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1、D&O LiabilityWhat just happened/Where is it goingConcurrent Session,June 6 8:30 9:45 AM ETAntitrust Notice The Casualty Actuarial Society is committed to adhering strictly to the letter and spirit of the antitrust laws.Seminars conducted under the auspices of the CAS are designed solely to provide a
2、 forum for the expression of various points of view on topics described in the programs or agendas for such meetings.Under no circumstances shall CAS seminars be used as a means for competing companies or firms to reach any understanding expressed or implied that restricts competition or in any way
3、impairs the ability of members to exercise independent business judgment regarding matters affecting competition.It is the responsibility of all seminar participants to be aware of antitrust regulations,to prevent any written or verbal discussions that appear to violate these laws,and to adhere in e
4、very respect to the CAS antitrust compliance policy.Meet the SpeakersRick Ramotar,FCASVP,QBE ReRick is a VP and Senior Actuary at QBE Re with expertise in Professional Lines insurance pricing.Rick has more than 20 years of actuarial experience dealing with a variety of lines of businesses.Rick has h
5、eld prior roles at Swiss Re,Hiscox,the PMI Group,Aon,Trans Re,and Farmers.Rick holds a BS in Statistics from UC Santa Barbara.Brian Sabia,ARe,ASLI,RPLUEVP CUO,TOA ReBrian is a EVP and Chief Underwriting Officer at Toa Reinsurance Company of America.Brian has over 20 years of experience in Profession
6、al lines underwriting,from positions within PartnerRe,Berkshire Hathaway,and Executive Risk.Brian holds a MBA in Finance from Sacred Heart University and a BA in Economics from the University of ConnecticutLon Chang,FCASVP,Ascot GroupLon is the head of US Pricing at Ascot Group.He has 13 years of ac
7、tuarial experience and has been with Ascot since Dec 2018.Lon holds a BS in Finance from New York University.Lon will be your Moderator for this session.4Marc BernerSVP,FI,Allied World Ins CoMarc Berner is SVP and Head of the U.S.Financial Institutions Division at Allied World where he has responsib
8、ility for all aspects of underwriting executive liability lines for financial services firms brokered in the U.S.Marc has more than 24 years of insurance industry experience as an underwriter and broker.Prior to joining Allied World in 2016,he was Department Head for the Financial Institutions Pract
9、ice at Hartford Financial Products.Marc holds a BA in Political Science from Binghamton University and a JD from Albany Law School where he was Associate Editor of the Albany Law Review.D&O Rating Index from 2002From AON Quarterly D&O Pricing Index Report,Fourth Quarter 2022Qtrly IndexLast 2 Yrs are
10、 broken down by QtrMix of different types of D&OPublicPrimaryExcessFIPrimaryExcessSide APrivateNot for ProfitQuarterly Year-Over-Year ChangeFrom AON Quarterly D&O Pricing Index Report,Fourth Quarter 2022What Happened 2018 rates increased and kept going thru 2021 Why?Rates had been low for a long tim
11、e Concerns about profitability Social Inflation Increasing Security Class Action Claims New Events i.e.Sexual Harassment Outside of D&O,there were large casualty and property losses D&O had large exposures limits up to$50mFear is good for rates Exit market didnt happen this time Reduce/Tighten capac
12、ity Non-renew riskier business Tighten terms and condition Increase deductibles Reduce Capacity deployment Max limits:$50m$15m$5mHard markets occur when capacity reduces,leading to increasing rate as insureds pay more to entice insurers to offer cover2022 Rate reversal Higher rates attracted more ca
13、pacity Existing companies had increased budgets New entrants a lot of new start-up capacity came online Special Purpose Acquisition Corporations(SPACs)High rate/low limit risks disappeared from the market Companies had high budget targets Existing were aggressive defending books to hit targets 2022
14、Delaware law passed to allow captives to cover D&O but impact so far unknownWhere are we now“Rates have fallen but are still above target rating levels”Rates are only half of the story SCA claims frequency&severity Prior Year development including potential pipeline claims Banking Crisis II SPACs/de
15、SPACs and runoff Regulatory/Political Environment/Increasingly Aggressive SEC ESG Cryptocurrency/Opioids ReinsuranceRecent Financials Make D&O Look GoodCalendar year loss ratios for largest D&O writers.But Industry Forecasts are Bearish“My gut tells me that the new competitors jumping into public D&
16、O and excess liability are going to get burned,a lot of them are going to get burned,and this is more of a short-term phenomenon on rate being below prospective loss ratio trend.”-Carl Lindner,co-CEO American Financial Group“We are one of the very few lead markets in large account public D&O where p
17、rimary rates have remained relatively flat year over year.In contrast,high excess public company D&O saw rate declines greater than 20 percent.”-Peter Zaffino,CEO AIG“One example of our risk discipline is the reduction of our public commercial D&O business where we found pricing insufficient for the
