Maximizing the Benefits of Your RWI Underwriting Call

What is R&W insurance?

Representations and Warranties (R&W) insurance, sometimes called RWI, is a type of insurance used in mergers and acquisitions (M&A) to protect buyers and sellers from financial losses arising from breaches of the seller’s representations and warranties in the transaction agreement. It mitigates risks by covering potential inaccuracies or undisclosed issues discovered after closing the deal.

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Some tips to help you prepare for your R&W underwriting call

If you are involved in mergers and acquisitions (M&A), you might be familiar with representation and warranty insurance (RWI). This insurance(R&W) compensates the buyer if the seller breaches any representations or warranties outlined in the purchase agreement. Although there are policies for sellers, this discussion will focus on buyer-side policies, which are more common. RWI aids in ensuring a smooth and efficient deal closure and offers protection against disputes and liabilities that may arise after the deal is closed.

Before obtaining RWI, you must go through an underwriting process, typically involving a call with the underwriters. This call is crucial as it is one of the few times the insurer directly interacts with the buyer and their advisors instead of going through the insurance broker, who usually handles all information and communication. During the underwriting call, the underwriter asks questions and addresses any issues or concerns related to the deal, the involved parties, the due diligence process, and the negotiation of the purchase agreement. The quality and outcome of this call can greatly impact the terms of the RWI policy, particularly in relation to coverage exclusions.

How can you effectively prepare for and conduct a successful underwriting call?

Combining strategic preparation, effective communication, and best practices ensures a successful Representations and Warranties (R&W) insurance underwriting call. Here’s a comprehensive guide incorporating these elements:

1. Preparation

Understand R&W Insurance:

Definition: R&W insurance covers breaches of representations and warranties in an M&A transaction, providing protection for both buyer and seller.
Scope: Understand the extent and limitations of the coverage, including exclusions and conditions that might apply.

Review the Transaction Details:

Transaction Specifics: Deeply understand the transaction’s specifics, including the purchase agreement, due diligence reports, and financial statements.
Market Context: Familiarize yourself with the industry context and market conditions surrounding the transaction.

Gather Key Documents:

Essential Documentation: Compile all necessary documents such as the purchase agreement, disclosure schedules, due diligence reports (legal, financial, operational), financial statements, and relevant third-party reports or audits.
Document Accessibility: Ensure all documents are easily accessible and organized for quick reference during the call.

Understand the Risk Profile:

Risk Identification: Identify potential risks and areas of concern that the underwriter might focus on.
Mitigation Strategies: Be prepared to explain how these risks are being mitigated, including any risk management strategies or contingency plans in place.

Coordinate with Counsel and Advisors:

Consistency: Coordinate with your counsel and other advisors to ensure consistency in the responses provided to the underwriter.
Role Assignment: Decide which team member will handle each agenda question and consider doing a practice run of the call beforehand.

Prepare Your Presentation:

Clear Objectives: Clearly outline the purpose of the call and the main points you want to cover.
Key Highlights: Highlight key representations and warranties and any disclosures made.
Due Diligence Insights: Prepare to discuss the due diligence process and findings, emphasizing how it has addressed potential risks.

Anticipate Questions:

Concerns and Queries: Think about potential concerns the underwriter might have regarding the transaction.
Detailed Responses: Prepare detailed answers to common questions about the representations and warranties, financial health, and any identified risks.

Practice:

Rehearsal: Rehearse your presentation and responses to potential questions with a colleague or mentor to ensure smooth delivery and confidence.

2. Conducting the Call

Start with Introductions:

Brief Introductions: Briefly introduce yourself and your role in the transaction.
Participant Roles: Ensure all participants are introduced and understand their roles.

State the Purpose Clearly:

Objective Clarity: Begin by stating the purpose of the call and what you hope to achieve.

Present Key Information:

Structured Presentation: Use a structured approach to present the most critical information first.
Transaction Overview: Discuss the transaction overview, key terms, and the rationale behind the deal.

Discuss Representations and Warranties:

Key Points: Highlight the key representations and warranties in the agreement.
Impact of Disclosures: Discuss any significant disclosures and how they impact the transaction.

Explain Due Diligence Process:

Due Diligence Details: Detail the due diligence process and any significant findings.
Risk Addressal: Explain how due diligence has addressed potential risks.

Use Visual Aids:

Visual Support: Share your screen to present charts, graphs, and documents that support your points. Visual aids can help make complex information more understandable.

Be Honest and Transparent:

Address Weaknesses: If there are weaknesses or risks, address them directly.
Mitigation Plan: Provide a clear plan on how you intend to mitigate these risks.

Encourage Questions and Feedback:

Open Dialogue: Invite the underwriter to ask questions at any time.
Thoughtful Responses: Listen carefully and respond thoughtfully to their concerns.

Summarize Key Points:

Recap: At the end of the call, summarize the main points discussed.
Next Steps: Confirm any follow-up actions or next steps.

3. Post-Call Follow-Up

Thank-You Email:

Gratitude: Send a thank-you email after the call, reiterating key points and next steps.
Additional Information: Provide any additional information requested promptly.

