The Rise of Transactional Insurance in M&A Deals Explained
We speak with Andy Hillier – a Chartered Surveyor and the co-founder of DUAL Asset. Since founding his first property company in 1993, he has gone on to build companies in the IT, renewable energy and now insurance sectors. DUAL Asset was founded in 2013 and is part of DUAL Group and Howden Group Holdings, a global insurance group. DUAL Group is the world’s largest international managing general agent* (DUAL Group) with in excess of $1bn of premium. DUAL Asset is the largest provider of Title Insurance solutions outside the North American market. DUAL Group has offices throughout Europe, Asia Pacific and the US. DUAL Asset’s products are designed to provide property title solutions for real estate deals, Title to Aviation, and Fundamental Reps coverage in corporate M&A transactions. The company’s Fundamental Reps policy sits either in excess of traditional Warranty and Indemnity Policy (W&I) or as a standalone product. Their clients include most of the top real estate funds and PE companies around the world.
A growing number of corporate investors and private equity firms are employing transactional risk insurance in merger and acquisition agreements to help accelerate M&A deals. Can you tell us a little bit about this trend?
The market for transactional risk insurance (Warranty and Indemnity or W&I)) has been steadily growing over the last 20 years. What had always been seen as a slightly ‘luxury’ product has now become mainstream. The growth of the marketplace came when risk appetite waned and deal teams and their lenders looked for a more ‘belts and braces’ approach to M&A transactions, without diminishing the quality of their bids to sellers. Equally, turning down the peace of mind of an insurance solution was not a risk many wanted to take, as it could prove a costly mistake if a claim did arise. At the same time, the increased availability of the product with new competing insurers in the market meant prices were driven down and more attractive. The industry has also proved itself to be effective in paying claims, which has given confidence to buyers of the product.
What has prompted this increase?
This is due to a number of factors coming together – the fact that the product is much more widely available and understood is probably the most important. Clients need to have confidence in the ability of the insurer to perform in the tight timescales we have come to accept in the M&A world. Also, there is estimated to be in the region of $1.5 trillion of private equity capital currently waiting to be deployed. This makes the buyer’s market extremely competitive and everyone is looking for an advantage in trying to win the bid. By securing an effective insurance policy, buyers and sellers are in a better position when negotiating the respective reps in the sale and purchase agreement (SPA).
How does transactional risk insurance make the negotiations easier?
From a seller’s perspective, this cover can allow them to exit deals with increased funds (no retention), to reduce or eliminate post-closing indemnities, reduce contingent liabilities as well as protect passive shareholders who may not have been part of the sales process. From the buyer’s perspective, it can help to increase the indemnification they have as protection, over and above what they would have received from the seller. In addition, it protects key relationships with retained management at the target company and eases the collection of monies due in the event of a claim, especially in the case of distressed sellers and allows buyers to obtain recourse for unknown issues. By working closely with the W&I insurer at an early stage, the buyer can give the seller comfort around these risks earlier in the bid process, providing them with a potential advantage over competitors.
How has DUAL Asset responded to this trend?
Whilst the W&I market has increased significantly in M&A transactions in recent years, on average buyers still only tend to purchase around 10% of the total enterprise value (EV) of the deal. Whilst the risk appetite in the deal partly drives the decision on the level of cover, the primary consideration is the cost of the policy. This can be between 1% and 5% of the coverage. DUAL Asset identified a niche in the marketplace to offer a much narrower coverage than the traditional W&I policy (covering tax, employment, contracts etc). Our policy covers the basic fundamental warranties in the SPA at a lower price point, and potentially up to the full EV of the deal.
The policy that we originally launched in Europe and now offer globally, including North America, typically sits above the existing W&I policy, as an excess for the covered reps. In some instances, it can be a standalone policy to compliment the W&I policy. Occasionally, in real estate deals, where the buyer decides there is no need for a traditional W&I policy, the DUAL Asset policy can just cover the structural elements of the deal.
How do you think the market will continue to evolve?
There is no doubt that the market will continue to grow. The US leads the way in terms of policies and premiums paid, but penetration of the M&A market for Transactional Insurance still lags behind Europe. We are also likely to see buyers trying to push to breadth of coverage, as they seek to maintain their competitive edge in the marketplace. Insurers will also be asked to look at new acquisition vehicles such as SPACS (Special Purpose Acquisition Companies), which have become popular in the US, to see if they can be included in the process. As long as there continues to be a global M&A marketplace, Transactional Insurance, including traditional W&I and DUAL Asset’s Fundamental product, will continue to play a big part in enabling M&A transactions to complete smoothly.
* Source: DUAL research 2019
Andrew Hillier is the Executive Chairman at DUAL Asset. DUAL Asset specialise in providing transactional insurance solutions in Legal Indemnities, M&A, Probate and Aviation, and are backed by some of the most respected insurance companies in the world. DUAL Asset also created the first and still only legal indemnity comparison site in the UK.
DUAL Asset underwriting Limited is an Appointed Representative of Dual Corporate Risks Limited which is authorised and regulated by the Financial Conduct Authority number 312593.