W&I
Overall W&I Trends
The W&I market continued to be buoyant in 2023, with 84% of all transactions featuring a W&I policy. The market capacity constraints seen in Q4 2021 were not repeated in either 2022 or 2023 as deal volumes were lower and more insurers have entered the market during this period. Alongside W&I policies, we are increasingly seeing buyers and sellers contemplate more bespoke insurance products for specific risks such as tax, title risk and litigation. Whilst the bespoke nature of such policies means trends are less obvious, as pricing on such products becomes more attractive we expect to see both buyers and sellers consider these products more often as an alternative to a significant price reduction or indemnity protection for identified risks.
The Dominance of the £1 Cap
On transactions where W&I was purchased, there was another increase in 2023 of W&I policies with a £1 or nominal cap on liability. In 2023, this reached 88% of transactions where W&I was purchased, up from 55% in only 2020. It is increasingly rare to see anything but a £1 cap on liability being offered by sellers in transactions involving financial sponsors unless there are specific circumstances justifying an alternative approach.
Excess
The average excess for W&I policies taken out in 2023 was equal to 0.5% of enterprise value, a figure which has been relatively consistent for a number of years now. However, insurers are increasingly able to offer excesses on a “tipping to nil” basis when the loss exceeds the agreed excess, for an additional premium.
Pricing
After reaching highs of 1.50% in 2022, average premiums have begun to decline again, with the average premium in 2023 being 1.40%. As more insurers have entered the market and capacity constraints have eased, we expect this will continue to decrease during 2024 and we saw indications of this in transactions in second half of 2023.
Warranties
Threshold & De Minimis
The most common claims threshold (being the financial threshold which warranty claims must exceed in order for financial recovery to be permitted) continues to be 1% of enterprise value.
The most common de minimis (being the minimum amount of any claim to be permitted or permitted to count towards the threshold) continues to be 0.1% of enterprise value.
In both cases, these statistics have been consistently static for a number of years now. However, there is increasingly flexibility to have a lower threshold and de minimis in a W&I backed transaction as insurers will typically follow the approach taken in the SPA, and insurers are often willing to do so for minimal additional premium.
Time Limits
For general business warranties, 12 months is now the most common limitation period for claims against the warrantors. However, this is commonly extended in W&I policies to 24 or 36 months.
For tax claims, whilst seven years is the most common limitation period, more than half of transactions had a limitation period of four years or less in the SPA. Again, this reflects the ability under insured deals to extend coverage under the W&I policy, typically to seven years.
Blanket Awareness
71% of transactions last year featured a “blanket awareness” qualifier applied to business and tax warranties, which is relatively static compared to 2022, but a significant increase from 48% in 2021.
On transactions where a blanket awareness qualifier is included (or indeed any transaction where some of the warranties are qualified by awareness), it is common for a W&I policy to include a “knowledge scrape” enhancement (typically for an additional premium). For the purposes of the policy, some or all of the warranties which are qualified by the awareness of the warrantors will be deemed not to include this awareness qualifier.
Tax Covenants
Tax covenants were seen on 76% of transactions, a second consecutive year of slight decreases, down from a high of 83% in 2021. It remains to be seen whether this is a short term blip as a result of unusual market conditions or whether it turns into a longer term trend, as we see tax covenants as standard on W&I backed transactions where warrantor liability is capped at £1. On sales by financial sponsor sellers, it remains extremely rare for a tax covenant to be given other than where capped at £1.
