M&A Insurance Growth Spurred by Increased Awareness of Transactional Value
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.