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Inside In Full: Axa XL and Sompo crimp appetite for Spac D&O risks

Axa XL and Sompo International are among management liability markets that have signaled an increasingly conservative risk appetite...

John Hewitt Jones

 

...for Special Purpose Acquisition Companies (Spac) D&O risks in recent months, Inside P&C understands.

 

 

Market sources told this publication that the two carriers have in recent months cut the line size they are willing to write on this type of risk, and increased their scrutiny of deal sponsors.

Despite the change in appetite, the insurers remain some of the only markets that write primary policies for the type of liability risk. Other market participants writing excess policies for such risks in the US include Chubb, Markel and Beazley.

Demand for Spac D&O insurance has mushroomed since about the second quarter, accompanying a surge in the number of such transaction vehicles as companies take advantage of heightened appetite among investors and specialist finance firms for the type of deals.

The tightening of capacity for Spac D&O insurance comes amid a backdrop of continuing double-digit rate increases in the management liability market during the third quarter, even for the cleanest accounts.

The reduced appetite for Spacs follows a missive from the SEC, which last month announced it would collect evidence from investors to ascertain whether additional protections for investors in the space are needed.

Broking and underwriting sources canvassed by this publication also noted that carriers’ appetite for the class of risk had been tempered by recent negative newsflow around deals, and concerns over the financial integrity of some of the entities providing sponsorship for the shell-company structures.

“Some of the celebrity sponsors for these transactions are pretty much unknown quantities, and we are concerned about the kind of litigation that may arise from these deals down the track,” an underwriting source said.

Spac D&O programs are typically completed in multiple segments, with separate policies usually purchased for the initial stage of the Spac IPO, the process of combining the entity with its target company, and the point at which the Spac starts operations as the adopted company.

The period during which a Spac is publicly listed but has not yet identified its acquisition target can leave directors especially vulnerable to lawsuits from public investors.

According to research by investment bank Renaissance Capital, total funds raised by Spac entities during the third quarter of 2020 ballooned to $30.2bn – a more than tenfold increase from the prior-year period. The number of such transactions also grew to 82 from 17 in the prior-year quarter.

  

 

Strong upward rate momentum in the US public and private D&O markets has continued throughout 2020, as insurers seek to price in the cost of rising claims and a longer tail.

According to the Council of Insurance Agents & Brokers’ quarterly rate study, D&O pricing rose by an average of 16.1% during the third quarter of 2020. This compares with 16.8% in Q2 and 8.9% in Q1.

Aon’s data showed that the price per million of D&O limit was up 68% in Q3, down from 74% in Q2 – but coming off a much higher base after D&O rates took off in Q3 last year, pointing to an acceleration of pricing improvements on an indexed basis (see graphic below). Price changes in the primary market for business with the same deductible and same limit were up 22% in Q3, versus +23% in Q2.

 

 

 Sompo international and Axa XL declined to comment.

 

Inside P&C provides unparalleled market intelligence on the entire US P&C market – from small commercial and personal lines right through to reinsurance and Bermuda. Redeem your complimentary 14-day trial for more premium content from Inside P&C.

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