Dive Brief:
- The mergers and acquisitions insurance market performed well for much of 2022 before seeing a late dip as M&A activity fell sharply amid several issues in the macroeconomic environment, a report found.
- The number of transactions featuring the use of M&A insurance fell from a record-high of 9,751 in 2021 to 9,178 last year, a roughly 6% decline. The drop came one year after the market had seen a roughly 55% increase in deals involving the use of M&A insurance.
- The business sectors that saw the greatest use of the insurance were technology, media and telecom (TMT) and infrastructure/renewables, according to the report from BMS, a global broker that provides specialist insurance, reinsurance and capital markets advisory services. Infrastructure/renewables saw the largest spike, with nearly 9% greater usage last year than the year prior.
Dive Insight:
The results in the report highlight that the M&A insurance market is not immune to macroeconomic trends, including rising interest rates and the war in Ukraine.
For example, M&A insurance activity dropped 12.5% in the third quarter of 2022 compared to the year prior and 25% in the fourth quarter compared to Q4 in 2021. This was during a time period in which M&A transactions saw a steep drop-off from their record pace two years ago.
However, the M&A insurance space remains much more active than it was in 2019 and 2020. Along those lines, the number of transactions featuring M&A insurance last year was up 45% from 2020, according to BMS.
“A healthy, growing appetite remains in the M&A insurance market,” said BMS’ Private Equity, M&A and Tax 2023 Report.
Warranty and Indemnity (W&I) policies are utilized in M&A transactions to protect either the buyer or seller against financial losses suffered as a result of an unexpected breach of warranty or claim under a tax indemnity.
Roughly 40% of buyers report paying the M&A insurance premium compared to 20% of sellers. Another 40% report a split in payment between the buyer and seller.
Meanwhile, the slowdown in M&A activity has led to insurance rates falling, the BMS report said.
In North America, for example, rates remained in the 5-7% Rate on Line (RoL) range for Q1 of 2022. Toward the end of last year, below 3% RoL was not uncommon on M&A deals, the report said.
In the area of claims, some insurers are expecting a spike in filings under existing W&I policies due to “buyer’s remorse.” This could be driven by a buyer not seeing the expected returns from a business it acquired due to economic headwinds.
However, there has not yet been a sudden shift in the types or sizes of claims, according to the data available to date.
“The largest claims continue to be driven by accounting and financial-related issues, with errors in management accounts being an increasingly common problem area,” the BMS report said.
As for 2023, M&A activity has gotten off to a slow start amid persistent inflation and high interest rates.
But BMS said there remain many companies making inquiries about obtaining M&A insurance, and a stronger economy would be a boost to the M&A market as a whole.
Tan Pawar, head of Private Equity, M&A and Tax at BMS, said he expected a resurgence in deal activity by the end of Q2 and into the second half of 2023 as market conditions stabilize.
“Institutional and corporate investors continue to look to private capital to fund growth and scale, utilizing the historic quantity of dry powder that has built up, in particular over the last 12 months,” Pawar wrote in the report. “In order to safeguard their investments and improve their returns, M&A insurance, already ubiquitous on private M&A transactions in Europe and North America, will remain a vital tool for M&A practitioners when executing deals not just in those regions but increasingly in other parts of the world.”
