Major insurer ‘actively’ looking at insurance risk linked to M&A in Canada

Commercial brokers advising Canadian clients involved in mergers and acquisitions could soon have another market to which they could place transactional risk.

The Travelers Companies Inc. announced Jan. 15 it plans to offer transactional risk insurance in the United States.

Asked whether Travelers plans to write transactional risk in Canada, a company spokesperson replied, “not currently, but we are actively looking at it.”

Transactional risk is a category of coverage that includes representations and warranties (R&W), tax liability and contingent liability insurance.

In an M&A deal, R&W is intended to protect the buyer if a statement made by the seller turns out to be false – meaning the buyer ends up assuming liabilities that the buyer did not originally think he or she was assuming.

Global commercial brokerage Aon plc reported earlier it has observed an increase in demand for transactional risk insurance.

In its global M&A risk in Review Report, released in the fall of 2018, Aon said about a third (34%) of the addressable market, in North America, used R&W insurance in 2017. This is up from 20% in 2016. One reason for that increase in more insurers are offering R&W and other transactional risk coverages, Aon said. Aon considers the “addressable market” as including M&A deal valued at US$25 million or more.

Transactional risk insurance can help buyers and sellers close deals more efficiently and with more certainty, Travelers said Jan. 15 in a release.

Prices for transactional risk insurance have “continued to fall as a result of significantly increased competition in the insurer marketplace,” commercial brokerage Marsh said in a report Transactional Risk 2017: Year in Review, released in May of 2018. The average price fell nearly 13% in 2017, Marsh said in the report.

“Transactional risk is an exciting segment of the insurance market that has seen significant growth over the past several years, and it’s a natural extension of our current suite of specialty offerings,” Tom Kunkel, executive vice president and president of bond and specialty insurance at Travelers, stated Jan. 15 in the release.

The risk involved in M&A is on the minds of some Canadian risk managers.

For example, Corby Spirit and Wine Ltd. warned this past August it  “may be required to assume greater-than-expected liabilities due to liabilities that are undisclosed at the time of completion of an acquisition.”

Toronto-based Corby made that comment in its annual report for the year ending June 30, 2018. It is standard practice for publicly-traded firms to disclose, in their securities filings, risks which could affect their financial performance.

Corby’s products include J.P. Wiser’s whiskey and Lamb’s Rum, which are produced at a Windsor, Ont. distillery owned by Hiram Walker and Sons Ltd., which is Corby’s majority shareholder.

“A failure to realize, in whole or in part, the anticipated benefits of an acquisition may have a negative impact on the results or financial position,” Corby said in its annual report.