M&A insurance demand reaches new heights amid bottleneck concerns

"There's been a tightening in the market recently," says Kate Cooper, a corporate partner at law firm Freshfields Bruckhaus Deringer. "At the start of the year, there was a lot of underwriting capacity, but as the year went on this has become much more selective."

Once a niche product, warranty and indemnity (W&I) insurance has become more mainstream over the years. The number of insurance-backed private market deals in the UK and Ireland alone grew to 949 in 2019 from 353 in 2014, according to a Practical Law report based on data by Paragon Brokers.

Besides W&I's growing popularity, the latest surge in demand also reflects the level of deal-making that has taken place over the last few months. The aggregate value of deals in the first nine months of 2021 was the highest in the past decade at USD 4.77trn globally, up from the previous USD 3.70trn peak in 2015, according to Dealogic data.

Some companies have turned to insurance as a way to alleviate diligence pressures caused by the pace of M&A, while insurers were equally keen to underwrite earlier in the year, Cooper says.

While still acting quickly, insurers are now taking longer to write business and becoming more selective. Less attractive terms could complicate M&A deals if sellers are asked to have more skin in the game. "Private equity owners will avoid that, and so selling management may be asked to bridge the gap, although that is only ever of limited additional value," she adds.

The hardening W&I market is adding to the current slowdown in M&A activity that has followed a flurry of deals earlier in the year, as there is an expectation that transactions should be insured, according to one private equity investor.

The issue transcends UK borders and may put sponsor-driven deals at risk, a management adviser says. However, this will only be the case for "flaky" transactions, a second adviser counters, adding that coverage issues would be the last thing to push them over the edge.

Getting creative
The popularity of W&I insurance is such that underwriters have exceeded their forecasts and requested additional capacity, says Tom Hobart, managing director at specialist M&A insurance broker Liva.

A number of insurers across the market, including top player Liberty GTS – part of Liberty Mutual – have nearly exceeded their underwriting allowance for the year through Lloyd's of London as a result of bumper demand, according to a source familiar with the matter. Some underwriters have effectively ceased new business, though Liberty GTS is shifting resources to continue to write W&I insurance through other channels until its new Lloyd's annual business plan kicks in, they add.

According to the Lloyd's calendar, syndicates had to submit their capacity allocations for 2022 to the market operator on 1 November so they can be signed off by early December.

Looking into 2022, Liberty plans to expand its M&A business, a spokesperson for the company says, striking a bullish note: "After such a strong year, we will be looking to grow further in terms of gross written premium (GWP) and underwriting capacity in 2022 – and to do this across all platforms."

Price hike
In terms of pricing, insurance rates saw a marked uplift during the summer as underwriters turned down deals, though this seems to be tailing off, with Hobart adding that there is no cause for alarm as there is plenty of capacity left in the market.

Still, prices remain elevated compared with the start of the year, with rates up 10 to 30 basis points depending on the nature and size of the risk with certain providers, according to Mark Ettershank and George Minoprio, respectively head of W&I and tax insurance, and head of M&A within Arthur J Gallagher's major risks practice.

Ettershank adds that in addition to the increased demand for coverage and constraints around market capacity, potentially higher levels of claims linked to an increase in global consumption of the product may have had a part to play in the temporary hardening of the market.

How long this will last is hard to predict as there are numerous moving parts. For example, prices could come back down if insurers obtain more capacity for the new year, depending on the volume of M&A deals, one broker suggests.

However, the W&I insurance market remains very competitive with some recent new entrants, which is typically a good counterweight to any upward pricing pressures. M&A activity in the coming months looks extremely busy, says Ettershank.

While M&A has seen a slight slowdown relative to the first half – perhaps signalling a more cautious approach amid potential inflationary pressures or global supply chain distractions – there is still a huge amount of capital ready to be deployed and pressure on boards across all sectors to turn to M&A to achieve business transformation, Cooper notes.

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