After a challenging couple of years, there are finally shoots of resurgence for global Mergers and Acquisitions (M&A) activity. The tremors of increasing inflation and rapidly rising interest rates have started to subside, and the dealmaking outlook is beginning to become more favourable.
2024 H1 was challenging, with economic uncertainty causing deal flow to be gradual at best. However, pent-up demand (particularly in the private equity space) along with corporates turning to M&A to accelerate growth ultimately led to a bounce back later in the year.
By the beginning of 2024 H2, sale preparations were mounting, and vendor due diligence engagements were increasing. Seller and buyer valuations were becoming more aligned, which allowed for more deal activity.
Distinct political and economic events have also contributed to deal flow. The Capital Gains Tax speculations leading up to the budget led to a spike in deal flow in the UK, for example. In the US, Trump’s victory is likely to lead to lighter regulation and therefore a spike in M&A activity.
It has been an interesting year for the global M&A insurance market; whilst rates and retention levels almost halved from the ‘2021 M&A rush’, there are signs that these are stabilising and perhaps even increasing in some sectors and jurisdictions.
Deal values and coverage levels have continued to swell, with insurable transactions ranging from the low hundreds of thousands to the tens of billions. US enhancements are becoming increasingly prevalent on deals with no US nexus, and underwriting timeframes are decreasing as experience increases.
The Tax Insurance market has had a stellar year, with a record number of submissions coming to market. With higher interest rates comes more cautiousness, and so buyers have been determined to remove any uncertainties that have been flagged during deal processes.
The use of Warranty and Indemnity (W&I)/Representation and Warranties (R&W) has continued to spread, with experts now being stationed in areas that were previously uninhabited by insurers such as South America and MEA. With language capabilities and regional presence, W&I/R&W processes are becoming more streamlined, meaning that insurer competition has increased.
As the M&A market starts to turn, insurers need to be more resilient than ever. Both placement and claims processes need to remain consistent with what we have come to expect; otherwise, insurers risk losing business to competitors.
It has been an interesting year for the global M&A insurance market; whilst rates and retention levels almost halved from the ‘2021 M&A rush’, there are signs that these are stabilising and perhaps even increasing in some sectors and jurisdictions.
Territory Analysis
UK and EEA
It has been another turbulent year for the UK and EEA M&A market.
Whilst H1 was very slow given the global economic uncertainty, activity in the UK and EEA picked up gradually throughout the rest of the year.
United States
This year saw a welcome increase in deal count across corporate and private equity. We are hopeful that this is the start of an upward cycle going into 2025, after the quarterly deal count remained flat since the second half of 2022 and private equity investors pulled back on larger deals due to increased borrowing costs.
Canada
Generally speaking, H1 of 2024 remained busy but still slower than the peak market a few years prior. Deal terms continued to move to a more balanced market, which allowed for deal execution to largely remain on track.
Asia Pacific
In Asia-Pacific, lingering inflationary issues, static high interest rates, and negative business sentiment saw a reduction of deal activity in the first half of 2024.
India
India's economy has grown rapidly over the past decade, driven by political stability, technological progress, strong financials, business-friendly reforms, high foreign direct investment, and an average growth rate of 6%–7%, positioning it as one of the world's fastest-growing major economies.
South America
The W&I/R&W market in South America continues to heat up. Whilst transactions based in Peru, Mexico, and Chile have been insurable for a few years now, those in Uruguay and Brazil are also now increasingly insured.
Middle East
Private equity and M&A activity in the Middle East outpaced global trends in 2023-2024, with increasing use of insurance solutions. Two underwriters plan to establish M&A underwriting capabilities in Dubai by early 2025.
Africa
It is exciting to see that many countries within Africa are now insurable from a W&I perspective. We have recently worked on transactions involving Mozambique, Nigeria, Senegal, and Ghana; W&I processes are becoming much more streamlined as experience in the region grows.
Tax Insurance
It has been an evolutionary year for tax insurance; there are now over 20 specialist tax insurers in the market able to provide a range of products to cover almost any type of tax risk. Further entrants are expected in FY 2025.
Appetite for risk has broadened across Europe and APAC with an increasing interest in providing a solution for risks with a more likely than not level of opinion as opposed to previously favouring risks with a ‘should’ level of opinion.
Tax insurers now have an appetite for risks under audit (tax authority enquiry) and risks in active litigation (judgement preservation). In addition, the product is being utilised in a broader range of contexts, including to facilitate fund wind-ups and administration proceedings/schemes, alongside the traditional facilitation of transferring risks within an M&A context.
Interestingly, there has been an appetite to cover ‘change of law’ risk and, in certain circumstances, ‘change in tax rates’ risks. Whilst these risks have tax as the primary consequence of loss, these are more within the remit of political risk. It’s fantastic to see insurers seek to broaden their appetite and approach for covering risks not traditionally within their domain.
