2019 M&A Forecast - Warranty Insurance
The use of warranty insurance continues to grow in New Zealand and across the Asia Pacific region. It is becoming the norm in bid processes where the starting point is often a ‘sell/buy flip’. This is where the seller engages with a broker ahead of bidding and chooses a preferred insurer to conduct some preliminary underwriting with the seller before ‘flipping’ over to the winning bidder and writing a buy side policy.
Increasingly we have seen insurers being asked to put together internal “A” and “B” teams with information barriers in place to allow more than one bidder to go through a full underwriting process ahead of final bids. This of course has cost implications (in underwriting, accounting and legal fees) for bidders and although provision is being made for these processes they have not been used until recently.
In October we saw our first full process where two bidders went through an entire underwriting process ahead of confirmed bids. We saw this a second time in December 2018 and we expect to see this tactic used more often in the year ahead– at least until the current bid process frenzy calms down a little.
While competition is strong among underwriters (with upwards of 10 insurers entering the New Zealand market) and pricing is sharp (staying static at around 1% of cover sought), coverage is tightening and insurers are pushing back on areas of known risk where they feel that due diligence has not been done.
This has frustrated many intermediaries who feel that the warranty insurance product may not be living up to the promise. But the truth is that a well thought through process can still lead to great coverage from the insurers. It is critical to engage advisors that understand the product, and can prepare appropriately if warranty insurance is a prospect.
Sellers can reduce much of the heartache by introducing the product early in negotiations (forcing bidders to consider their coverage needs balanced against the overall attractiveness of their bid). They can also prepare by anticipating the likely areas of concern and conducting appropriate Vendor Due Diligence to cover those areas off before they become contentious.