18、 risks we see in this line.”-Vince Tizzio,CEO AxisSecurity Class Action Claims*NERA Recent Trends in Securities Class Action Litigation:2022 Full-Year Review13Federal Filings By Type14*NERA Recent Trends in Securities Class Action Litigation:2022 Full-Year ReviewClaim Status by Filing Year*NERA Rece
19、nt Trends in Securities Class Action Litigation:2022 Full-Year Review15Average Settlement Value*NERA Recent Trends in Securities Class Action Litigation:2022 Full-Year Review16Average Settlement Value*NERA Recent Trends in Securities Class Action Litigation:2022 Full-Year Review17Banking Sector Unde
20、r StressMarch MadnessApril&MayApril 21Moodys downgrades 11 regional banks due to higher interest ratesApril 21Moodys downgrades 11 regional banks due to higher interest ratesApril 24First Republic releases alarming Q1 earnings and is“pursuing strategic options,”triggering steep stock declinesApril 2
21、4First Republic releases alarming Q1 earnings and is“pursuing strategic options,”triggering steep stock declinesMay 1First Republic is sold to JP Morgan.Second largest bank failure in US historyMay 1First Republic is sold to JP Morgan.Second largest bank failure in US historyApril 24Federal Reserve
22、says it failed to take forceful action on SVB in its postmortemApril 24Federal Reserve says it failed to take forceful action on SVB in its postmortemMay 3PacWest announces intention to sell itself.PacWest and other regional banks have steep stock declinesMay 3PacWest announces intention to sell its
23、elf.PacWest and other regional banks have steep stock declinesMay 4First Horizon and TD Bank call off proposed mergerMay 4First Horizon and TD Bank call off proposed mergerJune Gloom?June Gloom?Banks Under Stress Bank and banking failure have been in the news a lot this yearSilvergate,SVB,Signature
24、Bank,Credit Suisse,First Republic Some early failure tied to crypto but a big driver is higher interest rates and changes in the economyFed is being proactive While some banks are going under,the drivers are different from what happened 10 years ago What does this mean for Financial D&O?Rates/Claims
25、 What role has the media played?Does it even matter?Traditional media,Twitter,Peter ThielWestern Alliance denying it was exploring a potential sale Bank officials who served as Fed officials.Does this matter?Greg Becker,CEO SVB+SF Fed board memberCyber related D&O claims D&O claims as a result of Cy
26、ber incidence or failure to disclose Failing to meet business plan due to impact of Cyber events Claims related to cyber related penalties Loss of reputation Losses due to fines Restriction of future business Restatement of results Emerging issues and trends for Private D&OEPLI exposures remain at t
27、he forefront for underwritersDiversity and Inclusion policies and actions are important underwriting concerns#MeToo,Higher retentions and separate retentions for California risks.Covid-19 layoffs causing rise in discrimination,harassment and ADA claimsBankruptcy/InsolvencyWhile initially increasing
28、in the wake of Covid-19,bankruptcies declined toward the end of 20 government stimulus(around 25 in 21-and 22)before increasing to levels seen at the start of Covid pandemic(71 in March of 23 vs Covid high of 74 in July of 20)Interest rate increases/inflation,labor force and supply chain issues cont
29、ribute to economic uncertaintyTrends indicating that private companies are becoming a bigger slice of corporate bankruptcy pie(60%in 1H22 vs 40%from 05-21)Less access to capital markets than public companiesMerger and Acquisition riskComplex SPAC litigation results in multiple policies being tapped
30、to contribute to losses;i.e.,private company run-off,public company go forward,and SPAC D&O Emerging Industries(cannabis,crypto,AI)Increase in Regulatory vigilanceSPAC/deSPACImpact on rate from disappearance of SPACsDistribution/winddownRecent tax confusion Post-merger bankruptciesSPAC-SPAC mergersS
31、PACs/de-SPACs SPAC A special purpose acquisition company,also known as a blank check company,is a shell corporation listed on a stock exchange with the purpose of acquiring a private company,thus making it public without going through the traditional initial public offering process.(Wikipedia)De-SPA
32、C transaction When a SPAC identifies a potential match,theyll begin the acquisition process through a formal letter of intent,which is followed by a due diligence phase and the execution of a merger agreement.(Donnelly Financial)SPAC/deSPAC Basics Special Purpose Acquisition Vehicle(SPAC):vehicle fo
33、r taking a company public,alternative to IPO,often referred to as“blank check company”i.e.a shell company with no physical assets SPAC(blank check company)raises money in an IPO to be merged with private company,usually 2-year deadline for SPAC to invest.Combination referred to as de-SPAC transactio
