Pricing in the representations and warranties (R&W) insurance market has softened relative to the hard market conditions experienced from the start of 2021 into the first half of 2022, industry professionals told CU.
R&W insurance protects against financial loss arising from breaches in merger and acquisition (M&A) agreements. And prices for this line of insurance rose amid a frenzy of deals from late 2020 through the first half of 2022. But pricing’s now moderated, said Jonah Goldberg, head of Canada with Liberty Global Transaction Solutions.
Pre-pandemic, R&W pricing was relatively soft in North America, combined with clean quotes from insurers and more capacity in the market. That flipped on its head in 2021 and 2022, when there wasn’t enough underwriting capacity.
“Pricing went up and coverage correspondingly tightened, and that was primarily in response to the supply and demand,” Goldberg said. “That’s now shifted back the other way, where there’s a more normalized level of M&A activity. On a historic basis we’ve dipped into softer market territory.”
Pricing for R&W has “come off the highs of the second part of 2021 and has returned to the levels we saw in prior years,” agreed Craig Schioppo, global transactional risk practice leader for Marsh.
And 2023 is off to a relatively muted start, said Goldberg, due to continuing supply chain issues, inflationary pressures, the war in Ukraine and other factors. More recently, the collapse of Silicon Valley Bank and the Credit Suisse sale mildly spooked the M&A market.
These days, inflation and higher interest rates are the biggest issues, said Schioppo, “along with the tightening of the capital markets and the ability and desire to provide financing for deals.”
Plus, claims frequency has increased in step with the number of policies and deals in play. “As the product matured and more deals were done, more claims were coming in,” he observed. “Hundreds of millions of claims were paid last year globally, which shows the insurance is doing what it is supposed to do.”
Generally, about one in six of Liberty’s R&W policies receive a claims notification but fewer actually result in dollars paid out, said Goldberg. “When COVID started, we were wondering, ‘Would it result in a deluge of claims?’ and to date that has not proven to be the case.”
At the pandemic’s height in 2021, deals were happening fast. Now, timeframes are more drawn-out, he added. “People are taking longer to do their due diligence, which we appreciate as M&A insurers, because ultimately, we’re underwriting the buyers’ due diligence. The more time they’re taking, the better the diligence ought to be and the more comfortable we’re therefore able to get.”
At the peak of the M&A sellers’ market in 2021, buyers were paying top dollar for good assets. Now, there’s a shift toward more of a buyer’s market.
“There might sometimes be a bit of a surprise on the part of sellers,” Goldberg suggested. “And some of that’s probably wearing off as we settle into what might be a new normal with the interest rate environment that we’re currently in. Sellers initially…were taken aback by how much less buyers might have been willing to offer [compared to] six months or a year prior. It’s a very attractive time for purchasers of the insurance.”
Overall, Canada’s M&A market — which trends toward middle-market deals between $50 million and $250 million — remains in a good spot. There’s fairly healthy competition and plenty of brokers and carriers in the market. Intergenerational wealth transfer continues as well, with family businesses changing hands as the need to sell ramps up.
Plus, private equity firms have record amounts of capital to deploy. “I anticipate the middle market, which is what Canada lives and breathes on the M&A side, will remain robust,” he said.
This story is excerpted from one that appeared in the May print edition of Canadian Underwriter. Feature image by iStock.com/Parradee Kietsirikul