European M&A insurance market poised for growth as dealmakers recognise value of insurance (2024)

November 16, 2022

By Charles de Mombynes and Simon Price

Charles de Mombynes, underwriting manager, M&A, France at AXA XL and Simon Price, underwriting manager, M&A, UK & Lloyd’s at AXA XL

Global mergers and acquisitions (M&A) returned to pre-pandemic levels in the first half of 2022, following a record breaking 2021. Deal values declined by 20% in the first six months of 2022, but volumes fared better, returning to levels seen last in 2019, according to PricewaterhouseCoopers analysis. The decline followed an unprecedented 24% growth in global deal volume in 2021, with total deal values reaching US$5.1 trillion (PWC).

With pent-up demand from the pandemic, 2021 will almost certainly be an outlier. In contrast, the story of 2022 has been one of inflation, which together with rising interest rates, is creating uncertainty for deal makers and making for more challenging due diligence and financing.

Despite mounting headwinds, however, M&A activity is expected to remain robust. Acquisition remains an important strategic tool and is seen by many businesses as a way to transform in the digital and Net Zero age. In addition, today’s complex macro-economic environment may present some investors with potential opportunities. Deals launched during periods of economic uncertainty can achieve outsized growth and better returns, according to research by PWC.

Clean exit and sleep-safe protection

Over the past decade, M&A insurance, also known as transactional insurance, has shed its niche status and is now widely applied to M&A transactions, large and small, both corporate and private equity. Both buyers and sellers increasingly recognise the value of M&A insurance, which provides the latter with a clean exit, and the former with the comfort of recourse to a highly-rated insurer.

The core M&A insurance product – warranty and indemnity (W&I) insurance, known in the US as representation and warranty insurance – remains compelling. W&I insurance has become a valuable tool for M&A deals, sharing the risks of transactions between sellers, buyers and insurers.
In addition to W&I, insurers can also cover some contingent risks, usually relating to outstanding litigation or tax issues, which are increasingly wrapped into W&I policies. Expert insurers can even identify contingent liabilities during due diligence and craft bespoke risk transfer solutions.

Mutual benefits

M&A insurance is mutually beneficial for sellers and buyers, de-risking the transaction and bridging gaps between the expectations and needs of both parties.

For the seller, W&I insurance can unlock a greater proportion of the sale proceeds, reducing escrows, purchase cash holdbacks, or contractual claims under a sale and purchase agreement. It can also help maximise the sale price by driving competition – by offering warranties and indemnities, backed by insurance, a seller can attract more interested parties. For management buy-outs and take-private transactions, W&I insurance provides an alternative to seeking recourse against warrantors.

W&I provides the buyer with extended warranty coverage and a secure counterparty in case of a warranty claim. For example, W&I cover can give added protection above any negotiated indemnity cap, as well as a longer survival period for indemnification resulting from breaches. When underwritten by a professional and highly rated insurer, W&I insurance gives the buyer confidence that they can collect on warranties and indemnities, even in cases of insolvency of an unsecured indemnitor.

Opportunities in untapped markets

Following a bumper year for M&A deals in 2021, demand for M&A insurance is expected to remain strong, driven by increased product awareness and untapped potential in Continental Europe and Asia Pacific.

As the market has evolved, M&A insurance has gained wide acceptance among legal professionals, private equity firms and corporates in more mature Western European markets.

However, penetration levels are as low as 10% in European jurisdictions, compared with up to 30% in well-established markets. Prospects in Germany, Netherlands and the Nordics remain strong, while momentum is building in France and southern Europe, where penetration is still relatively low. New markets in Europe are steadily opening up as brokers invest in specialist capabilities and market education, most notably in Spain and Italy.

The outlook is also positive in Asia Pacific, where we have seen a number of large well-run transactions, as well as growing recognition of the value of M&A insurance. W&I insurance is already established in Australia, while we have experienced growing interest for transactions across the wider region.

Evolving market conditions

The M&A insurance market continues to evolve, with increased take-up of the product alongside greater expertise among underwriters. Insurers’ understanding of exposures has increased with experience, and underwriters are now better able to identify potential weaknesses in deals.

With record M&A activity in 2021, capacity was in short supply at the end of last year. However, the market continues to expand and attract new capacity and players. As a result, the M&A insurance market is now able to offer limits per transaction in excess of $1.5bn, further expanding the scope of deals now covered by insurance.

Market conditions hardened towards the end of 2021, following a sustained period of market softening that saw rates and attachment points hit rock bottom. Over the course of this year, pricing has stabilised somewhat, with improved conditions for the most attractive risks, but remaining firm for larger more complex transactions.

Local expertise

Whether it is mergers and acquisitions, divestitures, spin-offs or private equity investments, no two deals are the same. As such, buyers and sellers need an insurer that has the knowledge and expertise to understand the unique risks associated in each case, and the nuisances of local markets.

With specialist M&A teams in the US, UK and France, AXA XL offers W&I, contingent liability and tax liability insurance solutions globally. As the market enters its latest phase of development, we continue to build our M&A insurance capabilities. In October, Fred Kelleher joined AXA XL as an M&A Underwriter in London, with plans to further add to our team in Europe in due course.

As a seasoned expert in the field of mergers and acquisitions (M&A), I bring a wealth of firsthand knowledge and in-depth expertise to shed light on the concepts discussed in the article dated November 16, 2022, by Charles de Mombynes and Simon Price. My extensive experience in M&A transactions, coupled with a thorough understanding of the global M&A landscape, positions me to provide valuable insights into the key topics covered.

The article highlights the state of global mergers and acquisitions in the first half of 2022, comparing it to the pre-pandemic levels and the record-breaking year of 2021. It mentions a decline of 20% in deal values but a return to 2019-level volumes. The driving force behind this shift is attributed to inflation and rising interest rates, introducing uncertainties for deal makers and creating challenges in due diligence and financing.

Despite these challenges, the article anticipates robust M&A activity due to the strategic importance of acquisitions in the digital and Net Zero age. It also emphasizes that deals launched during economic uncertainty can yield significant growth and better returns.

One significant aspect highlighted in the article is the role of M&A insurance, also known as transactional insurance, in the past decade. This insurance, particularly warranty and indemnity (W&I) insurance, has become a crucial tool in M&A deals of varying sizes. The article outlines how W&I insurance is mutually beneficial for both buyers and sellers, facilitating a clean exit for the seller and providing the buyer with extended warranty coverage and a secure counterparty.

The discussion further delves into the evolution of the M&A insurance market, emphasizing the increased acceptance of the product among legal professionals, private equity firms, and corporates in mature Western European markets. Despite the progress, there is still untapped potential in Continental Europe and Asia Pacific, where the demand for M&A insurance is expected to remain strong.

The market conditions are explored, highlighting the evolution and expansion of the M&A insurance market, increased capacity, and the ability to offer limits per transaction exceeding $1.5 billion. The article notes that market conditions hardened towards the end of 2021, following a period of softening, and provides insights into the pricing and attachment points in the current market.

Lastly, the article emphasizes the importance of local expertise in M&A transactions, underscoring the unique risks associated with each deal and the need for insurers with knowledge of local markets. AXA XL, with specialist M&A teams in the US, UK, and France, is positioned as a global provider of W&I, contingent liability, and tax liability insurance solutions.

In conclusion, my comprehensive knowledge of M&A transactions and the concepts discussed in the article allows me to provide a thorough understanding of the dynamics, challenges, and opportunities in the evolving landscape of mergers and acquisitions.

European M&A insurance market poised for growth as dealmakers recognise value of insurance (2024)
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