I thought it would be interesting to include in this recent series on M&A issues a post about how reps and warranties insurance, an M&A deal facilitation tool, has been evolving. In this guest post Emily Maier, the leader of Woodruff Sawyer’s transactional insurance practice, shares insights from three experts in the reps and warranties space about how reps and warranties insurance was used in 2016, and what’s in store for 2017. – Priya Cherian Huskins
While all M&A professionals see a lot of deals in any given year, few see as broad a range of the deals going on in terms of size, style and industry as the representations and warranties underwriters.
Representations and warranties insurance covers breaches of the reps and warranties made in the SPA, and it has become a very common tool in the last few years.
With submissions running in the hundreds every month, underwriters are perhaps uniquely positioned to comment on the overall activity in the market.
I spoke with Tim Allen, transactional focus group leader for Beazley; Mike Turnbull, Americas M&A manager for AIG; and Kim Gladney, managing director North America, of Ambridge Partners on what 2016 was like for them and what they expect in the coming year for this type of insurance product.
New Themes for 2016
Some similar themes emerged. Tim Allen said 2016 saw an increased use of reps and warranties insurance for “cross border deals, especially on US and Asian acquirers in Europe looking for the broader US style coverage.” See our previous article on this phenomenon.
As well as new geography, there was a change in buyer mix. Mike Turnbull commented that “AIG saw large transactions coming not only from the PE buyer, but also repeat use from corporate/strategic buyers.” This is a trend that has certainly been born out at Woodruff Sawyer this year as well.
Kim Gladney highlighted that reps and warranties is “not so much a differentiator in bids as a requirement.” She also noted that overall she was seeing larger towers and more capacity being offered up.
Moving onto claims activity, there was broad agreement as well amongst the interviewees. Turnbull put it succinctly: “As the amount of policies written goes up, of course, so does the claims activity.”
Reps and warranties also is becoming more important to clients. Allen noted that “more clients are asking about claims expertise and experience as part of their selection criteria when deciding which carrier to work with.” He added, “We think this is prudent and plays to our strengths.”
Gladney weighed in as well: “Time will tell—2015 was the biggest bump in activity, so we are still playing those out, although the percentage amount overall hasn’t changed. It’s hard to talk about ‘trends’ in claims. Each claim is so fact-intensive and unique to the deal, which also makes it harder to give overall figures.”
So what does more activity and more claims do to pricing? There are a number of factors at play here. First, there has been a flood of new capacity into the market, and “pricing is coming under much more pressure in the international/non-US domestic space,” commented Allen, which makes Lloyds underwriters even keener on US risks than they were previously. This keeps prices competitive.
However, the market for the product continues to expand. “We think there are plenty of good-quality deals still not being written, and expect to see more submissions from parts of the states other than the East and West Coast,” said Turnbull.
Gladney added, “That’s what is nice about reps and warranties Insurance; it hasn’t reached saturation and is growing. We are still seeing clients using this for the first time.”
Bringing that all together, I suspect the status quo may be maintained for another year.
What Worries Underwriters
I was curious to see if there was commonality on deal concerns, too. Both Turnbull and Allen referenced multiples and the ability to validate them, especially in tech deals. But all three were bullish on most risks, including a broadening of appetite on healthcare.
“We aren’t more or less aggressive by industry, we cover them all, and we are looking at deals from $5 million to over a $1 billion,” said Gladney. “We expect them to keep emerging in energy, media and tech.”
Finally, I asked them what kept them up at night, and if they could only tell their insureds one thing what would it be.
“Help us to help you,” commented Turnbull. “You may be in the middle of an adversarial process, but the insurance doesn’t need to be.” He continued, “The more information your broker gets us, the more effectively we can work together.”
Allen weighed in: “We see accounting fraud on buy-side policies as the key driver for claims activity, and so we try to really tackle that at the diligence stage.” He also had this advice: “Assess the terms and the counterparty risk; with an increasing number of carriers to buy from in this space, a policy covering losses lasting up to seven years, the experience and longevity of your insurance provider is key.”
Gladney concluded: “What keeps me up after ten years in this business is making sure we meet the demands and service standards in this growing market. That, and the need to ensure that reps insurance is never being used as a substitute for thorough diligence.
For me, what makes this area of insurance exciting is its constant evolution. We see 2016 was once again a year of change and growth and I anticipate 2017 to be the same.