The surge in M&A deals, rising to the highest deal numbers the global market has ever seen, is having a considerable knock-on impact for some sellers.  The sheer volume of demand currently requires M&A insurers to pick and choose the deals they insure, and this is leading to a reduction in insurance options for smaller deals between $50m and $200m. The significant number of deals in 2021 meant that smaller transactions were getting far less attention than they had in previous years which has made it more difficult to insure such deals. This issue has been compounded by the general lack of capacity in the market and a shortage of underwriters who are willing to underwrite smaller risks.

The prospect of insurance for smaller M&A deals grew scarcer over 2021, especially towards the end of the year. Brokers were forced to advise their clients that they were unlikely to get insurance cover for smaller deals unless they were very active in the market and even then, it was a challenge.

It is likely that Q1 2022 will serve as a temporary solution, as the arrival of new capacity for the new financial year unlocks some of these challenges. However, this relief is likely to be short-lived, as yet another high-octane year of M&A activity is expected in 2022.

Not only do many of the factors that pushed up the number of deals in 2021 remain, but the looming corporate tax hike in the United States from 21% to 28% is also likely to spur on those who are keen to make purchases before this comes into play, maintaining the volume of deals at the current fever pitch.

However, in the past year the market has certainly become more selective about the transactions that it underwrites due to the volume of deals.

The importance of servicing smaller deals

I believe the trend away from covering small deals must be addressed, as we do not want to shut the door to potential clients looking to obtain insurance on deals in the small-to-mid market range. While big-ticket transactions will, of course, take focus and have to be insured, it is important that we continue to strive to service deals of varying sizes. This is not only to reassure both buyers and sellers, but it also allows us as insurers to diversify our portfolios and therefore decrease overall exposure.  Insuring a handful of mega-deals may reduce the burden for underwriters, but it leaves claims exposure seriously concentrated in a way that the smaller deals do not.

The key to making it work will be creating a partnership with those undertaking small-to-mid size transactions.  We will need both brokers and insureds to be prepared to provide really strong diligence and detailed reports on the acquisition as in most cases the target will not have been previously exposed to the rigors and disciplines required by an institutional shareholder. Some might say that buyers are unwilling to spend as much on diligence on smaller deals. However, if the deal is small because target is early stage due diligence can only help flush out compliance issues that typically relate to a young business fully focused on turning a profit or breaking-even.  

Essentially, if brokers and clients can meet us halfway, by helping to make the deals more straightforward to understand and transact, it will be much easier for us to consider submissions and for us as a carrier to insure these types of risks.  If we can clearly see from the get-go that a deal is a good fit for us as an insurer, we will always be encouraged to put work into considering the risk. At Liberty GTS we acknowledge the importance of our clients being able to obtain insurance for their deals and have begun to explore creative ways to focus energy on the often-ignored smaller transactions. Over the long term we are training a new generation of underwriters to support smaller size deals. This will provide a great learning experience and will also help to grow the pool of underwriting talent. More fundamentally it will allow for smaller transactions to be insured. While we cannot insure every deal in every sector, we can, should and will endeavor to underwrite insurance for the right deals no matter what the company size.