Friday, 20 March 2009

Stanford Ponzi and D&O / E&O Insurance Coverage

The Chief Investment Officer of Stanford is the only one against whom criminal charges have been far. Her assets and the assets of Stanford being frozen, she isn't finding takers for legal representation on contingent fees.

In today's news (story here) she sues Lloyd's for coverage under Stanford's D&O and Company Indemnity policy seeking $5m in actual damages and to get the media to cover the story and try to embarrass the Lloyd's Managing Agents involved, $40m in punitive damages.

Paraphrasing from what I've been told by law firms involved in bankruptcy protection and unwinding these matters, the following is how I understand it to go. Do you the readers agree with what I've been told?

The law firm defending the Stanford group in its bankruptcy goes to court and as the first act, asks for estimated legal fees (big sum) to be set aside in escrow.

That law firm then discusses all of the claims for money against Stanford with the claimants to do an off-the-record assessment of the merits.

The cases are ranked by the anticipated outcome (from must pay to no chance) and then the lawyers for the claimants are notified of their standing (again off the record). The lawyers for the claimants have their own assessment of the merits and they either proceed to settlement or an actual review of the merits through court. But guiding the discussions is the fact that the assets available (net of legal fees) is always a small fraction of what's been claimed in lawsuits.

The D&O or E&O insurance firms are in very close contact with the bankruptcy law firm and when the cases are ranked, they act. If these insurance companies are to pay the legal fees and then not get anything returned if fraud is proven, they are wasting money so they wait for the first assessments of the merits.

The tough part for everyone involved (including information outlets like Advisen) is that there is no transparency to the real horse-trading here. And because everyone knew that Lerach was straightforward and predictable as a deal-maker, the D&O or E&O guys could reserve accordingly. But with the new bumper crop of Lerach wannabes, it's anybody's guess.

Thursday, 19 March 2009

Ponzi Schemes

This week the Insurance Insider wrote about D&O insurance exposure in Lloyd's and the London insurance market to the ponzi schemes in the US.

Quoting from the recent Advisen report on Securities Litigation and the D&O Market, the article lists the proliferation of 2009 litigation (433 Madoff and 9 Stanford not to mention another 70 subprime and credit crisis-related cases). You can buy a list of this litigation here.

Apparently the law firm which represented Enron in its bankruptcy made almost as much as Milberg who brought the class action. This means both sides are racking up big legal bills before even getting to a judgment on the merits of the case.

Therefore these cases are going to lead to use of D&O coverage for mounting legal fees and when merits are judged, it's more likely that significant E&O or Professional Indemnity claims are paid. Core D&O claims are less likely to be paid as the losses were so "systemic" - how could any D or O be more culpable?

Similarly with the ponzi schemes, if you're bringing a case against the Ds&Os, where's the money to go after? Ruth Madoff only has so much jewelry and the rest of the Madoff business isn't worth $50b. Instead and in addition, go after the funds and pros that fed Madoff.

On this point, I remember a ponzi scheme that raced through UVM while I attended. The guys at the top of the pyramid fully knew that it would collapse under its own weight but that so long as they got out at least twice they would be playing with other people's money until the inevitable collapse.

While I'm happy to see Madoff's staff and family (was there really a distinction?) getting indicted like his accountant (all of these people had to be in on it), I am waiting to see how the scheme can be unwound to find the people who gave Madoff money at the beginning of the Ponzi scheme. These are the crooks Madoff is pleading guilty to protect.

On the insurance coverage of ponzi litigation, there could be negligence in due diligence on the part of feeder funds and investment professionals who put their clients into Madoff recently, and that could be covered under E&O insurance. But criminal charges will be overwhelming when they unearth Madoff's true accomplices - those with Madoff at the top of the pyramid. I doubt any insurance company would honor their E&O.

Tuesday, 10 March 2009

Volume Discounting

Having established at least a beachhead with 500+ insurance companies, brokers, buyers, law firms and others I'm focusing our sales, marketing and customer service on moving beyond 1 login:1 user to corporate licenses with our accounts.

