$20 million loss illustrates need for transaction insurance

With increasing boardroom confidence and greater pressure to improve profitability and efficiency, global deal-making continues at record-setting pace. Wanting to ensure successful and hassle-free M&A activity, companies are increasingly relying on transaction insurance. This is especially true in a deal environment that has become more risky and challenging. Oftentimes, the inevitable transactional risks lie on one critical issue: the possible post-closing erosion of value where the bulk of post-closing claims emanate.

transaction insurance loss cost $20 million

A 2010 case pulled from Advisen’s proprietary loss data provides an example. In this case, financial services firm ING sold its subsidiary ING Fianzas SA to AXA in 2008. AXA claimed that ING falsely represented that its former subsidiary had sufficient collateral and/or reserves, as required under Mexican law, for the bonds it had issued.

By the time AXA sold Fianzas to another bond company, it had paid millions of dollars on the bonds that it could not recover because Fianzas lacked the collateral or reserves that ING valued up to $162 million, according to the complaint filed in New York State Supreme Court. As a result of ING’s alleged breaches of its representations and warranties, AXA claimed to have suffered $20 million in out-of-pocket damages.

ING’s painful loss clearly illustrates why organizations must give adequate consideration to transaction insurance to cover for the possibility of future claims following an M&A.

Transaction insurance provides solutions aimed at transferring risks related to M&A deals. It could include warranties and indemnities for either buyer or seller, tax, prospectus liability, environmental issues, among others.

It can also provide insurance to remove hindrances which can block or delay the completion of an M&A deal. For example, where there are differences between a buyer and a seller, a warranty and indemnity insurance solution may break the impasse.

Transaction Insurance and the Lifecycle of an M&A Transaction

On April 26, 2018, Advisen will host the 2018 Transaction Insurance Insights Conference with the theme: “The lifecycle of an M&A insurance transaction: A practical guide”.

The conference will gather leading M&A and transaction insurance experts who will outline current trends in M&A. They will discuss the due diligence process and the types of issues that often come to light, and explain how those issues can be addressed, including the use of transaction insurance products – such as Reps & Warranties and M&A Tax Liability – so that deals can close.

Representations and warranties insurance, tax indemnity insurance, and contingent liability insurance, as well as other risk management and insurance options, will be examined.

This full-day conference will be of value to private equity investors, risk managers and insurance professionals who need to understand how transaction insurance products are making deals happen today, and how the M&A landscape is likely to be transformed by the increasingly widespread use of these risk management tools.

Registration is now open for the 2019 Advisen Transaction Insurance Conference.