Italy, as with many other markets, has seen a strong flow of deals in 2021, building momentum after the downturn in 2020 caused by the global COVID-19 pandemic. Italy was amongst the first countries to be seriously hit by the virus, and volumes of mergers and acquisitions (M&A) activity were undoubtedly affected. However, big deals have resumed and numbers are currently rising as economic activity rebounds and confidence in greater political stability increases. The swearing in of Mario Draghi as Prime Minister in February has brought hope to Italian dealmakers, who anticipate that investors worldwide will now pursue additional deals in Italy and that both inbound and outbound M&A activity will, in turn, grow rapidly. This upturn coincides with a boom in the use of Warranty and Indemnity (W&I) insurance which has reached a new peak in 2021 as activity and appetite come together.
W&I insurance was first introduced into the Italian market in around 2016 when major corporates, who were using the product in transactions in other geographies, asked for the same protections for their Italian deals. There was however little local expertise which, combined with a fundamental difference between the Italian civil code and the case law in the UK which underpinned the W&I policies, meant it was not always easy to underwrite.
The challenge for brokers and underwriters was to adapt the product to take account of these differences. For example, the definition of the insured loss in a policy had to replicate the civil code on damages in order that the policy could respond as needed. So considerable tailoring for local law requirements has evolved over the years, but the W&I market in Italy has now reached a stage of maturity where both the underwriting templates used, and Italian law sale and purchase agreements drafted envisaging use of W&I from the outset, are increasingly sophisticated.
The other significant cultural difference that needed to be addressed was around the disclosures required which are approached differently in Italy. Conventionally in common law jurisdictions, the seller sets out what specific disclosures are required against each warranty in a letter. In civil law jurisdiction Italy, this is replaced with schedules to the sale and purchase agreement for disclosure. To address the concept of updated disclosure in the interim period between signing and closing, the proposed solution is to update such schedules before closing, and over the years Liberty Specialty Markets has introduced wordings that are now standard in the Italian W&I market.
Over the next several years’ activity started to pick up as law firms became more enthusiastic about the W&I product and began to recommend it more frequently to their clients. 2018 saw both more policies and great enterprise values being insured, and 2019 saw volumes up by almost ten times across a wider range of industries and more sophisticated deals. Auctions are another area where use of W&I has been growing in Italy over the last two years, with much greater use of the so-called ‘hard-staple’ process. This is where, particularly for larger enterprise value or very competitive auction disposals, the W&I process start with the seller (i.e. rather than the buyer) who chooses the W&I insurer and negotiates the initial draft W&I policy with the W&I insurer before “flipping” to the preferred bidder(s) on the buy-side.
Activity picked up again in the second half of last year and W&I now feels fully embedded in the Italian market with regional brokers now involved and the product being used in deals which are 100% domestic with no foreign investors. There has been considerable focus on infrastructure – particularly renewables, telecoms and transport, many of which are public / private partnerships or where large foreign funds are investing in key infrastructure assets for the Italian economy. There is no doubt that the change of government in Italy has increased investors’ confidence in the political stability of the country and given it greater credibility. Dealmakers in Italy will hope that easing pandemic restrictions and upbeat forecasts for economic growth (4.2% GDP growth in 2021 is predicted - source) will sustain deal activity and the M&A market will be able to continue building on momentum from the first half of 2021, bringing with it ever greater demand for W&I insurance.
