"But the thing that is interesting is that it is very inconsistent for different types of companies and different size segments," he said.

Midsized companies, with revenues between $100 million and $1 billion, benefited most from the price competition for their D&O coverage, Mr. Bradford said.

Jim Nestheide, vice president of financial and professional services for The St. Paul Travelers Companies based in Cincinnati, agrees that the market is competitive.

Many carriers have shied away from what he terms the "mega-caps" (publicly trading companies with large market capitalization) because of their potential exposure. They have competed for the smaller companies, creating a softer market there, he said.

Rather than worrying about any particular price, Mr. Nestheide said that tying the rate to the exposure is a priority at St. Paul Travelers.

"There are accounts that probably warrant decreases in price because of their risk characteristics," he said.

Technology, pharmaceuticals and biotechnology warrant higher prices because of their past experience, he said.

The London Market shows similar pricing trends, according to the 2005 third-quarter Willis Index. All of the insurers surveyed reported rate reductions, but more than half put them in the single digits.

"Comparing these results with those given by issuers in the previous quarter, we see that these rate reductions were less than previously anticipated," the Index report stated.

Keith Thomas, New York-based senior vice president in Zurich's Management Solutions Group, said the D&O line "has given back in the past 18 months a considerable amount of the rate increase it got following 9/11."

"But we think that is almost stopping," he said. "In fact, we think we will see, by the end of the year, rate trends declining in the low-single digits, and then actually some rate increase."

The larger, Fortune 500 risks have seen some price stability. "Smaller cap companies, depending on their situations, may see more rate relief than that larger group," Mr. Thomas said.

Companies with "earnings issues" will always face more vulnerability to events that give D&O underwriters heartburn. "So, we watch that very carefully, along with companies that have a lot of activist shareholders--and that could be anybody," he said.

And even major product liability events such as Merck's Vioxx issues will eventually transform themselves into D&O suits through their effect on the stock price, Mr. Thomas said. He was referring to product lawsuits that the Whitehouse Station, N.J.-based drug maker now faces after it decided to pull an arthritis drug from the market because of studies that link Vioxx to increased heart attack risk.

"The issue would be that you didn't disclose that you had issues with this one drug, or that you over-hyped that it was so successful," Mr. Thomas said.

"Stock price is the trigger for the plaintiffs' bar. And that is the way we look at the business. While it is insurance, it is like a semi-financial product, and we are asked to mitigate market cap losses in an industry group," Mr. Thomas said. "So, we price it to that, almost like an option."

For D&O underwriters, the better mousetrap will be the underwriting methodology that best captures a company's lawsuit exposure.

"I have been doing this since 1983, and it has become a lot more scientific," Mr. Nestheide said.

Mr. Thomas said that Zurich's D&O methodologies offer customers transparency. "We can sit down with customers and tell them where their prices are derived from in terms of what their market caps have done, and in terms of risk factors that aren't quantitative yet but are in the process of getting there."

Class action securities litigation trends top the list of D&O insurers' concerns. The Stanford Law School Securities Class Action Clearinghouse reported the number of companies targeted by securities class action suits in 2004 rose to 212 from 181 the previous year. But the decline in stock market capitalization corresponding to these actions approached the levels seen in the aftermath of the 2000 stock market downturn, the Clearinghouse reported in cooperation with Cornerstone Research.

Elaine Buckberg, New York-based vice president for NERA Economic Consulting, in a report published in July wrote that 2005 "will likely bring new highs in both mean and median settlements." In the first six months of the year, the mean settlement value reached $25.8 million, compared to $23.5 million in 2002, excluding WorldCom and Enron (the two largest settlements in 2005).

Federal legislation crucial to the D&O line includes the 1995 Private Securities Litigation Reform Act, which aimed to curb the plaintiffs' bar, and the 2002 Sarbanes-Oxley Act. Passed in the aftermath of the Enron and WorldCom corporate governance scandals, D&O writers are now just starting to measure the impact of the latter.

