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ARC: HOW MID-MARKET COMPANIES CAN GUARD AGAINST MERGER AND ACQUISITION RISKS

D&O premiums continue to increase due to mergers and acquisitions claims

D&O Premiums Mergers and Acquisitions

Directors and officers liability rates are continuing to increase, with merger and acquisition activity claims a significant factor in the hikes.

Because M&A claims activity tends to be focused in the primary or low excess layers, excess layers continue to be competitive, experts say. Private companies also continue to see higher rates than their public company counterparts.

Meanwhile, the market is keeping a close eye on Berkshire Hathaway Inc.'s entry into the market.

Michael Lubben, director of risk management at Warroad, Minn.-based Marvin Windows and Doors Inc., a privately held firm, who works with New York-based broker Crystal & Co. Inc., said he sees that “prices are firming a bit” after years of declining rates.

Ann Longmore, New York-based executive vice president of FINEX North America, a unit of Willis North America Inc., said, however, “we are seeing very much of a bifurcated market between primary and excess, particularly once we are past the first layer primary excess” layer.

Steve Boughal, New York-based vice president and chief underwriting officer of Hartford Financial Products, a unit of The Hartford Financial Services Group Inc., said primary rate hikes average in the 5% to 10% range, while the lower excess layers are seeing rate hikes averaging from zero to 5%. High excess rates tend to be flat, he said.

Experts say an important factor in the higher primary rates is that virtually all M&A deals result in litigation, and these tend to reside in the primary layer as high-frequency, low-severity claims. Brian Dunphy, New York-based managing director at Crystal, said M&A litigation is being filed much more quickly now after a deal has been announced than even 18 months ago.

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Because about 80% of these merger objection cases are settled by paying off plaintiff attorneys rather than becoming shareholder claims, they are high-frequency, low-severity claims, which puts the “primary policy under the most pressure,” said Phil Norton, Chicago-based president of the professional liability division at Arthur J. Gallagher & Co.

In response, insurers over the past 12 months have been “successful in getting an additional higher retention for M&A claims,” said Gary Phillips, New York-based vice president, Northeastern financial services practice leader for Lockton Cos. L.L.C.

Andy Brett, a broker with Miller Insurance Services L.L.P. in London, said insurers now are seeking retentions that are in the $1 million to $2 million range for companies with $200 million to $1 billion in capitalization.

Experts say rate hikes are higher among private companies than among public companies. Peter Taffae, a D&O insurance expert at Los Angeles-based wholesale brokerage Executive Perils Inc., said that while the overall increase averages 3% to 5%, private firms are seeing D&O increases of at least 10%.

Factors behind this include the inclusion of employment practices liability.

“Roughly two-thirds of the cost of those combined policies is coming from” the employment products liability portion, Mr. Norton said.

Broader policies, which unlike public companies include entity coverage, also are a factor. “Policies are very broad” and the plaintiffs bar is “very, very creative,” said Anthony Komro, of Beazley P.L.C. in Chicago.

“In the private company and nonprofit space, the insurers are still recovering from the loss activity of the last couple of years with bankruptcy issues,” said Colin Daly, Denver-based managing principal for Aon Risk Solutions' Financial Services Group.

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Current trends are likely to continue for the rest of the year, experts say.

However, Kevin LaCroix, an attorney and executive vice president of RT ProExec, a division of R-T Specialty L.L.C. in Beachwood, Ohio, said the market hardening is not being driven by a capacity shortage.

“There continues to be ample capacity, and whatever you've got a situation like that” there is a natural tendency to undercut rates. Insurers “keep talking the discipline game, but in the end they want to grow their top line,” he said.

But Will Fahey, New York-based senior vice president in the management liability group at Zurich North America, said he does not anticipate rate moderation.

“Just because the insurers got single-digit increases last year doesn't mean the industry has addressed where pricing needs to be after eight years of a soft market cycle,” he said.

Meanwhile, Brenda Shelly, New York-based D&O practice leader for Marsh Inc.'s FINPRO unit, said one possible area of future concern is recent comments by U.S. Securities and Exchange Commission Chair Mary Jo White.

She has talked about changing the agency's policy of permitting companies to settle litigation without admitting guilt.

This could have a “far-reaching impact” on policy contract language and on how claims are settled, Ms. Shelly said.

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