Bankers who are eager to make acquisitions should be prepared to answer tough questions from an unexpected source — insurance carriers.
Anytime banks announce a deal, they are immediately hit with a wave of litigation claiming that shareholders, particularly those who invested in the seller, are getting shafted. Often banks will settle those lawsuits, considering the payments a cost of doing business.
Carriers often are the ones who foot the bill, and they want to get paid more for the risk that they take on. So a number of the biggest insurance carriers are starting to investigate their clients' mergers and acquisitions strategy.
"With a pickup in M&A activity, it is the one thing that we are asking about in every meeting," Heather Hill, a regional underwriting officer in Zurich North America's Chicago office, said during a panel discussion in Greensboro, N.C., hosted by the North Carolina Bankers Association last week.
"We'd want to know about the types of banks they want to buy, the condition of those banks and the loan portfolios" that would be acquired, Hill said in an interview following the discussion. "A one-off situation is different from [acquisitions becoming] a strategic way for a client. Transparency is the overarching theme."
For instance, banks owned by private-equity firms can expect "significantly higher requirements" for liability coverage, Eric Marshall, the managing director for financial institutions at Travelers, said during the panel discussion.
It is virtually guaranteed that merging banks will get hit with shareholder lawsuits, with those banks on average drawing five claims, said Bob Graham, a vice president of Keenan Suggs, a Columbia, S.C., insurance broker. "It is an almost 100% certainty that a claim is going to happen," he said.
Directors of sellers are often accused of breaching their fiduciary duties, while acquirers can find themselves accused of aiding and abetting them, panelists said.
Publicly traded banks can expect to pay a deductible of $200,000 to $500,000 to settle shareholder lawsuits associated with acquisitions. "It is viewed by many banks as a cost of doing business," Hill said.
Bankers have endured several years of increased premiums to insure directors and officers because of the financial crisis and a high rate of bank failures in 2009 and 2010. A heightened risk of litigation from the Federal Deposit Insurance Corp., which has a three-year window to pursue claims against managers of failed institutions, has continued to drive rates higher, panelists said.
Carriers are starting to pay more attention to mounting litigation following traditional acquisitions.
Last year, Beach Business Bank reached a settlement with shareholders to resolve claims that it let investors down by agreeing to sell to First PacTrust Bancorp (PACW). The settlement did not increase the consideration for shareholders, though it did cover up to $150,000 of the legal fees incurred by those investors.
A year earlier, Abington Bancorp in Jenkintown, Pa., agreed to cover up to $250,000 in attorneys' fees after it was hit with a lawsuit tied to its planned sale to Susquehanna Bancshares (SUSQ).
For those reasons, potential targets should also expect questioning from carriers in upcoming meetings.
"From the perspective of a target, we'd want to know who they have been talking to," Hill said. "We'd want to know if they just see themselves as a target, or if they believe they are going to be pursued during the next policy period."
Banks must also be prepared to discuss both short- and long-term aspirations. "The outlook could involve anywhere from one to three years," Hill said. "For the most part it has been a 12-month look ahead. But we do have one-, two- and three-year" planning if acquisitions are a part of the strategic-growth plan.