We’re well into the second half of 2021 now…and Representations and Warranty insurance is more popular than ever. Given the protection it provides both Buyers and Sellers in an M&A deal that should be a good thing.
However, that popularity, based on the trust both sides of the table have placed on this coverage, has also brought about an unintended consequence that has resulted in PE firms and Strategic Buyers scrambling to get their deals covered.
Here’s the deal: insurance companies are declining to cover otherwise great risks due to bandwidth. In other words, they don’t have the teams of Underwriters they need to research and understand the deals and then determine coverage and terms for all those parties wanting coverage.
As a result, if your deal is under $400M in transaction value (TV), you can’t go to one of the major nationwide insurance brokers. They’re just stretched thin and are concentrating on the deals that will bring in the most substantial fees. They’re no longer looking at $100M or even $200M deals.
So, at this point, if you come under that threshold and are interested in R&W insurance, you must find a boutique firm to secure your coverage.
Why is this happening… and why now?
There are a few factors:
More M&A activity = more demand for R&W insurance.
Who Is Behind This Trend?
M&A activity is at record levels right now, across the board. Driving demand are:
3 Steps to Take Now in Light of This Trend
Despite these trends, all hope is not lost to secure R&W coverage this year, even if you’re deal is under $400M in TV. But you do have act quickly and put in some extra effort to make an insured deal happen. (And you should still prepare yourself for waiting until 2022.)
Here’s what you should do now:
1. Line up all your diligence experts right now, e.g. lawyers and accountants.
R&W policies right now are being placed on $400M TV deals and up. If your deal is smaller than that, look for boutique broker. Go to solid, experienced regional boutique firms in law, accounting, and insurance to get response you need. If you need a Quality of Earnings report, the big 5 nationwide accounting firms won’t touch you at this point.
Contact these smaller firms and get on their calendar now.
2. Engage with an experienced, boutique regional R&W insurance broker now. The sooner you get your engagement lined up, the better, even if you are at the Letter of Intent stage.
In both cases you want to avoid the backlog at bigger, national/international players.
3. Expect and plan for increases in diligence costs, insurance costs, and R&W premiums. The sooner you act, the better as costs continue to rise. It’s simple supply and demand.
To give you an idea, the total cost for a $5M Limit R&W policy was under $200,000, now it’s running $225,000 to $240,000.
But also remember that the protection and peace of mind these policies offer is well worth even the increased costs… and all things considered this coverage is cheap.
As you can see, there is real urgency here.
If you’ve got a deal in the pipeline and are thinking of using R&W insurance to cover it, we should talk now so I can help guide you through the process.
You can contact me Patrick Stroth, at email@example.com.