Insurance solutions that cover warranties and indemnities (W&I) included in sale and purchase agreements (SPAs), commonly known as M&A insurance products, are becoming increasingly popular in corporate finance transactions.
Private Equity funds have been historically employing these products frequently to manage their transaction risks and have contributed to push up the total W&I premia, now estimated at over $3bn globally.
In addition to Private Equity funds, W&I insurance has risen in significance among a broader type of clients, that found these lines of products beneficial with regards to risk management for sale and purchase agreements. For instance, W&I insurance has been increasingly deployed in distressed disposals, private debt transactions and sales of real estate Special Purpose Vehicles (SPVs).
The top 5 reasons why investors purchase M&A insurance are:
- It helps reduce pricing differences between a seller and a buyer:
Once warranties and indemnities are taken care of by a W&I policy, the parties can focus on the commercial terms of the deal - Sellers are off the hook
Sellers like the idea of cutting their potential liabilities arising from warranties they have provides to buyers - Buyers have recourse to a rated insurer
Buyers like the opportunity to have recourse on a rated insurance company for potential claims arising from warranties and indemnities provided by a seller - Bidders can beat other bidders in tender offers
By taking a W&I policy, buyers can reduce the hanging liability of a seller and therefore look more attractive vs. other buyers in competitive tenders - Sellers and buyers can work together post transaction
Once sellers are no longer liable and the recourse has been shifted to an insurer, sellers and buyers can continue to work together without conflicts
If you are considering W&I insurance for your M&A transactions or you act on behalf of your clients, ClosingRisk can provide a competitive quote through its Blockchain-powered platform.
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