Getting to “Yes”: Transactional Insurance Beyond Reps & Warranties

May 2015

Download PDF: White Paper

Advisen released a white paper that looks at trends in mergers and acquisitions (M&A) and other commercial transactions, the issues that often impede deals, and insurance solutions to help simplify complex transactions. The free, 5-page paper is sponsored by Allied World Insurance Company.

Providing M&A Insurance Solutions

The M&A market has become more sophisticated and buyers are increasingly cautious as they strive to obtain a sufficient rate of return. In addition to adequate due diligence, factors such as proper target identification and valuation, and effective integration have become vitally important in determining the success of M&A transactions.

These conditions have contributed to an increased reliance on transactional insurance to facilitate M&A negotiations, many of which would not close without such solutions. Transactional insurance is a collection of products offered by insurers that complement the merger and acquisition process by bridging gaps between buyers and sellers that would have otherwise prevented a deal from occurring.

Transactional insurance products like representations & warranties insurance, tax liability insurance, and contingent liability insurance have been available from quite some time, but their use has increased in recent years as the value they bring to M&A deals  has become more widely recognized.

While only a small percentage of transactions utilize the products today, it is likely that they will become increasingly commonplace in facilitating M&A transactions in the future.

A 2010 case pulled from Advisen’s Master Significant Case and Actions Database (MSCAd) provides an example. In this case, financial services firm ING sold its subsidiary ING Fianzas SA to AXA. 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.