AIG Financial Lines. Claims Intelligence Report

Transcription

1 AIG Financial Lines Claims Intelligence Report Part 1 - Directors and Officers May 2012

2 D&O Claims Introduction There is plenty of speculation and hypotheses around corporate and individual risks, such as errors and omissions in the rendering of professional services, employee infidelity, employment practice litigation or Directors and Officers liability. Using our proven underwriting and claims experience in these areas we have prepared a series of fact-based communications to provide context to these risks as well as assist those concerned with these exposures to anticipate potential developments. The first topic to kick off the series is Directors & Officers Liability. Directors & Officers Liability in Europe In our experience, up until 2008 there was a steady rise of claims activity against directors and officers. The global financial crisis accelerated this trend, which continues to date. As an illustration, notification levels of claims brought against directors in 2011 were consistently 20 percent above the peak years of 2009 and We have observed several distinct paradigm shifts. Firstly, directors in Europe are now facing far more indigenous claims, which sees the US - though still prolific in terms of very costly litigation for directors - joined by other jurisdictions as high exposure areas. Most European countries now showcase costly and long investigations, proceedings or litigation, though the root cause may vary from country to country. Secondly, the number of claims against directors of private companies now outweigh those against their public peers. Finally, empowered regulatory bodies, state attorneys and criminal courts are now the more prevalent sources of action worldwide against directors, in comparison to actions brought by civil plaintiffs. In the following pages we establish this context by combining severe loss drivers and notification volume data with qualitative analysis derived from our claims handling experience. We also highlight what we may expect in the future. Methodology The claims information is derived from the analysis of AIG data related to European D&O policyholders since The severity analysis (pages 3 and 4) is based on losses incurred greater than US$500,000 or equivalent foreign currency. The frequency analysis (page 7) encompasses all notifications. 2

3 Severity: I) Exposures faced by all types of companies in Europe, private or publicly traded, but excluding securities related claims Regulatory & Criminal Number of Claims Bankruptcy M&A Company vs Insured Co-defendant Average Incurred Loss Top 5 sources of exposures by nature of loss: 1. Regulatory & Criminal actions e.g. investigations and proceedings brought by state attorneys or regulators for matters as varied as alleged corruption, anti-trust, unlicensed activity or misappropriation of assets. 2. Bankruptcy actions e.g. claims brought by receivers for continued trading whilst insolvent, or asset stripping 3. Company v Insured actions e.g. claims brought by or on behalf of the company by shareholders for breach of fiduciary duty causing waste of assets 4. Co-defendant actions e.g. claims brought by third parties against the company for anti-competitive behaviour or misrepresentation and naming a director or officer as co-defendant 5. M&A actions e.g. claims brought by minority shareholders alleging unfair treatment or valuation in a sale, acquisition or merger 3

4 II) Exposures faced by all types of companies in Europe, private or publicly traded, including securities related claims Regulatory & Criminal Number of Claims Company vs Insured Bankruptcy US Securities Claims M&A Co-defendant Non US Securities Claims Average Incurred Loss In addition to the categories of the first graph, two additional potential exposures emerge for companies with listed securities: 1. US Securities actions claims brought by shareholders or securities regulators in the USA 2. Non-US Securities actions claims brought by shareholders or securities regulators outside of the USA. 4

5 III) Take-aways from the 20 most severe claims To gain further insight into claims severity we analysed the 20 highest payments, made in relation to claims brought against Directors and Officers of European companies, insured by AIG Europe as lead primary carrier. 1. The loss amount assumed by AIG for these 20 claims was $580,000,000, an average of $29,000,000 per claim. The insurance market, as a whole, assumed payments in excess of a staggering $1,000,000,000 for these claims, an average of $50,000,000 per claim. The total insurance purchased was in some instances insufficient to cover the damages assessed or the settlements. 2. Reinforcing the paradigm shifts mentioned on page 2, we observed that: a. 50% of the total payments of the most severe claims relate to claims brought outside of the USA. b. Non-securities related claims (cf. page 3), which can touch private as well as publicly traded companies, represent 47% of the most severe payments. Non-Securities related Claims (Chart 1) AIG share only: Legal defence costs of individual directors and officers, plus settlements or damages assessed against them in bankruptcy lawsuits, amount to more than $100 million of the loss amount and 40% of non-securities related payments. Many such lawsuits related to bankruptcies of group subsidiaries, as opposed to the parent company. Legal defence costs of individual directors and officers in relation to Regulatory & Criminal actions represented $86.8 million of the non-securities related loss amount. Chart 1 How our non-securities losses are distributed Securities related Claims (Chart 2) AIG share only: U.S Securities claims represent only 16% of our most severe claims payments, whilst non-us Securities represent 37%. Litigation involving both U.S and Non-US claimants carry the lion s share of the securities related payments made. $86,750,000 $21,600,000 $55,000,000 Co-Defendant Losses (20%) Bankruptcy Losses (40%) Regulatory & Criminal Losses (32%) $106,700,000 Company v Insured Losses (8%) 5

