D&O Market In Flux

 

Monday, Mar 09,2009, 2:47:35 PM   Click:

State Farm Agents, Policyholders 'Hold Tight' Together Chad Hemenway

State Farm agent Craig Dewhurst is telling his clients to "hold tight" until State Farm Florida mulls the conditional approval it received from regulators of its plan to withdrawal from the property insurance market. Like other State Farm agents in the state, Dewhurst is holding tight as well.

"We're all in survival mode -- us and the customers -- and I tell them we're in this together," said Dewhurst, an agent for nine years. Prior to that, Dewhurst said he worked in management for State Farm for a decade.

"There's a lot of uncertainty, and the possibility that I will lose 40-50% of my business is not comforting," he said from his agency in St. Augustine, Fla. "Most policies are good until 2010 or 2011 so right now is not the time to panic because no one knows what the details will be."

Dewhurst, like the State Farm Florida policyholders he assists, is waiting -- as are more than 800 State Farm Florida agents. The Florida Office of Insurance Regulation on Feb. 13 approved the insurer's plan to withdraw from the market but Insurance Commissioner Kevin McCarty attached certain conditions to the approval, including one that State Farm allow its agents to write with other companies.

"I'd love to write for some reputable companies," said Dewhurst, "but that would challenge the State Farm agent agreement, which has been a competitive advantage for many years."

State Farm agents are independent contractors who only sell State Farm policies but they can also place policies with the state-run Citizens Property Insurance Corp, because the company has not written new policies in the state in several years. Dewhurst said he puts 20 or 30 policies a month into Citizens.

In a letter to state Chief Financial Officer Alex Sink, dated the same day the OIR's conditional approval was given, State Farm President Jim Thompson said the company "extended permission for State Farm Florida agents to service policyholders who move first to Citizens (Property Insurance Corp.) and to continue serving that business later if it is removed from Citizens by a state-approved 'take-out' insurer" (BestWire, Feb. 18, 2009).

However, that is not going to happen. The conditional approval from McCarty forbids sending policyholders to Citizens. State Farm "shall not, directly or indirectly, place any of the policies in Citizens," the OIR order reads, continuing, "State Farm shall not interfere with the direct placement of its policies by its agents into other private insurance companies."

Dewhurst said the "claims paying ability" of the 16 companies in Florida designated to take-out policies from Citizens are all in question. He said agents were meeting with Sink to ask why the quotes they have been getting from take-out companies are "up to 200% higher than us." "You will see what a lot of people have been talking about when we're hit with a big storm," said Dewhurst. "Florida should give consumers the choice to pay what they want."

State Farm plans not to renew the last of its 1.2 million property insurance policies during the fourth quarter of 2011. The insurer's withdrawal plans were submitted about two weeks after McCarty issued a final order denying a 47% average statewide rate increase State Farm first filed in July 2008 (BestWire, Jan. 12, 2009).

In his letter to Sink, Thompson also said State Farm was "working with officials at Citizens in support of an expanded 'market assistance plan.' The purpose of this plan is to help current State Farm Florida policyholders whose policies are nonrenewed to find replacement coverage with other insurers before they are placed in Citizens."

Citizens spokesman John Kuczwanski said State Farm had been in "preliminary talks" with Citizens as it planned to leave the market but "no specifics were discussed." Citizens has not spoken to State Farm since the OIR was issued.

State Farm spokesman Phil Supple said the company was still assessing the OIR order. State Farm has 21 days to respCopyright 2009 ProQuest Information and LearningAll Rights ReservedCopyright 2009 Rough Notes Co., Inc. Rough Notes

February 2009

Pg. 78 Vol. 152 No. 2 ISSN: 0035-8525

22286

1225 words


D&O MARKET IN FLUX

Zinkewicz, Phil

ABSTRACT

Over a very short period of time, directors and officers (D&O) insurance for publicly held financial institutions has gone from being readily available at reasonable prices to being unavailable, sometimes at any price. A recent white paper by Professional Risk Solutions (PRS), a leading wholesale broker and provider of liability insurance, detailed some of the reasons the D&O market may be in turmoil. The paper concludes that recent surveys of the litigation landscape reveal some potentially ominous trends. These trends are: 1. Mega-settlements are increasing. 2. The average settlement is larger. 3. The number of cases is increasing. 4. Almost all cases were settled, not litigated. 5. Defense costs are substantial. 6. Companies rely on D&O coverage. The PRS white paper, which was published in 2007 and released in early 2008, goes on to say, however, that even in the wake of high-profile corporate mega-settlements, D&O insurance is widely available and its costs are actually moderating. FULL TEXT

Mortgage meltdown, corporate settlements threaten D&O availability and affordability

Over a very short period of time, directors and officers insurance for publicly held financial institutions has gone from being readily available at reasonable prices to being unavailable, sometimes at any price. A recent white paper by Professional Risk Solutions, a leading wholesale broker and provider of liability insurance, detailed some of the reasons the D&O market may be in turmoil.

The paper concludes that recent surveys of the litigation landscape reveal some potentially ominous trends. But even those ominous trends did not anticipate the market dislocations that were to take place as the result of the mortgage crisis.