Mr. Nestheide said the PSLRA brought only a temporary respite in the mid-90s. "The plaintiffs' bar figured out what the Reform Act did, and so you had a temporary lull in the filing of class action suits. But then the numbers picked back up to historical levels and then higher."

While some have feared that the reporting requirements of the Sarbanes-Oxley Act could be a lure to plaintiffs' attorneys, fueling more suits, Mr. Bradford said about the only impact so far has been fewer lawsuit dismissals. "The more intense reporting requirements provide plaintiff attorneys with more data to build a case to survive the initial challenge," he said.

Mr. Nestheide said he was concerned that the first company that claimed to be in compliance with Sarbanes-Oxley, but was found to be otherwise, would not be defendable.

Mr. Thomas said that Sarbanes-Oxley has led to more engaged boards and better corporate governance. "But on the flip side, it can provide a road map for the plaintiffs," he said.

Buyers today are not only worried about the fervor of plaintiffs from a D&O perspective but also in terms of personal liability exposures--as some institutional investors seek to ensure directors of errant companies feel the investors' pain in their own pocketbooks.

Mr. Thomas said he recently participated in a New York Stock Exchange Summit where the trend of out-of-pocket director payments to "send a message" was a matter of increasing concern.

"Whether that changes the rules of the game from what we saw in the past, it is probably likely. But I think that will be reserved for the more egregious type of fraud accounting cases," he said.

D&O pricing has generally followed general commercial lines trends, which saw pricing shoot up after the 9/11 attacks. But those events were quickly followed by the Enron-WorldCom scandal which had its own unique D&O impact, sending rates up.

Mr. Thomas expressed concern that the subsequent decline in rates did not match the environment in which they fell. "If you look at what our marketplace did over the past 18 months, one would say 'why would you give back that much rate when you have data that says you have the same number of lawsuits and severity?'"

Primary D&O insurers are also keeping an eye of reinsurers, with some speculating that losses unrelated to D&O liability--from Hurricane Katrina--may increase reinsurer wariness to play in the D&O market. That, in turn, may reinforce any trend toward D&O market stability by those companies who rely on reinsurance, and who will think twice before cutting prices to grab market share, they say.

"When something happens on the scale of what happened in the past couple of months, it is going to impact us," said Mr. Nestheide, referring to primary D&O writers. "We, however, are also such a small part of it that we will be affected by our own things--such as PSLRA," he said. "But mostly what is going to affect us is reinsurance."

From his perspective, Mr. Nestheide sees reinsurers being more particular about the primary companies they want to do business with. "They will look at which carriers have the correct appetite, and which ones have the predicting models and strategies that are conducive to long-term success," he said.

Midsized companies, with revenues between $100 million and $1 billion, benefited most from the price competition for their D&O coverage.

David Bradford, Executive V.P.,Advisen Inc.

"There are accounts that probably warrant a decrease in price because of their risk characteristics."

Jim Nestheide, V.P., St. Paul Travelers Companies

"We think we will see, by the end of the year, rate trends declining in the low-single digits, and then actually some rate increase."

Keith Thomas, Senior V.P., Zurich Management Solutions Group

Art Caption:

The future direction of the D&O pricing seesaw is anything but certain, but after 18 months of declines that seemed inconsistent with loss experience, market participants are starting to see price drops fall to the single-digit range, and expect price hikes to emerge by year-end.

Big Numbers Chart

Flag: Suit Statistics

Head: WorldCom Eclipses Cendant

Year-to-date Suits in 2005

150

'Classic' Suits in 2004

212

Issuers Named Post-PSLRA

2,149

Highest Mega-Settlements

$7.2 Billion

Enron

$6.1 Billion

WorldCom

$3.5 Billion

Cendant

Mean Settlement Six-Months '05

$25.8 Million

Excluding WorldCom, Enron

Source: Suit figures from Stanford Law School Securities Class Action Clearinghouse/Cornerstone Research as of Oct. 17. 'Classic' Suits exclude 21 analyst and mutual fund cases in 2004. Mean settlement from NERA Economic Consulting