A Smart Investment.

Publicly traded companies are looking to directors and officers insurance to protect them from investor lawsuits, which are on the rise.

As companies like Conseco Inc., Aetna and Reliance Group Holdings Inc. face an ever-growing rash of investor lawsuits, the need for directors and officers insurance is increasing as well, according to insurance professionals.

Robert Hartwig, vice president and chief economist for the Insurance Information Institute, said he wasn't surprised financially troubled companies like Reliance and Conseco, whose stock prices have plummeted in the past couple years, are defendants in investor-generated lawsuits. That can happen to any publicly traded company facing financial turmoil, he said.

In other words, investor lawsuits are simple reality in the rollercoaster world of publicly traded companies.

"I would be surprised if there weren't lawsuits," Hartwig said. "In general, when a company suffers a severe decline in share price, like both of these companies have, you often see a directors and officers lawsuit. There are attorneys specializing in this, claiming to look out for the rights of shareholders, but the objective is to collect a lot in fees, with the plaintiffs getting little."

He said the directors and officers line of insurance is now approaching $3 billion in gross premiums written. "Because of the general interest of the public in investing, and the trial bar in suing, you have a potent combination driving D&O insurance," Hartwig said.

A Profitable Line

D&O insurance is "one of the most profitable insurance lines an insurer can write," said Eric Simpson, senior vice president and head of A.M. Best Co.'s property/casualty division. It wasn't uncommon for insurance carriers to generate combined ratios in the 70s and 80s a decade or two ago. It has "drifted" into the 90s and recently closed in on 100 in some cases, Simpson said, but that's still good compared to standard commercial lines, for example, where combined ratios are commonly in the 110 to 115 range. A combined ratio below 100 represents a profit; above 100 represents a loss.

Looking ahead, Simpson said capacity is stable and at an all-time high. Rates began flattening more than a year ago, he said, and multiyear deals are declining, which would allow D&O writers a chance to make premium increases at renewals, if warranted.

Some of the biggest writers of D&O include Chubb and Executive Risk, which was bought by Chubb in 1999; American International Group Inc.; and Reliance, although its future as a D&O writer is uncertain. These are companies with the longest histories of writing D&O.

Most companies and their boards have some basic D&O coverage, Simpson said, but the question is whether it's sufficient as liabilities increase.

The average size of a shareholder D&O liability claim award rose to $8.67 million in 1999, the highest ever, according to the "1999 Directors and Officers Liability Survey," an annual study by Tillinghast-Towers Perrin, a management and human resources consulting firm in Chicago.

Though claim awards have risen, prices for D&O coverage declined for the fourth consecutive year in 1999, according to the study's author, Mark Larsen, a consultant to Tillinghast-Towers Perrin. He said the exception is "substantial" premium hikes for high-tech and biotech companies with recent initial public offerings, given the volatility of the tech sector of stocks.

The trend is similar for D&O claims from employees, which reported an average cost of $306,000 vs. $287,000 in the prior survey, Larsen said. "Shareholder and employee claim-cost trends are crucial since these are by far the most frequent sources of D&O claims, with shareholder claims most common for publicly traded companies and employee claims most frequent for private companies and non-profit organizations," he said.

Larsen said he is still gathering surveys for this year's report and doesn't expect to have that ready until later this year.

Claims on the Rise

Simpson added that there was an increase in the number of claims settled for more than $100 million in 1999. In general, the frequency of claims is rising, with a large number filed in federal court in 1999; increased stock market volatility and more mergers and acquisitions may mean more D&O claim activity, and increased scrutiny by shareholders of how corporations are governed could lead to more D&O claims, he said.

Much of the focus with the classaction lawsuits is on money, as far as defense costs and settlements, but another important resource tied up by these suits is managerial time, said Bob Card, director of risk management for Risk International Services, Houston, a professional services firm with specialty practices in risk management, claim management & recovery, risk science, strife victims and insurance archaeology.

Typically, most, if not all, the actual defense costs and settlement value of these suits are covered by insurance, he said. Although this relieves the defendant company in the short run, insurance premiums over the subsequent years may increase as a result of one or more shareholder suits.

These lawsuits are labor intensive, especially because management credibility is at stake, Card said. Senior managers face pressure not only to succeed in the suit, but to assure that the company's long-term reputation with shareholders and customers is not compromised. The attention spent on the lawsuit reduces the amount of concentration on managing the company.

Bumpy Stock Market Rides Wave of Lawsuits

As Insurance stocks take bumpy rides in a volatile stock market, shareholders are increasingly seeking retribution in court. Conseco Inc., Reliance Group Holdings Inc., Aetna Inc. and Frontier Insurance Group Inc. are just a few of a growing roster of insurers facing a barrage of investor-generated lawsuits.

