It is important to remember that W&I insurance first gained real traction during the 2008 financial crisis, successfully enabling investors to de-risk their investments and move forwards more confidently. We are hoping for a much quicker recovery following COVID-19, due to both largely unaffected market fundamentals and PE houses with record high levels of dry powder. As in 2008, there are ways in which insurance can be used to help investors during these uncertain times.
Response from Insurers
There are approximately twenty five insurers operating within the W&I market, now competing for a much smaller pool of deals and we have already seen downward pressure on premium rates.
Although there is no escaping from the overall downturn in M&A activity, deals are still being done and areas such as healthcare, tech, software and renewables remain strong.
Most insurers are now including COVID-19 exclusions within their policy wording, and careful consideration therefore needs to be given in order to ensure that the scope of such warranties is narrowly defined and its application as relevant and suitably tailored as possible.
Contingent Risks
Contingent risk insurance is designed to respond to concerns beyond the scope of standard W&I products, such as "one off" legal, judicial or legislative risks that may inhibit or prevent completion of a transaction, or leave one or more parties with a greater risk of exposure than they desire. During these times PE houses can make use of contingent risks to release funds from their balance sheets to increase their level of "working capital".
Due to the fact that this type of insurance deals with known risks it is slightly more expensive than W&I which only covers the unknown.
Distressed M&A and Synthetic Warranties
We have had several enquiries recently from investors about insurance options for undervalued or distressed assets, and we expect this trend of less "vanilla" M&A to continue in the coming months.
Synthetic warranty packages are warranty deeds negotiated between the Insurer, the broker and the buyer and are socalled as the warranties are provided by the Insurer and sit within the W&I policy and not with the seller.
This can be a useful arrangement when buying a business out of administration, when the administrators are not usually in a position to give any meaningful warranties.
However, not all insurers will be willing to structure fully synthetic policies and their availability will be dictated by factors including:
Quality and extent of Due Diligence
Reasons for requiring a synthetic warranty pack
Type of asset / target company
Jurisdiction
Size of transaction
Tax Liability Insurance
Predominantly we have seen tax liability insurance required in a transactional context, as an alternative to an escrow arrangement or price chip. Given the market and deal flow has slowed following recent events, we have seen more tax risk enquiries from non-transactional scenarios.
Inevitably when trade and revenues are down, many businesses will be considering restructuring for financing purposes or perhaps in-order to partition under-performing assets. This can give rise to tax consequences, however provided sensible advice has been followed a specific tax insurance policy would provide comfort that if a material tax charge does arise as a result - cover is available.
"We are here and available to answer any questions that you may have so please contact us if there are any additional ways we can help you at present. We wish you and your families continuing good health."
For more information please contact
Will Seccombe
william.seccombe@asia.lockton.com (opens a new window)
Mindy Ng
mindy.ng@asia.lockton.com (opens a new window)
