Firms selling directors-and-officers liability policies for special purpose acquisition companies have been flooded by the listings that surged last year. That’s caused insurers to ratchet up their prices and seek ways to control their exposure to SPACs -- moves that are making it harder for blank-check firms to get started.
“There was clearly some SPAC exhaustion in the market,” Kristin Kraeger, national directors-and-officers practice leader at insurance broker Aon Plc, said in an interview. “The carriers that were writing these deals mid-year and through the fall started to reflect on their book” and didn’t want to get too heavily weighted in that area.
It’s a problem that’s become so widespread that even the biggest names in the SPAC world -- from former U.S. Commerce Secretary Wilbur Ross to Garth Ritchie, once a Deutsche Bank AG executive -- have started to include a warning about the insurance-market situation in their regulatory filings.
“When so much enthusiasm pours into a structure so quickly, some of the support mechanisms, like insurance, are having difficulty catching up,” said Yelena Dunaevsky, a corporate finance and securities attorney at Woodruff-Sawyer & Co. “When you have such a large influx of SPACs and a limited insurance market that’s able to cover them, you get into your standard supply-and-demand situation where insurers are dictating terms and hiking up prices.”
Popularity Explosion
SPACs -- corporate shells that use money raised in an initial public offering to buy a company that won’t have to go through the laborious IPO process itself -- have exploded in popularity. SPACs raised nearly $26 billion in January -- almost double the amount in all of 2019, before last year’s boom.
That popularity has led insurers to raise rates for the policies. In June, prices were hovering around $20,000 per $1 million of directors-and-officers coverage, and by December, they had quintupled to $100,000, according to Aon’s Kraeger.
“Those SPACs are looking at an all-in cost number anywhere from $1.5 million to maybe even as high as $2.5 million,” Kraeger said.
Michael Auerbach, who’s the founder of New York-based investment firm Subversive Capital and in the process of debuting his fifth SPAC, said the difficulties with getting insurance for his board have been especially acute because his previous SPACs were all focused on the controversial cannabis industry -- meaning the pool of available carriers was already smaller than normal.
‘Competitive Landscape’
“It’s a very competitive landscape because there are so many SPACs out there,” Auerbach said. “If you’re going to have a quality board of directors, you’re going to need high-quality D&O coverage. Sponsors are having to raise additional at-risk capital.”
The number of firms routinely writing D&O insurance for SPACs ahead of the boom was relatively small, partially because the policies are inherently different than traditional D&O coverage. Many policies are renewed annually, but blank-check companies often seek out two-year terms -- the same amount of time a SPAC is normally allowed to find a takeover target, according to Machua Millett, an insurance broker at Marsh & McLennan Cos.
The SPAC floodgates that opened last year quickly overwhelmed the small group of insurers already in the market. The insurers have sought ways to manage their exposure to the sector -- including by ensuring pricing is high enough in case things go awry.
Creative Insuring
That, in turn, is forcing some SPACs to become more creative with insurance coverage and sometimes more aggressive by purchasing policies with lower limits or with only a component of traditional D&O coverage, said Millett, Marsh’s SPAC and de-SPAC practice leader. (De-SPAC is the process that begins when a takeover target is identified.)
Still, the flood of listings means that insurers can be choosier when picking what policies to write. American International Group Inc. has become more active providing D&O insurance to SPACs in recent months as pricing and terms have improved, better matching the risk profile AIG sees in the sector, according to Nora McGee, head of management liability for national accounts. But the insurer carefully underwrites to avoid getting overexposed to the market, she said.
AIG takes into consideration a SPAC management team’s track record and the due-diligence process for vetting potential acquisition targets, among other factors, she said.
“What we underwrite to, from a SPAC perspective, is first the quality and the track record of the SPAC sponsor and the management team,” McGee said. “Then we’ll evaluate the industry they’re targeting.”
Ross, whose SPAC Ross Acquisition Corp II warned that the D&O market had changed in “adverse” ways for blank check companies, said in an email that he thinks SPAC directors who have a good history in those roles will still be able to attain insurance.
A-Rod, Och
The flood of new SPAC listings isn’t letting up. In the first week of February, investors including former New York Yankees star Alex Rodriguez and billionaire Dan Och backed blank-check companies. By the end of January, some insurers were already questioning whether they’d written enough coverage for the first quarter, according to broker Brian Hood, a senior vice president in the financial-lines practice at CAC Specialty.
“The carriers that may have been more aggressive in the past -- that you could rely upon their capacity for a SPAC placement -- they may take some time off, because it’s still early in the year and there’s only so much capacity to go around for SPACs in 2021,” Hood said.
Ultimately, the market will need more capacity to stabilize pricing, Hood said. Insurers could expand further into the sector as de-SPACs are completed and there’s a longer track record for their performance, according to McGee of AIG.
“That might give the market some more clarity and some greater comfort in putting out limits on future transactions,” she said, “because there are more underwriting factors to go on.”