U.S. mergers & acquisitions market momentum continues

Hilary Weiss : Underwriting Manager

Hilary Weiss

Underwriting Manager

In 2019, the burgeoning U.S. mergers and acquisitions market is continuing to build upon last year’s momentum.  Deals are focusing on traditional customer-base expansion and diversification of products and services by forward-looking companies within leading commercial sectors.  Domestic market transactions are being fueled by corporate tax reform advantages, less stringent regulatory environments and available sources of new capital.

U.S. transaction value at year-end 2018 stood at $1.5 trillion, a 21.5% increase from deal values that totaled $1.2 trillion in 2017, according to FactSet M&A News and Trends Report.  With more deal volume at higher values, the U.S. M&A market faces not only increasing claims frequency but higher severity of potential loss.

Deloitte’s annual survey of corporations and private equity firms revealed that market activity in 2019 will remain strong as “79% of respondents that expect the number of deals to close” within the year will increase, as compared with 70% respondent growth projections reported last year.2 Yet, underlying factors within the U.S. market present uncertainties that may challenge the reach and cost of transactions in 2019.  U.S.-imposed tariffs could inflate the costs of completing transactions amid trade tensions.  Due to supply chain disruptions, prices of goods are on the rise, thus triggering competitive pressures.

The U.S. has become a sellers’ market for aggressive buyers seeking quality transactions.  Two overarching factors underscore the trend:  1) Available private equity capital; and 2) Buyers’ record level balance sheets.  Middle market entities, defined by annual revenues ranging between $50 million and $100 million, will most likely see the greatest level of activity.  The JP Morgan 2019 Global M&A Outlook report cites “corporate clarity” as a leading market driver, whereby corporate buyers are seeking to “unlock value and refocus on core assets,” further catalyzed by increased shareholder activism.3

The M&A insurance market has accelerated in the U.S. reflecting the trajectory of deal activity.  M&A insurance protects against unexpected perils or exposure to financial loss that could be devastating if a transaction goes awry.  Disputes can arise out of multiple transaction complexities, including regulatory and compliance issues, financial irregularities and tax liabilities, among others.

Historically, M&A insurance was geared to private equity firms engaged in middle market activity to address post-closing indemnification provisions.  Domestic corporations and the influx of investment by foreign buyers have today emerged as active purchasers of the insurance coverage.   Sellers can close the transaction with fewer contingent liabilities.  Buyers are assured of greater “collection certainty.”  Professional transactional oversight also can contribute to building executive confidence in the two most important factors impacting a successful outcome:  effective integration and economic certainty.

Liberty Global Transaction Solutions has been a key player in domestic and cross-border transactional insurance, with an integrated team structure to respond to buyers’ and sellers’ primary countries of operation, thereby improving service and efficiency.  Liberty Global Transaction Solutions is expanding upon that approach with a rapidly growing team of dedicated experts within the Americas and across the globe.  Throughout the global platform, the standards for providing M&A insurance remain constant – consistency in coverage, certainty of insurance company’s financial reserves, and continuity in delivering comprehensive coverage structured to protect client’s business interests.

 

  1. “FactSet M&A News and Trends,” 2018 FactSet Research Systems, Inc.; factset.com
  2. Deloitte, “The State of the Deal: M&A Trends 2019”; https://www2.deloitte.com/content/dam/Deloitte/us/Documents/mergers-acqisitions/us-mergers-acquisitions-trends-2019-report.pdf
  3. “JP Morgan 2019 Global M&A Outlook: Unlocking Value in a Dynamic Market”; https://www.jpmorgan.com/jpmpdf/1320746694177.pdf

This website is general in nature, and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. By citing external authorities or linking to other websites, Liberty Mutual is not endorsing them.

Heightened insurer appetite in the M&A market

Hilary Weiss : Underwriting Manager

Hilary Weiss

Underwriting Manager

The mergers & acquisitions insurance market has experienced significant growth over the past few years with more insurance carrier entrants serving a broadening array of industry sectors. Buyers and sellers can benefit from transactional insurance by seeking coverage from expert underwriting teams and professionals equipped with the knowledge and resources to deliver thoughtful, bespoke insurance solutions.

The range of industry sectors served by insurance companies to provide R&W cover has expanded, particularly within heavily regulated industries, such as healthcare, life-sciences and financial services. Previously, sectors considered to be specialty industries had access to only a limited number of carriers with the appetite to underwrite such risks. Many of these industries have now become mainstream targets for M&A insurance coverage. Given the upsurge in the number of RWI entrants in the market and competition to secure deals, there are few industry verticals where an insurer is unwilling to structure programs for transactional risk.

