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Insurance offered to cover loans backed by intangible assets

intellectual property

As more companies use intellectual property as collateral for loans, an insurance market designed to help facilitate the deals is emerging, industry sources say.

While the use of intellectual property such as patents, trademarks, copyrights or other trade secrets to back loans is not new, the assets have previously been underserved by the insurance market, experts say.

Sometimes using insurance-linked securities structures, the insurance coverage kicks in if a borrower defaults on a loan and the value of the intellectual property used to guarantee the loan doesn’t cover the lost value.

Aon PLC, which has sought to grow its intellectual property insurance business for the past several years, placed its first such deal last month. 

The coverage structured for Indigo Ag, an agricultural technology company that borrowed over $100 million using its intellectual property as collateral, is insured by a group led by Richmond, Virginia-based Markel Corp.

“This asset class was woefully underserved in insurance markets and financial markets,” said Lewis Lee, CEO for IP Solutions at Aon PLC, who worked as an intellectual property lawyer prior to joining the brokerage.

Other brokers including Marsh LLC are involved in placing coverage for intellectual property collateral, and PIUS Limited LLC, a managing general agent in Menlo Park, California, also offers a product.

Half of the more than 130 people on the intellectual property insurance team at Aon are building a natural language processing system to assess and value intellectual property assets, Mr. Lee said.

Intellectual property can be “mapped” to see where it would fit in its market to help understand its value once in use, he said.

Once the assets are assessed a value, risks can be quantified and insurance coverage crafted, Mr. Lee said. “If you can measure value, then people can lend against it.”

Aon has more than 20 further deals in the pipeline, said Nicholas Chmielewski, chief broking officer for IP solutions at Aon PLC.

Customer profiles range from companies that have yet to generate revenue but have contracts in place to companies generating revenue in the hundreds of millions of dollars, he said.

“Over the last two years, we have received a few serious inquiries regarding this type of coverage,” said Jason Sandler, a vice president in Marsh’s FINPRO practice in New York.

The driver of the increased activity, Mr. Sandler said, “is essentially less expensive debt financing. Insurance-backed valuations of IP assets allow borrowers to obtain debt financing with much less risk involved for the lenders. Less risk, in theory, should translate to a lower interest rate and perhaps larger loan amounts.”

More broadly, the market for intellectual property cover of all types has grown.

“We’ve seen a massive uptick at Aon of insurance buyers for intellectual property,” Mr. Chmielewski said, adding that historically, only a “handful” of clients bought IP cover. Policy counts have gone from the single digits to “closing in on 100 now,” he said

“I do think you’ve got more people buying it,” said Kim Cauthorn, chief operating officer of PIUS, who previously worked in intellectual property insurance at Willis Towers Watson PLC.   

PIUS focuses on loans between $5 million and $25 million according to Joe Agiato, CEO of PIUS. These tend to be technology-based companies that see an “upward trend” as far as product adoption is concerned, but not startups.

“The coverage is particularly attractive to early stage growth companies that do not otherwise have sufficient tangible assets to pledge as collateral to obtain affordable debt financing,” said Mr. Sandler of Marsh, who works with PIUS and is in discussions with other providers about coverage for loans.

The PIUS policy is issued to a lender that has extended credit against the intellectual property of a company, Mr. Agiato said. “We’ve been doing this about three-and-a-half years and have completed a number of successful transactions,” he said.

The residual value policy pays the outstanding loan amount upon default even if the value of the intellectual property is less than the outstanding loan amount at the time of the default, Ms. Cauthorn said. If a borrower can’t service its debt, not necessarily due to an impairment of the intellectual property, the coverage is triggered.

The evaluation of the worth of the intellectual property takes place within the context of what it would be worth if had to monetize it, “which doesn’t necessarily mean sold,” Mr. Agiato said.  “That monetization can take place in one of a number of ways,” including licensing and royalties.