Mergers and acquisitions (M&A) insurance first came to prominence in the private equity industry in the 1990s as dealmakers looked for ways to manage deal risk and improve execution. In the last five years, there has been a significant uptick as corporates, private equity and other financial investors increasingly adopt M&A insurance to secure investments and enhance returns.
Understanding how insurance can mitigate M&A risk effectively is paramount for both sides in a transaction. Savvy dealmakers are looking to leading professional services companies such as Aon to help clients manage risk.
The staple product is warranty and indemnity (W&I) insurance, which protects a buyer against breaches of warranties given by a seller, including misstatement of accounts, and undisclosed risks and liabilities relating to the business and its operations. As a strategic tool, a W&I policy gives the buyer confidence that, in the event of a warranty claim, it has recourse against a highly rated insurer. From a seller’s perspective, it allows sale proceeds to flow to investors without any hold-back to cover warranty breaches.
Taking expert advice on managing this risk can give buyers increased confidence when structuring deals.
“Traditionally, people just thought of insurance as a risk transfer,” explains Simon Tesselment, executive director at Aon in London. “Now they’re looking to use insurance strategically to protect investments and optimise returns.”
At the same time as the M&A insurance market has grown, so has the frequency of claims. For M&A deals worth more than $1 billion, claims on W&I policies are increasing in frequency by 23 per cent year on year, according to a report by insurer AIG. Aon figures show that most breaches relate to financial statements and contracts, followed by compliance, tax and material contracts.
It’s important to work with an insurance provider that brings appropriate experience to help clients choose and structure the suite of insurance solutions which best meet their needs
Aon also sees that an increasing number of clients use insurance to address known risks, such as tax issues identified in an M&A context and on a standalone basis, for example a group restructuring, as well as contingent risks relating to litigation.
In addition to helping clients on private M&A transactions, Aon has also brought new products to market for UK public takeovers, such as topping insurance and cash confirmation bonds.
Whether it is W&I insurance or any other form of M&A protection, businesses know they need to proceed wisely. Getting the right insights and support is critical.
“M&A deals are typically complex and require a thorough understanding of the process, timing and salient issues,” says Mr Tesselment. “It’s important to work with an insurance provider that brings appropriate experience to help clients choose and structure the suite of insurance solutions which best meet their needs.”
Aon is a market leader in providing due diligence when it comes to insurance, human capital and cyber, analysing the compatibility of existing arrangements and structuring post-completion programmes. The firm can also advise on integrity issues and whether the acquired management team is a good fit for the business buying.
Aon’s M&A teams couple this expertise with extensive knowledge in individual sectors, from real estate and finance to manufacturing and renewable energy. Their teams work regularly with more than 30 major M&A insurers, leveraging relationships to help structure complex insurance solutions and manage effective claims processes.
Companies in any sector looking to buy or sell operations need the right insurance adviser if they are to compete effectively. Working with a broker that has deep M&A, insurance and industry knowledge will be essential to their acquisition success.
To find out how to close mergers and acquisitions effectively with well-structured risk management please contact Simon Tesselment at simon.tesselment@aon.co.uk or Piers Johansen at piers.johansen@aon.co.uk
Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance. Aon UK Limited is authorised and regulated by the Financial Conduct Authority © Aon plc 2017. All rights reserved.
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