As many as 248 special purpose acquisition companies (SPACs) went public in 2020, an increase of more than 300% over 2019.1
A SPAC is a shell company looking to purchase a private company and take it public. An alternative to traditional initial public offerings (IPOs), SPACs raise funds through a sponsor prior to formation, so they don’t need to undergo the same scrutiny as an IPO, such as an audit. SPACs are often called “blank check” companies.
SPACs’ popularity has meant larger deals and a closing rate of more than 90%. The vehicle has become so popular that sponsors include former star athletes and celebrities.2
However, as SPACs hit the market at breakneck speed, insurance underwriters may fear that the structures may be badly constructed or the deals will be poorly executed. Underwriters’ concerns have resulted in a hard market with rising premiums and declining limits, making it difficult for SPACs to obtain necessary coverage.
Insurance needs over the lifecycle of a SPAC
SPACs need coverage at four different points of their life:
- Initial Formation. During the initial registration phase of SPAC formation and intent to raise and target, directors and officers (D&O) coverage must be secured to indemnify the board of directors and investors for claims of mismanagement or wrongful acts. A D&O broker should help with the necessary due diligence during this first phase, which typically lasts up to two years.
- Runoff. Upon completion of a SPAC deal, runoff coverage protects against any claims against the directors brought during an extended reporting period that lasts six years.
- Acquisition. During the acquisition, Representation & Warranties coverage protects the SPAC’s board of directors and investors if the private business being acquired had falsely represented any aspect of their business.
- Public operating company. As the risks are different for SPACs and a new public company, the public company needs new Property & Casualty coverage.
Insurance Considerations for SPAC coverage
In a hard insurance market, it’s important to show the SPAC is a good risk. Here are four things important to understand when positioning a SPAC:
- Frame risk in a positive light. In a D&O policy application, explain the Reps & Warranties coverage in the SPAC deal, show the SPAC experience of the board of directors and sponsors, and say why the SPAC is a good risk.
- Understand the appetite of the underwriter. Many D&O insurers are not insuring SPACs, so finding a partner who understands each underwriter’s risk appetite is key. Remaining knowledgeable of the underwriters and their appetite for risk — which will change — is critical in showing insurers why the SPAC is lower risk.
- Eliminate exclusionary wording and policy limitations. There are several potential conflicts of interest around affiliated SPAC entities that could pose a liability. Determine if the SPAC D&O policy excludes these conflicts of interest.
- Craft alternative D&O insurance program structures and timing of premium payments. D&O insurance is not a one-size-fits-all product. Given the different stages of a SPAC process, and the different component parts of a D&O insurance program, look to your broker for new and innovative ways to construct programs that optimize coverage and manage costs.
Optimizing insurance coverage for SPACs is difficult and can be confusing, but your broker can help. Contact your HUB financial institutions expert for more information on securing your SPACs with the right coverage at every step of the journey.
1 Visual Capitalist, “Return of the SPAC: They’re Back and Bigger than Ever,” December 31, 2020.
2 New York Times, “Wall Street’s New Favorite Deal Trend Has Issues,” February 10, 2021.