As a natural consequence of increased numbers of insurers, competition for premium is at an all-time high, with insurers increasingly being willing to quote below 1% rate-on-line (for the UK and some jurisdictions in Europe). There has also been some consolidation across the sector, with one of the largest transactional MGAs acquiring insurance portfolios, which include specialist tax MGAs. It will be interesting to see how these MGAs work together with regards to quoting on insurance programmes and/or competing amongst themselves.
Cover-wise, there have been increased rumblings of exclusions or additional premiums being applied for ‘Advance Tax Payments’ in certain jurisdictions (e.g., Spain). We expect appetite for providing ATP cover without extra charge will remain for the near future; however, it would not be surprising to see a market shift in the next year or two.
Gallagher has had another record year with the placement of tax insurance. Policies have been placed in a wide variety of contexts across a variety of jurisdictions (including South Africa). We are also receiving an increase in enquiries from individuals seeking comfort in relation to estate planning.
The market for Indian tax risks remains healthy, albeit with a larger focus on PPT/MLI analysis as it relates to Double Tax Treaty risks. There has also been increased interest in providing solutions to cover domestic Indian tax risks and provide domestic Indian insureds with solutions. The market for domestic Indian insureds is still in its infancy, but it’s wonderful to see the market adapt to the demands of such a significant economic power.
We expect the tax insurance market to continue its rapid growth trajectory in 2025, with an increased appetite for risks in Latin American jurisdictions and Southeast Asia. In addition, the US tax insurance market is also expanding rapidly, with resounding success with respect to tax energy credit insurance.
As a natural consequence of increased numbers of insurers, competition for premium is at an all-time high, with insurers increasingly being willing to quote below 1% rate-on-line (for the UK and some jurisdictions in Europe)
Insurance Due Diligence (IDD)
Our Insurance Due Diligence team can offer a wide range of due diligence advisory services. Transactional risks range from niche investments to international deals. Insurance Due Diligence, including full reliance on agreed-defined parties, IDD serves as an invaluable function in the transaction process and dovetails with the legal, financial, tax, and other technical due diligence to allow bidders to make a further informed decision.
IDD identifies the targets’ insurable risks and enables dealmakers to make informed decisions as to the transfer of risks via insurance capital. Transactions are time-critical and can often leave dealmakers with unforeseen risks post-completion.
IDD can support in successfully closing deals, mitigating portfolio company risk, addressing ‘gap risk’, identifying synergies, and ultimately securing investment returns. The focus of the IDD workstream is to understand target’s risk profile, assess the adequacy of the insurance programme the target company procures, identify any gaps in coverage and change of control provisions, critique the costs of the current insurance programme, address loss history, and recommend any enhancements, new insurances, or risk management strategies to address gap risk. Post-close estimated insurance costs are included in the bid model, allowing for a further informed bid.
Vendor IDD is also undertaken by our IDD team; this can help identify any potential issues that could impact the sale price, such as underinsured or uninsured risks. It can also speed up the sale process by providing a buyer with a report they can rely on. ‘Carve out’ IDD is also available; this can help buyers mitigate insurance-related risks and provide an overview of a ‘go forward’ replacement insurance programme vs current coverage. This analysis also includes cost indications vs current costs.
The IDD team will review the Sale and Purchase Agreement (SPA) provisions to see how they impact risk and work with a Bidder’s legal counsel for appropriate inclusion. Operations & Maintenance Agreements (O&M) and other applicable agreements, are also reviewed during the course of IDD, ensuring compliance with any insurance clauses placed therein.
The team can subsequently provide actionable advice in relation to deal negotiation (including run-off cover and associated one-off costs), post-completion planning, and integration. Importantly, it allows W&I insurance underwriters to carry out the appropriate risk analysis on the target business. A bidder having undertaken appropriate IDD is a standard expectation or requirement by W&I insurers during the underwriting process and allows insurers to take a pragmatic view on policy coverage.
Contingent Risk Insurance (CRI)
Contingent Risk Insurance is primarily used as a tool to address matters identified in a buyer’s due diligence that neither buyer nor seller wish to bear and are therefore causing a roadblock in an M&A transaction. A bespoke CRI policy is a way of ring-fencing such a liability.
It is a cost-efficient alternative to a purchase price chip, specific indemnity, or escrow arrangement. Insurable risks often arise in situations where the parties to a transaction are comfortable with the specific issue on the basis of their external legal advice, but a related party (e.g. an underlying investor, lender, or in-house legal counsel) sees it differently and is more conservative in their tolerance for risk.
Increasingly we are seeing CRI deployed for financing and restructuring processes, where low probability/high potential impact legal risks can also come to the surface, and a similar dynamic is at play. No two enquiries we receive are the same, but we have seen particularly frequent requests for CRI in the following scenarios:
Environmental, Social, and Governance (ESG)
In an environment where ESG metrics are under increased scrutiny by investors, buyers, and counterparties with contractual relationships, we have seen a significant spike in requests for insurance that aims to mitigate and insulate those stakeholders from adverse impacts, particularly financial. As global supply chains diversify in a post-COVID-19 environment, we expect this trend to continue and have developed bespoke products and partnerships that reduce exposure significantly.
