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How Warranty and Indemnity Insurance Facilitates Merger and Acquisition Deals

20-Jan-2020 11:00:00 / by The Insurance Institute

The Insurance Institute

The use of warranty and indemnity (W&I) insurance in Ireland is on the rise. The product is designed to facilitate smoother mergers and acquisitions (M&A) deals and speed up the sale.

The policies offer an innovative means of dealing with the inherent risks associated with these deals. We spoke to Oisín McLoughlin and Niall Campbell from Pinsent Mason about how the process works and the advantages of using it.

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How do M&As start off?

A central theme in all M&A transactions is risk and another can be competitive tension. Many M&A processes involve a seller setting out its stall with the help of advisers in order to try to get as many potential buyers as possible interested in what is on offer. Creating competitive tension is one way to get the best possible terms for a seller. Less desirable suitors will fall away earlier in the process and the more attractive candidates will be given an opportunity to carry out commercial, financial, tax and legal due diligence to a certain extent before being whittled down to a small number, who are asked to make a formal offer. Eventually, one bidder will emerge usually with an exclusive period in which to get the deal done on the terms set out in its offer.

What are the advantages of W&I insurance?

On the sell side, the advantage of using W&I insurance is that it can get around deadlock situations where the parties cannot agree who should be on risk in relation to the potential, latent risks associated with any transaction. It also increases returns for sellers because it is can create a clean break scenario as any claims down the line are dealt with by the W&I insurance provider and there is an element of the seller being free and clear to take more proceeds, and sooner, off the table for good. From the buyer's perspective according to Howden, W&I insurance offers an “A” credit rated counterparty in the event of a warranty breach. It also prevent the need to make claims against management which is particularly helpful for private equity investors who typically see management as partners in the business and not a party whom they want to litigate against. Offering to reduce the exposure of the seller by bringing W&I insurance into play can also be the difference between winning a bid and not. We have seen W&I insurance used in both private equity and non-private equity transactions in Ireland and in flexible ways. It is an innovative and a welcome addition to the menu of options parties use to get deals done.

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What does the current landscape look like?

In the UK, W&I insurance is commonplace with 41% of transactions having W&I insurance taken out by the buyer (surveyed in the recently published Pinsent Masons, Livingstone and Howden 2019 report on Private Equity and M&A deal trends) with the figure rising to 59% for private equity buyers. The market in the UK is relatively mature, with over 25 W&I insurance providers (according to Howden).

The use of W&I insurance is in its adolescence in Ireland but this is changing. With the increasing number of private equity players in the market (including a number from the UK) W&I uses is increasing. Since October 2018, Howden have been involved in 5 Irish law governed transactions that have successfully completed where W&I insurance was taken out. Further, Howden currently have a number of live mandates on Irish deals.

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