SPACs, or special-purpose acquisition companies, are on a tear. SPACs raised billions of dollars in 2020 and they are pursuing acquisitions (also known as de-SPAC transactions). There is tremendous excitement about how SPACs can be used to accelerate a private business’s path toward accessing capital and becoming a public company. This all means that more SPACs are on the way.
With the increased availability of SPACs as potential merger partners, insurance, reinsurance and insurtech companies are including SPACs in their strategic planning. Also, financial sponsors and other insurance industry participants are exploring SPACs as vehicles for raising capital and acquiring insurance industry businesses.
SPACs have a structure that is driven largely by U.S. securities laws and markets. They are formed and sell common stock and warrants in an IPO, before they have targeted any specific acquisition. That means the prospectus focuses on the background and capabilities of the sponsor and the management team, and discusses the plan for a proposed acquisition. The proceeds of the offering are held in escrow for the future acquisition or to redeem shares of stockholders that elect to receive back cash instead of maintaining an investment in the SPAC post-acquisition.
A SPAC typically must identify, negotiate and consummate its de-SPAC transaction within 24 months of its IPO, subject to extension by the stockholders. This timeline can be challenging for some insurance industry transactions, such as acquisitions of—or mergers with—U.S. insurance companies or their holding companies.
A SPAC focused on potential investments in insurance or reinsurance companies will typically have a management team and board of directors that are experienced and well known in the industry. That can help facilitate resolving some of the regulatory approval issues encountered in acquiring an insurance company in the U.S.
In a de-SPAC transaction, if a SPAC or its affiliates will acquire direct or indirect control of 10% of more of the voting stock of an insurer, the transaction will require advance approval of the change of control by a state insurance regulator. Even if the insurer has no new (or perhaps fewer) 10% control persons, insurance regulators may assert authority to approve, or at least conduct prior review of, a merger or combination with a SPAC.
Approval, Review Process
Any approval or review process will include background checks of— and financial or other disclosures by—new control persons, officers, and directors of the insurance carrier or its holding company. The state regulatory process may take from three to 12 months depending upon the jurisdiction (or jurisdictions if the acquired carriers are domiciled in more than one state), the business plans for carriers after the de-SPAC transaction, and the complexity of the resulting debt and equity capital structure.
U.S. insurance regulators have been cautious about new investors in, or sources of capital for, the insurance industry. For example, the scope of control rights of limited partners of private equity funds that acquire control of insurers are scrutinized by regulators. Regulators have required assurances that general partners of those funds are the only persons with control of—management rights in—the acquired insurer
Sponsors and target carriers are advised to educate regulators about the specific SPAC, particularly as to the impact of what the sponsor warrants on the capital structure and control of the insurer. SPACs targeting insurers should be structured so that control or acquisition of 10% or more of the insurer’s voting stock cannot occur without the required prior regulatory approvals.
Changing Company Structure
There may be opportunities to utilize SPACs to demutualize mutual insurance companies or mutual holding companies. One possible transaction would be for mutual members to be offered subscription rights to acquire shares of a SPAC for a price based on valuations of the target and SPAC. Such a demutualization transaction would require prior approval of state insurance regulators, policyholders, and the Securities and Exchange Commission.
Given the favorable pricing inherent in mutual to stock insurance conversions, such a transaction could be attractive to SPAC sponsors. The viability of this approach will depend on the specific mutual insurance company laws and regulations of a state, as well as the length of time involved to obtain all the required approvals. In light of the shelf life of a SPAC, these timing considerations could be a hindrance.
Regulatory delay can generally be eliminated or significantly reduced by acquisition of insurance industry companies that do not bear insurance risks, such as insurance brokers, and managing general agents, service providers, insurtech companies, or marketers of insurance-related products, such as service contracts.
However, some states still have prior notice or approval requirements for the change of control of non-risk bearing entities, if they hold certain licenses, such as managing general agent or service contract provider licenses. In most cases, though, the regulatory approval requirements for these entities is less onerous.
Careful advance planning and sophisticated counsel experienced in insurance and SEC regulatory processes can help facilitate approvals to help meet acquisition deadlines.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Geoffrey Etherington is a partner in Locke Lord’s New York office where he focuses on merger and acquisition transactions involving the insurance and financial services industries, including insurance carriers and producers, debt and private equity investments in financial services companies, captive insurance and alternative risk transfer.
Rob Evans, a partner in Locke Lord’s New York office, is co-chair of the firm’s capital markets group. He advises on complex transactions, including interpretation of SEC rules and rulemaking, public and private offerings of equity and convertible securities, and investment grade debt and high-yield debt offerings.
Brett Pritchard, a partner in Locke Lord’s Chicago office, has experience in a wide range of corporate, securities and finance matters, including public and private offerings of securities, compliance with federal and state securities laws, corporate governance, and stock and asset acquisitions and sales.