Judgment Preservation Insurance (JPI)
JPI crystalises the financial value of a verdict or determination that is favourable to the insured, reducing the risk of the decision being overturned upon appeal. We have seen this play out numerous times this year where unresolved and pending litigation has been a potential block to the completion of a transaction. Whilst the market has hardened in some jurisdictions owing to significant claims being paid out, there is still an appetite for well-thought-out and presented risks.
Contractual disputes
Any scenario where our client is facing or could face commercial litigation, and our client has received favourable (but not foolproof) legal advice about their case.
Insolvency and restructurings
CRI can, for example, help facilitate distributions to valid creditors by ring-fencing a successful third-party claim directed against decisions taken by an insolvency practitioner.
CRI underwriters focus on the motivation for seeking insurance just as much as the jurisdiction, risk size, and legal arguments at play. The product is well-suited for circumstances where taking a certain issue off the table will provide our client with a compelling strategic advantage in effecting a transaction.
We expect significant further growth in 2025, as awareness of the product continues to grow, deal-makers and their lenders face challenging issues during M&A, financing, and restructuring proceedings, and competition amongst CRI underwriters increases.
Legal Indemnities
Title to Shares and Title to Real Estate
The uptake of this cover has increased during 2024, particularly in conjunction with W&I policies. In doing so, the full value of a transaction can be covered in isolation, with no warranties needing to be reviewed. Whilst we have seen the withdrawal of certain capacity providers, capacity remains strong, with some markets able to provide GBP1 billion of cover across Europe. Rates on this product type have remained stable. In 2025, we are expecting to see an expansion of both the territories and capacity available.
Fundamental Warranty Top-Up
The supply and availability of this product have largely shifted to W&I insurers. That being said, we are aware of a number of markets that are looking to re-enter, so throughout 2025 we are hoping to see the availability of new capacity and a reduction in rates that are currently available for Fundamental Warranty top-up products.
Portfolio Title
Portfolio title is a product area in which we have continued to see growth. The main driver for this cover are the lack of title due diligence required and the ability to cover both known and unknown risks. Further alterations to cover can be made to provide bespoke solutions, such as removing any requirement for title due diligence. With sublimits in place, the cover is available for almost any size portfolio.
Certificate of Title Top-Up
A relatively new product in 2024, driven by the desire to cover the full market value of the asset or assets covered by a certificate of title. We have seen a large uptake of this product and expect to see this continue in 2025. This product covers the gap between the limit of liability offered under the certificate of title and the market value of the assets. The cover lasts as long as the certificate of title can be relied upon. Given the rising costs of associated insurance, it is a trend we expect to see continue into 2025.
Contingent Material Damage
During 2024, this is a product that has been traditionally used for single real estate assets or utilised by lenders to cover their entire portfolio. Premiums are charged on a monthly based on the total outstanding loan amount. It is a block policy that can be amended when loans are removed from the portfolio or new loans are issued. We expect to see marked growth for this in 2025.
Lending Due Diligence
Activity in the debt sector has continued to rise over the past 12 months, with competition fierce across the broad variety of banks and non-bank/alternative lenders. With 2023 being dominated primarily by refinancings, 2024 has seen acquisition activity pick up across the UK and Europe, with a focus on more diverse asset classes and territories from our lender clients.
From an insurance perspective, this variation in appetite from lenders has resulted in a number of scenarios where the typical loan requirements under an LMA-based facility agreement become more challenging to agree with nontraditional insurance markets.
Whilst most insurers remain broadly open to accounting for lender interests, most are becoming increasingly stringent in standardising their position around key policy requirements, which can result in difficulty when expecting a consistent approach across all types of financing. It therefore remains key to be able to rely on an advisor with experience across a variety of territories and asset classes who can build on precedent agreements to bring about the best possible result and minimise any frictions across the insurance workstream.
Conclusion
The market remains resilient and is anticipating a significant uptick in 2025. Insurers now have the capabilities to underwrite W&I in almost every sector and jurisdiction, with language and governing law no longer being an impediment.
Insurers continue to innovate in the known risk space, with Tax Insurance and Contingent Risk Insurance becoming ever-present, especially with buyers needing as much comfort as possible before pulling the trigger.
The economic environment appears more positive than it has been for the last few years, which is translating quickly into the M&A world. Whilst we still expect buyers to exercise caution throughout deal processes, we do anticipate an uptick in the number of transactions throughout 2025.
The use of M&A insurance continues to increase, with the % of deals insured rising every year for the last 10 years. Given the flexibility and innovation of the M&A insurance market, we only expect to see this % increase for many years to come.
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Arthur J. Gallagher (UK) Limited is authorised and regulated by the Financial Conduct Authority. Registered Office: The Walbrook Building, 25 Walbrook, London EC4N 8AW. Registered in England and Wales. Company Number: 119013.