Matthew Heinz, Senior Managing Director and Co-Practice Leader, Aon, explained the ins and outs of transaction liability insurance during his presentation to Argyle's CLO membership at the 2017 Chief Legal Officer Leadership Forum in New York on March 15. In his presentation, "Transaction Liability Insurance: Helping M&A Professionals Close Deals on More Favorable Terms with Greater Certainty," Heinz discussed the importance of transaction liability insurance for M&A professionals, how M&A professionals can get the right coverage and the steps that M&A professionals will need to take to obtain this type of insurance.
Today, many M&A professionals use representation and warranty insurance (RWI), which offers protection against unintentional and unknown breaches of a seller's representations or warranties. This insurance may extend or back-stop an indemnification package or offer a single source of recovery for a buyer.
Although RWI offers value for M&A professionals, it is important to consider all of the factors associated with it. By doing so, M&A professionals can obtain the right level of RWI.
"We discovered that [representation and warranty insurance] was largely driven by private equity funds," Heinz stated. "They realized there was an arbitrage to be executed. By offering the seller minimal indemnity, they could actually haircut their valuation in an auction process by more than the cost of the insurance."
Moreover, M&A professionals should consider the costs associated with RWI. This will enable M&A professionals to weigh the costs versus the overall value of the insurance and plan accordingly.
"Sellers will go out and pre-price insurance on the front-end of a transaction," Heinz noted. "They'll come to us in advance and figure out what insurance costs on a deal."
Evaluating the level of risk that comes with a merger or acquisition is essential as well.
"Sellers will go out and pre-price insurance on the front-end of a transaction. They'll come to us in advance and figure out what insurance costs on a deal."
Each M&A transaction is different, and M&A professionals should study the terms of a M&A transaction closely. This will enable M&A professionals to examine the short- and long-term value of the deal, along with the level of insurance required to protect both buyers and sellers.
"Our underwriters have realized that they are very comfortable insuring a buyer-friendly acquisition agreement," Heinz indicated. "They're basing their risk assessment on many deals over a broad base."
An M&A transaction should meet the needs of all parties involved. Furthermore, both sides require insurance to maintain the proper level of protection at all times.
"Insurers may be willing to cover terms that are a little bit broader than what a seller might offer in a traditional deal," Heinz stated.
How sellers and buyers approach M&A deals may differ. As such, it is paramount to consider both parties' perspectives during the search for RWI.
"Sellers roll over on the rep and warranty negotiation process to a certain degree and are much more willing to give you a broader window of recovery when there is insurance involved and there is less skin in the game for them," Heinz pointed out.
Typically, transaction liability insurance requires a short amount of time to obtain. Insurers have streamlined the process to get this insurance – something that has proven to be exceedingly important for M&A professionals who want to close deals as quickly as possible.
"It is not a cumbersome process," Heinz noted. "It's really about a [few] days to get the insurance done."
During the process, an underwriter may ask for any documents that M&A professionals can provide related to the transaction.
"Our underwriters have realized that they are very comfortable insuring a buyer-friendly acquisition agreement."
If these documents are unavailable, however, the process won't slow down. Instead, underwriters will work with the information available to them to ensure a policy can be produced as soon as possible.
"When you pick an underwriter, the underwriter will get access to all of your due diligence," Heinz said. "If you don't have internal summaries, [the underwriter] will roll with whatever you do have."
In most instances, a transaction liability policy will be available around the same time that a M&A transaction will close. This ensures all parties involved can review the policy and make any changes if necessary.
"We normally try to align signing of the acquisition agreement with the binding of the policy," Heinz indicated. "We want to have our work done and have your policy ready to go for you when you sign the acquisition agreement."
How M&A professionals approach transaction liability insurance can play an important role in the completion of a transaction.
M&A professionals who review transaction liability insurance options may be better equipped than others to find coverage that suits their needs perfectly. As a result, these professionals will be able to minimize the risks commonly associated with a merger or acquisition.
Matt joined the ATS team as the National Practice Leader for Reps & Warranties Insurance. He previously worked as a broker in Aon's Private Equity and Transaction Solutions Group (APETS), which served as a national resource in the private equity space for the broader Financial Services Group. APETS provides services both with respect to management liability and transactional liability products, including General Partner Liability, Representations and Warranty, Tax Liability, Contingent Liability, and Litigation Buyout insurance. Matt began his insurance brokerage career at Aon in 2010. Prior to joining Aon, Matt managed and worked as an underwriter in the Mergers & Acquisitions Insurance Group at AIG. Matt began his professional career as a corporate attorney with Proskauer Rose LLP in New York City, where he worked for over four years before entering the insurance field.