6 Chart 2 How our securities losses are distributed Securities related Claims (Chart 2) AIG share only: U.S Securities claims represent only 16% of our most severe claims payments, whilst non-us Securities represent 37%. Litigation involving both U.S and Non-US claimants carry the lion s share of the securities related payments made. $146,500,000 $21,600,000 $48,750,000 US Securities Losses (16%) Non US Securities Losses (37%) US & Non US Securities Joint Losses (47%) $114,750,000 6

7 Frequency: Management Liability Claims Notifications in Europe MLC Notifications (Europe including UK/Ireland) (2) 3.0 Notification Index (1) FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 This graph represents notifications brought against policies written in Europe by Chartis against directors or officers anywhere in the world. The frequency graph shows two distinct trends in management liability notifications between 2001 and 2011: Trend (1), representing the general increase in notifications between 2001 and 2011, is reflective of a number of factors: Increasing number of buyers of D&O insurance over that period, especially private companies Rising number of notifications against executives of private companies whereas in 2008 losses incurred by AIG from claims against executives of private companies in continental Europe represented 22% of all claims notified, in 2010 this rose to 56%, significantly outpacing the growth in policycount over that period. Active regulatory investigative environment EXAMPLES: the number of cases handled by the French regulator against discrimination grew from 1,400 cases in 2005 to 10,000 in 2009; the Serious Fraud Office in the UK handled in excess of 100 cases in 2011 compared to 60 in Active criminal law enforcement in the corporate sphere EXAMPLES: in France the number of criminal convictions in health and safety, anti-trust and other corporate law cases rose by 17% between 2004 and 2008; between 2007 and 2010 the number of anti-corruption enforcement actions by the US Department of Justice and the Securities Exchange Commission rose by 95%. 7

8 Trend (2), representing a 63% increase in notifications between 2007 and 2011, is reflective of: The tail effect of the Global Financial Crisis, reflected in a greater number of bankruptcies and claims made by or on behalf of companies uncovering breach of fiduciary duties by executives EXAMPLES: in France bankruptcy litigation rose from 47,000 cases in 2006 to 61,000 cases in 2009; in Spain the number of companies being declared bankrupt has increased from less than 1,000 in 2006 to nearly 6,000 in 2009 and 2010 and the figure for 2011 is expected at 6,500. Increasing scrutiny by regulators and stakeholders of acts of individual directors and officers EXAMPLES: the number of directors reported for alleged misconduct by Insolvency Practitioners in the UK in 2010 was 7,030, in 2002 it was only 3,539; the number of criminal charges by the US Department of Justice linked to anti-trust against individuals has increased by 67% between 2004 and 2009; while there was a slight dip in the amount of corporate fines in 2011 compared to 2010, the amount of fines assessed against individuals by the Financial Services Authority increased by 47%. At time of print the examples in the sections Trend (1) & Trend (2) are accurately quoted from publicly available sources. Take-aways: There is increasing activity in Europe to seek redress, whether monetary (settlements, judgments or fines) or non-monetary (e.g. disqualification, imprisonment, board changes, strategic changes, etc.), and hold individual directors and officers accountable. This pressure is typically exercised by shareholders, empowered regulators, state attorneys and criminal courts, with a tail wind from the Global Financial Crisis demanding more ethical business conduct and more corporate transparency. Due care, transparency and ethical conduct across organisations, especially with exemplary conduct from the top leadership is paramount. Regulatory bodies, state attorneys and criminal courts are now the more prevalent sources of action against directors, in comparison to actions brought by civil plaintiffs. Costs of defence provided by outside counsels to executives in regulatory or criminal matters are soaring, especially when multiple parties or jurisdictions are involved. In our experience, the average defence costs incurred (above US$500,000) per criminal or regulatory proceedings and/or investigations, incurred by individual executives targeted or questioned in their individual capacity in formal hearings, is a staggering 3 million. This amount will inflate as most of the proceedings are still ongoing and it does not include securities related matters. Most if not all jurisdictions have laws that capture and enable punishment of regulatory and or criminal misconduct by directors or officers. However certain jurisdictions have specific areas of emphasis with dedicated laws and regulation, dedicated regulatory bodies and dedicated resources. Such dedicated focus brings a higher volume of investigations and enforcement actions. Knowledge and understanding of such a landscape is fundamental. 8

