Subprime Crisis Raises Claims Risks, Warns Marsh

NEW YORK, August 20, 2007 – Marsh, the world's leading insurance broker and risk adviser, is warning the financial services sector, including insurance companies, hedge funds, banks and ratings agencies, that they may be exposed to greater directors' and officers' liability (D&O) and errors and omissions (E&O) liability claims in the wake of the current subprime mortgage crisis.

Higher interest rates and falling property prices have contributed to rising mortgage delinquencies among high-risk, or subprime, borrowers in the United States. This, coupled with increased relaxation of underwriting standards, has led to the bankruptcy of several mortgage lenders, the collapse of hedge funds, increased regulatory scrutiny surrounding lending practices, and ratings downgrade of 2005 and 2006 vintage residential mortgage-backed securities bonds. In addition, the mortgage market problems have ignited concerns about the potentially large exposure insurance companies and pension funds may have to securities backed by subprime mortgages, including investments in collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) with subprime exposure.

Potential litigation arising out of D&O and E&O liability, include:

• Lender lawsuits against banks -- Since lenders are unable to do business without capital, some have been forced to file bankruptcy when they were asked to buy back loans. It is likely that there will be claims of improper margin calls and flawed valuation of underlying collateral on the part of banks and other institutions that purchased or financed the loans.
• Shareholder suits against lenders, accountants, trustees, and underwriters -- Subprime lenders that have gone into bankruptcy may well face extensive accusations. Shareholders could make claims of misrepresentation and omission related to accounting for residuals, as well as claims of bad valuation and poor underwriting standards.
• Insurer lawsuits against lenders -- Large insurance claims on failed sub-prime collateral may lead to accusations of poor underwriting (misrepresentations and omissions) on the part of lenders.
• Investors suits against trustees -- To the extent that bondholders are not paid, there will be claims of breach of fiduciary duty on the part of the trustees responsible for the distribution of cash-flow.
• Trustee suits against lenders and underwriters on behalf of investors -- Potential claims are likely to be along the lines of fraudulent conveyance and breach of contract related to loan servicing.
• Individual investor lawsuits -- If and when the investors in mortgage-backed securities post poor returns as a result of failing sub-prime backed investments, the individual investors may accuse the funds of not taking on suitable and prudent investments and failing to follow investment guidelines and standard risk management procedures. There also may be claims of misrepresentations, omissions, bad pricing and mark-ups.

(Source: Dr. Faten Sabry, NERA Economic Consulting, 'The Subprime Meltdown')

In the U.S, the Federal Reserve Bank is taking steps to stop abusive lending practices, including reviewing disclosures under the Truth in Lending Act and enacting new rules about mortgage advertising, how borrowers become qualified for a loan, and limiting the use of no-documentation loans.

Jill Sulkes, a managing director in Marsh's Financial Institutions Practice, said: "Insurance companies, hedge funds, banks and ratings agencies must continually assess the risks raised by the subprime crisis and examine their D&O and E&O exposures."

Securities class action lawsuits already have been brought against several bankrupt mortgage originators alleging violations of the Securities Exchange Act of 1934, more specifically that these firms issued materially false and misleading statements about their financial results. Lawsuits also have been brought against hedge funds and securities firms allegedly for misleading investors about their exposure to subprime mortgages. In addition, the potential for regulatory investigations into deceptive lending practices and resulting drops in shareholder value may bring about claims that may be covered by a company's D&O or E&O insurance policy.

"Although the D&O and E&O insurance market has been largely stable, if there are a high number of costly claims under these insurance policies, this trend may reverse and costs may begin to rise. Companies should be prepared to provide a detailed description of their subprime exposure to their insurers when purchasing D&O and E&O coverage." Ms. Sulkes added.

About Marsh
Marsh, the world's leading insurance broker and risk advisor, has 26,000 employees and provides advice and transactional capabilities to clients in over 100 countries. Marsh is a unit of Marsh & McLennan Companies (MMC), a global professional services firm with approximately 54,000 employees and approximately $10.5 billion of annual revenues. MMC also is the parent company of Guy Carpenter, the risk and reinsurance specialist; Kroll, the risk consulting firm; Mercer Human Resource Consulting, the provider of HR and related financial advice and services; and Oliver Wyman, the management consultancy. MMC's stock (ticker symbol: MMC) is listed on the New York, Chicago and London stock exchanges. MMC's Web Site is www.mmc.com.

About NERA
MNERA Economic Consulting is an international firm of economists who understand how markets work. Our more than 45 years of experience creating strategies, studies, reports, expert testimony, and policy recommendations reflects our specialization in industrial and financial economics. Our global team of more than 600 professionals operates in over 20 offices across North and South America, Europe, Asia, and Australia. NERA Economic Consulting (www.nera.com), founded in 1961 as National Economic Research Associates, is a unit of the Oliver Wyman Group, an MMC company.

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