The global Mergers & Acquisitions (M&A) market has bounced back decisively from the COVID 19 pandemic with 2021 deal activity topping out at US$5.9 trillion. This trend is expected to continue through 2022.
M&A advisors are seeing the increasing use of Warranty & Indemnity (W&I) insurance in transactions at all levels. The drive from Private Equity for a clean exit has sparked the interest for these products but now M&A advisors are aware of the advantage these products bring to a negotiation and will usually consider W&I insurance as an enhancement to a deal rather than an expensive “nice to have”.
W&I insurance should now be a serious consideration in the majority of M&A deals as coverage and cost are more rational than ever. There are few restrictions now on sector and location meaning that there are few barriers to its usage and the costs are almost always outweighed by the comfort insurance brings and the positive knock-on effect to funding and negotiation.
Bespoke insurance solution to enhance a bid
Warranty & Indemnity insurance policies are bespoke to a specific deal and mitigate the financial risk of a vendor being unable to compensate for a breach of warranty. There are clear benefits for both buyer and seller in taking a policy and it can be a mutually agreed point of the deal that a policy is taken out.
A W&I policy can be a key factor in enhancing auction bids as it potentially makes the offer more attractive, allowing a seller to exit with only a small amount of capital at risk. Deductibles for these policies are in the region of 0.5%-1% and vary depending on sector and level of risk.
Benefits of W&I Insurance
A well-structured W&I policy brings reassurance to a deal and benefits to both sides of a transaction.
Buy side benefits:
- Reduced reliance on financial strength of seller post transaction
- Eases negotiations
- Enhanced comfort for funding partners
- Can enhance the bid as the seller may favour the inclusion of insurance
- Avoids potential future conflicts with staff members in the event of a breach of warranty
Sell side benefits:
- Allows distribution of funds to shareholders
- Vastly reduced liability for warranties given
- Reduces contentious negotiations around emotive subjects
- Can allow more varied warranties to be given
It worth noting that an underwriter will ensure that the terms of the warranties are robust, and insurance is not used to give a seller the ability to offer overly generous warranties which ordinarily would be rejected.
Developing W&I insurance market
The market for W&I insurance is evolving to follow requirements of M&A deals and the scope and jurisdictions of these products is ever widening. Insurer competition has driven premiums down and encouraged insurers to be more flexible.
Insurers will also consider the specific contingent liabilities of a deal and offer cover accordingly. These can be standalone or part of a wider W&I policy. These are liabilities that are not seen on the balance sheet and could include environmental liabilities or employee pension liability.
W&I Insurance for Private Equity investment
Equity raising can be a delicate process and potential investors would sometimes like reassurance on issues by way of warranty, which may not be realistic for a company in its early stages. Warranty & Indemnity Insurance can potentially be a solution for a company to financially support the required warranties without burdening the cashflow of a business.
These polices are bespoke to a business and can include:
- Employee welfare
- Contingent Liabilities