Specialty Podcast: Changing Dynamics of the Public D&O Market for Life Sciences Companies
Life Sciences companies remain a favorite target of plaintiffs' lawyers in securities litigation, but outcomes have not been as dire as carriers predicted. Rich Levitt, Life Sciences Practice Leader, is joined by Steve Shappell and Andrew Sousa, Alliant, to discuss how past securities litigation and industry trends are changing the dynamics of the public D&O market. They explore what this means for those protected by and purchasing D&O insurance.
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Rich Levitt (00:08):
Welcome back to the Alliant Specialty Podcast. My name is Rich Levitt. I'm one of the Life Sciences practice leaders at Alliant, and I'm joined today by Steve Shappell from Alliant Claims and Legal, as well as Andrew Sousa from Alliant Management Liability. And we're going to discuss how the results of prior years’ securities litigation, as well as industry sector trends and life sciences continue to change the dynamics of the public D&O market. Despite remaining a favorite target of the plaintiffs' bar, securities litigation outcomes for life sciences companies have not met the dire predictions or reserves of carriers. Additionally, a marked decrease in IPOs and new issuers is altering underwriters' projected supply-demand ratios. The team will explore what these developments mean for those protected by D&O insurance, as well as those responsible for purchasing it. Steve and Andrew, with all the negative news we've had surrounding Silicon Valley Bank and Wall Street, it's nice to be able to share some positive news. Steve let's start with you. Now that the data for '22 has been released, how does that further inform your analysis of life sciences securities claims?
Steve Shappell (01:21):
Yeah, thanks Rich, and thanks for having me on. Your observation about the dire predictions is a pretty good one. The D&O marketplace, the sky's always falling on life science pharmaceutical issuers, and I think '22, with all the data in, and we had our finger on the pulse of this data as the year progressed, and we saw positive trends. But the good news is, we ended up with 43 of the 200 or so shareholder class actions of last year involving life science companies, and that's pretty good, right? When I look back at these stats and, as I mentioned, we tracked these and it's been almost a decade since we've had this low frequency of shareholder litigation against pharmaceutical companies. So, that's a really positive development and trend in my mind. We expect to see a certain number of shareholder litigation, and the shareholder class action suits are down and they're down against life science companies. So, that's the positive.
Rich Levitt (02:21):
Thanks, Steve. Andrew, what happened to the IPO market? Is the sector suffering from a COVID-19 hangover?
Andrew Sousa (02:28):
Yeah, so I think it's a couple of factors that have affected the IPO market over '22 and thus far through '23. One of the major drivers is a lot of the companies that went public in '19, ‘20 and '21 are trading net valuations that are well below what they IPO’d at. Another factor is the macroeconomic environment. We have a challenging interest rate environment, inflationary pressures, they're all causing some apprehension in the investment community. Those things combined have led down to the major slowdown in the IPO market.
Rich Levitt (03:02):
Thanks Andrew. Steve, before we move on, you talked a bit about the frequency. How's the severity been looking?
Steve Shappell (03:09):
The severity, I would say is generally ticked up in shareholder class action litigation. I say ticked up and I mean it, we don't have dramatic increase where we go from a 10, 11, 12-million-dollar median to a 22. It's truly just ticked up and I certainly don't think I see any concerning trend in the severity in shareholder class action litigation, generally or specifically to life science. So, I think that remains also good news, right? 50% less suits were filed last year than five years before that, so severity is not dramatically increased.
Rich Levitt (03:50):
It's so nice to be on a call with you when you've just got positive news to deliver - a welcome change. So overall, we have a situation in which carriers have vastly overestimated their loss projections for the three-year period, 2018 through 2020, combined with a significant decrease in the expansion rate of the public life sciences market, as well as new carriers entering the market. How are these factors and others impacting the dynamics of the D&O market from claims, coverage, capacity and cost perspectives? Steve, any notable developments on the claim and coverage front, now that carriers’ fear of Armageddon have been stayed?
Steve Shappell (04:32):
I'll say no, I've said for decades, we have this large loss mentality and unfortunately life science and financial institutions tend to be the test for this large loss problem of systemic claims that are very large. It has forced carriers in the past to engage in pretty aggressive behavior on claims because they're going to have 43 claims in life science, and how do they behave? How do they manage their book? I would say it's positive, right? I didn't see carriers bending over backward to write me checks, but that being said, I haven't seen the reverse either with particularly aggressive behavior on large losses, looking to preserve the profitability of a book. So, I continue to see it as a very positive trend and development.
Rich Levitt (05:25):
Andrew, what's the pendulum look like on the capacity and cost? How far has that swung?
