2019 proved to be the fifth record year in a row for the mergers and acquisitions insurance market. Mergers and acquisitions insurance products, such as warranty and indemnity insurance, have been increasingly in demand, broader in scope and available in wider jurisdictions, and are being utilised as a staple in transactions. Tax, litigation buy-out and other contingent risk insurance used in mergers and acquisitions have been part of this. This recent report by Gallagher outlines some of the key trends of 2019.
The use of mergers and acquisitions insurance solutions to safeguard private equity funds by preventing balance sheet exposures has seen increased application by private investors and corporates. As a result it is now being used by prospective buyers instead of escrow arrangements because it both meets the requirement for protection and allows for a clean exit by the seller.
Demand driving scope and availability
Demand for mergers and acquisitions insurance products (including warranty and indemnity, litigation buy-out, tax, and contingent liability insurance) has attracted more than 65 insurers globally to provide capacity leading to increased competitiveness, expansion into broader territories, and innovation. There are now very few jurisdictions that underwriters view as uninsurable.
At the same time the increased number of providers has also enabled a streamlining of insurance for smaller sized deals (AUD5-AUD20 million transaction value). Often the buyer and the seller share the premium cost. Global capacity for any single deal has risen to over USD2 billion.
In addition to competing on premium rate, insurers are broadening coverage, such as wrapping in cover for certain known tax issues.
Premium rates for Australian transactions reduced in 2019 by 0.32% from 2018 to an average of just on 1.00% (excluding real estate deals). This is a trend mirrored, albeit to a lesser degree, in Europe and the United States. Premium rates rose by 9% in other markets, reflecting the broader availability ‒ at a price ‒ in previously inaccessible jurisdictions.
Claims notifications have increased, driven by
- a greater volume of policies placed
- insurers providing broader coverage
- insuring larger deals
- accessing more jurisdictions.
More attractive terms
Retention rates fell in all markets in 2019. Retention is the industry term for the excess on a policy – the aggregate sum of loss borne by a party to the transaction other than the insurer. Insurers are becoming more innovative when it comes to retention structures in underwriting: fixed, tipping (partial and full), dropping over time and nil retentions.
Australian ‘clean’ (unencumbered) real estate transactions attract a nil retention, while operational businesses are subject to retentions of between 0.3% and 1% of the deal value, and deals involving financial Institutions are at the higher end of the scale.
The lowest premium and excess rates occur in the real estate sector, since there is little or no operating business risk. The more risky sectors tend to involve more heavily regulated industries such as financial institutions and healthcare.
“For real estate transactions, and actually for other sectors too, we are achieving full purchase price coverage for fundamental warranties that are effectively binary, such as title.”
Antony Butcher, Gallagher National Practice Leader, M&A Insurance Services
Purpose designed innovations
Innovations to merger and acquisitions cover in 2019 included streamlining of the process, through the use of knowledge and materiality scrapes, synthetic tax covenants and cover for pre-completion re-organisations, which are becoming standard practice internationally.
Specifically, on Australian transactions insurers are going farther and offering cover on most transactions for protection where a breach of seller warranties occurs between signing the purchase agreement and settlement.
While transaction timelines have been disrupted by the current impacts of COVID-19, the expectation is the mergers and acquisitions insurance market will offer a similar platform going forward, and continue to develop ways to aid in streamlining transactions.
Growing business, increased resources
Comprising specialist brokers, corporate solicitors, tax specialists and ex-M&A underwriters, in 2019 the United Kingdom, US and Australian mergers and acquisitions global team advised on over $10 billion in combined transactions value in Europe, Australasia and North America, as well as structuring deals in South American and African operations.
Access the benefit of our mergers and acquisitions expertise and international resources, as well as a detailed explanation of these market trends, in planning your upcoming deals and transactions.
For more information on these market trends, download the full report.
Alternatively contact our Australian expert Antony Butcher, National Practice Leader ‒ M&A Insurance Services,
02 9242 2007.