Insights

Rep and Warranty Insurance Is a “Mature” Product
POSTED 11.9.22 M&A

In the world of M&A, Representations and Warranty (R&W) coverage has become a go-to transaction insurance product. Many PE firms, for example, have made it an almost standard part of any deal that is able to be covered.

Simply put, R&W is a mature insurance product and despite its growth in popularity, it has not fallen off in terms of quality.

Despite the increase in policies that have been issued, there has been no spike in claims… because there has been no material spike in losses, either by type or by size. It’s been steady.

The number of insurance carriers offering this coverage has also remained steady. We have not seen a lot of newcomers in this category. That is despite the backlog of submissions to be reviewed that we saw in 2021 due to the record levels of M&A activity taking place… and resulting increase in requests for R&W coverage.

After those struggles to keep up with demand, insurers learned their lesson. No wonder, as R&W insurance is a highly desired product and very profitable. As a result, insurers have expanded their Underwriting teams to increase their bandwidth. Many have also specialized in certain sectors, so they’re not wasting time on exceptions. That has sped up processing times.

On the “other” side, policyholders are enjoying price decreases this year compared to last year because it’s such a competitive marketplace.

In short, R&W has become commonplace and reliable. It’s mature. There have been no major shifts in coverage terms, prices are low, and claims are settled in a timely manner.

But that doesn’t mean that there is no room for improvement or innovation, especially in the application process. And that’s where brokers and insurers can stand apart, as policyholders want to be able to secure their coverage as easily and efficiently as possible.

They want competitive pricing for a minimum of effort on their part. An “easy” button, if you will.

Insurers are listening.

They have incorporated streamlined procedures for applying for R&W coverage and even automated parts of the process to make it faster… importantly, without sacrificing their guidelines or increasing risk. I think they have struck a good balance between speed and quality, as evidenced by the increased number of R&W policies being written yet the number of claims not being appreciably higher as a result.

Another factor that has helped in this regard is the introduction of Transaction Liability Private Enterprise (TLPE) insurance in the last year or so. This specialized coverage is specially designed to cover deals that R&W insurance won’t. Deals at $20M EV or below are generally ineligible for Buy-side R&W coverage. In TLPE, diligence is not as rigorous and approval time from Underwriters is short.

This allows R&W policies to continue to focus “up market,” rather than on “down market” deals that could be riskier with less established diligence. Another important distinction is that TLPE policies are “Sell-side,” rather than “Buy-side,” as is generally the case with R&W coverage. As I’ve explained in previous articles, this means Sellers don’t need permission from their Buyers to secure this coverage on their own, which significantly decreases Sellers’ risk and gives them peace of mind at a relatively low cost.

But there are also advantages to the Buyer with TLPE coverage. Because TLPE policies are available where traditional R&W insurance is not, I have seen many Buyers ask their Sellers to apply.

I got a call recently about a TLPE policy for a deal north of $30M. The Buyer, a PE firm, is seeking this coverage because of the relatively small size of the deal and because, as they put it, “the target isn’t the cleanest risk in the world.” They don’t feel like they could quality for R&W coverage so they’re seeking an alternative.

I believe this is going to happen more and more as more M&A players realize the value and flexibility of TLPE insurance. And I believe that could also spark a change in how TLPE is used.

When it first came on the market, transactions under $10M EV were covered. Soon we were up to $20M. Then $30M. And now I’m field requests from even larger deals.

It’s the perfect example of filling a need in the market. These PE firms love R&W. But when it’s not available, due to the risk or size of the deal, they are now turning to TLPE for coverage.

If you have any questions or would like to explore the protection TLPE coverage could offer you or your clients, please contact me, Patrick Stroth, at pstroth@rubiconins.com.

Representations and Warranty insurance has become very commonly used in M&A transactions. Buyers and Sellers recognize the protection and peace of mind it offers. At the same time, insurers have made securing this coverage as easy and quick as possible.

Still, not every deal qualified for R&W insurance due to the size or the potential risk.

Thankfully, a very viable alternative has emerged. But this new type insurance has some key differences than traditional R&W coverage…

There are several reasons R&W policies have become so ubiquitous.

If you’re interested in securing maximum protection for the next signature event in the life of your company, contact me, Patrick Stroth