M&A insurance: a standard tool driving deals


M&A insurance: a standard tool driving deals

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The use of merger and acquisition insurance and related products has become prevalent in Europe and the US, driven by its ability to reduce deal negotiations and transfer uncertainty, as David De Berry of Concord Specialty Risk and Tim Martin of Hunter George & Partners tell Intelligent Insurer.

Global merger and acquisition (M&A) activity has reached its highest post-crisis value with $1.94 trillion (8,560 deals) recorded in the first six months of 2018, according to the Global & Regional M&A Report H1 2018 by Mergermarket. Driving M&A deals is the fact that traditional corporates are looking to regain market share from newer, disruptive firms, according to the report.

There have been 26 megadeals (>$10 billion) announced in the first half of 2018, just four short of the number seen during the entirety of 2017, the report notes. This included six deals worth over $20 billion in the second quarter—pushing the second quarter value above the $1 trillion mark.

Cash-rich private equity funds, strong corporate confidence, and the emergence of disruptive technologies are all helping to drive global M&A activity, according to RSG, which offers transactional insurance via two managing general agents (MGAs).

In Europe, the group underwrites via Hunter George & Partners; in North America it operates through Concord Specialty Risk.

“At the moment global M&A is at record levels,” says Tim Martin, director, Hunter George. “We are seeing corporations with cash balance sheets that they need to spend. We are seeing investment in new technology, and consolidation in other sectors, and that is all driving European M&A,” he adds.

Peace of mind

In addition to the M&A frenzy, demand for transactional insurance is being boosted by the increasing popularity of the products among executives.

Transactional risk insurance comprises a suite of products that insure either unknown risks in an acquisition (warranty and indemnity insurance or, in the US, representations and warranties insurance) or known risks in the sense that they rise to the level of a contingent liability as opposed to a mere contingency.

Tax insurance covering particular tax positions, specific litigation insurance covering the outcome of a pending lawsuit, and other contingent liability insurance (anything from potential withdrawal liability owed a pension plan to lost stock certificates) are all examples of known risk coverage.

M&A insurance helps drive transactions as it eliminates uncertainties and gives executives peace of mind over the potential risks inherent to a transaction.

In the past, the design of products was adapted to suit the changing needs of customers.

“Originally, the product was supposed to wrap around the existing transaction culture to facilitate a transaction,” Martin says.

“Nowadays you might argue that insurance is now driving behaviour in transactions,” he adds.

“There is an increasing percentage of M&A deals that use these products,” says Concord Specialty Risk CEO David De Berry.

“Even if the volume of M&A activity declined, there would still be a boost in M&A insurance because of the continued increase in use of these products,” he explains.

M&A insurance was initially designed for private equity funds but it then spread to other players in the market, De Berry adds.

A policy can be used as a means to reduce indemnity caps or escrows and can include tax insurance, allowing for reduced uncertainty in more complex transactions, he notes.

“Seven or eight years ago, the level of US mid-market deals where such products were in use was probably 3 percent,” De Berry says. “Now it is around 40 or 50 percent.”

In Europe, there is increasing demand for M&A insurance particularly from the real estate sector.

“In Europe the real estate sub-sector has embraced indemnity insurance for transactions, partly due to the size of the advisory groups. When they have used the product once, they are keener to use it again. The higher visibility of the product has also boosted the uptake,” Martin says.

“More than 30 percent of the deals we write are in the real estate sector,” he notes.

More competition

Along with higher demand, the number of players offering products in the segment has also increased.

“There is a lot of competition in Europe at the moment. We have seen a number of new entrants over the last few years,” Martin says. More competition has also allowed for a higher specialisation in the segment in Europe.

“There have been many more boots on the ground. There are underwriting teams settled around Europe, particularly in the Nordics and Germany, who have a good transaction background.

“Brokers are spending more time looking at the strength of the underwriting teams, at the terms being offered, and at the attachment points,” Martin notes.

A similar development has taken place in North America.

“In the US, in warranty and indemnity (reps and warranty) insurance we’ve seen the competition go from four major carriers to 24,” De Berry says. “That’s within the last four years.”

In tax insurance, which tends to require large limits, the industry has boosted available capacity.

“We have far more industry capacity and we are now relevant to public companies which is where we think the product should be,” De Berry says.

“For certain product lines, such as tax insurance and specific litigation insurance, the base of demand has grown from private equity funds, to include strategic buyers, and now public companies, particularly public companies with uncertain tax positions or pending litigation not covered by insurance,” he adds.

RSG also sees great growth potential in the US for successor liability law. Companies structure deals as asset purchases to insulate them from legacy liabilities and want certainty that judicial doctrines won’t be applied to undermine that insulation.

In Europe, RSG is viewing extensive growth opportunities as micro markets become more established in Germany, the Iberian Peninsula and the Nordics, which are developing their own sustainable infrastructure with dedicated brokers and resident insurers, Martin says.

“There is an opportunity for Hunter George to export its model from London into those jurisdictions and beyond to become a full-service M&A provider across a variety of products such as tax, specific litigation, and contingent risk,” he says.

“The footprint of Hunter George tomorrow will be far different from today’s, once we press forward with our expansion plans,” he adds.

Cash-rich firms

RSG believes that the cash on balance sheet, which is at the heart of all liquidity in both trade buyers and private equity, certainly in the underlying transaction markets, is going to sustain transaction volumes in Europe for several years to come.

“Products to sustain such deals only have an upward trajectory,” Martin says.

While currently operating from the City of London, Hunter George is likely to put people on the ground in countries such as Germany, the Nordics, Spain, and Portugal in order to seize growth opportunities.

In North America, RSG is looking at new applications for existing products as well as the introduction of new products in order to capture growth. The group sees demand for tax insurance that covers the tax returns filed by taxpayers, particularly for public companies, allowing for uncertain tax liability to be annually insured.

Demand for products is also increasing due to the fact that legal and political institutions are becoming more unpredictable, De Berry explains.

“For example, the US has enacted tax law that leaves the Treasury scurrying to promulgate new regulations.

“The outcome of pending or threatened litigation or of a regulatory approval, has also become less predictable,” he says

“Judges, jurors, and regulators are a microcosm of the general public, which is becoming increasingly polarised.

“There has been pent-up demand and now we are responding to it. There is a heightened tension around what our institutions are going to do,” he explains.

RSG is facing a higher demand for contingent liability products including pending or threatened litigation as well as regulatory concerns.

“There has been demand for these products but the insurance industry hasn’t really responded to it. Because we are now responding, we are awakening the sleeping dogs.

“Whenever I quote a proposal for contingent liability or specific litigation, what follows within a week or two is three further submissions,” De Berry concludes.

David De Berry is the CEO of Concord Specialty Risk. He can be contacted at: daviddeberry@concordspecialtyrisk.com

Tim Martin is the director of Hunter George & Partners. He can be contacted at: tim@hgunderwriting.com

Mergers & Acquisitions, Insurance, M&A, Concord Specialty Risk, David De Berry, Hunter George & Partners, Tim Martin, US, Europe, Global

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