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M & A Insurance as Hedge to Deal Risk

M&A Insurance Definition

It is insurance bought by either the Buyer or Seller or both for protection against certain deal risks within a Merger or Acquisition, and is therefore part of the M&A risk due diligence process. Just like all other insurance products, M&A Insurance (aka. Transactional Liability Insurance or Rep and Warranty Insurance) is a second line of defence used to transfer residual risk of a specific M&A transaction. Any M&A transaction will be exposed to a wide range of risks and claims as shown in Graph 1 below.

M&A Insurance Broker

Contact us if you are looking to procure M&A Insurance. As risk advisors independent of any M&A insurance broker or company, we make brokers compete for your business and reword the fine print of the M&A insurance for best value to you, which we contractually guarantee.

To Buy or Not to Buy M & A Insurance

To determine whether or not M & A Insurance is worth it, Buyer and/or Seller should:
(a) perform a detailed cost/benefit analysis on whether insurance is needed to protect the Purchase/Sale of a business; and
(b) aim to purchase a structured insurance policy (instead of ‘off-the-shelf’) in the event the cost/benefit analysis yields a net insurance benefit. Either Buyer or Seller can purchase the M&A insurance policy (cost can also be split amongst them).

Charts showing M&A post-close sources of risks and claims
Graph 1. Source: 2013 SRS Post-Closing Claims Study

M & A insurance has to be reworded and triggered independently of insurance brokers or companies in order to yield a high payout ratio on the post-closing issues of interest, all while reducing premium.

Benefits to Seller from M & A Insurance

* Distribution of Sale Proceeds: immediate liquidity at Closing for Seller --> shown in Graph 2.

* Expedite Sale and/or increase Purchase Price --> eliminating obstacles to completion of Sale + offering greater indemnity to Buyer.

* Minimize or eliminate any contingent liabilities.

* Protect passive Sellers who have not controlled the disclosure process.

Chart showing liquidity benefits to a seller from Transactional Liability Insurance (M&A)

Graph 2. Source: Gary P. Blitz and Daniel Schoenberg, Aon Risk Solutions, 2016. A deal valued at $500 million: Seller can receive an additional $48.5 million on closing with the use of M&A insurance. This is an example only and each deal has different requirements.

Benefits to Buyer from M & A Insurance

* Protect the deal and key relationships with stakeholders at Target company beyond Representations & Warranties (R&W).

* Ensure certainty of the Purchase Price + avoid unanticipated future expenditures.

* Extend duration of R&W --> Term of the insurance can be much longer than the term of the escrow --> protection against post escrow expiry claims (as shown in the Table below).

* Making collection easier in the event of a claim --> having a large and established insurance company as a counter-party (vs. Seller).

Chart showing M&A post-close claim types and figures
Source: 2013 SRS Post-Closing Claims Study

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