Most of the suits, which seek class-action status, are similar in their allegations--that the companies issued materially false and misleading information concerning the company's financial and operating condition and the company's prospects, among other investment-related issues.

It's not clear what investor lawsuits would achieve at this point, said Robert Hartwig, chief economist of the Insurance Information Institute. It's been a difficult environment for insurance on Wall Street, and in 1999, the stock price of many insurers dropped to new lows, he said. "There has to be a detangling of the effects of the market from the effects of these class-action suits," he noted.

Attorney Eugene Anderson, of Anderson, Kill & Olick, New York, said class-action lawsuits in general make more money for lawyers--sometimes more than they do for the claimants. Still, corporations also benefit--something they don't admit, he said.

"It's a slimy game, and no one will tell you," Anderson continued. "Corporations have to say class actions are terrible, are the result of greedy lawyers and don't benefit society or the economy. They say that so much, they actually believe it. But when a corporation has a serious and widespread problem, they are looking for a one-time, one-shot solution, which class actions provide."

Attaining class-action status is a two-part process, said attorney Mike Peacock. A class certification is filed and has to be resolved by the court. Then the liability portion of the trial is decided in a separate procedure. Peacock's firm, James, Hoyer, Newcomer & Smiljanich, of Tampa, specializes in class actions and representing victims of corporate fraud.

Peacock said it's a misconception to think in terms of a large pot of money having to be divided among many people. "The objective is to make sure as many people as possible are made as whole as possible. Victims are looking to be made whole...this is an opportunity for a large number of people to be made whole."

Sometimes investor lawsuits are started to get rid of a current board of directors or management structure, Hartwig said, but in the case of Reliance, it will probably be acquired in pieces or in its entirety, and Conseco--another company facing a spate of such suits--already is under reorganization.

Bermuda reinsurer Overseas Partners Ltd. said it will acquire Reliance Reinsurance Co., a unit of Reliance Group Holdings Inc., for an undisclosed amount. It's one of several recent agreements by Reliance Group to sell off its "rating-sensitive" lines of business. Leucadia National Corp. this summer terminated its $292.7 million offer to buy Reliance Group.

Hartwig finds the Reliance situation unusual, because relatives of Saul Steinberg, who acquired the company several years ago and took it public, hold a significant portion of the stock and would stand to benefit if the shareholders prevail.

A similar question could apply in the Conseco situation. Stephen Hilbert, the founder and former chief executive officer of Conseco, and Rollin Dick, former chief financial officer, both resigned April 28. Hilbert owes $162 million in company loans, which he used to buy some 5.7 million shares of Conseco stock. He owes another $16.8 million for a loan Conseco extended him to pay the interest on that loan. Dick owes $70 million for 2.4 million shares, along with $8 million for an interest loan.

Gary C. Wendt, 58, was appointed in June to lead Conseco, replacing David V. Harkins, acting interim chairman and chief executive officer. The entrance of Wendt, who was chairman and chief executive officer of GE Capital Services, follows the resignation of Conseco's two top executives and comes at a time of financial instability for the company.

Recent Investor-Generated Class-Action Lawsuits

Among the pending class-action lawsuits filed by investors against insurers:

* Frontier Insurance Group Inc.--The law fir of Wolf Haldenstein Adler Freeman & Herz LLP said Aug. 2 it is filing a class action lawsuit in United States District Court for the Southern District of New York on behalf of those who bought securities of Frontier Insurance Group Inc. between Aug. 5, 1997 and April 14, 2000. The complaint alleges the defendants issued materially false and misleading information concerning the company's financial and operating condition and the company's prospects, among other things.

* Reliance Group Holdings Inc.--The law fir of Milberg Weiss Bershad Hynes & Lerach LLP, New York, said July 19 it filed a class-action lawsuit on behalf of investors who purchased securities of Reliance Group Holdings Inc. between Feb. 8, 1999 and May 10, 200. Similar lawsuits against Reliance were filed by the law firms of Rabin Peckel LLP, New York; Wolf Haldenstein Adler Freeman & Herz LLP; Cauley & Geller LLP, Boca Raton, Fla.; and Weiss & Yourman, New York.

* Conseco--As of May 16, 21 lawsuits had been filed in U.S. District Court for Indiana in Indianapolis. The lawsuits g nerally allege that Conseco misled policyholders by exaggerating the value of interest-only securities held by Conseco Finance, the former Green Tree Financial Services Corp. Earlier this year, Conseco lowered the value of those assets by $554.3 million, reducing 1999's earnings by $349.2 million.