In this article our consultant Andrea Hutchinson explores the growth in the Transactional Liability market, focusing specifically on Warranty & Indemnity (W&I) insurance opportunities in London and why this offers a compelling career opportunity particularly for lawyers with corporate or tax experience.
Mergers & Acquisition (M&A) activity over the past two years has been on a stable incline; according to ‘The Deloitte M&A Index 2016’, 2015 was the highest for deal values since 2007, ending with around $4 trillion worth of deals being completed worldwide. With this increased activity comes increased risk on behalf of buyers and sellers. To combat this risk, the global Transactional Liability market, which offers solutions designed to reduce the impact of liabilities arising from M&A, including Warranty & Indemnity (W&I) insurance, tax consequence and contingent liability insurance, is also on the rise.
W&I Insurance history
W&I insurance has been around since the 1980s and was, historically, exclusively used by sellers, largely in private equity, as a protection measure where they had given warranties to prospective buyers. Throughout the 1990s W&I insurance products broadened in scope to offer more bespoke coverage. For example, where sellers were unable to provide buyers with the appropriate level of warranty in case of breaches during a merger or acquisition, underwriters developed a more customised solution.
Since then W&I insurance products have evolved from expensive, burdensome ‘add-ons’ to essential ‘deal facilitators’ on transactions.
W&I Insurance today
A significant change in W&I insurance products has been their uptake outside of private equity, into real estate and corporate transactions. Reports from 2015 suggest that there is now a near 50/50 split in representation of W&I insurance across private equity and corporate/real estate deals and it’s on the increase.
Secondly and significantly, W&I insurance products today are increasingly more flexible, moving on from only covering a breach of warranty to include indemnities and fraud. In addition, in the past these products were typically aligned with deals of $25 million to $1 billion, but now there is uptake for deals of a range of sizes, with smaller deals regularly being underwritten.
The existence of W&I has now started to become a major factor in deals with their existence in a deal becoming a real benefit. For example, an insurer client of SSQ recently described how their client, a large corporate and the seller in a transaction, opted for a particular buyer not only for financial reasons, but also because they had a W&I insurance policy in place adding additional security and reassurance on their behalf, ultimately securing them the deal. We believe this will become standard practice in transactions. Reports suggest a 20% increase in W&I insurance use over the past three years.
What is the impact on the legal recruitment market?
The insurance market is no stranger to ‘up skilling’ their business teams. It is a well-trodden path for litigators to bolster claims teams and for commercial lawyers to join policy wording groups and now corporate and tax lawyers are able to follow suit. Opportunities are particularly prevalent for corporate and tax lawyers with private equity and real estate experience to join Transactional Liability teams in underwriters and brokers in the City and internationally.
For our clients, the attraction of hiring a solicitor is to harness their M&A or Tax insight as well as their ability to understand deal requirements from a different perspective, comprehend the mechanics of M&A and Tax documentation and help to facilitate overall deal timetables.
Over the last year we have seen a number of our clients looking to expand their teams with additional lawyers; however, often lawyers themselves do not see the real benefit of moving into such a business focussed role. In reality these roles can be very appealing for solicitors as they present the opportunity to have:
1. Increased client contact. Unlike in private practice, W&I teams have responsibilities over and above drafting, reviewing and negotiating documents. This includes liaising with clients to discuss tactics and products directly, using both legal and commercial knowledge.
M&A or Tax solicitors add huge value to underwriting/broking teams as they have the skills help to give clients and their employers themselves an overall appreciation of how the documents work without having to necessarily construct the document itself. This appeals to solicitors looking for a more entrepreneurial, ‘hands on’ role.
2. More involvement in corporate advisory work. Alongside advising on transactions and products, W&I lawyers have the added benefits of advising and considering matters outside of their typical practice area, for a corporate lawyer for example this may include pricing and Business & Occupation (B&O) Tax Classifications. This allows for a broader understanding of a transaction and for developing commercial awareness and business acumen.
3. Increased deal exposure. In private practice a typical corporate lawyer may be exposed to 2 or 3 deals a month, often times focused on negotiating similar terms repeatedly. In a Transactional Liability team lawyers are often exposed to 6 or 7 deals a month, across various sectors, on a more macro level. In addition, W&I lawyers still maintain negotiation skills when working with underwriters on policy creation.
4. Strong long-term career prospects. Transactional Liability offers long-term and highly lucrative career prospects. W&I insurance roles sit uniquely between legal in-house and purely business roles, opening doors long-term on both sides. Lawyers moving into underwriting/broking roles in the industry have often quickly climbed the ladder to management roles or gone on to head up their own businesses.
With all the signs showing that the M&A market is continuing to pick up momentum we expect that more and more businesses will see the value of W&I insurance and will be looking for experts with these specific skills. We have already built up a strong track record within the Transaction Liability space, placing corporate and tax lawyers into leading underwriters and brokers in London, Germany and Australia. We therefore have an in-depth understanding of the market both in the UK and internationally and can help candidates and clients alike with their requirements within this growing niche market.