M&A market at record level
M&A market at record level
In terms of transaction numbers and volumes, 2021 was easily a record year. All market players recorded maximum capacity utilisation, with the result that towards the end of the year, some insurers even stopped accepting new transaction mandates. Accordingly, the number of insured transactions was also at a record level. Demand for specialty insurance – with the exception of tax insurance – fell slightly. The first half of 2022 has seen a solid trend so far, but the war in Ukraine means this trend is not exceptionally good.
Despite general uncertainty and the decline in the number of transactions, the outlook for the M&A (insurance) market is positive. The number of insured transactions continues to grow strongly compared with the total number of transactions, which is why the impression that Warranty & Indemnity (W&I) insurance is increasingly becoming a standardised solution has solidified. In addition to W&I insurance, tax insurance policies in particular have become established complementary solutions and, as such, are regularly requested due to their relevance to transactions.
Despite the now increased base rates, there is still a high volume of capital in the M&A market, accompanied by high investment pressure on institutional investors and strategically oriented companies (corporations). This is inevitably leading to a fierce competitive situation at auctions, resulting in a consistently strong seller’s market with corresponding liability limitations. Having said that, in terms of sales and EBIT multiples, we are seeing a slight decline in purchase prices paid. What is known as a seller’s “1 euro liability” is widely accepted as a market standard. At the same time, sellers have become more willing to offer a balanced, buyer-friendly catalogue of warranties from the outset. In the case of W&I insurance, the insurer provides cover for losses arising from warranty breaches under company purchase agreements. The buyer, in turn, is given the opportunity to add the otherwise necessary risk discount for warranty breaches to the purchase price, improving the buyer’s position in any bidding with competitors.
Special tax insurance continues to be in high demand and is firmly established as a product. Its advantages – broader and faster provision of legal certainty compared with the non-binding information provided by the tax authorities, plus the prevention of provisions and purchase price retention – are now widely known and appreciated. This also applies increasingly to litigation buy-outs. Litigation buy-out insurance protects (i) the plaintiff against the risk of a favourable (payment) judgement (judgement preservation insurance), (ii) the defendant against the risk of a potentially catastrophic adverse judgement (adverse judgement insurance), and (iii) against the risk of having to bear the litigation costs (after-the-event insurance).
Digital M&A is, and remains, an innovation driver: due to the increasing number of technology/software-related corporate transactions and the associated demand for specific warranties in purchase agreements, (technical) advice on cyber & data protection due diligence is of particular importance. Only the right technical cyber due diligence will enable the insurer to assume liability here. To this end, Aon has developed a three-step model to identify technical cyber risks, financial risks and the compliance status (GDPR compliance, for example) early in the transaction cycle. By deploying special cyber risk detection tools, financial quantification models and cyber M&A experts, transaction risks can be identified more precisely and subsequently transferred.
In 2021, Aon placed over 260 M&A policies across Europe, with the total sum insured exceeding EUR 12bn.
In this context, a big increase to more than 70 closed transactions was recorded in the DACH region (Germany, Austria, Switzerland).
Overview of insured M&A transactions (D-A-CH)
by insurance product
The COVID-19 pandemic no longer seems to be affecting the M&A market. Market players have adjusted to the limited availability of face-to-face meetings and remote working. There was no COVID-19-related increase in loss reports or warranty breaches. It appears that the uncertainties surrounding the impact of COVID-19 have been replaced by uncertainties about the situation in Ukraine.
Distressed M&A continues to be a non-issue in the current market environment. Fully synthetic warranty concepts (where warranty catalogues are merely attachments to policies) continue to be discussed regularly, but are purchased only very occasionally, especially in real-estate transactions. The same applies to W&I insurance in De-SPAC transactions. Here, there is a basic level of interest, but only few precedents. Against this backdrop, an as yet unique solution has been developed by Aon.
As a result of capacity bottlenecks and losses, premium levels increased slightly in 2021. Furthermore, the strong demand for (synthetic) extension of insurers’ liability (e.g., knowledge scrapes and longer policy maturities) has, on average, led to slightly higher premiums overall.
There was little movement in insurers’ standard exclusions and coverage positions last year. Given market players’ focus on the speedy execution of transactions, leeway to negotiate unusual and innovative types of coverage was limited. Nevertheless, the broad range of experience among insurers usually also enabled discussion of issues such as coverage for pension underfunding, GDPR, transfer pricing and secondary tax in general. However, in this regard no fundamental change in the position of insurers has been achieved. Massive losses, a development which had led to the hardening of the market for cyber insurance at operational level for target companies, did not remain without consequences in the W&I line. Here, too, it has become increasingly common for insurers to include a standard exclusion of cyber risks.
It has, however, proved possible to negotiate such an exclusion with a number of insurers, at least to the extent that W&I insurance would come into play on top of operational coverage. In some cases, a specific technical cyber DD may give the insurer the additional comfort of being able to cover cybersecurity-related warranties and waive the inclusion of standard exclusion clauses.
Furthermore, W&I processes are increasingly pre-structured on the seller side, with policies pre-negotiated and transferred to the buyer side as a package with the company purchase agreement (“hard stapling”).
The advantages – certainty of conclusion and rapid, lean implementation – are also usually seen and recognised on the buyer side.