September 19, 2021

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Boom in ‘blank check’ companies is wearing out insurers

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The boom in “blank check” companies is overwhelming a key player in their creation companies: insurers.

Firms selling directors-and-officers liability policies for these 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. “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 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.”

These 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. They 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.

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.

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.

The flood of new SPAC listings isn’t letting up.

Tilman Fertitta, billionaire owner of the Houston Rockets, Golden Nugget casinos and Landry’s Inc. said Feb. 1 he’d merge the gambling and restaurant businesses with a blank check company, valuing his businesses at $6.6 billion, including debt.

Yet 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 SPAC mergers are completed and there’s a longer track record for their performance, according to McGee of AIG.

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