2021 set to be record year for M&A insurance: report

This year will be a record year for mergers and acquisitions insurance, a recent report by global independent broker BMS Group estimates.

The inaugural Private Equity, M&A and Tax Insurance Report, released in May, found that while the COVID-19 pandemic dampened M&A activity in Q2 of last year, by Q4 “a frenzy of renewed M&A activity” had led to a 25% increase in transactions using M&A insurance. In 2021, Q1 saw a 21% increase in such transactions compared to the same period the year before.

M&A insurance, also known as representations and warranties (R&W) insurance, is intended to protect a deal’s buyer if a statement made by the seller turns out to be false. For example, this type of insurance would prevent the buyer from assuming liabilities the seller failed to share.

Four in five private equity transactions in North America used M&A insurance, while claims notifications are now made on around one in five M&A policies, according to the report.

Pandemic impact

“Initially, the pandemic put M&A insurance carriers on their heels. A year ago, we saw full exclusions of cover arising or resulting from COVID-19,” Toronto-based Jason Stone, managing director of private equity and mergers & acquisitions at BMS’s North American division, told Canadian Underwriter.

“Now, M&A underwriters can underwrite around this and make sure any COVID-19-related exclusions are specifically tailored to the risk that is being underwritten. For example, if a seller has major supply chain interruptions with a country like China, we expect an exclusion with respect to those supply chain matters. However, if the seller is well insulated from the effects of COVID-19, the expectation is that no broad exclusion is needed from the M&A insurance carrier.”

M&A insurance keeping pace

A surge in private M&A deals globally have resulted in a massive uptake in M&A insurance cover, Stone said, and growth is expected to continue post-pandemic.

“Specifically in North America, more than 60% of private M&A transactions have used this insurance product. We expect to see this trend continue for the rest of the year as [private equity] funds, pensions plans, sovereign wealth funds and corporates continue to do deals. Pent-up demand has required sellers to run full auction processes, which include the most sophisticated investors who recognize R&W/W&I insurance as a major component to distinguish themselves to the seller.” R&W insurance is also known as W&I, or warranty and indemnity insurance.

Sellers are seeing “unprecedented valuations and looking to monetize their business,” Stone said. “We’re also seeing that claims continue to be paid out, something many buyers were cautious of five or six years ago.”

As the M&A market continues to stay hot, the M&A insurance market will keep pace, Stone said.

Growth areas

In particular, deals in healthcare, special purpose acquisitions companies — commonly known as SPACs — and secondary transactions have spurred growth around M&A insurance, Stone said.

“The M&A insurance market continues to innovate, with more tax insurance policies being used for known tax matters as well as contingent liability insurance. As clients continue to come to us as advisors on their deals, and problems present themselves, the insurance market will continue to evolve.”