Warranty & Indemnity Insurance (W&I) on Public Deals

W&I insurance is being used routinely to de-risk public transactions, providing financial protection to buyers who would otherwise have limited or no recourse.

Key Takeaways

  • W&I insurance is being used routinely to de-risk public transactions, providing financial protection to buyers who would otherwise have limited or no recourse.
  • Buyers should socialise their W&I strategy with the listed target company early on in the process to ensure a robust suite of warranties and key clauses are included in the purchase agreement or via a separate warranty deed. 
  • Schemes and now even takeovers are insurable.  
  • Insurers have a strong appetite for public deals, with pricing, coverage and process comparable to private transactions.

No Insurance No Recourse

Dealmakers are routinely using W&I insurance on large public schemes and even takeovers. A trend that began in 2017 has sharply accelerated in the past 18 months as buyers have looked at a broader assortment of acquisition targets while still seeking the deal protection that W&I affords.  

Savvy buyers are keenly aware of the losses that can be suffered on a large deal (especially when aggressive share price premiums are applied), and they have grown less comfortable signing deals with only bare title and capacity warranties given by the target. In many cases, insuring public deals has become an obvious choice for buyers. Importantly, while affording material benefits to the buyer, the use of W&I does not introduce any additional deal risk to the target shareholders or management.  

Buoyed by W&I protection, a buyer is better positioned to enhance their purchase price, with the comfort that the financial cost of unknown risks is shifted to insurers. The W&I process enables the addition of a comprehensive suite of warranties to be given by the target business for the benefit of the buyer. In the event of a subsequent claim due to a warranty breach, the buyer seeks recourse directly against the insurer.

W&I Market Raring To Go

The W&I market is primed to meet the demand of increasing investment in public M&A. Insurers have been quick to support these transactions with a keen appetite to underwrite deals across the whole spectrum of sectors and industries, and at competitive pricing. Up to a billion dollars of insurance capital is available to insureds, with Marsh having tested the market and structured a number of large and complex programs. Insurers are demonstrating great flexibility in how they accommodate specific deal dynamics, and they are willing to insure both schemes and takeovers.

Recipe for Success

Early engagement with Marsh is critical so that W&I operational clauses and the warranties can be incorporated in the deal documentation. Additionally, having the benefit of the insurer’s indicative terms at the outset can help shape the initial warranty package. 

Comprehensive buy-side due diligence is essential to achieving optimal coverage under a W&I policy, with the other key ingredients being a well populated data room, adequate seller disclosures and a healthy dialogue between the buyer and target management. Board approved processes typically allow for this ready exchange of information.

Going Forward

Buyers in public deals, who are increasingly reluctant to walk into transactions without any purchase price protection, are turning to W&I insurance for financial peace of mind. This is a strategic decision that is being made more often and one that we expect will become a market standard practice for public M&A.

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Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. LCPA: 22/350