34、n SPAC sponsors granted significant consideration,usually 20%of the SPACs equity in the merged company SPAC IPO investors have the choice of redeeming shares or investing in the now public company.Private Capital in form of Private Investment in Public Equity(PIPE)can be raised to supplement company
35、s capitalization.Redemptions have increased and PIPE financing have dried up SPACs have been in existence for decades but increased exponentially in 2020-21 with 248 in 2020 and 613 in 2021,2022 has slowed 65(through May).Average of 20 per year from(2009-19)92 de-SPACs closed in 2020,213 in 2021 and
36、 16 in thru March of 22;over 350 SPACs looking for partners.Many have returned capital to investorsWhy are SPACs ImportantMassive increase in SPACs in 2021 but has come back to earth due to economy and heightened regulationViewed as an easier and cheaper alternative to IPO ProcessWasnt as heavily re
37、gulatedWas a fringe vehicle but its use exploded in 2020SPAC Liquidation and Follow-on IssuesSrc:Wall Street Journal 2022SPACs are liquidating now that suitable merger partners cannot be found within the SPAC lifespan(typically 2 yrs)Market conditions have not been favorable to IPOs and SPACs since
38、1H 2021Many SPACs wound down at the end of 2022 to avoid a 1%federal buyback levyIRS released clarification on Dec 27,2022 that the levy will not apply to SPAC liquidationsSPAC sponsors have attempted to keep break-up fees and other(limited)sources of revenue instead of returning to shareholdersGood
39、will Write-downs and BankruptciesSrc:Wall Street Journal 2022Recent SPAC mergers targeted smaller,more speculative companies2022 Fed tightening made financing for speculative companies difficult with no relief in sightWrite-downs occurring now as goodwill created in the merger evaporateBoxed,Virgin
40、Orbit,and Pear Therapeutics are latest SPAC deals to go bankruptArrival,after going public via a SPAC in 2021,is attempting to raise money by merging with another SPAC in 2023 to avoid bankruptcyThe Fall Out Wave of SPAC related litigation:78 Securities Class Action Cases filed between January of 20
41、19 and May of 2023.Claims differ from traditional core SCA suits because in addition to being brought against the surviving public company,also brought against the SPAC,and its sponsor and principals.Multiple Insurance policies in play SEC Vigilance:Proposed rule changes that may add significant D&O
42、 exposure;i.e.,(1)required disclosures;(2)private company subject to liability under Section 11 of the Securities Act of 1933;(3)elimination of safe harbor for forward looking statements under the PLSRA Enforcement Division activity for misleading statements Industry is prepared by making rate adjus
43、tments for these exposures.Though new market entrants and other factors have caused recent rate deterioration;e.g.,Primary pricing for de-SPAC companies typically exceeded$200k/mil from mid 20 to Q122.Primary pricing,while still historically strong,is closer to$100K/mil on average.To Be ContinuedESG
44、What are E,S,G?ESG lawsuits not doing what you saidAnti-ESG lawsuitsAnti-ESG investing billsFL vs DisneyESG claims Environmental,social,and governance(ESG)Set of standards for a companys behavior used by socially conscious investors to screen potential investments.Environmental criteria consider how
45、 a company safeguards the environment,including corporate policies addressing climate change,for example.Social criteria examine how it manages relationships with employees,suppliers,customers,and the communities where it operates.Governance deals with a companys leadership,executive pay,audits,inte
46、rnal controls and shareholder rights.(Investopedia)Evolving area Is this a severity or frequency issue?Whats the biggest concern?E,S,or G?Sustainability proposals are popularbut anti-ESG measures are growingSrc:Reuters 2022Environmental This has been around in different forms for a while Climate cha
47、nge lawsuit Pollution Now,its more on the forefront Greater disclosure brings greater scrutiny Did you do what you said?Carbon credits Dueling science SEC is coming out with guidanceSocietal Hard to define Not everyone agrees hot button issues politics/abortion/etc.Hard to measure Not all goals are
48、quantifiable Societal norms change Once you put it to paper,it opens the door to claims Not doing what you said Actions hurting corporate results and thus stockholders Corporate duty Stockholders Workers SocietyGovernmental SEC has gotten much more active Empowered/Aggressive Increased fines Increas
49、ing reach to target companies clients and vendors Going after companies around disclosure Crypto regulation is far from settled Coinbase claims SECs review of IPO rules out SECs ability to say operations are unlawful Lawyer defending ex-OpenSea worker for frontrunning listings claims NFTs are not se
50、curities and are not technically insider trading Will the tax man cometh?Other ESG Questions Regulatory approach may lead to more ESG claims in state than federal courtssee current energy sector Environmental D&O suits Is there a time limit for ESG claims?Can this turn into D&Os reviver statute?Can net-zero be measured?How do companies balance ESG without running into antitrust issues?