The FINANCIAL — As the green shoots of economic recovery have started to show in key markets like the UK and US, demand for mergers and acquisitions (M&A) insurance has been rising, according to Lloyd's, the world's specialist insurance market.
Interest in M&A insurance has grown substantially over the last three years, according to Lorraine Lloyd-Thomas, who heads up the Transactional Risk team in the UK for Marsh. M&A insurance placed by the broker grew 155% in the three years to 2013, and strong growth is expected to be repeated again this year, she says.
The growing M&A insurance market is an exciting opportunity for insurers, especially for Lloyd’s underwriters that have been instrumental in developing the product, believes John McNally, who leads the Transaction Liability team at Beazley.
“We are just scratching the surface with M&A insurance, covering only around 5% of all M&A transactions. So there is enormous potential for the industry to grow,” he said.
Market perception is that last year was a record year for M&A insurance, according to Andrew Graham, who heads up the M&A insurance practice at Allied World Europe. This increase in demand for M&A insurance reflects, at least in part, a recovery in deal numbers since the financial crisis, he says.
A steady recovery in M&A activity is underway, stimulated by returning confidence in a global economic recovery, according to law firm Clifford Chance LLP’s M&A Trends 2014 report. Although global M&A was broadly flat at $2.2trn in 2013, activity picked up in the second half of 2013 (in the US it increased by 57%), with momentum expected to continue into 2014, it says.
Demand has also picked up as organisations and their advisors have become more familiar with the product: “Awareness of the product is now greater than ever,” said Graham. At the same time, coverage has become broader and pricing has come down as the market has matured and achieved economies of scale, he says.
M&A insurance is actually a suite of coverages, according to McNally. The most popular is cover for breach of warranties and indemnities given by the seller to a buyer in private deals. However, cover is also available to deal with tax or other liabilities that have yet to crystallise – such as potential litigation, or environmental and asbestos liabilities, he says.
“M&A insurance can remove potential obstacles to a deal getting done, or that might cause a significant price reduction,” explained McNally.
In particular, growth is being fuelled by the increasing popularity of M&A insurance among private equity firms, which typically seek to limit their exposures to warranties and indemnities, according to Lloyd-Thomas.
M&A insurance can help differentiate buyers in a competitive bid process, says Graham. It also gives firms a much cleaner exit, enabling firms to realise the proceeds of a sale and distribute them to investors as soon as is possible, he explains.
“M&A insurance has really caught the imagination of private equity firms and their advisors in recent years,” said Lloyd-Thomas. “The ability to exit an investment with limited warranty exposure can be an attractive proposition to private equity firms,” she added.
M&A insurance is also gaining traction in other types of deals. For example, there is growing interest among corporates looking to make acquisitions in overseas markets, according to Lloyd-Thomas.
“We have found that some corporates are much more cautious on the warranty cap they are willing to accept when buying in a new jurisdiction and on their confidence in the ability to collect on warranties and indemnities from some overseas sellers,” she said.
Marsh is also seeing more infrastructure and real estate deals using M&A insurance, including transactions for renewable energy and power projects, according to Lloyd's
Asia Pacific and the Middle East, as well as Germany, have all seen an increase in enquires for M&A insurance, according to Marsh. “Marketing by brokers has helped the advisory community in Germany see value in M&A insurance, and this is helping drive demand,” said Lloyd-Thomas.
Raising awareness among advisors, in particular law firms, is key to growing the M&A insurance market, according to Lloyd-Thomas.
In jurisdictions where brokers have raised awareness, there has been a resulting uptick in enquiries, says Graham. “We need to change any perception that M&A insurance is too expensive when the reality is that pricing is extremely competitive and the product has evolved over time with ever increasing coverage and lower attachment points,” he said.
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