Aetna Declines to Renew Drexel Accounts Policy : Brokerage Seeks Insurer to Provide $9.5-Million in Coverage Per Customer

Aetna Life and Casualty has refused to renew the policy by which it insures securities accounts held by Drexel Burnham Lambert customers for up to $9.5 million per account, according to sources at Drexel and in the securities industry.

The move has forced Drexel, already under a cloud because of its links to stock speculator Ivan F. Boesky, to negotiate with other insurers for continuation of the indispensable coverage.

A spokesman for Drexel confirmed this week that Aetna has told executives of the firm that it will not renew its policy coverage on Drexel accounts when it expires March 1. The spokesman, Steven Anreder, said Drexel is already negotiating with “several companies” to provide similar coverage.

“Our coverage will be maintained,” he said.

$500,000 Limit

Customer accounts at most securities firms are insured up to a limit of $500,000 per account by the government-sponsored Securities Industry Protection Corp.

The insurance principally covers customer losses that might result from the failure of a brokerage, much as the government’s Federal Deposit Insurance Corp. protects bank depositors from losing money if their bank fails. The insurance does not protect securities investors from losses in the market.

Most major brokerages also provide customers with what is known as “excess” coverage--that is, for securities account balances larger than $500,000. Aetna appears to be the largest provider of this insurance on Wall Street. Among its policyholders are the investment firms of Merrill Lynch, Shearson Lehman Bros. and Bear, Stearns. Spokesmen for all three companies said in interviews that they have no reason to believe they will have any problems continuing their existing policies through Aetna.

Unusually High

Drexel’s coverage ceiling of $10 million is unusually high among brokerages. Most contract to insure conventional accounts only up to $2 million or $3 million. At Merrill Lynch, the nation’s largest retail brokerage, only comprehensive cash management accounts (which generally hold the highest balances) are afforded $10-million coverage. Regular brokerage customers get coverage up to $2.5 million, including the SIPC protection, a Merrill Lynch official said.

Account protection over SIPC’s $500,000 limit has become more important for investors in recent months as the stock market has boomed. This means that more investors are investing in stocks and the average size of their accounts may be growing as the stock and bond markets rise.

Drexel’s high coverage has been something of a selling point for the firm. On Nov. 19, when the first wave of negative publicity over links between the firm and Boesky created some customer nervousness over their accounts, Drexel issued a statement reading in part:

“All securities held in customer accounts are absolutely in safekeeping and are protected with insurance up to a maximum of $10 million by SIPC and the Aetna Insurance Co.”

Aetna declined to disclose to The Times its reasons for ending its coverage of Drexel accounts. “We do not comment on our contractual relationships with clients,” said one spokesman, Jason Wright, from the insurer’s headquarters in Hartford, Conn.

However, Wall Street sources said Aetna has notified several firms that, although it will continue their existing policies, it will not agree to any increase or change in coverage. Whether the firm has refused to renew policies at any major brokerages other than Drexel could not be determined.

“They’ve sent a letter to everyone on the street declaring a moratorium on raising or changing their coverage,” said an official at one firm, asking to remain unidentified. “It doesn’t affect anything in force, but after a cutoff date they won’t change the coverage parameters.”

Anreder said Drexel does not believe that Aetna’s move is a result of the cloud that has afflicted Drexel since the disclosure Nov. 14 that Boesky had settled insider-trading charges and agreed to plead guilty to a felony securities fraud charge.

Since that time, Boesky’s ties to Drexel and several of its executives have been exhaustively publicized. Federal securities investigators are known to have subpoenaed documents and testimony covering several Drexel investment banking deals in which Boesky played a role.

Drexel’s retail brokerage business, however, has not been implicated in any wrongdoing and would not necessarily be weakened if regulatory charges were brought against any other departments in the firm.

Anreder suggested that Aetna’s notification may have been part of the insurer’s wholesale withdrawal from the brokerage account insurance business, but Aetna’s Wright said the company is staying in that business.