Mergers & Acquisitions

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Reps & Warranties Insurance by T.J. Noonan

Reps & Warranties Insurance by T.J. Noonan

T.J. Noonan

Reps & Warranties Insurance

T.J. has several areas of expertise, including account management and M&A experience with a Fortune 50 company, where he served in a variety of roles before joining Hylant. At Hylant, T.J. is part of the M&A and Transaction Solutions (MATS) team focusing on reducing valuation uncertainty and optimizing return on capital during a transaction. The MATS team advises clients by developing customized, value-added solutions to ensure investments are safe while maximizing financial returns.

Guest Profile

T.J. has several areas of expertise, including account management and M&A experience with a Fortune 50 company, where he served in a variety of roles before joining Hylant. At Hylant, T.J. is part of the M&A and Transaction Solutions (MATS) team focusing on reducing valuation uncertainty and optimizing return on capital during a transaction. The MATS team advises clients by developing customized, value-added solutions to ensure investments are safe while maximizing financial returns.


Highlights

  • Insurance policies only continue in a stock transaction.
  • No two transactions are the same – most insurance policies are very flexible.
  • Many private equity firms require reps & warranty insurance (R&W insurance).
  • 75% of all PE transactions have R&W insurance.
  • 50%-60% of all mid-market M&A transactions have R&W insurance.
  • The insurance company often relies on the buyer’s due diligence.
  • The standard coverage amount is 10% of the purchase price.
  • The seller and buyer usually split the premium.
  • The typical minimum transaction size is $30 million, which equals $3 million in coverage, although some insurers will go as low as $10 million.
  • 20% of R&W insurance policies see a claim.
  • Claims are paid out based on the transaction multiple.
  • Claims are paid out to the insurance policy holder, which is almost always the buyer.
  • R&W insurance DOES cover fraud.
  • Most common claims by the numbers:
    • Financial statement accuracy – 20%
    • Tax liabilities (income, payroll, etc.) – 18%
    • Compliance with laws (e.g., minimum wage, etc.) – 15%
    • Material contracts (e.g., all customer contracts are in good standing) – 13%
    • Miscellaneous – IP, litigation, operations, environmental, fundamental, etc. – 34%
  • There is no subrogation for R&W insurance, with the exception of fraud.
  • R&W insurance costs the seller approximately 2% of the transaction size.
  • The buyer and seller’s legal teams are much more comfortable expediting the negotiations of the reps and warranties if R&W insurance is in place.
  • Most insurance companies can perform due diligence in seven days.
  • There are currently approximately 20 to 25 R&W insurance carriers.
  • Not offering R&W insurance should constitute malpractice, according to one national law firm.

Topics Covered

  • What types of insurance are relevant to M&A transactions? [3:30]
  • Can you insure against tax related risks? [4:35]
  • Why can’t a buyer rely on the seller’s existing insurance policies? [5:50]
  • Does the seller need to continue the policies after the closing? [7:00]
  • Change of control clauses [8:00]
  • Does insurance cover successor liability-related risks? [9:10]
  • How efficient is the market for pricing M&A-related risks? [11:50]
  • Overview of reps & warranties insurance [13:10]
  • To what extent does the insurance company need to perform due diligence? [16:40]
  • How does the insurance company become involved in deciding the basket (minimum or deductible), cap (maximum), knowledge qualifiers, and other terms in the purchase agreement? [18:10]
  • Who pays the premium? [21:55]
  • Does the cost increase on a pro-rata basis for smaller transactions? [23:30]
  • How long are most R&W policies? [26:00]
  • What are the most common claims? [28:00]
  • How does the definition of knowledge affect coverage? [35:20]
  • What should the seller know about R&W insurance? [40:00]
  • How do you quantify the amount of the claim? [42:45]
  • How involved is the insurance company in performing due diligence and negotiating the purchase agreement? [44:40]
  • Are carriers industry specific? [47:10]
  • What other types of M&A insurance do insurance companies offer? [49:00]
  • What is a risk profile assessment? [54:30]
  • Insurance benchmarks by industry [57:45]
  • The future of R&W insurance [1:04:00]

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