,422 restatements involving 1,246 companies. “That means about 9% of all public companies had earnings restatements,” he said. “People are taking restatements very seriously.”

Siegel said that the rising number of company restatements demonstrates that Sarbanes-Oxley is working and that corporate transparency is here to stay.

Life cycle of a renewal

Another symposium panel, titled “Anatomy of an Account: The Life Cycle of a Tough Renewal,” was a departure from the usual panel structure. The interactive panel conducted an exercise showing the various phases of a mock tough D&O renewal. The exercise incorporated video and other media elements. Brokers and underwriters portrayed their real-life roles at various points in the renewal process. The exercise showed how the respective parties grapple with the various issues that arise.

Moderated by Chris Duca, president of Navigators Pro, New York, the panel consisted of Lori Marino, senior vice president, ACE, New York; Keith Martinsen, executive vice president, Carpenter Moore, New York; Peter McKenna, president, corporate accounts, management liability, National Union Fire Insurance Co., New York; Joseph C. O’Donnell, senior vice president, Arch Insurance Group, New York; and Brian S. Wanat, senior vice president, Aon Financial Services Group, New York.

Duca began by observing that corporate merger activity is on the rise. In times like these, he said, directors and officers are extremely vulnerable to lawsuits when things don’t work out quite right.

For the purposes of this exercise, Duca used a company called Arrogant Software. Reminding his audience that not only was this firm fictitious but also that all participants in the exercise were “role playing,” Duca described the company as one that had grown substantially in a four-year period. During that period, the company had reported no claims activity.

Suddenly Arrogant Software’s accounting practices came into question with regulatory authorities, and the company was forced to restate earnings—creating a potential D&O liability exposure.

At this point, Duca switched to a video of the fictitious company’s president being interviewed by a reporter. Under intense questioning, the president said that, despite reports in the press, Arrogant Software was “rock solid,” a remark that drew laughter from the symposium audience. He said: “We do have some challenges and infrastructure problems” (more laughter) but added that analysts were moving too fast in predicting downgrades.

Duca then threw the discussion over to the panelists, who generally agreed that before renewing the firm’s D&O coverage, they would like to have further discussions with the company’s chief financial officer and general counsel to find out exactly what the accounting irregularities were.

Duca next turned to the symposium audience, some members of which had been given voting machines prior to the session. These attendees were allowed to vote on whether the exposure should be non-renewed or renewed at much higher rates.

Further changes in Arrogant Software’s posture were offered via more “media reports,” and panelists as well as audience members were able to share their views as to whether these changes were significant to Arrogant Software’s continued growth and whether the company should be deemed a viable risk.

With the help of panelists, the symposium audience was able to vote several more times as to the outcome of the company’s D&O coverage.

Good times for D&O

At luncheon on the first day of the symposium, John J. Degnan, vice chairman, The Chubb Corp., also addressed the subject of class action litigation and then moved on to general conditions in the D&O market.

“When I last addressed the PLUS D&O Symposium in February 2003, I proposed that our industry ought to work collectively to combat a continuing wave of abusive securities class action litigation,” Degnan said. “At that time, none of us could have predicted what we would see over the ensuing three years. Public prosecutors—resurgent in the wake of Enron, WorldCom and other business scandals—both caused the insurance industry to take a hard look at abuses within its own house and leveled a criminal indictment threatening the very existence of the leading securities class action plaintiffs’ firm, Milberg Weiss. In the process, they revealed a level of cynicism and just plain dishonesty that not even I had foreseen.”

Nevertheless, Degnan pointed out, the D&O business overall is experiencing good times. He said that underwriting profits in D&O are “the healthiest” the industry has seen in years. “Insureds and their agents and brokers can once again access adequate D&O capacity at rates which, if always a source of spirited negotiation, have moderated over the past two years,” he said.

These developments, Degnan said, are particularly gratifying in light of the recent past, when the D&O market had serious problems. “The industry was buffeted by the confluence of a bursting dot-com bubble, a series of mega-business scandals and a lack of underwriting discipline.”

A number of developments have served to bring the D&O market around, Degnan pointed out. “First, economic times are good. The stock market has experienced a sustained period of rising prices, with the Dow breaking the 12,000 barrier late last year. Even better, from the perspective of D&O underwriters, this boom has been a measured one, displaying low volatility in stock prices and few examples of the kind of hyper-inflated P/E ratios seen in the ‘irrational exuberance’ days of the dot-com era. Corporate bankruptcies in 2005 were at their lowest level since 1994, having dropped almost 70% from their 2001 high. Early reports indicate that the number of public company bankruptcies continued to decline in 2006.”

Another development that has been positive for the D&O market, according to Degnan, is the Sarbanes-Oxley Act. While it may be controversial in many respects, he said, the act’s intense focus on internal controls required by Section 404 has undoubtedly increased the vigilance of corporate directors and officers. “So increased vigilance has accompanied economic growth,” he said.

Finally Degnan turned his attention to more disciplined underwriting on the part of D&O insurers. “We are managing limits more intelligently, at least in the United States, than was the case in the 1990s. The underwriting cycle is still with us.”

Degnan also mentioned some danger signals. He said that multi-year deals in public D&O remain “largely, if unfortunately,” not entirely a thing of the past. “Insurers’ efforts to restructure D&O wordings in the wake of the line’s recent profitability have begun to succumb to competitive pressures,” said Degnan. “Hearing underwriters express concern over the reappearance of ‘creative’ policy wordings produces a strong feeling of deja vu for those of us who were following conferences like this a decade ago.”

Degnan concluded by saying that, despite the strides the D&O industry has made, it needs to remain vigilant. *

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