Here are some of those trends, according to the white paper:

* Mega-settlements are increasing. Just a few years ago, only 3% of settlements came in at more than $100 million. But in 2006, that percentage more than tripled to 10%, including a record-breaking settlement against Nortel that topped the charts at $2.2 billion. In 2007, this was eclipsed by the Tyco settlement in the vicinity of $3 billion.

* The average settlement is larger. With more mega-settlements in the mix, it's no surprise that the average settlement jumped from $23.7 million to $34 million between 2004 and 2006. Even more telling, however, is the continuing rise in the median value of settlements, from $5.3 million in 2004 to $7.3 million in 2006.

The dollar amounts of settlements with the Securities and Exchange Commission (SEC), U.S. Department of Justice and other regulatory bodies also continued to rise unrelentingly, with some reaching more than $400 million.

* The number of cases is increasing. According to the PricewaterhouseCoopers 2006 Securities Litigation Study, 214 cases were filed in 2006, which is higher than the 173 cases filed in 2005 and not much different from the average of 218 cases filed annually since 2002.

* Almost all cases were settled, not litigated. Overall, under 1% of securities-related cases actually get to litigation or trial. It appears that both corporations and plaintiffs are reluctant to risk taking the issue to trial - where a judgment could land anywhere between zero and $200 million.

* Defense costs are substantial. In its 2006 survey of insurance claims trends, Towers Perrin found that corporations reported spending an average of $800,000 per D&O case in legal fees and other defense costs.

* Companies rely on D&O coverage. On average, in the Towers Perrin survey, public companies' median D&O limit of liability was $20 million, which is less than the value of an average shareholder claim.

Good news/bad news

The PRS white paper, which was published in 2007 and released in early 2008, goes on to say, however, that even in the wake of high-profile corporate mega-settlements, D&O insurance is widely available and its costs are actually moderating. Late last summer Rick Grimes, executive vice president of PRS and a co-author of the white paper, said insurers were "eager to write new business and protect renewals by any means necessary, sensing that recent troubles are behind them. They are generally looking to build market share, even in the face of many large litigation cases, which some attorneys believe are worth hundreds of millions of dollars and which carriers will eventually have to pay."

Grimes told Rough Notes that while his assessment still holds true for the commercial D&O market overall, it does not apply to private institutions that have subprime mortgage exposures and back-dated stock options. That's another story altogether, he said.

"As high-profile financial institutions fall victim to the mortgage crisis, many carriers are non-renewing D&O coverage and declining new business in the financial services industry," said Grimes. "We at PRS have been flooded with calls from agents and brokers who can't secure any D&O coverage for financial services clients. This is a train that isn't going to be stopping soon," he asserts.

Grimes said that all directors and officers need to be aware that their behavior will be scrutinized by many more eyes than in the past, including many with the interest and wherewithal to seek legal recourse when they perceive that corporate governance has been less than adequate.

The PRS white paper reviews statutes and laws that apply to directors and officers, including Sarbanes-Oxley, and addresses such issues as securities fraud. The white paper specifically looks at back-dated stock options, calling it a "hot issue."

Says the paper: "Options backdating is a corporate governance issue as well as a public company concern. In 2005, as a result of the Department of Justice and SEC investigations into stock option practices, companies began announcing the resignations and departures of senior executives and restating their financial statements. Since then, more than 160 investigations have been conducted, resignations and departures have continued, and approximately 130 lawsuits have been filed alleging options backdating."

The white paper says the main issue is when stock options were granted and in particular whether the option grants were backdated to coincide with a date when the share price was low, thus making the grant either more immediately valuable or more valuable over time to the grantee.

"Although the majority of companies that have come under scrutiny are in the technology sector," says the white paper, "companies from almost all industries have been subjected to investigation regarding this issue. The Department of Justice has filed criminal charges against former executives of companies including Brocade Communications Systems, Converse Technology, and Monster Worldwide. Options backdating has significant implications for IPOs and executive compensation structure," the white paper observes.

As serious as that issue is, however, the subprime mortgage issue is likely to dwarf it. By midJanuary The Wall Street Journal reported that Goldman Sachs estimates that losses on delinquent U.S. residential mortgages will exceed $1 trillion. SIDEBAR

"A high-profile financial institutions fall victim to the mortgage crisis, many carriers are non-renewing D&O coverage and declining new business in the financial services industry."

-Rick Grimes

Executive Vice President

Professional Risk Solutions

Photographs

February 23, 2009

Copyright © 2009 LexisNexis, a division of Reed Elsevier Inc. All Rights Reserved.
Terms and Conditions Privacy Policy
ond to the conditions.

"As far as the issue of agent assignment, it would be premature to discuss it publicly until we answer to the OIR," Supple said.

Until then, Dewhurst takes dozens of calls a day from State Farm customers.

"They are mad at us at first but once we educate them on the facts, they want to write the governor and insurance commissioner," Dewhurst said. "A total of only six customers out of hundreds of calls have canceled."

(By Chad Hemenway, associate editor, BestWeek: Chad.Hemenway@ambest.com)
Copyright © 2009 A.M. Best Company, Inc. State Farm agent Craig Dewhurst is telling his clients to "hold tight" until State Farm Florida mulls the conditional approval it received from regulators of its plan to withdrawal from the property insurance market.