Industry SectorsFinancial ServicesBig jump in demand for M&A insurance

Big jump in demand for M&A insurance

Broker JLT Specialty saw a 60% increase last year in the number of merger and acquisition deals for which insurance cover was taken out.

The insurance broking and risk management group JLT Specialty saw a 60% increase last year in the number of merger and acquisition (M&A) deals globally for which insurance was taken out.

The type of M&A cover purchased – also known as warranty and indemnity (W&I) insurance – is particularly in demand where the real estate and private equity (PE) sectors are involved. Both are key beneficiaries as W&I insurance is designed to pay out should a buyer subsequently discover that the business purchase is not what the seller advised it would be.

Among deals that subsequently turned sour was Hewlett-Packard’s US$11.1bn acquisition of UK software firm Autonomy in 2011. The following year HP recorded an US$8.8bn impairment charge, citing Autonomy’s alleged accounting improprieties as the reason.

In its annual M&A Insurance Index, JLT reports that the average limit of insurance (as a percentage of the enterprise value) increased by 16% in 2016 from the previous year. This equates to an average insured amount of 29% of the total deal value for global transactions outside of the US.

The increased demand could reflect perceived heightened investment risk driven by economic uncertainty around the Brexit negotiations. However, it is also likely to be due in part to a steady decrease in rates that makes it possible to get more protection for less premium. Levels of cover in the US were lower at 23% of deal value, but Japan and Singapore saw the highest levels of protection at 30% and 34% respectively.

“The events of 2016 in the UK and Europe have served as a test of maturity for the M&A insurance market, which perhaps surprisingly, has continued to soften further, both in terms of premium rates and policy retention levels, compared to 2015,” commented Ben Crabtree, a partner in JLT Specialty’s M&A insurance division.

“This underlines the fact that competition between insurers remains at unprecedented levels. However, the market may harden a little if the current increase in claims activity we’re seeing continues.”

Overall market capacity has increased, largely due to new insurer entrants. Existing insurers and managing general agents (MGAs) are also significantly increasing their individual line sizes with a number now able to deploy US$100m or more per deal, allowing high limits of insurance to be met by a single or small number, of insurers. This has advantages from an execution risk perspective, as well as potential benefits in the event of a claim.

The real estate sector continues to be one of the main users of M&A insurance. Alongside this, PE deals still represent a majority of insured transactions, with industrial and retail markets becoming increasingly frequent users. In what is becoming common practice across numerous business sectors, the seller often facilitates the use of insurance at a very early stage of deal process to optimise its exit from the transaction.

JLT also reports that whilst the seller commences the insurance process 40% of the time, it is the buyer that is the insured party on 93% of M&A deals. This reflects a strong seller marketplace where selling parties have been able to negotiate reduced liability under the sale agreement and offer a W&I insurance policy to the buyer instead.

Related Articles

The Treasury Challenge of a Post-Merger Integration

EEA The Treasury Challenge of a Post-Merger Integration

5m BELLIN
PSD2: dull name, but seismic effect

Clearing & Settlement PSD2: dull name, but seismic effect

5m Alex Kwiatkowski
2017's most read: Correspondent banking: still in rude health?

Bank Relationships 2017's most read: Correspondent banking: still in rude health?

6m Henry Balani
2017's most read: The future of cash management: the single multi-currency virtual account

Accounts Payable 2017's most read: The future of cash management: the single multi-currency virtual account

6m Matthew Fuellhart
2017's most read: Open API: unlocking innovative new services in banking

Automation 2017's most read: Open API: unlocking innovative new services in banking

6m Lu Zurawski
Many bank roles to be automated but 98% positive about robotics at work

Automation Many bank roles to be automated but 98% positive about robotics at work

9m Victoria Beckett
The future of banking: it’s all about sharing

Automation The future of banking: it’s all about sharing

10m Edward Berks
Falcon Private Bank expands virtual currency services

Financial Services Falcon Private Bank expands virtual currency services

10m GTNews