Sponsored briefing: Access to capital: adding client value differently

Legal Business recently met with members of Aon’s UK transaction solutions team – the insurance broking arm of Aon’s M&A business – to learn how insurance-backed risk transfer solutions play an increasingly significant role in M&A deals, corporate reorganisations, tax, litigation and insolvency, as well as helping to unlock investment capital.

Aon transaction solutions team (UK)

Meet some of the senior M&A insurance players at Aon:

Anka Taylor, a doyenne of the London insurance market and former Macfarlanes litigator, turned Hiscox underwriter and now Aon broker, leads the UK and European M&A insurance broking teams. E: anka.taylor@aon.co.uk

 

 

David McCann, a former ‘Magic Circle’ senior tax associate, manages Aon’s 12-strong tax insurance broking team across the region.
E: david.mccann@aon.co.uk

Specialist contingent risk, litigation and insolvency expertise:

Robin Ganguly, ex-Burford Capital Counsel, associate director at BCLP and Linklaters managing associate.
E: robin.ganguly@aon.co.uk

 

 

 

Nick Moore, former investment officer at Therium Capital Management and, previously, CMS Cameron McKenna associate.
E: nicholas.moore@aon.co.uk

What services does Aon provide from its ‘M&A and transaction solutions’ team?

Aon M&A and transaction solutions is the advisory business within Aon, a global professional services firm. At a high level, we help corporate, private equity and other financial investor clients manage volatility, optimise business performance and create value. We do this by providing specialist advice and structuring insurance-backed solutions which transfer risk to help enhance event-driven, growth capital and portfolio opportunities.

How is insurance relevant to M&A deals, corporate reorganisations and other event-driven situations like tax, litigation and insolvency?

In its classic sense, insurance is a risk management tool – a downside mitigant. Over the last 15 years, it has become increasingly used by clients as a value creator – to influence operational cashflows or capital structures positively by improving return on capital. Unsurprisingly, private equity clients led the way in the early days, but it has become a mainstream concept now within the M&A world, and more broadly.

Please elaborate, and explain how insurance can translate into ‘client value’ in this context?

The best-known example is warranty and indemnity (W&I) insurance, a solution which backs seller warranties in M&A deals and protects against ‘unknown’ risk, ie whether the warranties provided in a sale and purchase agreement (SPA) are untrue.

Offering an alternative form of security, W&I insurance can represent a ‘win-win’ for both buyer and seller alike. For the buyer, a more commercially oriented, better capitalised avenue of recourse for breach of covered SPA warranties is attractive in terms of preserving the value of its investment; for the seller, the ability to maximise ‘day one’ sale proceeds by avoiding an escrow, or either a price deferral or reduction, enhances deal returns.

In parallel, broader contingent risk insurance – which covers ‘known’ risks arising (among others) in a tax, litigation or insolvency context – has grown significantly in recent years. Insuring against tax uncertainty, for instance, can be both prudent in terms of risk management and financially beneficial in terms of outcome: by transferring the economic risk of an unexpected tax loss crystallising into the insurance market, cash flows can be protected as uncertainty is removed.

Structured credit solutions offer another way for clients to improve their balance sheet or find capital-enhancing alternatives in M&A deals, such as strengthening a buyer’s financial covenant in a deferred consideration arrangement, helping to replace a parent company guarantee in a carve-out or back-stopping the ‘certain funds’ obligation in a UK public takeover.

From a growth perspective, clients can use structured insurance solutions to attract a lower cost of capital into their business, with insurance ‘wraps’ helping to underpin intellectual property (IP)-backed lending or provide capital protection for investors in the structuring of a litigation portfolio.

How does Aon deliver client value when arranging these insurance solutions?

In our capacity as an intermediary, we act as a bridge to capital for clients.

While helping to transfer a diverse range of risks into the insurance market is a core part of what we do, our sights have a broader horizon as we seek to develop new and better ways to serve clients by driving market innovation to improve their access to capital.

