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Protecting Buyers and Sellers

M&As Fuel Reps and Warranties Coverage

Representations and warranties policies evolved into an efficient and effective capital solution.
By: | March 24, 2016 • 4 min read

Demand for representations and warranties coverage is on the rise for a number of reasons: increased M&A activity, a continued seller-friendly market, and the increased acceptance of the insurance product by deal makers, including law firms and investment bankers.

Kirk Sanderson, senior vice president, transactional risk, Equity Risk Partners

Kirk Sanderson, senior vice president, transactional risk, Equity Risk Partners

When the product became available about 10 years ago, buyers primarily purchased R&W as supplemental indemnity coverage when they were unable to get sellers to provide what they considered to be adequate indemnification protection under the transaction agreement, said Kirk Sanderson, senior vice president, transactional risk at Equity Risk Partners in New York City.

Sanderson’s firm was recently acquired by HUB International Ltd.

But in today’s market, sellers are essentially mandating that buyers take a reps and warranties policy to remain competitive in an auction scenario while providing very limited indemnification and zero escrow to buyers, Sanderson said.

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“Private equity firms and their outside counsel have really pushed the envelope over the past three to four years on developing the R&W insurance policy into a highly efficient and economically favorable capital solution,” he said.

Renee Szalkowski, senior vice president and transaction liability practice leader at Lockton in New York City, agreed. Sellers in prospective M&A deals now have more leverage to demand that buyers take out R&W policies to suit their own purposes, she said.

“They are dictating terms, including providing little or no indemnity in deals where they don’t have to set aside a large percentage in escrow for 12 or 18 months,” Szalkowski said.

Renee Szalkowski, senior vice president and transaction liability practice leader, Lockton

Renee Szalkowski, senior vice president and transaction liability practice leader, Lockton

Moreover, there is greater acceptance of the product because pricing — at 3 percent to 4 percent of limits purchased — is more reasonable, and the underwriting process more streamlined, she said.

The manuscripted polices are now underwritten by ex-M&A attorneys and are more insured-friendly, based on “actual knowledge” definitions, with limited subrogation against sellers and an increased appetite for certain types of damages, she said.

The “actual knowledge” exclusion in older vintage policies was much more expansive, said Matthew Heinz, managing director at Aon in New York City, and a 2016 Power Broker® in the Private Equity category.

He said the current exclusion is much narrower and makes it harder for the carrier to prove that the insured had actual knowledge of a breach at binding and to prove that the exclusion should apply.

In general, Heinz said, reps and warranties coverage terms have gotten a lot better, and are closer to the traditional indemnity provided by sellers in transactions.

Some exclusions, such as those limiting the breadth of recoverable loss for consequential damages or diminution in value, are frequently removed, providing the buyer with coverage terms that more closely approximate the types of loss the buyer would seek to recover from the seller if there is a breach.

An example would be the availability of consequential damages in connection with a seller’s breach of a regulatory compliance representation.

“If a target company was not compliant with some regulation and must pay a fine and shut down a portion of its operation as a result, the buyer would seek to recover not just the immediate financial impact of the breach (i.e., the fine), but also any consequential damages resulting from the shut-down, including lost profits,” Heinz said.

“Today’s policies allow for this coverage,” he said.

Using R&W Strategically

Matthew Heinz, managing director, Aon

Matthew Heinz, managing director, Aon

Reps and warranties policies are also more strategic now, as opposed to being driven by concern over heightened risk, Heinz said.

“Clients are strategically incorporating policies into the front end of deals, rather than when an issue comes up,” he said. “Sellers have been able to exit deals more cleanly by pushing buyers to obtain insurance coverage.”

Without insurance, sellers might have to indemnify the buyer up to 10 percent of the deal size, and potentially leave an escrow in place up to that amount, Heinz said. But now the seller may only need to put 1 percent or less in escrow, with the remainder of risk allocated to the insurance market in the form of a buy-side reps and warranties insurance policy.

Premiums have also come down from a range of 4 percent to 6 percent pre-2008, to the 3 percent to 4 percent range in the current market, he said.

Szalkowski and her team expect reps and warranty insurance will continue to be in high demand over the next year as the M&A landscape remains competitive.

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“Sellers are retaining post-closing equity positions more frequently and selling management is staying involved,” she said.

“This will result in buyers continuing to use reps and warranties policies to protect these relationships post-closing.”