Andrew Sousa (05:31):
Yeah, so it's swung pretty wildly over the past couple of years. So, if you go back to when the D&O market really became challenging, one of the major drivers was insurers taking a more conservative approach to limits management or capacity. We started to see a lot of insurers drop the amount of limit they would have up on any one particular risk down from, say a 10 to a limit to a 5 to a limit, or a 5 to a limit to a 2.5, and one of the challenges with the life science sector is there's historically been a limited amount of insurers who are willing to participate on these programs at lower attachment points. So, these scenarios oftentimes resulted in very challenging placements that resulted in expensive premiums. As the market shifted and we've started to see new capacity come into the market, this pricing has been driven down and those limits that we saw go from 10 to 5, or 5 to a 2.5, are starting to come back to where they were prior to the hard market.
Rich Levitt (06:33):
So, given the turnaround in a volatile life sciences D&O market, and it does always seem to be swinging one way or the other pretty quickly, how do those impacted by D&O maximize this opportunity from both a near and longer-term perspective? Andrew, your thoughts from the point of view of risk managers responsible for securing D&O?
Andrew Sousa (06:56):
Yeah, I think when you're going out to the D&O market, it's important to engage all the insurers willing to participate on public company D&O programs for life science companies. That, traditionally, helps get the best pricing, terms and conditions, retentions on D&O programs. Something that I would advise risk managers and buyers on is to make sure you're partnering with insurers who really understand dynamics of a publicly-traded life science company, and to be with an insurer partner who is committed to the space or sector for the long-term and has a track record for paying claims.
Rich Levitt (07:33):
So, this is a good time then for companies to think if they need to shuffle the deck and bring on some stronger carriers, now would be an optimal time for companies to explore?
Andrew Sousa (07:43):
I would say that while you're going through the process at a renewal or transaction, whether it be an IPO or something of that nature, to not just always focus on price, and look to the insurers who are dedicated to the space and really understand the risk.
Rich Levitt (08:03):
Steve, if you had the chances - you often do to talk to boards of directors as well as officers - what advice would you give to them, if you were sitting in a boardroom advising on D&O?
Steve Shappell (08:14):
I think the advice is - and I'd love to tell this to board members when I get that chance; it's one of the rare times when board members need to think a little selfishly - but when we're talking about D&O, it's the time to think selfishly. How do we get good counsel and construct this insurance program to most maximize protecting both the company and the directors’ and officers’ personal assets? Because as we see over and over again, the 200 shareholder class action suits we saw, they're naming directors and officers, right? They're the target of this litigation and so it's an uncomfortable conversation that I like to make sure that directors and officers get comfortable with. We need to have really a solid program to protect the directors and officers because they're the ones being hauled into court in 200 of these 200 shareholder class action suits and being challenged with interesting, often salacious, allegations of self-dealing and fraud. By the very nature of a security suit, they must allege scienter, the mental state to commit fraud. Those are concerning allegations. So, that's the thing I would most advise them to do and then the second is the sky's not falling, especially in pharmaceutical. When I look at life science pharmaceutical litigation, dismissal rates are good, frequencies are down and dismissal rate is up, and so there's something to keep in mind. So, that's at a high-level what I would talk to directors about.
Rich Levitt (09:44):
Thanks, Steve. Over the past two or three years, so much of the focus has been on cost and capacity. I don't want to say coverage went out the window, but I also don't know if as much time was spent focusing on key coverage issues, particularly around individual directors and officers, I don't know whether underwriters consciously took it away, but I know that in some of the reviews that we've done, it seems as if some of the coverage for individual D&Os has been a little bit bare bone. Is the focus coming back now to nuts and bolts coverage?
Andrew Sousa (10:16):
Yeah, it's a bit easier to achieve coverage enhancements in today's market than it has been the last few years where the insurers really tightened things up. They were never really making material changes in coverage terms, but oftentimes there was what we'll call some of the bells and whistles of the policy that weren't there, and now we're able to get those back.
Rich Levitt (10:41):
So, before we close, two very important questions that we're going to revisit when we convene again next month. Your picks for both the Stanley Cup and Larry O'Brien trophy. Andrew?
Andrew Sousa (10:53):
I will go with the Bruins in four and the Celtics in seven.
Rich Levitt (11:00):
Wow, even getting down to the number of games. Steve, go ahead.
Steve Shappell (11:05):
Yeah, so the Colorado Avalanche will repeat and then the Nuggets will finally get out of the second round of the playoffs and win it all.
Rich Levitt (11:13):
Wow, so we've gone hometown on both counts here. Andrew and Steve, thank you both very much for this edition of Life Sciences D&O Under the Microscope. See you next month.
Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.
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