04 July 2023
Global M&A Insurance
2023 Mid-Year Market Update
It has been a difficult start to the year for most M&A practitioners. Geopolitical uncertainty and continued high interest rates have caused deal flow to fall year-on-year.
However, on the positive side, insurers have used the downtime to innovate and create bespoke solutions in order to differentiate themselves and win business.
M&A insurers doubled headcounts in 2022, after foreseeing a need (which did not eventuate) to service the same or similar number of deals that had been underwritten in 2021. The market now has excess capacity. To generate greater premiums, some insurers have become more willing to write standalone policies to ring-fence specific known risks that are identified in due diligence, be they for tax, IP, environmental or litigation matters. Other insurers are offering different enhancements such as (broader) US-style cover for M&A transactions not governed by US law.
Since early 2022, average US rates have dropped from c. 4.5% to c. 2.75%. In Europe and Australia, rates have fallen from c. 1.5% to 0.85%. Retention levels have plummeted too – in Europe, 0.25% (of the enterprise value of the target) tipping to nil is available on most operational deals. In the US, standard retentions have now come down to 0.75% dropping to 0.4% after 12 months.
Some insurers have chosen to pivot their focus to emerging markets, where premium rates are higher. Demand for W&I has grown massively (in terms of % of deals that are insured) in Africa, South America, the Middle East, India and South East Asia. Greater competition between insurers is quickly pushing rates down.
Premium rates have fallen across all sectors and jurisdictions.
Fully synthetic W&I insurance policies continue to trend. Buyers have started to look at the insurance market to provide warranty protection when a seller is unable or unwilling to giving warranties (especially in the context of a distressed transaction), and in some instances sellers are becoming accustomed to not giving any warranties in the SPA at all. Buyers are now able to negotiate warranty packages directly with insurers, allowing them to make a more competitive bid and facilitate smoother negotiations.
The emergence of greater coverage options for SME deals (both on the sell-side and buy-side) has been one of the key talking points of 2023 so far. In the U.K., minimum premiums for buy-side W&I policies have fallen to as low as GBP20 thousand (from c. GBP75k a few years ago), meaning that it can be commercially viable to insure deal values as low as GBP1m. Insurers that are specialised and experienced in the SME space are also implementing an underwriting process more appropriate for deals of this size and nature – meaning less Q&A and a commercial underwriting approach. We have even seen sell-side policies making a comeback, with one insurer in particular offering ‘off the shelf’ warranty protection for minimum premiums as low as GBP2,500 and for deal values as low as GBP250k.
While insurers are offering lower rates, broader coverage and bespoke enhancements, M&A tides can turn extremely quickly (as they did at the end of 2020 and 2021). As of June 2023 we are still in ‘bargain season’ for insureds, but we anticipate this will turn as soon as wider M&A activity bounces back.
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