• Market Crumbs

The Cost Of Insuring Against Executives' Mistakes Is Skyrocketing

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2019 was most certainly not the year of the CEO. 1,640 CEOs departed U.S. companies last year, shattering the prior record of 1,484 set in 2008, according to Challenger, Gray, & Christmas.

"Following the #MeToo movement, companies were determined to hold CEOs accountable for lapses in judgement pertaining to professional and personal conduct, creating higher ethical standards at the C-level," said Challenger. "What may have gone unrecognized or was downplayed in the past was not overlooked by boards, shareholders, or the general public in 2019."

CEOs were replaced for just about every reason imaginable last year. From having a relationship with an employee in McDonald's case to overseeing the colossal failure of controls in Boeing's case, to even running a company like a cult with the goal of being the world's first trillionaire in WeWork's case.

So while holding management accountable is now comically in vogue, there's an interesting side effect of doing so as a result. Premiums for directors and officers liability insurance, or D&O, is skyrocketing as class-action lawsuits filed against companies has soared 150% over the last decade.

D&O is liability insurance payable to the directors and officers of a company, as reimbursement for losses or defense costs in the event an insured individual suffers a loss as a result of a legal action. D&O can extend to defense costs as a result of criminal and regulatory investigations, but typically does not cover intentional illegal acts.

D&O costs have quadrupled over the last two years for IPO companies, according to insurance broker and consulting firm Woodruff Sawyer. Aon, which provides insurance to Fortune 500 companies, said its clients are paying a median 24% more in premiums compared to a year ago. In 2018, nearly 1 in 10 S&P 500 companies was the target of a securities class-action lawsuit, according to insurance company Chubb.

"You can expect to see a securities class action filed whenever there is an event followed by a drop in stock price," said Scott Meyer of Chubb. "But now, even events that didn’t move the stock price are triggering securities class actions against the board."

Wildfires, data breaches, air crashes, shootings, opioid-related cases and sexual misconduct are all notable examples of event-driven lawsuits that have cost insurance companies millions in settlements. Mergers and acquisitions are also driving up the price of insurance as shareholders typically contend companies paid too much or sold for too little. Chubb estimated that 85% of mergers in 2018 were challenged with a merger objection lawsuit.

Not surprisingly, IPO companies are increasingly prone to lawsuits. As was evident last year when Wall Street lost its appetite for money-losing IPOs, lawsuits are commonly filed when a company's share price falls below the offering price.

"Insurance carriers are realizing when it comes to IPO companies, they are very likely to be sued," said Priya Huskins of Woodruff Sawyer. Sawyer estimates that between 15% and 25% of businesses will have lawsuits filed against them.

We live in a world where executives, such as Adam Neumann and Dennis Muilenburg, can make out like bandits when they make poor decisions, while shareholders and employees usually end up getting hit the hardest. With the cost of protecting executives skyrocketing, it's remains to be seen if this leads to any meaningful change in executive accountability and compensation or if it will just be another cost of doing business subsidized by shareholders and employees.

Leftover Crumbs

  • Boeing's issues are hitting the supply chain. Spirit AeroSystems, which is one of the largest parts suppliers for Boeing's 737 MAX, is laying off 2,800 employees as production of the grounded plane remains halted. The job cuts amount to 20% of Spirit AeroSystems' U.S. workforce. The company said it may have to lay off additional employees if the 737 MAX doesn't go back into production soon. "The difficult decision announced today is a necessary step given the uncertainty related to both the timing for resuming 737 Max production and the overall production levels that can be expected following the production suspension." Tom Gentile, Spirit AeroSystems president and CEO said.

  • They only have about 175 competitors. Casper, the company that started selling mattresses online but now has 60 physical locations, has filed to go public. Casper only lost $92.1 million on $357.9 million in revenue last year, compared to a net loss of $73.4 million on $250.9 million in revenue in 2017. Casper, which said it was the "pioneer of the sleep economy," was last valued at $1.1 billion and counts Target as one of its largest investors. Casper isn't the only one in the space, however. Mattress review site GoodBed.com estimates there's about 175 bed-in-a-box companies similar to Casper.

  • The biggest IPO just got bigger. Saudi Aramco has exercised its "greenshoe option," meaning the IPO has now brought in a record $29.4 billion. Prior to exercising the option, the IPO had brought in a record $25.6 billion. "No additional shares are being offered into the market today and the stabilizing manager will not hold any shares in the company as a result of exercise of the over-allotment option," Aramco said.

  • That's 1,000,000,000,000. For the first time ever, Americans listened to more than 1 trillion music streams last year, according to Nielsen Music’s annual report. Total music streams in the U.S. increased 29.3% to 1.15 trillion in 2019. Video streams of songs hit 401.2 billion, while audio streams accounted for 745.7 billion of last year’s total. Physical album sales dropped 15% last year, despite the increasing popularity of vinyl and cassettes

  • Seth MacFarlane has $200 million reasons to keep writing. Seth MacFarlane, the creator of Family Guy, has signed a $200 million deal with NBCUniversal to create new shows for the network. His hit show Family Guy will continue to air on 20th Century Fox Television, where MacFarlane has produced numerous shows throughout his career. The deal can reportedly see MacFarlane earn additional money through incentives, while he is free to shop films to other studios.