W&I insurance

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More US buyers — and more buyer-friendly deal terms — are entering the seller-friendly UK market, although the picture is increasingly nuanced.

By Joshua M. Dubofsky, Sam Newhouse, Jennifer N. Cadet, and Catherine Campbell

Whilst global M&A deal volumes have dipped at the start of Q1 2023, UK-bound M&A activity is expected to be one of the year’s highlights as overseas buyers seek out attractively priced British public and private targets. Within this activity, the deal term preferences of US buyers are likely to impact private UK M&A. A detailed understanding of both UK and US expectations is therefore essential for transatlantic dealmakers.

US private M&A deal terms — particularly related to deal certainty and post-closing recourse — have historically been viewed as more buyer-friendly than those in the more seller-friendly UK market. However, the picture is increasingly nuanced, and deal teams navigating ongoing economic uncertainty and financial market dislocation are being called upon to find new solutions to deal valuation, certainty, and recourse concerns.

Warranty and indemnity insurance may remain a staple of European private equity, but are buyers changing course?

By Neil Campbell, Tom D. Evans, Sebastian Pauls, Maximilian Platzer, David J. Walker, Edward Coates, and Catherine Campbell

Warranty and indemnity (W&I) insurance has become an important component of European PE transactions in recent years. However, changing market dynamics and challenging macro conditions (which have cooled deal flow) mean that PE buyers are now more critically evaluating the merits of W&I insurance. The Eighth edition of the Latham & Watkins Private Equity Market Study indicates that the overall uptake of W&I insurance is beginning to plateau, having increased significantly between 2016 and 2019. From a high of 35%, overall usage of W&I insurance in European deals has dropped in the past two consecutive years.

As W&I insurance has matured and PE buyers have become more experienced consumers of the insurance (and of low or nominal liability caps for warranties), the emerging picture is one of a product with a nuanced value. Increasingly, deal-specific characteristics, structures, and issues are playing a role in the demand for and success of W&I insurance, including appetite for stapled policies.

By Richard Butterwick, Nick Cline, Robbie McLaren, Terry Charalambous, and Catherine Campbell

In a complex and competitive market, minimising and mitigating risk in M&A is a key concern for deal teams. High demand for assets saw strong deal volumes and values in 2019, following a standout year in 2018. The search for opportunity has brought large corporates face to face with new or rapidly expanding businesses whose risk and compliance processes may not have kept pace with other areas of growth. New risks are gaining in size and profile — meaning companies must remain alert to value-compromising issues and inherited liabilities within targets. Corporate veil cases, as well as big-ticket regulatory fines for competition failures and data protection breaches, all indicate that corporates are in the firing line.

How can deal teams capitalise on the latest trend in the deal insurance market to improve bid success?

By Tom Evans, Paul Davies, David Walker, Michael Green, Aoife McCabe, Harry Redford, Catherine Campbell, and Amy Watkins

The emergence of contingent risk insurance policies, which address known risks that would otherwise be excluded from coverage under traditional W&I insurance, is an exciting recent trend in the deal insurance market. PE funds that identify previously uninsurable risks through due diligence now have the possibility of transferring such risks to insurers, rather than seeking either a price reduction or escrow retention from the purchase price. Therefore, the use of contingent risk insurance can make a PE fund’s bid more competitive and, as a result, more likely to succeed.

By Drew Levin, Maarten Overmars, and Catherine Campbell

Click for larger image.

Warranty and indemnity insurance (W&I) has become a common feature of European transactions in recent years, amid a strong sellers’ market that has enabled vendors to offload risk to buyers. According to the most recent edition of the Latham & Watkins Private M&A Market Study, which examined transactions between July 2016 and June 2018, the proportion of transactions employing W&I has continued to increase — from 8%, 13%, and 22% of deals in the previous three editions of the survey, to 32% for the latest period surveyed. We believe PE deal teams should be aware of changes and enhancements to W&I that will bring insurance coverage closer in line with the US market. In our view, the developments are positive for PE bidders.

The Impact of US Buyers on European W&I Policy Terms

US buyers are very active in the European deal market, and their influence is becoming increasingly evident in W&I terms. US buyers are pushing for more US-like W&I terms on European deals, and the changes have enhanced policies. Insurers are thinking outside of the box and providing new products. We believe US PE bidders will reap the benefits as policies begin to resemble their home market and PE bidders from other jurisdictions will also benefit as terms become enhanced.

PEViews3By Neil Campbell and Leif Schrader

Warranty and indemnity (W&I) insurance products have been marketed as a “silver bullet,” which can bridge the gap between a buyer’s wish to receive proper deal protection and a seller’s aim of a clean exit. However, as the market continues to mature, insurers are becoming cautious and terms are tightening. In our view, recent developments in insurance practice pose new practical issues for buyout firms, particularly on German deals.

According to the Latham & Watkins 2016 European Private M&A Market Study, which examined over 170 deals signed between July 2014 and June 2016, the proportion of transactions employing W&I insurance has increased over 60% since Latham’s 2015 survey. As expected, W&I insurance is most prevalent in sales by private equity sellers. Recent claims data compiled by AIG (R&W Insurance Global Claims Study 2016) indicates that claims are filed against around one in seven W&I policies globally, suggesting real protection for buyers and also benefit for sellers, who would otherwise have been the addressees of such claims.

However, such claims have resulted in significant payouts, particularly against financial and tax warranties. A relatively large proportion of claims come from continental Europe, with insurers reporting further large European losses pending. Consequently insurers, particularly in Germany, are increasingly conservative and are reflecting their claims experience in the terms on offer. There is greater reluctance to cover matters outside the scope of due diligence (even on a knowledge qualified basis) and insurers are less willing to compromise on general exclusions such as property and pension payments. In addition, while W&I insurers have always required sight of transaction documentation, German W&I insurers are now reviewing deal terms in more detail and are imposing their own requirements, such as warranty bring-down at closing. While this is typically for insurer information purposes only, buyers and sellers must carefully review transaction documentation alongside the insurance policy to ensure that any seller disclosure does not inadvertently release the insurer or expose the parties to additional risk or liability.