According to a report issued this week by Marsh’s Private Equity and Mergers & Acquisitions Services (PEMEA) division, demand for transactional risk insurance grew 41 percent globally in 2012. The increase is due largely to firms eager to protect large deals and cross-border acquisitions and sales.
The most pronounced increase for insurance of this kind is in North America, where increasing regulation and economic uncertainty makes foreign investors gun-shy.
Additionally, North American firms feel trepidation when approaching deals in the EMEA and Asia Pacific regions and turn to the insurance markets to bear a portion of the risk. Policy limit for transactional risk insurance in North America were up 86 percent in 2012, driven by an increased usage of the insurance on deals in excess of $100 million.
Bermuda:Re spoke to Lorraine Lloyd Thomas, senior vice president in the PEMEA practice at Marsh and head of the UK transactional risk team, about rising interest in the space.
How much of the risk inherent in M&A does this type of insurance really remove?
The intention of warranty and indemnity insurance (W&I) is to cover as many of the warranties under the sale agreement as possible, and the insurers will append a schedule to the back of the policies outlining all of the warranty numbers and stating clearly whether they are 'covered', 'partially covered' or 'excluded'. If an insurer cannot provide coverage for a warranty as drafted under the sale agreement they can often 'partially cover' it instead of adding an exclusion.
Exclusions do vary from insurer to insurer and transaction to transaction. An important point to note is that [these policies] are not intended to take out all of the risk relating to mergers and acquisitions— this would be impossible— but a W&I policy is intended to cover the contractual breach of warranty/call under the tax covenant risk, which can be a substantial part of the concern for clients when entering into a transaction
Has the availability and popularity of this kind of insurance driven M&A to some degree?
Yes, to the extent that it has made some transactions happen that wouldn't have otherwise happened. This would be the case where, for instance, the seller and the buyer couldn't agree on the warranty position and the insurance has bridged the gap in expectations.
Do you expect to see higher rates of growth outside of North America going forward? What factors are holding other regions back from the kinds of increases seen there?
Although North America saw the biggest increase in limit placed last year, the highest quantum limit placed was by our Europe, Middle East and Africa team (EMEA). I think the main reason for the growth in North America last year was the use of W&I by US corporates buying overseas and taking perhaps a more cautious approach to a warranty package then they would if they had been buying in a familiar territory.
It is true to say that North America and some countries in EMEA such as the UK and France are more developed in their use of W&I insurance than some other countries. Having said that; our Asia-Pacific team experienced the highest percentage growth in 2011 compared to 2010.
With 'newer' markets it often takes time for deal-makers and advisors to get familiar with the concept of structuring W&I into their transactions. We have seen in other countries that, once lawyers in particular get comfortable with the concept and have experienced it helping to get a transaction across the line, we often benefit from a great deal of repeat introductions for advisors, which can of course help to drive growth.
Marsh, M&A, insurance, reinsurance, Bermuda, PEMEA