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Deal Activity Decreases in Q4 2022, Making Reps and Warranties Coverage Vital

Tuesday, November 8, 2022
Mike Richmond

By: Mike Richmond, Senior Vice President – Business Insurance

2021 was a record-breaking year for deal activity in the mergers and acquisitions (M&A) industry. However, deal volume and premium rates have been decreasing this year, and it looks like we will continue to see this trend in 2023.

Leveraging the decreases in rate, retentions and enhanced terms as part of the deal life cycle is a great way to combat this slower deal market, which is important to consider when choosing your reps and warranties insurance coverage. Here’s a snapshot of what we can expect to see in 2023.

Increase in Capacity and Decrease in Rates

We continue to see increased underwriting interest in the market and competitive terms on most submissions. As interest rates continue to increase, deal volume is slowing, leading to more capacity in the Reps & Warranties Insurance market. This is leading to lower rates, enhanced terms and unique deal structures.

Rates are also ticking down, with averages closer to 3.5 percent of the policy limit. In some circumstances, we are seeing rates dip below 3 percent, showing even more interest by underwriters in wanting to compete on deals. We expect these rates to hold around 3-4 percent as we go through Q4.

Enhanced Terms

Underwriters are willing to decrease retentions to help win opportunities. Traditional retentions are 1 percent of the purchase price. In some cases, we are seeing retentions as low as .5 percent and are routinely seeing retentions from .75 to .90 percent. Exclusions are lighter than previous terms; in some cases, we receive non-binding indication letters without exclusions.

Heightened underwriting risk items remain a key focus, and upfront discussions around those items are imperative. But comfort can be gained by conducting additional underwriting prior to choosing which non-binding indication is best. This includes having prospective insurers review the draft purchase agreement and financials, as well as having buyer’s counsel review base policy forms. This will help address underwriting concerns prior to choosing the best option, preventing issues during the underwriting process and creating a more efficient lead up to close.

Unique Deal Structures

We’ve seen unique deal structures starting to take place. This includes combined underwriting approaches where underwriters will provide enhanced terms if they write two or more of a buyer’s policies within a short time frame. This is rare, given that reps and warranties insurance is typically underwritten based on the unique characteristics of each transaction, particularly the operations of the seller. We are tracking this development closely to determine if it will be a trend heading into 2023.

Using Reps and Warranties Insurance to Help Facilitate Deals

As uncertainty in the financial markets causes deal activity to slow, it is as important as ever to leverage reps and warranties insurance and other transactional liability insurance to help facilitate and close transactions. Contact Horton’s M&A practice to ensure you are selecting the best reps and warranties coverage.

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.