For Insurers, SPAC Boom is About Avoiding Bust

Over the last six months the parade of new special purpose acquisition companies, or SPACs, has proceeded without interruption. As has the media coverage.

Rest assured this story isn’t about the SPAC boom – it’s about insurance brokers throwing cold water on it.

The Weed Dealer Sin Tax

To set the stage: SPACs raised nearly $26 billion in January, roughly double the amount raised in all of 2019.

The surge in popularity has resulted in surging prices for so-called directors and officers (D&O) insurance, which protects SPAC executives from liability in the event of a lawsuit:

• In June, prices were hovering at roughly $20,000 for $1 million of D&O coverage. Now, according to insurance brokerage Aon, that same coverage costs roughly $100,000.
• For a typical SPAC deal, that could run up to $2.5 million.

The Fallout: Some high profile sponsors, including former U.S. Commerce Secretary Wilbur Ross, have advised caution. Ross’ aptly named “Ross Acquisition Corp II” warned the D&O market has changed in “adverse” ways for blank check companies.

Brian Hood, a broker at CAC Specialty, told Bloomberg some insurers are already wondering whether they’re done writing SPAC coverage for the first quarter because volume has been so high.

The Takeaway:

Big deals haven’t stopped in their tracks. In the first week of February, former baseball star Alex Rodriguez filed to raise $500 million for a new SPAC and billionaire investor Dan Ochs grabbed a 5.6% chunk of a $350 million SPAC targeting China’s consumer market.

But for the non-billionaires looking to raise their first SPAC, the waters have gotten choppy.