Mergers & Acquisitions

M&A insurances offer buyers and sellers the opportunity to transfer known and unknown risks to the insurance market. The most commonly used insurance in the transactional context is the Warranty & Indemnity insurance (W&I insurance), covering unknown risks. The W&I insurance affords the buyer of a company with financial protection against breaches of the seller’s warranties under the SPA or APA. A W&I insurance can efficiently remove the seller’s financial exposure from warranty breaches through transferring the exposure to the insurance market.

M&A Insurance

W&I Insurance

As the use of W&I insurances has become normalized in the M&A-market, strategic benefits and value-adding elements have been realized. Below is a summary of the main advantages of insuring a transaction.

The Seller Achieves a Clean Exit and Lowered Opportunity Costs

A W&I insurance enables the possibility of a clean exit to the seller, as the insurance provider overtakes the financial exposure of the seller’s warranty breaches which the buyer may claim under the transaction agreement. Full access to the proceeds from the divestment is gained through a one-time payment of the insurance premium for a multi-year policy period, as the insurance generally can replace the need of an escrow. This creates an essential financial upside as the seller is able to invest the proceeds immediately upon completion of the transaction.

Buyer Safeguards Relationships with Management

It is common that certain sellers of the target company form part of its management even after the transaction has completed. They may be key persons for the future success of the company, why it can be important for the buyer to maintain them within the management group even after completion of the transaction. A W&I insurance can safeguard the relationship between such management personnel and the buyer, as potential breaches of the seller’s warranties are not directed at management, but rather an external insurance provider.

The Transaction Process is Facilitated and Difficult Negotiations are Mitigated

Negotiations are made easy, as a balanced warranty catalogue is achieved through a more collaborative approach by the seller and buyer, as the insurance providers stand the financial exposure of warranty breaches which helps streamlining discussions to the key areas of the transaction.

Eliminates Buyer’s Concerns Around the Seller’s Solvency

Potential concerns around the seller’s solvency can be eased, as insurance providers are of good financial stability, typically with an A-rating from Standard & Poor’s. Experienced claims handlers enable a structured and clear process from the notification of a potential loss of the buyer due to a warranty breach, to the potential final insurance payment. Additionally, the buyer may avoid litigation with a scattered group of sellers as potential claims are directed to a single insurance provider.

W&I Process

The W&I process follows the transaction timeline, and may often be finalised within 3 to 4 weeks. There are possibilities for a shortened timeline from the insurance perspective, however it is advantageous to allow for additional time to secure relevant capacity and resources from the insurance market well ahead of signing, particularly when the M&A market is highly active. Our insurance submission process is based upon materials such as the latest draft SPA, latest available annual accounts, an information memorandum or management presentation (if available), as well as our specific short-form questionnaire regarding the transaction. After selecting the preferred insurer, a draft policy is negotiated and the in-depth underwriting begins, with the final coverage position mainly being based upon sell-side disclosures, the buyer’s due diligence reports and Q&A with the deal team and its advisors.

Enhancing a Bid and Increased Protection

The W&I insurance can be used for many reasons by a buyer to make its bid more attractive to the seller. The insurance further allows a buyer to extend the warranty period in the SPA/APA and increase the “liability cap”, and accordingly the protection in the event of a warranty breach as insurance capacity normally is available up to the full enterprise value, if so desired.

Contact us

Do you have any questions regarding M&A insurance or want to know more about our services? Söderberg & Partners has advisers with extensive experience in the field. Contact us and we will get back to you!

Ken Jansson
Co-Head | M&A Risk and Insurance Solutions
ken.jansson@soderbergpartners.se
+4670 431 19 15

Eddie Johansson
Co-Head | M&A Risk and Insurance Solutions
eddie.johansson@soderbergpartners.se
+4676 495 30 25