Definition:Purchase and sale agreement (PSA)
📝 Purchase and sale agreement (PSA) is the definitive legal contract governing the transfer of ownership in an insurance M&A transaction, setting out the terms under which a buyer acquires all or part of an insurance company, brokerage, MGA, or other insurance-related business. In the insurance context, the PSA carries a complexity beyond that of typical corporate acquisitions because it must address sector-specific considerations such as regulatory approvals from insurance supervisors, treatment of loss reserves and unearned premiums, continuity of policyholder obligations, and compliance with change-of-control provisions in reinsurance treaties and binding authority agreements.
🔧 A typical insurance PSA includes detailed provisions on purchase price and its adjustments — often tied to a net asset value or embedded value mechanism that accounts for movements in reserves between signing and closing. Representations and warranties sections tend to be extensive, covering the adequacy of reserves, the status of regulatory filings, the validity of licenses, and the absence of undisclosed claims or litigation. Conditions precedent to closing typically include obtaining approvals from the relevant insurance regulators — a process that can take months in jurisdictions such as the United States (where multiple state approvals may be needed), the European Union, or China. The agreement may also address transition services, restrictive covenants, and arrangements for run-off of legacy liabilities.
💼 Getting the PSA right is essential because errors or ambiguities can have consequences that ripple through the insurance business for years after a deal closes. Disputes over reserve adequacy, for example, can lead to significant post-closing purchase price adjustments and protracted litigation. Similarly, failure to properly address reinsurance relationships in the agreement may trigger cut-through provisions or loss of critical reinsurance recoverables. Buyers increasingly supplement the PSA with R&W insurance to cap their exposure to breaches of seller representations, a practice that has become standard in insurance-sector transactions across North America and Europe. A well-drafted PSA, informed by deep understanding of insurance operations and regulation, is the foundation upon which successful ownership transitions are built.
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