9 The frequency of claims against executives of private companies now outnumbers that of their listed counterparts. Regulatory & Criminal actions, claims brought by or on behalf of their own company, claims brought by competitors or clients naming executives as co-defendants as well as bankruptcy proceedings are claims that concern the executives of all types of companies. Future claims could come from anywhere, including one s own company. As such, Directors & Officers should be aware that any conduct and correspondence may be the subject of public litigation. Although they concern a small minority of companies in Europe, class actions against foreign issuers with securities traded on US exchanges (including level 1 ADR) is still a contributing force to the litigation landscape. Heightened focus on disclosure quality and transparency to markets and regulators is essential; especially when your company is subject to US jurisdiction. Future Trends: We forecast the current trends to continue with: Further actions from regulators and public prosecutors: typically when legislation such as the UK Bribery Act is enforced. This will accelerate if US concepts, such as deferred prosecution and whistle blowing, gain momentum. Regulatory activity in Latin America and Asia is also expanding in correlation to the economic growth of these countries. Further securities related claims from civil plaintiffs: avenues for litigation are facilitated on one hand by legislators (e.g. collective or group actions in Europe) and on the other by the European domiciliation of litigation funding and law firms with a US plaintiffs bar heritage. The recent decision in the Netherlands on the Converium case in January 2012 is a further testament to this trend. Further bankruptcy litigation: as sovereign debt issues and macro-economic slowdown unfolds and a further liquidity crisis looms. This may be more readily anticipated in the SME sector, in distressed sectors or in companies with high gearing or a high reliance on state funding or procurement. It may however also be found in subsidiaries or affiliated companies within larger healthier groups. In such cases instances to recoup creditor losses may be particularly vigorous using allegations such as asset stripping. A litigious culture against individual executives may become the norm, especially if a culture of zero-tolerance or fear of bringing liability upon oneself becomes prevalent: we can also expect further claims from stake-holders as they seek accountability for corporate losses or from commercial partners or competitors naming executives as co-defendants. 9

10 Regulatory & Criminal Actions (excluding Securities Claims) Example 1 Example 2 Example 3 Example 4 Directors were summoned by the examining magistrate in a criminal investigation, which alleges the misuse of company s assets. European state Criminal Prosecutor Misuse of public funds; a European state regulatory authority investigated Directors regarding overpayment (using public money) with respect to business events. European state regulatory authority The City of London Fraud Squad conducted an investigation into the conduct of a director in a group s subsidiary. This concerned an allegation of bribery by the director with respect to providing favorable purchasing terms to a customer. City of London Fraud Squad The US subsidiary of a European company, along with a number of its directors and officers, have been under investigation by the Antitrust Division of the United States Department of Justice for antitrust activities around the world. US Dept of Justice Bankruptcy Actions Example 1 Example 2 Example 3 Insolvency trustees in Spain allege breach of fiduciary duty of former executives of a real estate company by grossly overpaying for the purchase of foreign real estate. The Insured has been served with a complaint filed by the insolvency trustees for alleged negligence and mismanagement. Liquidators Winding up of an Insured s subsidiary in France revealed a significant lack of assets. The court appointed liquidator summoned all former directors for mismanagement and asset stripping. Court Appointed Liquidator A company and its former directors, along with the company s accountant, are being sued with respect to asset stripping, specifically depriving a subsidiary of assets. Liquidators 10

