More companies are buying representations and guarantee insurances to cover potential liabilities arising from mergers and acquisitions, said a panel of transaction risk experts.
The coverage, which includes more advance costs than traditional property / accident insurance lines, has gained ground in recent years as company acquisitions and acquisitions have accelerated, they said.
They spoke during a session on Tuesday at Riskworld, Risk & Insurance Management Society Inc.’s annual conference in San Francisco.
Resellers and warranty insurances are used to cover potential contractual errors in approximately 85% of mid-market transactions, says Anna Geml, a Chicago-based partner at Kirkland & Ellis LLP.
The “sweet spot”; for reps and guarantees is for deals worth between $ 50 million and $ 2 billion, as the minimum premium requirements may be too high for smaller deals and percentage retention requirements limit the attraction of coverage to larger deals, she said.
Marsh LLC placed 991 reps and guarantees last year, which was a hectic year for M&A business, says Jodi Rosensaft, a New York-based CEO of the brokerage house’s transaction risk practice.
The buyers of the policies were fairly evenly distributed between private equity firms and corporate buyers, she said.
The attraction with the coverage is that it gives the sellers a clean exit after a deal, and for the buyers it means that they do not have to pursue the seller if something goes wrong, said Rosensaft.
Without representatives and guarantees, businesses often prescribe that 10% of the purchase price be kept for a year to give the buyer damages, she said.
“Our sub-teams really want a clean exit, even with salespeople they have known historically,” said Lori Seidenberg, New York-based global director of real assets insurance risk management at Blackrock Inc. “They want to do business; they want to walk away from the store. “
However, the coverage has costs that are not associated with traditional property / accident insurance, she said.
Because the insurance process is complex, insurers require payment of an insurance fee before binding and a dissolution fee is charged if the underlying transaction is not completed, Seidenberg said.
Coverage pricing peaked in the fourth quarter of 2021, as M&A business accelerated, said Toria Lessman, Chicago-based senior vice president, transaction responsibility, at QBE North America.
“During the first quarter of 2022, we have seen the volume decrease. Business is still being done, but it is smaller than we saw before, and prices have fallen. I think it is still a very healthy pace,” she says.
The total cost of coverage – including the premium, an insurance fee of $ 40,000 to $ 50,000, excess premium tax and brokerage fees not included in the commission – is about 4% to 4.5% of the purchased limit, Rosensaft said.