Insurance · Litigation · CFO

Your Insurance Policy Does More Than Just Pay Claims

By now I think we have all seen that Marriott was hacked.  What I find astonishing is not that they were hacked but how fast the lawsuits have been filed.  I have already read about numerous lawsuits, some coming just hours after the hack was announced.  For an insurance broker, making a case of why clients need cyber insurance is not a tough case to make, but there is another lesson that can be learned.

The vast majority of companies I speak with believe there is a very low risk that they will have a claim and I tend to agree with them, but that does not mean insurance will not be used.  There is very little that prevents your company from being drawn into lawsuits, even if you were not negligent. Getting pulled into lawsuits costs money, possibly a lot of money, even if you are eventually proven innocent.  This is why insurance is important, if the allegation is a covered claim then your insurance policy should be paying to defend you.

There are a couple of things to be cognizant of when it comes to the insurance company defending you.  

  • It could erode your limits of insurance, meaning you won’t have as much insurance to pay claims.
  • The insurance company may have the right to choose counsel and decide how to defend the lawsuit.  For example, they could decide to settle the claim against your wishes.
  • The amount you spend on defense may not start reducing your deductible/retention until you have put the carrier on notice.
  • Most policies have some sort of provisions on when you need to provide notice to the carrier which if not followed could jeopardize coverage.

These are just a few things that you want to pay attention to when you are served with a lawsuit.  The important thing to remember is that you should make the carrier aware of the claim sooner rather than later, even if you don’t think the lawsuit is going anywhere.  I have seen some desperate plaintiffs drag lawsuits on for a long time making even groundless lawsuits quite expensive.

CFO · Investment

Ray Dalio and the Private Debt Market

Trying to predict where the economy and stock market are going in the short term is a fool’s game and is something I would not bet on. With that disclaimer out of the way I want to point you to two pieces of content I recently consumed that might give us some clues as to where the economy is headed. I would suggest you consume these articles in sequential order.

The first comes from the “Masters in Business” podcast that featured Ray Dalio as the guest, you can find the transcript and links to the podcast here. I suggest you listen to the whole podcast because it is full of great information, but knowing that most of you won’t, according to Mr. Dalio the economic cycle works in the following way:

“Okay, so what happens is in the early part of the cycle, the amount of lending that takes place produces a cash flow which is greater than the debt service payments on that, so that’s a virtuous lending because credit gives buying power.

‘And depending on how you’re using that buying power for using it to create income that’s greater than the debt service payments is a self-reinforcing positive cycle, that normally happens in the early part of the cycle.

Then it pushes asset prices up and what happens is that people start to extrapolate those things going forward. So as the debts continue to rise and they believe this is going to go higher and higher…

‘The bubble stage is also accompanied by the development of shadow banking.

‘There’s a shadow banking system now, you know, in other words it – private lending that takes place outside of the banking system in various ways and it’s not regulated. And there is an incentive to go outside the banking system because the banking system being regulated and being controlled can’t make as much money as going outside the banking system.

‘And so the irony is asset prices are higher, there’s much more leverage in the system, and so why would asset prices be higher or credit spreads be lower when there’s a lot more leverage and the price of everything is higher? It doesn’t make sense but that’s where the bubble is. These are the good times, these are the great times it seems. Right?”

Now, you may or may not agree with Mr. Dalio but I think it would still be worth considering his words when you read this article from ETF.com. Here are a few excerpts:

“Private credit funds invest in nonrated, debtlike instruments that have no readily tradable market or publicly quoted price. Assets under management in such funds were growing rapidly until 2008. However, fundraising activity slowed significantly with the onset of the 2008-2009 financial crisis.

‘The increase of both supply and demand for private credit has resulted in substantial growth in assets under management.”

Again, I would recommend you listen to the entire podcast and read the whole article before making any conclusions.

Where is the economy going in the near term I do not know but I can say with pretty good certainty that at some point we will see a downturn and a recovery. I know…my prediction is bold.

CFO · Conference

NJ Tech Council CFO Forum – An Overview of the Amneal/Impax Merger

Today I had the privilege of attending the NJ Tech Council CFO Forum at EY in Iselin (Metropark), NJ.  The featured speaker was Jim Mastakas (bio), the current Senior VP and CFO of Virtus Pharmaceuticals, and who previously worked at Amneal.  Jim was there to speak about his time at Amneal and the deal he helped close with Impax Labs valued at approximately $7 billion.

Amneal was a private generic drug company that merged with Impax Labs earlier in 2018.  Impax Labs was publicly traded company, but Amneal was the more valuable company. When the deal finally closed the split in ownership split was 75% Amneal and 25% Impax Labs, with the combined company retaining the Anmeal name and becoming a public company (AMRX).  The deal was transformational for both companies as the combined company became the 5th largest generic drug company in the US, with expected revenues of $2.6 billion.

Jim talked about the challenges of getting the deal across the finish line and what he thought CFOs need to pay particular attention to.  For a deal to close a lot of things need to go right and from an operational standpoint some of these are obvious.  Some of the less obvious things a CFO needs to be aware of are:

  • Making sure proper confidentiality was in place both externally and internally
  • Knowing you will need to manage a CEO’s expectations when it comes to the numbers
  • Assuming your company is like most, stretched pretty thin, being prepared to lobby for extra help in the due diligence
  • Managing employees’ motivation in getting the due diligence completed. This can be done through compensation and because employees know there is someone who does a similar job on the other side of the transaction
  • Making sure there is a person whose sole job is integration of the two companies so that those synergies are realized. You can expect this to be done correctly if this is a part-time job for a current employee, the person has to devote all of their time to this.

The one thing he would have probably done differently was not have updated Amneal’s forecast as frequently as he did.  The reason for this was two-fold.  First, a lot of time and effort was put into these forecasts every time they needed to be redone, time that he and his staff really did not have.  Secondly, it could have possibly undermined the confidence that Impax had in the numbers since they changed so often.  Ultimately, Jim did not feel that happened but felt it was a real possibility.

This was a great event and Jim did a wonderful job of walking through the transaction and what went down.  Kudos to NJTC for putting it on and EY for hosting.