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📝 '''Interim operating covenant''' is a contractual obligation in an insurance [[Definition:Mergers and acquisitions (M&A) | M&A]] transaction that governs how the target business must be operated during the [[Definition:Interim period | interim period]] between signing the [[Definition:Sale and purchase agreement (SPA) | purchase agreement]] and closing the deal. These covenants are designed to preserve the value, risk profile, and regulatory standing of the insurance entity so that the buyer receives substantially the same business it agreed to acquire. In insurance transactions, interim operating covenants are particularly granular because the target — whether an [[Definition:Insurance carrier | insurer]], [[Definition:Managing general agent (MGA) | MGA]], or [[Definition:Insurance broker | brokerage]] — makes consequential decisions daily that affect [[Definition:Loss reserve | reserves]], [[Definition:Policy | policy]] obligations, and [[Definition:Regulatory compliance | regulatory]] status.

⚙️ A typical set of interim operating covenants in an insurance deal will require the seller to operate the business in the ordinary course consistent with past practice, and then layer on specific restrictions tailored to the industry. Common provisions prohibit the target from materially changing [[Definition:Underwriting | underwriting]] guidelines or risk appetite, entering into or terminating significant [[Definition:Reinsurance | reinsurance]] agreements, amending [[Definition:Binding authority agreement | binding authority]] terms, settling large [[Definition:Claims management | claims]] above an agreed threshold without buyer consent, modifying [[Definition:Loss reserve | reserving]] methodologies, or allowing [[Definition:Insurance license | licenses]] to lapse. The covenants may also address capital management — restricting extraordinary dividends or capital distributions that could impair the target's [[Definition:Solvency | solvency]] position under [[Definition:Solvency II | Solvency II]], [[Definition:Risk-based capital (RBC) | RBC]], or other applicable regimes. Carve-outs and consent mechanisms are negotiated so that the seller retains enough flexibility to respond to genuine business needs, such as renewing key contracts or fulfilling [[Definition:Regulatory compliance | regulatory]] obligations, without being paralyzed by overly rigid restrictions.

🎯 The practical significance of interim operating covenants becomes clear when the gap between signing and closing stretches for months — which is common in insurance deals that require [[Definition:Change of control | change of control]] approvals from multiple [[Definition:Insurance regulator | regulators]] across different jurisdictions. During this extended window, the business continues to generate new exposures and process claims, and without clearly defined guardrails, the seller could — intentionally or inadvertently — alter the economics of the portfolio. A well-structured set of covenants, paired with a robust [[Definition:Interim breach clause | interim breach clause]], gives the buyer confidence that the business will not be degraded while awaiting regulatory clearance. For sellers, these covenants create a discipline that requires transparency and communication with the buyer, often through regular reporting obligations that function as an early form of [[Definition:Integration planning | integration]] collaboration.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Interim period]]
* [[Definition:Interim breach clause]]
* [[Definition:Sale and purchase agreement (SPA)]]
* [[Definition:Change of control]]
* [[Definition:Ordinary course of business]]
* [[Definition:Integration planning]]
{{Div col end}}

Definition:Interim operating covenant - Revision history

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