“Around 2002-2004, capacity was relatively easy to find. We did a number of deals where the limits were £200m plus, where the capacity was writing blind or semi-blind”
business line. Ten years ago there were four brokers in the London market, four brokers in the US market, and one broker in the Australian market that had dedicated teams focused on this business. Today, you have many more.
NS: Do you still feel there is opportunity for the flow of transactions using these products to increase as it would appear there is effectively an under-supply in services, are there opportunities for other brokers to come in and gain a share of the market? JP: Going back to the early days of my first career as a D&O underwriter, there were many brokers who did not have specialist D&O units. When they placed a D&O programme it was through a wholesale broker. That has changed dramatically with every broker of a certain size having a unit that handles D&O. I think that we will see the same dynamic in Transactional Insurance. Last night I had dinner with a highly experienced investment banker who could not believe these products were out there because he could have used them in past deals. If you look at the US, the knowledge and utilisation of these products is low and we are probably at about 1% maximum penetration. There is a real need in the market for more brokers to be out there selling the added value that Transactional Insurance can bring to a deal.
JE: Do you think that differs from the UK to the US? It depends on the type of product that you are talking about. If it’s W&I (or Reps & Warranty Insurance as its known in the US), product knowledge in the UK is way ahead of knowledge in the US. The UK market has taken longer to embrace Tax Insurance and Specific Situation Legal Contingency Insurance. At Ambridge, we believe one of the most important things that needs to be communicated to a prospective client is what these products can and cannot achieve. These products are not designed to make a bad deal a good deal but rather are intended to facilitate the closure of a good deal by resolving points of disagreement regarding allocation of risk between the parties to a deal.
JP: In your view, do the clients select the broker or do the law firms? NS: Well, for the big corporates who may be multiple users of the product, the purchase would be driven through their corporate broker relationship, but I would say that law firms have always been a key introducer of the concept. Certainly in my Aon days it was a split because whilst almost every specialist unit in Aon was fed by the network, we additionally found business through by developing those contacts.
10 years ago the perception was that it was the private equity community driving the purchase of W&I but actually it was company transactions and manager-owned businesses. Private Equity were reluctant buyers as they didn’t want to spend the money on the premium. Cross-border purchasers (therefore foreign buyer of a UK asset) in the early 2000’s were also one of the big driving forces and again would invariably be driven by the UK lawyer acting for the overseas client.
NS: Do you see any flow of what used to be termed “Loss Mitigation” or “Litigation Buy-Out”? JP: While we don’t offer Litigation Buy-Out insurance, we offer a hybrid of what has become known in the market as “Loss Mitigation” Insurance when insurance is being sought in connection with a potential transaction. One of our products offers insurance against a judicial decision being reversed on appeal. We also have a product that responds to pre-litigation demand or threat letters. This is often cheaper than what is often referred to in the market as Loss Mitigation Insurance because there must be two triggers before loss will be paid; – will a demand turn into a claim, and if it does, will it be successful? But it is fair to say that a lot of the time people don’t know that insurance exists for this sort of scenario.
NS: Is this something that those in the market should be making lawyers aware of? JP: Yes, definitely. Many of those who are familiar with Transactional Insurance are most familiar with W&I or Reps and Warranties Insurance policies that cover undisclosed risks. It is fair to say that potential buyers aren’t aware of the breadth of situations to which Transactional Insurance can apply.
JE: What other situations are you finding where this type of insurance is being utilised? We are seeing many cases where companies are emerging from bankruptcy or administration, or where the bank is receiving all of the proceeds received in connection with the sale (and the seller is getting nothing). In these situations, the scope of warranties that will be offered is very limited. Buyers who have undertaken a thorough due diligence in connection with this type of transaction are coming to us more and more and asking us to provide cover for a handful of warranties that they require in order
32 Author Viewpoint
Risk and Insurance in Private Equity and M&A 2012/13
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