M&A insurance to support transactions in emerging jurisdictions on the rise

Gareth Rees : Chief Underwriting Officer

Gareth Rees

Chief Underwriting Officer

As global M&A activity continues to accelerate in regional markets worldwide, the use of transactional insurance has simultaneously increased.  In the past eighteen months, a clear trend has developed within the M&A insurance space.  We have seen rapid growth in the use of Warranty & Indemnity insurance in jurisdictions that, until recently, would not have been likely candidates for transactional insurance products.

Liberty GTS’s professionals have underwritten complex deals where the target business, or material component of it, has been located in jurisdictions including: Croatia, Ghana, Jordan, Kenya, Kuwait, Morocco, Niger, Romania, Serbia, Turkey and Uganda.  Buyers and sellers in emerging M&A markets such as these are taking the lead from market practice in jurisdictions such as the U.S., Western Europe and the Asia Pacific region by leveraging M&A insurance tools to facilitate satisfactory deal terms and outcomes.

Global M&A volume is at a 10-year high, according to the most recent EY Global Confidence Barometer, based on the annual survey of nearly 3,000 executives across 47 countries.  Deal appetite is being driven by innovation, disruption and the need for growth as buyers reshape asset portfolios to achieve greater scale and operational efficiencies.  The Global M&A market in 2018 was $4.1 trillion, up 16% from 2017.  In 2018, cross-border deal activity remained extremely strong, reportedly representing nearly 30% of the total global M&A market, which is an increase of 23% totaling $1.2 trillion as of year-end, as stated in the JP Morgan Global M&A Outlook report.

Despite economic and political uncertainties in emerging markets, both corporate and institutional buyers are seeking risk-reward investment opportunities by increasingly looking further afield.  The executives running the deals will likely have used W&I insurance in more “traditional” markets, where the product is now regarded as a normal part of the M&A transactional toolkit. They are now driving greater use of the product when conducting transactions in emerging markets, often with the same top-tier professional advisors, also familiar with W&I insurance, that advised them in more mature markets.

W&I insurance can actually be used to mitigate one of the actual or perceived risks of doing deals in emerging markets, namely unfamiliarity with the local court system.  The dispute resolution mechanism in a W&I policy, whether court-based or arbitration, need not match the SPA so, if that provides for local dispute resolution, the W&I policy can be used by a buyer to ensure that any warranty claims are dealt with in a forum and jurisdiction with which it is comfortable and familiar.

For insurers looking to grow their books, while it is positive that use of the W&I insurance is expanding into emerging markets, care must be taken to enter new jurisdictions prudently.  That can be achieved by insurers instructing advisors familiar with both the W&I product and the local market so that cover and commercial terms can be adapted to reflect any specific risks associated with transacting in these emerging markets.

This website is general in nature, and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. By citing external authorities or linking to other websites, Liberty Mutual is not endorsing them.

M&A insurance growth spurred by increased awareness of transactional value

Rowan Bamford : President

Rowan Bamford

President

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.

This website is general in nature, and is provided as a courtesy to you. Information is accurate to the best of Liberty Mutual’s knowledge, but companies and individuals should not rely on it to prevent and mitigate all risks as an explanation of coverage or benefits under an insurance policy. Consult your professional advisor regarding your particular facts and circumstance. By citing external authorities or linking to other websites, Liberty Mutual is not endorsing them.