As a relatively new class of insurance, M&A, tax and other event-driven solutions are probably in their adolescence, although the application evolves constantly. To become a sustainable client solution for the longer-term, however, we’re conscious that this insurance class (and W&I insurance, especially) needs to stay responsive to client priorities and continue to provide value in terms of capital and process efficiency, as well as outcome.

For this reason, we challenge ourselves – and our insurer counterparties – to develop solutions which improve clients’ access to insurance capital to best meet their needs, examples of which (focusing on the W&I insurance space) include the following:

• Improved pricing, diversified risk, deal efficiency: in 2022, we launched WinXS, our exclusive W&I ‘excess’ facility which offers clients dedicated ‘follow form’ London market W&I insurance capacity up to 60m (in GBP, EUR or USD) above a minimum primary layer of 25m. By streamlining the structure and cost of cover for deals involving an insurer syndicate, our clients can access the insurance market on a more competitive and risk-diversified basis.
• Improved pricing, enhanced cover, deal efficiency: in 2020, we established a proprietary real estate solution which integrates – into one policy – W&I and broader sector-specific cover to a higher limit (closer to a level more commonly found in standalone ‘insurance to title’ policies). This approach eliminates the cover, cost, and process dis-synergies which arise when separate policies are placed to cover these risks and allows faster client access to funds through any W&I claims process.
• Consistency of client outcome, deal efficiency: in 2018, we established a dedicated panel of insurers in the London market to help clients bridge differences in terms of how transaction insurance is obtained between US and European law deals. United States clients who are more familiar transacting with ‘rep and warranty’ (the equivalent of W&I) insurance for their domestic deals can replicate that style of cover on their European acquisitions, giving them access to the insurance market on a basis with which they are more familiar, creating consistency of client outcome and process efficiency.

We’re fortunate to have a team with a highly diverse collective professional background in law, tax, private equity, finance, investment and insurance. This breadth of experience lends perspective to each opportunity and provides the key ingredient: understanding the client risk and being able to articulate it effectively to the insurance market.

Equally, it’s essential to build confidence with our insurer counterparties – in terms of the integrity of both our submissions requesting underwriter terms at the front end of a process as well as the formal notification of claims made to insurers on behalf of our clients after the deal has been struck.

To achieve this, our insurer relationships are managed through a dedicated, senior M&A broking officer channel which oversees consistency of market approach and deliverability across the UK and Europe; and our clients benefit from specialist claims advocacy to ensure that, when presented to insurers, Aon’s claims – like its risks – have been reviewed through an expert lens.

How do buyers of this class of insurance benefit from these innovations?

Some of the larger, serial buyers of W&I insurance are, understandably, keen to ensure they get an appropriate return on their premium spend. Our discussions with them include exploring dedicated captive insurance arrangements and developing premium share investment structures with key insurer partners to improve cost structure and alignment of investment protection and return theses. In the smaller/mid-market space, some repeat buyers of W&I insurance look to drive process and cost efficiencies through standardised policy documentation and underwriting processes with a panel of insurers.

What sets Aon apart in this space?

We look to provide differentiated client service by accentuating a collaborative team ethos with multi-disciplinary capabilities – acting as a trusted adviser who combines industry and technical insight, together with strength in transferring risk. Our transaction advisory teams, which support clients by providing specialist due diligence – including digital, ESG, pensions and people – and our transaction solution broking teams offer complementary services which, taken together, can create added client value.

Tech deals are a good illustration of this: leveraging our advisory colleagues’ due diligence outputs can help improve the quality of W&I insurance cover which our brokers secure, particularly in relation to cybersecurity, data, source code and intellectual property. Providing underwriters with a better understanding of the relevant risk can give them sufficient comfort to include it as part of the W&I cover, thereby enhancing the quality of the client’s W&I cover and – as such – improving its value protection.

Aon UK Limited is authorised and regulated by the Financial Conduct Authority.

Registered in England and Wales. Registered number: 00210725. Registered Office: The Aon Centre, The Leadenhall Building, 122 Leadenhall Street, London EC3V 4AN. Tel: 020 7623 5500. FP.GLOBAL.1188.SECb

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