Trends for M&A Transactions:
W&I Insurance as a Deal Accelerator

Dr. Dennis Froneberg, Head of M&A North Europe and Cyber for the DACH region (Austria, Germany and Switzerland), and Sven Dannemann, Senior Underwriter M&A at AIG

Deals using W&I insurance in M&A transactions have increased considerably in recent years and markedly changed the M&A market. The trend has also been on the rise in Germany, Austria and Switzerland (DACH region) since 2014. Last year, AIG in Germany was contacted about W&I insurance for more than 400 M&A transactions - in 2014, it was still less than100 inquiries.

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The growing demand for W&I insurance can be attributed to different causes. On the one hand, the underwriting process has become more efficient in general as a professionalization process has taken place among insurance companies and insurance brokers. For example, AIG continuously invests in the expansion of its team of experts, which now consists of ten highly specialized and experienced M&A underwriters. The former transaction lawyers and investment bankers are well-versed in M&A processes and take account of the need of the parties involved to ensure a high level of transaction security through speed and reliability. On the other hand, the underwriting process has also become faster (the conclusion of a transaction is now possible in just a few days) because the insurer has access to the buyer's due diligence in issuing the buyer's policy and can use it as the basis for his underwriting instead of having to start at zero.

But the main promoters of W&I insurance have been financial investors who have recognized the benefits of the tool from a seller perspective at an early stage already. When terminating an investment by selling a company or property, the seller's liability can be reduced to a minimum (0.5 % of the transaction volume) if a W&I insurance policy is taken out. As a result, the proceeds from the sale no longer need to serve as a guarantee for warranty claims by the acquiring party until the expiry of the warranty periods, but is immediately available.

Finally, a certain snowballs effect can be observed, which also contributes to the wide use of W&I insurance. Strategic investors who are confronted with an insurance solution in a bidding process, e. g. because the seller or his advisers set up the process with a buyer policy in mind right from the start ("stapled insurance"), recognize the advantages of W&I insurance for the buyer and will use the insurance solution again in their next transaction. With the conclusion of the W&I insurance, warranty periods are significantly extended compared to the purchase contract and the insured sum chosen by the policy holder by far exceeds the maximum liability limit that the seller would guarantee in a non-insured transaction. This risk minimization option is particularly popular among Chinese investors who are highly risk averse. Last year, a large number of policies were concluded with Chinese investors. Here, too, AIG responded promptly to the market, setting up a China desk with native speakers to better meet the needs of Chinese investors.

The strong increase in the use of W&I insurance has inevitably also led to rising in claims events. The findings collected in connection with the claims settlement are analysed annually by AIG within the scope of a claims event study. Please follow the link.

Year after year, the data from this study show the advantages offered by W&I insurance. For example, a large number of claims reports are only received after 18 months have expired (and, hence, after expiry of the contractual warranty period).

For the future, it will be important to further improve coverage through appropriate product innovation and the integration of subsidiary insurance products such as cyber and environmental liability insurance, and to respond flexibly to new developments in the transaction market. In the field of tax-related risks, AIG has already developed appropriate hedging options through W&I insurance or special tax policies. In addition, the hedging of particularly known risks by special policies will gain in importance. Against the background of recent political developments in the US, this is particularly about hedging break-up fees in cases where a transaction is prohibited due to security concerns by the Foreign Investment Committee (CFIUS). Several market participants, both on the broker and on the insurer side, are observing this trend carefully and analysing the potential applicability to the development of a product for the German market. First of all, however, the legal framework needs to be created by policy makers.

AIG article published in "Versicherungswirtschaft", 04/2017