CFOs whose companies are considering an acquisition could struggle to get representations and warranties insurance unless the deal falls neatly into carriers’ comfort zones, insurance specialists said in a Dechert LLP webcast.
Since the end of last year, mergers and acquisitions have been exploding, creating a bandwidth problem at insurance carriers as they try to keep up. As a result, insurers aren’t hesitating to turn down deals.
“Carriers across the board right now are inundated with deals and requests to quote deals and as a result they can be, and are being, highly particular with the deals they choose to actually underwrite,” said Emily Standen, senior vice president of insurance broker Marsh JLT Specialty.
Particularly at risk are smaller-scale deals, $5 million and under, and larger deals that don’t fit neatly into insurers’ preferred terms.
“Deals on aggressively tight time tables, deals that have too many layers of complexity, maybe a super high rollover coupled with unaudited financials and no buyer quality of earnings report, could be [subject to] a declination to quote,” she said.
Deals in traditionally less favored sectors, like healthcare, insurance and finance, are also seeing high declination rates, both for quotes and underwriting.
Deals that do get insurance tend to face tighter underwriting and due diligence criteria as well, driven by a high number of claims that is making insurers more careful, Standen said.
“In the past six to 12 months, we’ve seen a large uptick in claims across the board coming out of transactions,” she said. “Because of that, we’re seeing an increase in premiums and also a tightening of what carriers are willing to agree to.”
Driving the claims are undisclosed liabilities and problems arising from customer and supplier relationships and the contracts between them.
“We’ve seen so many claims, both coming in and being paid out by carriers in the past year in these areas,” she said.
The jump in claims stems from carriers’ tendency, over the last year or so, to offer a broad set of buyer-friendly representation coverage, a practice which they’re now reversing course on, which Standen described as a “kind of paring back of what carriers will cover in terms of the representations,” she said.
Going forward, insurers are looking more at special purpose acquisition company (SPAC) deals, in which sponsors acquire a target company to take it public. Insurers are covering these deals but only when the risk profile is low, said Craig Schioppo, a managing director at Marsh JLT Specialty.
“We are getting some done but they kind of need to fall into a particular bucket,” he said. “They need to look and feel like a traditional deal — traditional diligence is being done, the seller is a known entity, the buyers are known to have used this insurance before.”
For parties that are unknown or considered fly-by-night, pick-a-target sponsors, “trying to find and use rep and warranty will find it particularly difficult,” he said.