Insurers cautious over recent surge in SPAC deals, legal activity

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    SEC

    Additional regulatory scrutiny and the sharp rise in SPAC deals in the first quarter of this year have heightened the wariness of the few insurers willing to write primary directors and officers liability coverage for the sector, experts say. 

    There were 308 SPAC IPO transactions this year as of April 26, compared with 248 for all of 2020, according to SPACInsider. 

    Some of the most recent SPAC IPOs have started to include information on risk factors related to D&O insurance in their registration statements, said Thomas P. Conaghan, a partner at McDermott Will & Emery LLP in Washington.

    “The risk disclosed is that the SPAC will not be able to obtain, or will have to pay high prices for, D&O insurance, because the market has become so tight and the prices have gone up,” Mr. Conaghan said. 

    SPACs are a specialized class with a limited number of underwriters prepared to offer coverage, said Kevin LaCroix, executive vice president in Beachwood, Ohio, for RT ProExec, a division of R-T Specialty LLC. 

    In 2020, several lawsuits, including a putative class action complaint filed against electric car manufacturer Nikola Corp. in September, “sent a bit of an alarm bell to the D&O underwriting community,” he said. 

    “In Q3 2020 the pricing began to escalate, to the point that by Q4 the pricing for a SPAC IPO was more than double what it would have been just two quarters previously,” Mr. LaCroix said. 

    While SPACs are becoming the path of choice for many companies wanting to go public, they face the same challenges as any other public companies related to D&O risk, said Jeff Kurz, Columbus, Ohio-based managing director, captive insurance sales and consulting, North America, at Artex Risk Solutions.

    “It’s a hard market — we all understand that — but with SPACs there’s heightened awareness of the potential shareholder lawsuit issues that are starting to come to the forefront related to the prospectus and issues and securities class actions,” he said. 

    Generally, insurers are pulling back capacity and increasing premiums but with a “heightened interest” in the unique potential risks that SPACs have, Mr. Kurz said. 

    Given the SPAC boom, “we’re now at the point where sponsor teams on their second, third and even fourth SPAC are asking: ‘Why did the price double? Why did retentions increase? Why are my limits more restrictive?’” said Jonathan Selby, general manager at broker Foundershield LLC in New York. 

    Retentions for a SPAC IPO, which ended 2020 at around $5 million, are now potentially as high as $10 million to $12.5 million, Mr. LaCroix said. Not surprisingly, there’s a lot of interest in using alternative vehicles to fund the retention, he said.