Replies to post #63737 on InterDigital Inc (IDCC)

[olddog967]

ams: The following is one of several articles I have read with the same theme i.e. there has been a significant increase in D&O insurance costs. No matter what you think, that is a fact. I believe we are all aware of your concern, but your continuous harping on the subject no longer serves any purpose,.

From the October 17, 2003 print edition

D&O insurance costs spike after corporate scandals

Michael Muckian

Special to Atlanta Business Chronicle

When the directors and officers insurance coverage policy at A.O. Smith Corp. expired June 30, corporate risk manager Pat Cauwenbergh prepared for a significant spike in rates.


The $1.5 billion manufacturer of electric motors and water heaters, which has its headquarters in Milwaukee, had paid $170,000 per year on a three-year contract that provided $30 million worth of protection to Smith's officers and directors.

Cauwenbergh was correct to expect a jump. The new one-year policy's cost, which raised coverage 25 percent to $40 million, jumped to $600,000, an increase of 200 percent when coverage changes are factored, Cauwenbergh said. "That's a big number, but it's less than the 300 to 400 percent increases other companies have seen," he said.

A.O. Smith's Midwestern location and stable management team helped keep the increase from being even more massive, Cauwenbergh said.

A.O. Smith is one of many companies shouldering increased directors and officers -- D&O for short -- costs thanks in part to the Sarbanes-Oxley Act, passed in July 2002. New regulations, along with a tougher insurance market driven by social and economic trends, have raised business insurance rates in general, and D&O rates in particular.

The result is increased premiums paid by all companies to cover their boards and executives. Public companies that are subject to greater regulatory oversight have a much higher price to pay.

"New regulations have put directors under scrutiny that goes beyond balance-sheet questions," said Jim Povlich, senior vice president in the Milwaukee office of Marsh USA Inc., a major D&O coverage provider.

In the wake of corporate scandals, regulators are taking a harder look at company management and board oversight policies and activities, Povlich said. Increased pressures on board performance mean higher accountability levels, which insurers translate as greater risk, he said.

For public companies, D&O insurance costs have increased precipitously, according to an April survey of public companies nationwide, conducted by Foley & Lardner, a Milwaukee law firm.

Companies responding to the survey said they've experienced a 100 percent to 300 percent D&O insurance premium increase since the enactment of Sarbanes-Oxley. Companies just coming off the standard three-year insurance contract cycle had especially dramatic jumps in premium costs, according to survey results.

Those hit hardest are technology, software and health-care companies that are subject to greater market fluctuations and liability claims. Insurers are not only increasing premiums but also providing less protection when policies renew.


Companies are making changes to their policies, including lower coverage caps and increased co-insurance.

Increased claims severity in recent years has significantly driven up premiums, Povlich said. Claims that once settled for between $5 million and $10 million have now reached an average of $26 million, he said.

"It's loss experience, not speculation on Sarbanes-Oxley's potential effect, that's raising premium rates," Povlich said.

Claims related to the Sept. 11, 2001, terrorist attacks have increased activity, while underperformance in the stock market has reduced insurance companies' investment income.

D&O insurance costs for privately held companies -- which are not directly subject to the new regulatory scrutiny -- have risen less than other types of business insurance, said Rick Kalscheuer, a commercial insurance account executive with R&R Insurance Services Inc., in Waukesha, Wis.

In an insurance rate increase environment averaging between 5 percent and 20 percent, D&O coverage for privately held companies has gone up just 3 percent, Kalscheuer said. Lack of regulator scrutiny makes the difference, he said.


Muckian writes for The Business Journal of Milwaukee, a sister paper of Atlanta Business Chronicle.

[Desert dweller]

AMS you said it was immature to say that all are in the same boat in regards to the D&O insurance, but I stand by what I said. While I don't have a link, I have read in several magazines/papers that while some insurance costs have stabilized, D&O insurance is still rising at a rapid rate. In my position I read various publications to see what the trends are in our overall cost structure, and insurance is one of those costs.

While my company does not have the need for D&O insurance as we are a small closely held company, I still read about the trends. One of the trends is that due to all the problems created by the crooks on Wall Street, the cost of D&O insurance is expected to continue to increase at very high rates. Couple that with the fact that IDCC has now added a few more members to the BOD, and the D&O insurance for those who understand it, is bound to rise.

You said that due to the lack of patent litigation, our insurance costs should be decreasing. The cost of D&O insurance has almost no bearing on how many IPR infringement claims we may have going. The cost is based on the insurance industries estimate of what is the likelihood of the Officers and Directors being sued as a result of their performance on the job. Well with all the scandals on Wall Street, the chances of the Directors and Officers at public companies being sued continues to rise, not just IDCC directors, but all directors.

My guess is also that to some extent the cost of D&O insurance is also based on the market cap of the company, although this is strictly a guess on my part. Since our market cap has risen until recently, if the market cap determines the premiums then it would also explain some of the increase.

As far as the company indicating it would be shedding jobs, I just have missed that one because as far as I know, they have said they will continue to increase their investment in technology while maintaining a strong balance sheet. I can't see how anyone can fault management in this area. I would think our balance sheet is the envy of many companies.

As far as the rejection of the options is concerned, did you really think when that proposal was defeated, that the employees who are no longer getting the options at the same rate wouldn't supplement the "lost compensation" in some other way, namely cash. To me, pay them only in cash because cash if fully measurable and they can't hide behind some fringe benefit whose true cost can easily be disguised.

I believe the loss of $10 per share is due mainly to the company's inability for now to land the big contract. The delay in Nokia to me is the major reason, along with the slide in Nasdaq, for the fall off. Also remember that we rose to the $27 level on pure speculation and no news. So take away the $3-4 rise on no news and our fall was not so dramatic. It was still large but there is no doubt in my mind that we will easily eclipse the $27 price target within the next year, and my bet is it will happen much sooner.

I believe Howard when he said there are times when there is a a lull in the licensing activity, and then all of a sudden there is a flurry of activity all at once. Look at IDCC's past history of licensing, many times it comes in bunches. I believe it will happen again this year. I also believe Howard when he said we will land the big one that Merrit talked about.

Just like you said that sometimes it is necessary to remove the blinkers (although in the US I think you mean blinders) to actually see what is going on, I also think you need to open your mind to the possibilities that Howard talked about during the cc. If you don't believe they will come through, then I think you should do as you said you would, sell and move on. For me, I believe Howard and have placed my bets accordingly.