11 Company v Insured Actions Example 1 Example 2 Example 3 The subsidiary of a continental European company is claiming breach of fiduciary duty by the president of the company s Management Board which caused a significant loss. Due to the failure to supervise, a large number of speculative derivative transactions had taken place at the company. Subsidiary At the Annual General Meeting of a continental European company, its shareholders approved legal actions against the chairman and former directors, alleging the company had sustained damages arising out of a transfer of funds to a third party investment entity. This transaction, approved by the chairman & directors, is allegedly negligent and in breach of their duties, specifically with respect to the company law. Shareholders In 2009, as a result of a Supervisory Board decision, a company announced that they are claiming against former board members, alleging mismanagement, breach of fiduciary duty and lack of duty of care causing significant financial damage to the company. The claim is based on numerous different allegations, including wrongful accounting and conducting a high loss making business outside the core business. Policyholder Co-Defendant Actions Example A subsidiary is accused of conspiring in misleading creditors, of one of its foreign based customers, The creditors of the customer (which had subsequently entered involuntary bankruptcy) filed several actions naming the parent company, its subsidiary and certain directors. The plaintiffs allege the companies and their directors conspired with the customer and its management to make these misrepresentations to creditors. Insolvency Trustees M&A Actions Example After the acquisition of the Insured company, the purchaser brought legal action against the Insured s former managing director, alleging violation of the Companies Act through the provision of false information to third party appraisers who consequently over valued the Insured s assets. Purchaser 11

12 Securities Actions Example 1 Action was brought by shareholders of this European company. They allege that throughout the class period the Insured issued materially false and misleading statements, via their financial reports, press releases and during earnings and analyst conference calls, which caused the Insured s Level 1 American Depository Receipts and its ordinary shares to trade at artificially inflated prices, in violation of the federal securities laws. Example 2 Example 3 Shareholders A securities class action was filed against a European company to recover damages due to allegations of violations of the Securities Exchange Act of 1934 specifically in relation to misrepresentations to the public as to the financial performance of a subsidiary. The class action claimed for damages following a drop in stock price, subsequent to the disclosure that losses in that subsidiary had been understated. Shareholders, Securities and Exchange Commission Several shareholders initiated claims against a European company for financial damages. They argue that financial statements were manipulated for a number of years, causing them to purchase their shares at artificially inflated prices. Shareholders 12

13 About AIG Financial Lines in Europe: Proven Underwriting Expertise and Sustained Market Leadership In excess of 100,000 policyholders in the middle market sector in Europe AIG insures more FT 500 boards as lead D&O insurer than any other 40 years of D&O experience worldwide More than 300 underwriters in Europe A leading force in innovation, over 30 Financial Lines products were launched in Europe in 2011 alone Superior Claims Experience and Expertise - Delivered through the Insurance Industry s Most Extensive International Network International (outside the USA) financial lines claims staff number over 120. Handling claims through our local offices, they include 80 claim professionals in Europe In 2011 we received in excess of 5,000 D&O claim notifications in Europe In 2011 we paid in excess of 700 million in financial lines claims, on average 3.5 million every working day! Unmatched Global Presence to Deliver Service Excellence and World-Class Underwriting Know-How AIG companies have D&O licences in more countries than any other insurance company, 26% more than the closest competitor 99.7% of our local policies are issued through the AIG owned network More than 90 local AIG D&O offices worldwide to handle your claims and service your clients needs American International Group, Inc. (AIG) is a leading international insurance organisation serving customers in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional, and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange. AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. Products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. In Europe, the principal insurance provider is AIG Europe Limited. This material is for information purposes. Not all products and services are available in every jurisdiction, and insurance coverage is governed by the actual terms and conditions of insurance set out in the policy or in the insurance contract. Certain products and services may be provided by independent third parties. Insurance products may be distributed through affiliated or unaffiliated entities. For additional information, please visit our website at AIG Europe Limited is registered in England: company number Registered address: The AIG Building, 58 Fenchurch Street, London EC3M 4AB. AIG is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority (FRN number ). This information can be checked by visiting the FS Register ( 13