Insurance giant AIG is concerned. Although the rate of claims from Representations and Warranty (R&W) insurance, which covers M&A transactions, has been steady since 2012 across the board, for deals of all sizes… they have noted a rising trend with how much they are paying out for smaller claims. In a nutshell, they are paying more on smaller claims than before. This is for policies for smaller deals where the premium was a relatively small amount. In other words, the area where premiums are down, claim payments are up. I consider this a signal from AIG. They’re saying this trend is not sustainable and that means the insurance market should look to solidify rates and potentially look at increases. I believe we should also be prepared for more stringent underwriting for these types of transactional insurance policies as well. As they put it in their recent report, M&A: Small Deals and Emerging Markets Drive Claims Activity: “This shift was picked up in AIG data between 2018 and 2021, and we expect that moving forward we’ll continue to see greater deal and claim activity in these segments. Almost without exception, the limited number of larger deals and deals overall, together with a soft market insurance environment has resulted in terms and conditions and, in particular, policy pricing that is not sustainable in the mid-to-long term.” In other words, the area where policyholders pay the least, the insurer is paying out more. The backdrop to this “warning” that they will raise rates is that I do not think AIG can attribute the whole rising trend to an issue with the claims themselves. Increased competition and a slowdown in deal-making – which caused a reduction in demand for R&W insurance – are also contributing factors. Granted, underwriting in recent years has also been
I’m helping a first-time client place Representations and Warranty (R&W) insurance, and it’s taking a bit of hand-holding on this first go-around as we get quotes from insurers and review other elements of the process. We should all keep in mind that the primary thing Underwriters want to see is thorough due diligence. Otherwise, they are going to be a lot of exclusions in the policy.
It’s Never Too Late for TLPE I was at a conference recently talking with an M&A advisor. One of his clients sold his RV park for about $10M a few months prior. But, he was getting nervous that he has money withheld from the purchase price, in escrow, in case of a breach of the purchase and sale agreement.
As we exit the first quarter of 2022, all the buzz is around the slowdown in M&A activity. It’s true that deal activity in the beginning of 2022 is a drop from Q4 2021, as well as a drop compared with Q3, Q2, and Q1 of 2021 because there was so much pent-up activity as pandemic closures waned.
Case Study: A Strategic Buyer and TLPE Insurance It took years for Representations & Warranty insurance (R&W) to gain the trust of the M&A community. For years, lawyers argued that nothing was more sure than cold- hard cash sitting in an escrow account. But PE firms, seeing the value of R&W’s ability to successfully transfer risk at a reasonable cost propelled the use of R&W to where it’s present in far more deals than not.
D&O Liability Coverage Versus TLPE Insurance As I’ve written in the past, there are many founders of small- and medium-sized, privately held companies that simply don’t see the need for Directors & Officers (D&O) liability coverage. I won’t argue the merits of D&O insurance here. But, the reality is that when those owners try to sell their companies, that lack of coverage will come back to bite them.
The Biggest Impact of TLPE Insurance Transactions—the major decisions in the life of a business—impact both Sellers and Buyers. In a standard transaction, a Buyer will request that money from the purchase price be held in escrow. While I’ll admit there is a strong argument justifying these requests, there are viable alternatives.
Four Reasons to Use TLPE in SME M&A Deals If you’re a sell-side advisor… investment banker, business broker, or an insurance agent… I have some news for you: If you aren’t at least discussing Transaction Liability Private Enterprise(TLPE) as an option to cover an M&A transaction, you are doing your SME clients a serious disservice.
In this era of sky-high valuations, PE firms seeking inorganic growth are increasingly looking at an alternative to acquiring fully built out platform companies. The strategy is to buy a platform that is not fully built out yet and available for a lower price and then “add on” other small companies. Not only are these acquisitions cheaper, but they are also easier to transition into the platform, which helps accelerate growth. This trend has also led to increasing adoption of two unique M&A insurance products that have been available for a couple of years but were not widely used until