However, clients should not expect prices to fall further in the near future just because “quite a few” carriers have entered the R&W insurance market, Szalkowski said.

“Notwithstanding increased supply and given increased demand, the fact that insurers that have been around for a while are paying claims means that overall pricing is holding steady,” she said.

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

The risk manager for Boyd Gaming Corp. says curiosity keeps him engaged, and continual education will be the key to managing emerging risks.
By: | May 1, 2018 • 4 min read

R&I: What was your first job?

I was trained as an accountant, worked in public accounting and became a CPA. Being comfortable with numbers is helpful in my current role, and obviously, the language of business is financial statements, so it helps.

R&I: How did you come to work in risk management?

Working in finance in the corporate environment included the review of budgets and the analysis of business expenses. I quickly found the area of benefits and insurance — and how “accepting risk” impacted those expenses — to be fascinating. I asked a lot of questions. Be careful what you ask for — I soon found myself responsible for those insurance areas and haven’t looked back!

R&I: What is the risk management community doing right?

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I have found the risk management community to be a close-knit group, whether that’s industry professionals, risk managers with other companies or support organizations like RIMS and other regional groups. The expertise of the carriers and specialty vendors to develop new products and programs, along with the appropriate education, will continue to be of key importance to companies going forward.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

As I’m sure many in the insurance field would agree, Hurricanes Katrina and Rita in 2005 changed our world and our industry. It was a particularly intense time and certainly a baptism by fire for people like me who were relatively new to the industry. This event clearly accelerated the switch to the acceptance of more risk, which impacted mitigation strategies and programs.

Bob Berglund, vice president, benefits and insurance, Boyd Gaming Corp.

R&I: What emerging commercial risk most concerns you?

The fast-paced threat that cyber security represents today. Our company, like so many companies, is reliant upon computers, software and IT expertise in our everyday existence. This new risk has forged an even stronger relationship between risk management and our IT department as we work together to address this growing threat.

Additionally, the shooting event in Las Vegas in 2017 will have an enduring impact on firms that host large gatherings and arena-style events all over the world, and our company is no exception.

R&I: What insurance carrier do you have the highest opinion of?

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With the various types of insurance programs we employ, I have been fortunate to work with most of the large national and international carriers — all of whom employ talented people with a vast array of resources.

R&I:  How much business do you do direct versus going through a broker?

We use brokers for many of our professional coverages, such as property, casualty, D&O and cyber. We are self-insured under our health plans, with close to 25,000 members. We tend to manage those programs internally and utilize direct relationships with carriers and specialty vendors to tailor a plan that works best for team members.

R&I: Who is your mentor and why?

I have been fortunate to have worked alongside some smart and insightful people during my career. A key piece of advice, said in many different ways, has served me well. Simply stated: “Seek to understand before being understood.”

What this has meant to me is try everything you can to learn about something, new or old. After you have gained this knowledge, you can begin to access and maybe suggest changes or adjustments. Being curious has always been a personal enjoyment for me in business, and I have found people are more than willing to lend a hand, offer information and advice — you just need to ask. Building those alliances and foundations of knowledge on a subject matter makes tackling the future more exciting and fruitful.

R&I: What have you accomplished that you are proudest of?

Our benefit health plan is much more than handing out an insurance card at the beginning of the year. We encourage our team members and their families to learn about their personal health, get engaged in a variety of health and wellness programs and try to live life in the healthiest possible way. The result of that is literally hundreds of testimonials from our members every year on how they have lost weight, changed their lifestyle and gotten off medications. It is extremely rewarding and is a testament to [our] close-knit corporate culture.

R&I: What’s the best restaurant you’ve ever eaten at?

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Some will remember the volcano eruption in Iceland in spring of 2010. I was just finishing a week of meetings in London with Lloyd’s syndicates related to our property insurance placement when the airspace in England and most of northern Europe was shut down — no airplanes in or out! Flights were ultimately canceled for the following five days. Therefore, with a few other stranded visitors like myself, we experimented and tried out new restaurants every day until we could leave. It was a very interesting time!

R&I: What is the riskiest activity you ever engaged in?

I am originally from Canada, and I played ice hockey from the time I was four years old up until quite recently. Too many surgeries sadly forced my recent retirement.

R&I: What do your friends and family think you do?

That’s a funny one … I am a CPA working in the casino industry, doing insurance and risk management, so neighbors and acquaintances think I either do tax returns or they think I’m a blackjack dealer at the casino!




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]