M&A drives boom for Concord

Concord Specialty Risk, a transactional risk insurance and loss mitigation specialist which is a series of RSG Underwriting Managers, is enjoying exponential growth in demand for its representations and warranties insurance products in relation to mergers and acquisitions, and also its tax insurance products. Multiple factors underpin the rapid growth of these products.

Concord’s representations and warranties insurance products are designed to insure companies against breaches, unforeseen liabilities and other problems following a merger or acquisition. For this product line, the number of submissions the company saw doubled in 2014 compared to the year before, the number of bound deals finalised also doubled and the gross written premiums it wrote more than tripled.

Dave De Berry, chief executive officer of Concord Specialty Risk, says that one of the biggest driving forces behind this growth was the fact that some of the key corporate law firms in the US, which often play pivotal roles in large acquisitions, have thrown their weight behind the product.

One of the most influential has been the law firm Kirkland & Ellis, which acts for many private equity funds on mid-market US deals in particular.

“The fact that these law firms have become such keen advocates of the policy has been a real game-changer for us,” De Berry says.

“That combination means that firms like Kirkland & Ellis recommend us but there is still room for upward trajectory."

The product has also gained traction for three other reasons. The first is that rates have come down, meaning that buying such a policy can represent a cost-efficient alternative to holding money in escrow. The second is that the policy’s terms (such as the definition of “damages”) have liberalised and generally follow the scope such terms are accorded in the underlying transaction agreement. Third, Concord Specialty Risk has demonstrated a solid track record of paying claims in full and on time.

“That combination means that firms like Kirkland & Ellis recommend us but there is still room for upward trajectory,” De Berry says. “There are many others who could benefit who are unaware of the product. Private equity funds are starting to dabble with it more so we feel there is a lot more growth ahead.”

He estimates that some 25 percent of transactions involving mid-market deals and private equity money now have parties buying a form of representations and warranties insurance. He believes that the percentage will continue to grow.

Tax insurance

The company is also seeing rapid growth in the uptake of some of its tax insurance products—a product bought by companies with complex or uncertain tax positions. From 2013 to 2014, Concord experienced a fivefold increase in bound deals year on year for the product.

“We are experiencing phenomenal growth in this area but for very different reasons,” De Berry says. “Sometimes it is bought in association with representations & warranties insurance but there are also several other factors driving forward the growth here.”

The first of three reasons he gives for this trend relates to the complex world of energy tax credits, which have been used by the US government to encourage investment into the ‘clean, renewable energy’ sector. Tax equity investors don’t necessarily want to become experts in and negotiate about the nuances that could reduce or negate tax credits. They want relative certainty. But a recent court case held that if a sponsor of a tax credit investment provides too much certainty, the tax credits may be disallowed. The IRS has itself suggested that a tax equity investor obtain tax insurance to close the gap created.

“The inherently subjective nature of whether sponsor guarantees negate ‘partner’ status, coupled with the complex set of rules governing the allocation and allowance of tax credits, joined by the fact that the IRS is encouraging investors to get tax insurance,” De Berry says, “has resulted in something of a boon for us.”

The second area relates to real estate investment trusts (REITs). He describes these as a historic problem in terms of the way the tax implications around investments are treated, especially where buyers want to liquidate assets and/or the REITs will have non-US investors, who seek to lawfully avoid the withholding requirements of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).  He describes growth in this area as robust for the business.

The third area of growth relates to public companies, which are increasingly purchasing tax insurance to protect themselves against unfavourable interpretations around the way they account for their tax liabilities, especially when they are operating in multiple jurisdictions.

“The directors of these companies have fiduciary responsibilities to their shareholders and are accountable for the accuracy of their financial statements.  An unreserved tax liability is especially troublesome because it not only distorts net income, but also constitutes cash out the door as well as reputational harm.  Tax insurance significantly ameliorates these risks. In particular, in today’s global and fragile economy, deployment and redeployment of capital is a necessity that spawns tax uncertainty ,” says De Berry.

This sector is growing. He believes that about $350 million of capacity is available now and this could increase to $500 million this year as new providers enter the market.

Two risks common to public companies involve tax-free reorganisations (including spin-offs and debt restructurings) and transfer pricing, where a multinational company operating in more than one tax jurisdiction must decide how to allocate costs and assets across a business, ultimately having a direct effect on where it pays tax and how much.

“There are guidelines from the OECD but this is a problem that confronts many companies. The tax authority in any of the jurisdictions they operate in could object to how they have done it. It is a problem for public companies and we are seeing growth in this area as a result.

“Responsible tax underwriting is a badge of tax accuracy for any public company, as well as risk transfer device and, when properly timed, a potential tool to render tax uncertainty to immaterial status (which could reduce the need for disclosure in SEC filings, etc),” he explains.”

David S De Berry is the chief executive officer of Concord Specialty Risk. He can be contacted at: daviddeberry@concordspecialtyrisk.com