Agents and Warranties: Trends to Watch in Spring 2022 | woodruff sawyer

We know it is essential to keep our customers as up-to-date as possible in the relatively small and rapidly developing RWI market.

This month we witnessed a very substantial drop in prices, as well as an equally substantial increase in the number of listings and the competitiveness of the market. In this blog, we will update the data and analyze emerging trends.

What RWI New Deal Activity In April Means For The Future

Although the M&A market continues to flourish, we saw a drop in activity in the first quarter. That’s entirely common in the M&A cycle, with the first quarter traditionally being the slowest. See below for Euclid’s transactional filing rate analysis for the first quarter. This shows a marked decrease from the last quarter of 2021, but slightly higher than the first quarter of 2021.

However, we believe that an air of hesitation entered the market in mid-March which we believe is due to financial concerns related to interest rates and geopolitical instability. As reported by Paul Weiss, “March was the second consecutive month of decline in the number of transactions.” Summary of mergers and acquisitions (April 2021) | Paul, Weiss (paulweiss.com)

Year-over-year and quarter-over-quarter comparison: a historical look at trends

RWI Global Policy Presentations by Year

RWI statistics

As we can see below, the market has responded quickly to this change in conditions. While activity may be on par with the first quarter of 2021, subscribers and markets increased in response to last year’s increased activity and therefore face the level of activity in 2022 with more capacity and more staff. .

Overall, the news was very good for our customers and for those who need representative insurance and warranties. The average number of listings has skyrocketed and the premium prices we’re seeing are on par with early 2021, if not a bit more competitive.

The lowest quote we saw was 2.98%, a return to early last year in pricing terms. Unlike last month, this low number was not as outlier as previously seen. We are pretty much in the 3.5 to 4.5% range for most quotes right now.

The average share price fell from 5.1% to 3.5%, which represents a substantial decline and shows the market’s ability to quickly adapt to changing circumstances. To put this in context, if you bought a $10 million policy in March you would have paid approximately $510,000 and if you bought the same policy in April it was more likely to cost $350,000.

Global volatility trends, February, March and April

The average number of listings went from just over 4 to 10 per risk, showing the continued oversupply of underwriting capacity due to reduced deal flow, increases in human capital and new market entrants.

As we saw earlier, the lowest price was 2.98, which is a significant drop. What is just as noteworthy is that the top price has also dropped from 5.9% in March to 4% in April, again a substantial saving for deals listed this month compared to the previous month.

Trends in RWI “Elevated Risk” You Should Know

Anyone with experience in the RWI policy placement process should be familiar with the highest risk areas listed in each NBIL. These are the specific areas of the deal that underwriters will focus on during their due diligence review by the buyer’s advisory team. If diligence is lacking in one of these areas, insurers will likely look to build an exclusion into the policy for that portion of the risk.

Ukraine and Russia continue to be a higher risk area. However, we have seen subscribers abandon the blanket approach and focus on those transactions where there is likely to be a real problem rather than wanting to dig deeper into each transaction.

Three RWI litigation cases

Arbitration as a first port of call is standard in RWI’s policies. Historically, litigation surrounding RWI has been difficult to find. There are currently three active cases in the court system at this time. They’ve been around for a while, but we think they’re worth exploring a bit.

The three cases are:

Novolex Holdings, LLC v. Illinois Union Ins. Co, index number 656825

This dispute centers on the seller’s knowledge of its third-largest customer’s intent to significantly reduce business. A decision is currently pending on the motion for summary judgment of the Insured.

A fuller analysis can be found here The Novolex case brings insurance lessons R&W – Lexology

WPP Group USA, Inc.v. RB/TDM Investors, LLC, Index No. 656825

This case focuses on whether financial projections were misrepresented and is currently in the discovery process. It is interesting to note that in the WPP case the insured had the right to decide between arbitration and litigation and chose litigation.

You can find a more complete analysis here WPP Grp. U.S.v. RB/TDM Inv’rs, 2021 NY Slip Op. 30160 | Case Text Search + Citator

pH Beauty Holdings III, Inc.v. Certain Lloyd’s Underwriters, Case No. 21-1586 BLS

This case focuses on the failure to account for millions of dollars in promotional expenses that resulted in purchase price inflation.

More case details can be found here PH Beauty sues insurers to cover losses from ‘inflated’ deal | Reuters

None of these cases are solved at this time and further discovery is expected. Therefore, we anticipate that unless a settlement can be reached quickly or through arbitration, long-term disputes are likely to be the norm.

All relate to claims of more than $10 million. We would expect litigation to come into play for higher limit claims and we do not see this trend shifting towards smaller claims. All three cases relate to the accuracy of financial statements or significant customers. We hear from the market that complaints around material customers are much more frequent and are increasing recently. While this is not relevant to the above, we expect this cause of conflict to continue. Material contract claims are where we see Covid issues materialize in that Covid is often the inciting incident that leads to a supplier or customer being unable to maintain existing conditions.

What does this mean for you? As these make their way through the courts, it will be interesting to see how this affects the buyer’s desire to retain the right to litigate in court, either expressly or by keeping quiet about the venue options. We imagine that insurers will resist, because they generally want to arbitrate as the first port of call. In some cases, arbitration is the only method of dispute resolution.

Moving Forward: RWI Trends to Watch

The market is back to early 2021 levels in terms of pricing and competition. We imagine this will continue for the foreseeable future as the war in Ukraine and the domestic economy unfolds, affecting the M&A market and number of filings.

The market has come to terms with the Ukraine situation much more quickly than with COVID-19 and we expect this to continue as well.

We anticipate more negotiation and pressure on dispute resolution clauses and more diligence on material contract representatives in the future.

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