Underwriting complex deals is a niche market that relies on the skills and insight of disciplined teams of underwriters and outside counsel familiar with structuring comprehensive coverage. Sophisticated buyers and sellers are increasingly recognizing the upside of insurance capital to remove some of the historic roadblocks in bringing a deal to fruition. While recent efforts have been made by some carriers to deploy technology to improve underwriting efficiencies, such rules-based solutions cannot adequately uncover known and unknown risks or provide the level of service for multi-faceted, high profile transactions.

Liberty’s global M&A group is well positioned to underwrite complicated transactions with significant liability limits and cross-border elements. Our team of professionals structures coverage designed to protect buyers and sellers from the unknowns that arise throughout the deal process. As one of the only carriers in the market with a dedicated claims team, we understand looking after our insured post-deal is equally as important as our execution of the policy.

As the RWI market continues to evolve, carriers are looking towards creative solutions to enhance coverage. Such offerings, however, will need to be sustainable with rate pricing and claims management systems aligned in accordance with the level of risk. Insurers and brokers will be challenged to innovate together to ensure that coverage meets the expectations of the insured while maintaining the sanctity of the market.

This website is general in nature, and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. By citing external authorities or linking to other websites, Liberty Mutual is not endorsing them.

M&A insurance growth spurred by increased awareness of transactional value

Rowan Bamford : President

Rowan Bamford

President

Global mergers and acquisitions activity is poised for another year of robust growth, albeit somewhat lower in total deal value due to a range of uncertainties in regions worldwide. Market momentum in 2019 is likely to persist reflecting executive confidence in aggressively pursuing quality deals. An abundance of available investment capital will drive mergers and acquisitions pursuits against the backdrop of a competitive landscape. Deloitte’s annual M&A trend report cites “the need for more effective due diligence and integration to make sure revenue projections materialize.” M&A insurance underscores greater recognition by sellers and buyers of corporate assets in the value of implementing transactional risk management strategies.

In 2018, the total value for global M&A transactions was $3.4 trillion (USD), as compared to $2.9 trillion (USD) as of year-end 2017. Market activity surged in the first nine months of last year, representing a 32% increase over the comparable period in 2017, as reported by Dealogic, driven by mega-deals in virtually every industrial sector. Market watchers anticipate that the first half of 2019 will remain strong, with private equity markets playing a larger role. Today, monies raised in private markets and on-hand for investment have surpassed $1.1 trillion (USD), according to Mergermarket. Uncertainties surrounding trade wars, political unrest and regulatory constraints will likely dampen investment appetite for cross-border transactions. Unpredictable repercussions of the U.S.-China tariffs and the Brexit cloud looming over the UK pose additional challenges. M&A activity is expected to slow in the latter part of this year, with total deal volume predicted to return to pre 2018 value levels.

In these times of uncertainty, M&A insurance can play a vital role in enhancing the terms, offering conditions, and outcomes of the transaction. Private equity firms generally leverage insurance into the bidding process. Strategic corporates are now realizing the advantages of the product whether it is a mechanism to gain seller advantage or for balance sheet planning. Insurance protection may eliminate the need to establish an escrow account, allowing for seller and/or equity investor to receive 100% cash return post-closing.

M&A insurance serves as third-party protection for a range of transactional risk perils that may result in financial loss post-closing. M&A insurance shifts the risk of potential financial losses due to breaches of warranties and obligations to the insurance company. Bespoke policies are structured to address specific terms and conditions of the sale and purchase agreement, including post-closing sale contingent liability through the duration of the survival time period, which is typically seven years. Experienced specialty insurers can often identify a problem or transactional issue within two years following closure of the transaction. At that stage, that new entity would have gone through one year of operation. Evidence of financial exposure emerges from accounting irregularities discovered in its earliest years; however, the dispute may take 3 or 4 years to reach settlement.

Given the long tail nature of the business, the client values an insurance carrier that understands the process in taking a conservative approach to reserving. A stable insurance carrier needs to reserve prudently, which requires in-depth knowledge of deal cycles and potential claims exposures. Insurance companies offering specialty, bespoke M&A cover provide professional analysis of transactional risk exposure. Consistency in underwriting reflects the carrier’s proven expertise in structuring policy coverage to protect against severity of loss. Managing transactional integrity through M&A insurance is clearly aligned with the professional underwriting team’s understanding of the claims process for satisfactory resolution.

This website is general in nature, and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. By citing external authorities or linking to other websites, Liberty Mutual is not endorsing them.