Planning for an IPO D&O Insurance Considerations
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Transcript of Planning for an IPO D&O Insurance Considerations
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Planning for an IPO D&O Insurance Considerations
March 2014
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IPO D&O Underwriting Profile / Risk Factors
Size of offering / Projected Market Capitalization / Public Float
Selling Shareholders
Regulatory Compliance
Experience of management with IPOs and public company experience
Use of funds from the offering
Address Risk Factors identified in S-1
Earnings Guidance
Profitability of the Company / Projected financials post offering
Managing Growth
Industry / Barriers to Entry / Innovation
Debt levels and liquidity positions
Corporate Governance Policies – board composition, audit and compensation committee, SOX procedures, financial reporting protocols, evaluation of key accounting measures, insider trading protocols, etc.
Go-Forward Strategy Plans for a secondary offering M&A Activity
Litigation
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Private to Public Coverage Considerations
Road Show Coverage (Private company policy) Claims made by security holders for failure to undertake / complete IPO Includes the preparation for any public offering including presentations
Properly address SEC exposures Coverage for SEC exposures (‘33 Act and ‘34 Act) will be included in public program. Public form to incept the date of the pricing.
Scope of Entity Coverage – How coverage will change Private Form – entity coverage for all claims alleging wrongful acts. Public Form – entity coverage only applies to security claims.
Transition Option #1 - Private form cancelled at pricing date and public form incepts with full
continuity Lose non-securities entity coverage. Unearned premium credited against public form premiums. More cost efficient.
Option #2 – Private form, six year run-off (tail) purchased and new public form incepts at pricing date. Maintains entity coverage for non-securities claims. Potential issues with claims that bridge the pricing date. Can be mitigated with properly crafted policy
language. Public companies generally carry higher limits and use market capitalization as a key
metric when benchmarking limits. Potential damages (loss of shareholder value) will drive estimated damages and settlements. Encourage securities claim loss modeling.
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JOBS Act IPOs – D&O Insurance Market Conditions D&O Underwriters view JOBS Act IPOs as having more risk.
Reduced disclosure requirements No immediate requirement of SOX 404 auditor attestation
Underwriters Will Offer Less Capacity Typical IPO has little trouble securing $10M in primary layer capacity. JOBS Act Companies will receive fewer options for $10M (many carriers will only offer
$5M).
Higher Retentions 2 years ago – “typical” small IPO or public company renewal would have a securities
retention as low as $250K. Now – smaller public companies are seeing pressure on retentions, and separate M&A
retentions of $1M or above. JOBS Act IPOs – likely to see retentions starting at $750K - $1M for all claims.
Pricing – smaller IPOs generally see primary layer pricing in the high teens per $million of limit. JOBS Act IPOs generally fall between $20K and $30K per $million.
Terms and Conditions – generally the same as other public companies / IPOs. Market evolving.
IPO Players: AIG, AXIS, XL – Lockton has had the most success with these carriers. Others: ACE, Chubb, CNA, Zurich, Beazley, Hiscox, Great American, AWAC, ARCH, and Travelers.
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IPO Timeline and Company Risk Profile
120 Days
60 – 45 Days 30 Days 15 Days
10 – 1 Days Pricing Day
IPO PreparationsOrganizational Meeting/
Management Due Diligence Presentations
Underwriter chosen and other key planning completed
D&O Insurance Program
Planning / Preparations
BeginTimeline drafted
Implementation and
Completion of Marketing.Insurance
underwriting meetings.
Lockton alerted as to the potential
offering date
Coverage incepts 12:01
AM to cover all past acts and those actions
within the policy period
Pre-Filing Period Waiting Period Quiet Period
IPO Filing Process – Securities Act of 1933 Exposure
Lockton to provide an overview of the IPO and Insurance
process, submission information required by underwriters and initial
consultation.
95 Days
Work on the registration statement commences. Due
diligence meeting; underwriting agreement drafted; audit
completed; board meetings; legal matters resolved; first
draft of prospectus completed.
Initial filings done; SEC review and “cooling off” period begins;
red herring distributed; sales effort and road show
undertaken; meetings on due diligence; Blue Sky filings
completed.
SEC comment letter received and
response to; pricing amendment filed;
acceleration requested.
Public offering begins; underwriting agreements signed; comfort letter given to underwriter; press release distributed and tombstone ad
run.
Closing proceeds received; final
documents and certificates exchanged;
accountant provides underwriter final
comfort letter
Exposure to SEC Laws
1933/1934 Exposure
Ongoing advice, claims
service/support. Delivery of policies
within 60 days.
1 – 10Days
5
Quotes Received and terms/pricing
finalized.