February 9, 2024

R&W Insurance: Claims Still Common With Established Targets and Sophisticated Buyers

Euclid Transactional recently released the results of its first study of R&W claims. The study covered claims received from July 2016 through June 2023. “With 5,089 policies placed, 1,040 claims received, and 97 payments made,” Euclid believes “this is the largest data set used in an RWI claims study produced by an underwriter to date.” This clip from the intro discusses claim volume and premium trends:

Although we are receiving claims in record numbers, pricing of RWI is approaching an all-time low. The surge in claims is expected. During the busy period from the second half of 2020 through the first half of 2022, an estimated $250 billion of transactional liability limits were placed into the market. The claims from that high-volume period are still making their way to us and we expect the number of claim notices we receive to remain elevated throughout 2024. In fact, we received the most claims we had ever received in a month in July 2023, the month after the data for this study was finalized.

Meanwhile, premiums for RWI have decreased dramatically. Deal volume, particularly with respect to larger deals, has dropped from the peaks of 2021 as rising interest rates led to a challenging lending environment and a mismatch in pricing expectations between buyers and sellers. With less deals to insure, rates in the RWI market have decreased throughout 2023. We are monitoring this trend closely, as adequate rate is required to underwrite profitably.

The data highlights that the risk of a claim doesn’t necessarily decrease with more established target companies or more sophisticated acquirers:

It is commonly assumed that acquiring a founder-owned target would present higher risk than buying from a financial or strategic seller. And yet 82.8% of our Loss Paid is attributable to policies bound where the seller was either a corporate parent or financial sponsor, which closely correlates with the 77.8% of our policies bound with such sellers. Even in these deals, risk remains.

Further, when acquiring portfolio companies, large private equity funds typically engage the best advisors and perform some of the most sophisticated due diligence money can buy. Once acquired, rigorous processes are required to satisfy the reporting obligations of funds and lenders. As a result, one might expect fewer claims or lower Loss Paid on deals involving these large private equity funds. However, 21% of our Claim Payments, resulting in $188M of Loss Paid (over a third of our total Loss Paid), have been made where one of the top 25 largest private equity funds in the world is on at least one side of the transaction.

Meredith ErvineĀ