John Keogh, president and CEO of National Union Fire Insurance Company of Pittsburgh, Pa., the nation’s leading writer of directors’ and officers’ liability insurance, calls the D&O market “unpredictable.” He sat recently for an interview with Risk & Insu

Choppy waters: John Keogh, president and CEO of National Union Fire Insurance Company of Pittsburgh, Pa., the nation’s leading writer of directors’ and officers’ liability insurance, calls the D&O market “unpredictable.” He sat recently for an interview with Risk & Insurance. Our questions and his answers follow

Thomas J. Slattery

What is National Union’s position in the D&O market?

We’re the largest underwriter of this product line in the country. We’re almost exclusively a lead carrier, so we set terms and conditions for everyone else to follow. In the last two years, on a relative basis, we’ve tried to make a fair market for all our clients. We haven’t run away from certain types of business, whether it’s certain industries or certain types of accounts. Some carriers took that position. We attempted to stay in everything that needed a solution.

What is the current state of the D&O market?

I’d characterize the market as fairly uneven and unpredictable compared with the last couple of years, when you could make some broad generalizations and be right all the time, namely being that prices were going up.

Over those years, pretty much across the board, prices have escalated, terms and conditions have been amended, and retentions and financial coinsurance in terms of partnership with our clients have changed. All of that, really, is a result of a recognition by underwriters in this field that the risk for D&O is much greater perhaps than had been understood in the late ’90s and even into 2000 and 2001.

Is that attributable entirely to corporate governance issues? Or are there other factors?

There’s a host of factors that led to this situation. Some of it goes all the way back to legislation passed in 1995, the Private Security Reform Act, which everybody at that time thought … if you look at the type of claims that were affecting corporate America then on the D&O side … would lead to a better claims environment. As a result, the market got pretty competitive during the late ’90s.

So it didn’t lead to a better claims environment?

No, just the opposite.

Why was that?

A few things. One is that one of the requirements of PSRA was that the lead plaintiff in a case had to … be a shareholder with a meaningful stake in the company. So you couldn’t have the shareholder with one share in a hundred companies bringing a class action every time the stock dropped.

As a result (one of those unintended consequences), today more often than not the lead plaintiff is a large institutional shareholder. Settlements aren’t 10 cents to 15 cents on the dollar anymore. Institutional shareholders want a much more significant settlement, and they want some level of reform at the company. That’s one of the areas that has contributed to an escalation in settlement values.

At the same time, you had in the equity markets a huge increase in market caps during the late ’90s. The stock market across the board rose to record levels both in NASDAQ and New York. And whenever there’s a security class action, damages are normally based on stock drop mad the associated market cap loss of that stock drop. So, as market caps grew, the underlying exposure, when there was a problem, was also growing. So when stocks dropped, the lost market share was in the hundreds of millions if not the billions of dollars, which was the basis for the damages alleged and ultimately the basis for the final settlement.

At the same time too, you had significant pressure building on the management teams of publicly traded companies to continue what were very good streaks of earnings results. When the economy started to falter, there was a lot of pressure on them to continue to make “street numbers” and expectations. The consequences of falling short of those expectations were dramatic in terms of how Wall Street would treat your stock price, and perhaps what that meant to you in terms of your job as a CEO or CFO. So all that pressure, in my view, may have, in some cases, been what was behind some of the clearly inappropriate and egregious behavior of management.

And you had, quite frankly, a plaintiff bar that in the late DOs was incredibly well resourced and smart and capable. It found new opportunities to pursue litigation in the D&O arena, became more aggressive, more emboldened and really changed its behavior in terms of the type of settlement dollars it was looking for.

So what was good about PSRA?

It did eliminate what I would say were frivolous securities class action suits that were going on before the legislation. It put a filter on the ability of the plaintiff bar to successfully bring frivolous cases, but for the cases that made it through the filter, the plaintiff bar wanted a lot more money.

As an insurer, how do you feel about the heightened scrutiny now falling on corporations, your clients?

I think, frankly, the environment for corporate directors right now is rather toxic. That’s a broad generalization, and I recognize it as that, but I think there’s a broad attitude that exists [among] regulators, media or the average citizen because of the more notable high-profile cases of corporate misbehavior that everybody in corporate America is a bad actor. There’s this general attitude that everyone in corporate America is somehow corrupt. That isn’t fair or accurate.

As we sit here today, the Martha Stewart, Adelphia and Tyro cases are now going to trial and are back on the front pages and in lead stories on television. It continues to perpetuate, in my opinion, that unfair generalization of corporate America. It means that the plaintiff bar has the wind at its back right now and has public sentiment on its side and is taking full advantage of this environment.

Is D&O pricing through the roof, out of control, as some contend?

No. I think you [shouldn’t] judge it against where it was two years ago, when clearly it was ridiculously inexpensive, to the point of being highly unprofitable for the carriers. Go back further, perhaps a decade, and look at what D&O prices are today compared with then. Prices are just getting back to where they were then, maybe a little bit higher.

Furthermore, if you look at loss costs and expectations for D&O today, loss costs are multiples of what they were. And I think the exposure in terms of the environment we’re in today is a lot more dangerous, a lot more severe than it was then. I’d argue that, all things being equal, prices should be much higher than 10 years ago and they’re just getting back.

What’s the biggest risk in D&O today?

The ones that get people’s attention are the ones of blatant and egregious misbehavior by company executives, the ones that dominate the headlines like Worldcom, Tyco or Enron.

You may come with a dozen of those, but still the standard things we see today are the same sort of things we’ve seen before and will continue to see. Anytime a stock drops and management makes an announcement about a business not performing as well as expected, you get a lawsuit. It doesn’t mean anyone did anything wrong; it doesn’t mean anybody misrepresented or lied, much less committed fraud. They simply announced that something unexpected happened with their business and that leads to them having to dampen expectations for earnings, stock prices drop, and you get sued.

Unfortunately in this environment, that’s very expensive. Whether it’s the cost of defense against those kinds of suits, or whatever. You do nothing wrong as management. You run your business well.

The world is full of surprises and you have a surprise that’s negative. Rest assured you’ll get sued and rest assured it’s going to cost millions of dollars to defend yourself and settle out that claim. We had 250 some-odd claims last year.

Do you still see opportunity here? Is it a good line of business to be in today, tomorrow?

I don’t know. There’s so much uncertainty in terms of what affects loss costs. It’s a hard one to answer. I like the fact certainly that I’ve got 100 people that do nothing but handle security class claims and have been doing it for years and know what they’re doing. That kind of expertise is going to allow us to weather the storm much better than others. We have core competencies that I feel good about. It’s just that you pick up the paper every morning or watch the news every night and you keep hoping things are going to get better.

What’s next for this product?

Underwriters who are worth their salt and are smart and honest will say they don’t know. That’s what’s scary. I don’t know that we could have seen coming a lot of what’s gone on [and avoided it] by approaching underwriting any differently or more diligently.

The fact is there’s a record number of SEC investigations going on right now. They’ve hired several hundred people in the past few years to go out and investigate. Where those investigations lead, I have no idea.

In that same vein, look at what’s going on right now in the mutual fund world … which had been a nice, still quiet place with not a lot of claims. Here we are a year later with regulators and plaintiff firms going after them. And that all started (and that’s my point here) with one whistle-blower at a hedge fund who didn’t like what she saw going on and went to the attorney general in New York. That affects an entire industry. How do you see that coming?

THOMAS J. SLATTERY is a senior contributing writer to Risk & Insurance. He can be reached at

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