This article was provided by Charles de Mombynes (pictured), underwriting manager, M&A, France at AXA XL and Simon Price underwriting manager, M&A, UK & Lloyd’s at AXA XL.
Global mergers and acquisitions (M&A) returned to pre-pandemic levels in the first half of 2022, following a record-breaking 2021. Deal values declined by 20% in the first six months of 2022, but volumes fared better, returning to levels seen last in 2019, according to PricewaterhouseCoopers analysis. The decline followed an unprecedented 24% growth in global deal volume in 2021, with total deal values reaching US$5.1 trillion (PWC).
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With pent-up demand from the pandemic, 2021 will almost certainly be an outlier. In contrast, the story of 2022 has been one of inflation, which together with rising interest rates, is creating uncertainty for deal makers and making for more challenging due diligence and financing.
Despite mounting headwinds, however, M&A activity is expected to remain robust. Acquisition remains an important strategic tool and is seen by many businesses as a way to transform in the digital and Net Zero age. In addition, today’s complex macro-economic environment may present some investors with potential opportunities. Deals launched during periods of economic uncertainty can achieve outsized growth and better returns, according to research by PWC.
Clean exit and sleep-safe protection
Over the past decade, M&A insurance, also known as transactional insurance, has shed its niche status and is now widely applied to M&A transactions, large and small, both corporate and private equity. Both buyers and sellers increasingly recognise the value of M&A insurance, which provides the latter with a clean exit, and the former with the comfort of recourse to a highly-rated insurer.
The core M&A insurance product – warranty and indemnity (W&I) insurance, known in the US as representation and warranty insurance – remains compelling. W&I insurance has become a valuable tool for M&A deals, sharing the risks of transactions between sellers, buyers and insurers.
In addition to W&I, insurers can also cover some contingent risks, usually relating to outstanding litigation or tax issues, which are increasingly wrapped into W&I policies. Expert insurers can even identify contingent liabilities during due diligence and craft bespoke risk transfer solutions.
Mutual benefits
M&A insurance is mutually beneficial for sellers and buyers, de-risking the transaction and bridging gaps between the expectations and needs of both parties.
For the seller, W&I insurance can unlock a greater proportion of the sale proceeds, reducing escrows, purchase cash holdbacks, or contractual claims under a sale and purchase agreement. It can also help maximise the sale price by driving competition – by offering warranties and indemnities, backed by insurance, a seller can attract more interested parties. For management buy-outs and take-private transactions, W&I insurance provides an alternative to seeking recourse against warrantors.
W&I provides the buyer with extended warranty coverage and a secure counterparty in case of a warranty claim. For example, W&I cover can give added protection above any negotiated indemnity cap, as well as a longer survival period for indemnification resulting from breaches. When underwritten by a professional and highly rated insurer, W&I insurance gives the buyer confidence that they can collect on warranties and indemnities, even in cases of insolvency of an unsecured indemnitor.
Opportunities in untapped markets
Following a bumper year for M&A deals in 2021, demand for M&A insurance is expected to remain strong, driven by increased product awareness and untapped potential in Continental Europe and Asia Pacific.
As the market has evolved, M&A insurance has gained wide acceptance among legal professionals, private equity firms and corporates in more mature Western European markets. However, penetration levels are as low as 10% in European jurisdictions, compared with up to 30% in well-established markets. Prospects in Germany, Netherlands and the Nordics remain strong, while momentum is building in France and southern Europe, where penetration is still relatively low. New markets in Europe are steadily opening up as brokers invest in specialist capabilities and market education, most notably in Spain and Italy.
The outlook is also positive in Asia Pacific, where we have seen a number of large well-run transactions, as well as growing recognition of the value of M&A insurance. W&I insurance is already established in Australia, while we have experienced growing interest in transactions across the wider region.
Evolving market conditions
The M&A insurance market continues to evolve, with increased take-up of the product alongside greater expertise among underwriters. Insurers’ understanding of exposures has increased with experience, and underwriters are now better able to identify potential weaknesses in deals.
With record M&A activity in 2021, capacity was in short supply at the end of last year. However, the market continues to expand and attract new capacity and players. As a result, the M&A insurance market is now able to offer limits per transaction in excess of $1.5bn, further expanding the scope of deals now covered by insurance.
Market conditions hardened towards the end of 2021, following a sustained period of market softening. Over the course of this year, pricing has stabilised somewhat, with improved conditions for the most attractive risks, but remaining firm for larger more complex transactions.
Local expertise
Whether it is mergers and acquisitions, divestitures, spin-offs or private equity investments, no two deals are the same. As such, buyers and sellers need an insurer that has the knowledge and expertise to understand the unique risks associated with each case, and the nuisances of local markets.
With specialist M&A teams in the US, UK and France, AXA XL offers W&I, contingent liability and tax liability insurance solutions globally. As the market enters its latest phase of development, we continue to build our M&A insurance capabilities. In October, Fred Kelleher joined AXA XL as an M&A Underwriter in London, with plans to further add to our team in Europe in due course.
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