Andrew Pendergast, SPAC Practice Leader from NFP, is back again to help further explain the current insurance landscape for SPAC teams. Read on for his current take on how the recent boom in SPACs is affecting the D&O Insurance sector.
By Andrew Pendergast
NFP SPAC Practice Leader
SPAC D&O Insurance Costs are Rising
Underwriters of directors and officers (D&O) liability for SPACs have pulled back capacity and significantly increased rates as they evaluate the recent increase securities class action filings, the SEC’s chairman’s comments and the overall pace of SPAC IPOs. In today’s article, I’ll detail the impact that each of these factors has on the insurers’ appetites and what SPAC teams can do to differentiate themselves in a year where it seems every SPAC record has been broken.
Recent Securities Class Actions
A SPAC D&O policy, at its core, is intended to cover the defense and settlement that is incurred as a result of a SPAC director or officer being named in a securities class action. For years, SPACs have been viewed by the insurance underwriting community as low frequency and low severity risks, as the number of securities claims that were filed against SPACs and their teams were negligible in comparison with their traditional public company peers.
Just in the past two months we have seen a number of new securities class actions filed against SPACs relating to their prospectus and proxy filings that have given the insurance underwriters cause to be concerned. In a recent filing, the plaintiffs allege that the SPAC sponsors breached their fiduciary duty and filed a materially deficient proxy filing in connection with the SPACs proposed transaction. These types of allegations seem to be coming in with every new proxy that is filed. While they appear to be similar in nature to the nuisance style “bump-up” claims we see in public M&A, they have yet to play out in full and have caught the attention of insurance underwriters. Adding to their concern is the Nikola securities class action filed last month, which names the CEO and CFO of VectoIQ as defendants and points directly to their prospectus and proxy filings. These are the types of claims insurance underwriters truly worry about as there is tangible investor loss that could lead to significant settlements and defense costs that will ultimately be borne by the insurers.
Insurer Market Fatigue
It exists. I can tell you with confidence that no insurer was expecting to have to underwrite and potentially insure over 138 SPACs by October, let alone the full year. Insurers look to manage profitability and limit the potential for claims payout by diversifying the capital they deploy across multiple industries, much like any fund manager would. In reaction to the historic pace of SPAC IPO filings this year, many insurers have begun to limit the capacity they are willing to deploy on a single SPAC D&O program. Historically, each carrier was willing to deploy $10M in capacity on each SPAC program. In today’s market that has been halved to a maximum of $5M per deal per carrier with premiums similar to what was being charged for $10M. Overall capacity remains abundant in the marketplace albeit at much higher costs.
SEC Chairman’s Remarks
Carol Anne Huff, of Winston & Strawn, wrote a wonderful article for this site on this topic that I highly recommend you read — I’ve sent it to every D&O underwriter in the market. In summary, the chairman of the SEC noted that while SPACs provide “healthy” competition to traditional IPOs he would like to see more robust disclosures specific to sponsor equity and incentives. This all appears relatively benign, but when the chairman of the SEC speaks, public company insurance underwriters listen. Outside of the SEC making significant changes to the regulatory landscape for SPACs, the insurance underwriters I have spoken to generally agree that this will not have a lasting effect on pricing.
What to Do & How to Differentiate
My first point of advice to SPAC teams is to begin the conversation as early as possible with your insurance broker to make sure you understand the current market dynamics and set a comprehensive strategy as to how they will approach the insurers on your behalf. With that, you can then make an informed decision on limit adequacy while also having a grasp on budgeting before you file your S-1 confidentially. The process of marketing a SPAC D&O program and obtaining quotes is taking longer than it has historically given the points above. Starting early will ensure that your broker has the time necessary to fully market your program and achieve the best possible outcome.
In the past, insurance underwriters have focused on three factors when evaluating a SPAC risk. The size of the offering, the experience of the management team and the target industry. SPACs sponsored by private equity, venture capital or other alternative asset managers with experience in performing extensive due diligence and M&A are viewed as more favorable risks. Insurers in today’s market are going beyond those traditional components and are evaluating their advisors as well. The outside counsel, auditors and investment banks that SPACs choose are beginning to impact how they are viewed within the market, as insurers begin to follow the track records of certain advisors. While it is still paramount that the SPAC teams’ experience and expertise are highlighted to insurers, the experience and expertise of their advisors need to be part of the conversation as well.
The pace of SPAC IPOs doesn’t seem to be slowing and neither does the plaintiff bar’s interest in them. While D&O rates are on the rise for all SPACs, you still have the ability to differentiate yourself from your peers. Start the conversation early, set a comprehensive strategy and make sure that you are armed with the data necessary to make an informed decision.