Aon Representations and Warranties Case Study
Background
Representations and Warranties insurance (“R&W insurance”) helps secure investments and enhance returns. Concerns about known and unknown risks can prevent a deal from closing or leave buyers with unwanted liabilities, placing both sellers and buyers at risk of not realizing their desired goals. The use of this insurance can protect buyers from losses resulting from a breach of the seller’s or target company’s representations in a purchase agreement, thereby eliminating the need for a robust indemnity. It also allows sellers to walk away cleanly from a deal. Representations and Warranties insurance is a proven tool that can allow deal professionals to bridge gaps between buyers and sellers and help improve deal outcomes.
How it Works
A buyer simply incorporates R&W Insurance into its bid with or without the knowledge of seller by offering a seller-friendly indemnity package, and then procuring coverage in lieu of that seller protection (or as a supplement to a much-reduced seller escrow or indemnity). The underwriting process is completed without seller involvement and the parties can negotiate who covers the cost of the coverage; some buyers simply bake the cost of coverage into their valuation, effectively (but not explicitly) shifting the cost to the seller.
Case Study
A private equity firm, secured a $15M Representations and Warranties policy, excess of a 1% of target enterprise/deal value retention (subject to a minimum of $200,000), for a company it purchased based on a 9x EBITDA multiple (with GAAP). When the PE buyer discovered a $2. 3M double counting issue, the company restated its financials as a result of the error and submitted a claim under the policy to its insurer, alleging that the seller had breached a representation regarding compliance. The financials were not in compliance with GAAP and the dollar for dollar loss was actually $2.3M.
It took approximately 45 days for the insured to gather the information that had been sought by the insurer, and once provided, the insurer engaged an accounting expert to review the materials. Within a month of receipt, the parties had organized a call, during which the insured and its accountants and attorneys answered questions from the insurer’s expert. Following the call, the insurer asked for additional materials, including the investment committee report that the private equity fund had used to demonstrate the valuation model used in the acquisition.
Following additional calls during which the insurer’s expert tested the multiple and validated the loss calculations, the insurer offered the entire $15M policy limits to cover the loss suffered by the insured.
For more information or to get in contact with our team please contact Allyson Coyne
Allyson Coyne – Managing Director & Senior Broking Officer – M&A and Transaction Solutions
Aon Risk Solutions
259 Radnor-Chester Road, Suite 160 | Radnor, PA 19087
t +1.215.255.1715 | f +1.610.834.2176 | c +267.408.0971
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