January 13, 2020

D&O Insurance: ESG Reputation Matters

This Allianz report highlights 5 “mega trends” likely to impact boards and officers – and the D&O insurance market – in 2020 (also see this annual Protiviti memo that identifies emerging risk themes involving talent & culture and technology & innovation). The “mega trends” identified in the Allianz report include:

1. Litigation Risks: The report highlights the growing risk of “event driven” litigation – e.g. cyber security breaches, environmental disasters, product problems – as well as continued high levels of securities class actions & shareholder activist suits.

Allianz has seen double-digit growth in the number of claims it has received in the last five years and expects that increased claims activity to continue. According to Cornerstone Research, plaintiffs filed lawsuits in 82% of public mergers valued over $100 million. And event driven litigation often triggers claims under multiple policies – e.g. D&O and cyber.

2. Expectation that Boards Focus on ESG: As Liz blogged recently, D&O underwriters are paying attention to a company’s “social media temperature” as a factor in assessing reputational & brand risks

3. Slowing Economic Growth & Political Uncertainty: Allianz expects to see increased insolvencies, which have been rising for the last 3 years and lead to D&O claims

4. Litigation Funding: This fuels the other mega trends and is forecast to continue growing internationally

What does all this mean for your insurance? Here’s an excerpt from the report’s parting remarks:

According to Aon, D&O rates per million of limit covered were up 17.1% in Q2 2019,compared to the same period in 2018, with the overall price change for primary policies renewing with the same limit and deductible up almost 7%. Primary policies renewing with the same limit were at 93.5% in Q2 2019, but only 70.6% renewed with the same deductible and 66% at the same limit and deductible, suggesting tightening terms and conditions. Still, over 92% of primary policies renewed with the same carrier.

From an insurance-purchasing perspective AGCS sees customers that are unable to purchase the same limits at expiration are also looking to purchase additional Side A only limits and also to use captives or alternative risk transfer (ART) solutions for the entity portion of D&O Insurance (Side C). Higher retentions, co-insurance and captive-use indicate a clear trend of customers considering retaining more risk in current conditions.

Sustainability Disclosure Trends: Small & Mid-Caps

This new memo courtesy of White & Case is unique in showing sustainability reporting trends for small & mid-cap companies by number of years since IPO – and by whether a company is controlled/dual class versus widely held. Here are six key nuggets (for even more info on small & mid-cap perspectives on sustainability, also check out our recent webcast transcript):

1. Overall, more than 33% of surveyed companies include some form of website sustainability disclosure – either via a “sustainability” page or a standalone report

2. Sustainability disclosures are more prevalent among surveyed companies that have been public for longer periods

3. Surveyed companies with higher market caps are more likely to report on sustainability – but even among companies with a market cap below $1 billion, 25% are providing some form of disclosure

4. Among controlled or dual-class surveyed companies, 26% provide some sustainability disclosure – that compares to 35% of other companies who may be receiving pressure from significant institutional shareholders

5. Energy companies are the most likely to provide some form of sustainability reporting

6. The most common topics covered are: environmental impact & risk management (including waste reduction), human capital management (including diversity & inclusion and community engagement) and health & safety

MD&A: Corp Fin Wants More Info on Supplier-Finance Arrangements

In recent remarks at an AICPA conference, Corp Fin’s Deputy Chief Accountant Lindsay McCord said companies need to do a better job discussing the financial implications of supplier-finance arrangements on liquidity & cash flows in the MD&A. That’s according to this memo from Moody’s, which explains that supplier-finance arrangements – also known as “reverse factoring” – are arrangements where a bank or other finance company serves as an intermediary between a company and its suppliers.  The bank agrees to pay the company’s invoices to the supplier in exchange for interest.

But, GAAP guidance doesn’t say whether supplier-finance arrangements should be classified as debt or accounts payable, or how the arrangement should be disclosed in financial statements.  Usually the only evidence of supplier-finance arrangements in the financial statements is an increase in the accounts payable balance. So, improved disclosure would help shareholders & analysts identify financing arrangements that are otherwise embedded within working capital.

According to Deloitte’s highlights from the conference, Corp Fin has observed a lack of disclosure of the use, and sometimes, the existence of the arrangements in the MD&A.  Key points Corp Fin expects companies to consider disclosing in the MD&A include:

– Material terms, general benefits and risk that are introduced

– Any guarantees provided by subsidiaries or the parent

– Any plan to further extend programs to suppliers

– Factors that may limit further expansion

– Trends and uncertainties, including interperiod variations related to the programs

– Lynn Jokela