Respond to Follow-Up Questions:

Follow-Up: The underwriter will compile a list of follow-up questions from the call. Respond promptly and accurately to these questions, even if they differ from those initially identified during the call.

Evaluation and Feedback:

Internal Review: Conduct an internal review of the call to evaluate performance and gather feedback.
Continuous Improvement: Identify areas for improvement for future underwriting calls.

Consider these tips for success:

Be prepared. Before the underwriting call, thoroughly review the deal documents, due diligence reports, and, if available, the draft RWI policy (although the RWI policy is usually provided after the call). Go over the agenda given by the underwriter and try to anticipate any questions or issues they might bring up; have the necessary information and documents ready to address these points. Coordinate with your counsel and other advisors to ensure consistency in the responses provided to the underwriter. Decide which team member will handle each agenda question and consider doing a practice run of the call beforehand.
Be forthright. Answer questions fully and truthfully, providing the basis for any conclusions when appropriate. Underwriters are not interested in responses like “we got a representation to cover that matter.” Instead, they want to understand your independent diligence, as they are insuring the accuracy of the representations.
Be concise. The underwriting call typically lasts two hours or less. Skip lengthy introductions and background information, and focus on the main points of the deal and the diligence process. Provide clear and accurate answers to the underwriter’s questions, avoiding unnecessary details or digressions. If you do not know the answer to a question, do not guess or speculate; instead, inform the underwriter that you will follow up with the information after the call, if requested.
Answer the follow-ups asked. The underwriter will compile a list of follow-up questions from the underwriting call and circulate them afterward. Sometimes, the underwriter may decide that a follow-up question mentioned during the call is no longer necessary, and it won’t be posed. Therefore, you only need to respond to the follow-up questions that the underwriter specifically asks, even if they differ from those initially identified during the call.
Be patient. Keep in mind that while you have spent a lot of time reviewing the materials and understanding the transaction’s issues, the underwriter has only had a few days to do so. The underwriting call is not meant to catch you off guard; rather, it is an opportunity for the underwriter to comprehend a large amount of information in a short period.
Be consistent. The underwriter will compare the information you provide during the call with the details in the deal documents and due diligence reports. Ensure your answers align with the written materials. If there are any discrepancies or gaps, provide clear explanations. Underwriters understand that additional diligence might be done or new information may become available after a diligence report is provided but before the underwriting call. If this happens, simply explain it to the underwriter.
Be courteous. The underwriting call is not solely for gathering facts but also for building a relationship. The underwriter aims to assess your credibility, professionalism, and trustworthiness. Be polite and respectful, and avoid being defensive or confrontational.

conclusion

In conclusion, preparing for a representation and warranty insurance (RWI) underwriting call is essential for ensuring a smooth and efficient transaction in mergers and acquisitions (M&A). By thoroughly reviewing deal documents, coordinating with advisors, and practicing the call, you can anticipate and address the underwriter’s questions effectively. Being forthright, concise, and consistent in your responses helps build trust and credibility with the underwriter. Additionally, answering follow-up questions diligently and maintaining a courteous demeanor can significantly influence the terms of the RWI policy. Adhering to these best practices will enhance your chances of securing a favorable RWI policy with minimal exclusions, thereby protecting your interests and facilitating a successful deal closure.

FAQs

What is the purpose of an R&W underwriting call?

The R&W underwriting call is a key step in the process where the underwriter, the buyer, and their respective advisors discuss the specifics of the transaction, the representations and warranties, and any potential risks. This assists the underwriter in evaluating the risk and setting the conditions for the insurance policy.

What should be prepared for an R&W underwriting call?

Preparation for an underwriting call includes:

A narrative of the transaction.
Drafts of the purchase and sales agreement.
Financial statements and a quality of earnings report.
An executive slide deck or Confidential Information Memorandum (CIM).
The buyer’s due diligence report.

How long does the R&W underwriting process take?

The underwriting process typically takes 7-10 business days once the underwriter has received all necessary diligence materials, including third-party diligence reports and drafts of the acquisition agreement and disclosure schedules.

What are common exclusions in R&W policies?

Common exclusions in R&W policies include:

Breaches known to the buyer’s deal team.
Purchase price adjustments.
Injunctive or equitable relief.
Environmental and tax issues.
Specific industry-related exclusions, such as labor law matters or cyber risks

Can R&W insurance cover synthetic representations and warranties?

While R&W insurers are generally reluctant to offer synthetic representations, some insurers in specific markets may provide synthetic warranties where the seller is unable or unwilling to make certain warranties in the transaction agreement.

What is the role of diligence materials in the underwriting process?

Diligence materials are crucial as they help the underwriter assess the quality and depth of the buyer’s due diligence. This includes legal, financial, and operational reviews. The underwriter relies on these materials to identify potential risks and determine coverage terms.

What happens if the underwriting call identifies issues?

If issues are identified during the underwriting call, the underwriter may ask for further information or clarification. Depending on the nature of the issues, there might be specific exclusions or conditions attached to the policy to address these risks