XL’s M&A offering arrives with perfect timing

XL’s decision to add an M&A insurance division to its business lines could not have come at a better time.

This is the assessment according to Louise Dennerståhl, head of international financial lines at XL Group, who spoke to Bermuda:Re about the company’s newest market venture.

“The creation of the M&A unit is part of our strategy to broaden our international financial lines business,” says Dennerståhl.

The firm is seizing the opportunity to provide clients undergoing M&A’s with insurance solutions to assist in managing the risks involved and to help facilitate these transactions. At the moment, the use of warranties & indemnities (W&I) - a key component of the M&A insurance product offering - is enjoying an upward trend in penetration rates across a number of markets, she explains.

“We think this trend is likely to continue and anticipate that M&A practitioners and clients will turn to these solutions to support their M&A activities over the coming years and into the long-term.” says Dennerståhl.

In terms of geographies, the US represented about half of the world’s M&A (approximately 46 percent by value) in the first quarter of 2014 and Europe about a quarter (26.8 percent by value). Globally, the leading singular industry grouping was telecommunications ($101 billion) followed by energy, mining & utilities ($82.7 billion) and consumer ($75.9 billion).

Capacity for this line of business has amplified over recent years and there has been an increase in brokers specialising in the line and building real market expertise.

So the signs for 2014 suggest that M&A activity is on the rise, and, according to analysts, both buyers and sellers are adopting a more realistic approach to valuations.

“We think that now is a good time to invest and build a team that can service clients across a broad range of M&A situations across geographies and sectors,” says Dennerståhl.

The M&A team will be based in London under the supervision of Tim Allen, global head of M&A insurance.

“M&A appetite is sector specific and is influenced by many factors, including the markets and jurisdiction as well as the specific circumstances of the parties involved,” says Dennerståhl.

However, there is evidence of increased levels of confidence in economic stability, as well as pressure to deploy cash sitting on corporate balance sheets and “dry powder” sitting within funds.

“The option of achieving growth by acquisition as opposed to organically is one that many CEOs are considering with increasing regularity,” Dennerståhl says.

Alongside the need for growth and shareholder pressure or activism with regard to balance sheet cash, there seems to be signs that the gap in stances taken by sellers and buyers to asset valuations is narrowing.

“If this is the case, it will make for increased levels of interest in targets as they are brought to market, hopefully increasing the number of successful sale processes but also encouraging otherwise hesitant CEOs and fund managers to invest,” she says.

Addressing XL’s move into the M&A sector, Dennerståhl concludes: “The specialist and entrepreneurial nature of the M&A insurance market fits well with our continued commitment to provide innovative and relevant products.”