Both buyers and sellers should think about terms and protections that mitigate the risk inherent in transaction agreements, including considering some form of M&A insurance.
Whether as part of a growth strategy or a move to increase shareholder value, more companies are involved in complex transactions that are critical to the long-term success of the organization. Regardless of the deal dynamics, both buyers and sellers should think about terms and protections that mitigate the risk inherent in such transactions, and this means considering some form of M&A insurance.
As a specialty insurance company with global operations, Allied World has written M&A insurance from its London office since 2008, focusing mainly on European deals. When deciding to expand to North America, we researched the market, talking to corporate deal staff, deal attorneys, bankers, private equity principals, our insureds and – most importantly – our insurance brokerage trading partners. Consensus showed a definitive uptick in interest around these transactional risk insurance products. Allied World seeks areas of insurance that show growth potential and are under-served, so this new product suite fits nicely in our long-standing professional lines strategy.
Independent forecasts for 2013 M&A activity have been mostly positive, anticipating solid growth in the number of transactions and the dollar values of the deals. PwC predicts transaction volume in 2013 will be strong due to ‘improving corporate confidence, increasing private equity activity from both a buy-side and sell-side perspective, and relatively healthy debt markets. There remains strong competition for quality assets as both corporates and private equity continue to seek out deals to fuel their growth and deploy capital.’
Regarding the M&A insurance product set, Allied World has seen a mix of strategic and financial transactions for 2012 and 2013. These transactions include asset purchases, mergers, stock purchases and recapitalizations. Any entity that could be involved in an intricate transaction needs an experienced insurance team that can offer innovative solutions to help move the dialogue forward and bring the parties together. As specialists in the M&A insurance field, we work with clients at their pace to recommend risk mitigation solutions before disagreements impair or derail the process.
Drivers for insurance are varied. Since we launched our North American M&A insurance operations in 2011, we’ve talked with various transactional clients and advisers, including corporate counsel, law firms and private equity firms. We’ve found the driver to purchase transaction risk insurance depends on each situation and often includes an interested investor, a legal, accounting or tax adviser or a financial institution. Regardless of who wants the insurance and the deal structure, we see a definite uptick in interest around this product set across the board in North America.
What types of specific products do you offer?
Our North American M&A practice has several options to help buyers and sellers during a transaction. For the risk of unknown contingencies, our representations and warranties coverage is a solution to bridge the negotiation gap that often occurs when a buyer and seller are trying to negotiate a deal. We offer this product from a buyer-side perspective and also a seller-side perspective, so the product has great versatility. For already known risks, such as pending litigation or a pending tax matter, we can offer contingent risk and tax liability insurance solutions to help ring-fence liability and bring the buyer and seller together around deal terms.
This group of insurance products has been around for several years and include the following:
Representation and warranty insurance provides coverage for losses arising from breach of representations and warranties within the context of an M&A transaction. These policies can be enhanced depending on transaction dynamics. A standard policy can be amended to reflect: an extension of the policy period beyond the original representation time periods in the transaction documents; a retention that may be eroded by all contractual claims; a ‘no claims’ declaration focused only on actual knowledge of breach; and no general environmental exclusion.
A great example of how representations and warranties insurance can be used to remove uncertainty is when the selling investor purchases the coverage, transferring the risks to the insurance company and allowing for a clean and timely exit from its investment. Another example, for a buyer, is to better position its offer for an auction process. Buyers can purchase a representations and warranties policy to supplement or replace seller indemnity obligations. In doing so, buyers make their bid much more attractive and preserve rights for a seller breach under the policy.
Contingent risk insurance provides solutions for a number of contingent liabilities that may arise during an M&A transaction. Examples of special situation contingent risks that can be insured include: loss mitigation/litigation buyout risk; loss portfolio transfer; and contingent environmental risks. These are known or disclosed risks that are often uncovered as the parties enter into a diligence exercise and which, without insurance, can serve to derail a potential deal.
Tax liability insurance is a valuable tool for managing significant tax risk arising out of complex M&A transactions. Again, this insurance coverage is for known risks that may come between a buyer and seller, creating an obstacle to get the deal completed.
Are there any new trends?
The above insurance products are custom-tailored for each specific transactional agreement, and the actual coverage provided will be subject to the policy itself.
Allied World has written M&A insurance business in London since 2008. Given the underserved marketplace and since several of our senior US leaders have handled these products in the past, we decided to add an M&A practice Stateside. Since starting the practice, we have significant traction and will continue to offer solutions that make a difference to our customers.
Coverage for environmental representations is one trend we’ve noticed. As recently as five years ago you would have been hard-pressed to find many insurance markets interested in coverage for breach of an environmental representation; now it’s common. We work with our experienced environmental liability insurance team to provide an environmental policy alongside our representation and warranty policy, offering a more comprehensive transactional environmental solution. This is a bit different when compared with some of our competition and we see this two-policy co-ordinated solution as a significant differentiator.
We have also noticed a greater focus on compliance-related representations. Given the ever-evolving regulatory space (both in the US and abroad), we are asked to cover this representation as parties enter into a transaction where buyer and seller have a disagreement in terms of the depth or duration of the representation.
How fast can an insurance solution be put together?
As experienced underwriters, we work under tight timeframes, just like the deal teams. As these products are commonly a very important part of the closing and are custom-tailored to each situation, we work with the insurance broker to have the final policy language complete and ready to bind at deal close. Our London team has built its practice around a reputation for superior service, and our North American operation has worked tirelessly to match its service and expertise.
We believe US M&A products have evolved in recent years and are now viewed as a smart consideration whenever a gap exists between buyer and seller. We will continue to educate the market about these offerings, with our underwriters spending time listening to people’s needs and crafting insurance solutions accordingly. We launched this division in the US to fill those needs in the market and, so far, transactional buyers and sellers have been extremely receptive toward our M&A insurance product suite.