The goal is to provide what clients want, when they want it and the way they want to consume the information.

Our clients are overwhelmingly receptive to this approach as they want to find the path of least resistance to get our information to their staff in the cheapest and easiest route.

Our service has expanded in breadth and depth so that many clients are canceling other services to accommodate a greater spend with Advisen within existing budgets.

2009 customer implementations have all been solutions-oriented rather than one-size-fits-all.

As we get set to publish our rate card for this solutions-oriented approach, I'm researching how best to reward customers for doing more business. Any comments from readers would be much appreciated to How do you volume discount in your business?

Jack Degnan Speaks Part II

Talking about the market, Mr. Degnan predicted that "2009 will see dramatic hardening across all lines, all sectors" because of deteriorated combined ratios, investment return, rate reductions and poor yields in the market. Chubb CSI saw Q4 rate increases, the first in 18 quarters.

Countervailing measures are there:
  • forecasts like the above seem rational, but the insurance industry doesn't act rationally
  • the economic implosion reduces exposures and it's hard to raise the top line when demand shrinks

Speaking of the credit crisis, Mr. Degnan thought the "hyperbolic forecasts" of big losses were way overblown. Citing high dismissal rates and other measures he discussed in Chubb's last earnings call, Mr. Degnan thought the $10, 15 20b numbers are overblown. Was he subtly asking Advisen to revise its forecast?

In the Q&A he was asked about direct distribution and said it had been seriously reviewed at Chubb but Chubb is "strongly committed" to working with brokers who provide a significant "value add".

Monday, 9 March 2009

Jack Degnan Speaks Part I

I had the opportunity at an industry function to hear a terrific speech by Chubb's Vice Chairman John Degnan (see bio here). As a former New Jersey politician and lawyer, and as head of most of Chubb's operations, he's a very effective and entertaining speaker with good stories.

Mr. Degnan started with the experience of the last two days testifying in front of Congress in Washington and forecast that "by the end of this year there will be a Federal Systemic Risk Regulator" and that while insurance is not likely to be covered in phase I, regulation is moving to the federal government from the states.

Mr. Degnan compared the relative pain for European insurers trying to do business in the US and how they have to open in 50 markets, not just 1 market and wonders if they will take countermeasures at some point for US firms operating in Europe.

Analyzing recent testimony by NY State Insurance Superintendent Eric Dinallo (bio here) that NY regulation saved the markets from AIG's implosion, Mr. Degnan called it a "truism" because they only regulate the insurance company subsidiaries and not the rest of the holding company such as the Financial Products division that caused the implosion.

Mr. Degnan also reminded the audience of Mr. Dinallo's approval of $20b in AIG subsidary dividends going to the parent before the federal government bailout. While noting that this might have been politically motivated (saving jobs in NY), it was ironic nonetheless.

Mr. Degnan said that before Chubb got out of credit derivatives in 2002 not one state regulator had asked Chubb about these, and that state regulators aren't equipped to regulate this type of thing. "Federal Systemic Risk Regulation is happening" and while "systemic" is hard to define, there may be a role for the ratings agencies and wondered whether it would be more than solvency regulation.

Noting resistance to this movement, Mr. Degnan said insurance agencies are so numerous and such effective lobbyists and that agencies favor the state system. I assume this is because agencies compete in niches such as geographical areas that global or national brokers don't serve as well.

Noting that he's a Democrat, Mr. Degnan told the audience to be very aware of "economic populism" in Washington and while the industry might enjoy federal oversight, it might watch what it asks for.

Noting that trial lawyers own Democrats, Mr. Degnan warned of the ascendancy of the Trial Bar. Citing one of the "very few" positives from the George W. Bush years, Mr. Degnan cited good legislation that kept the trial lawyers down (e.g. District Attorneys outsourcing to trial lawyers). "Even the stimulus bill had pro-plaintiff language." Part II tomorrow.