Transactional risk market grows 155% in three years reports Marsh

Last year Marsh placed $5.1bn of transactional risk cover globally, up 26% on 2012. The Europe, Middle East and Africa (EMEA) region saw a 20% increase in policy limits in 2013. According to research published yesterday by Marsh, the broker placed $2.74bn of limits in EMEA, up from $1.5bn in 2010, $1.03bn in Asia Pacific, up from $114m, and $1.34bn in the Americas, up from $395m. Marsh's M&A Transactional Risk Solutions: Global Growth Special Edition report notes that the growing utilisation of transactional risk insurance is most pronounced in Germany, South Africa and across Asia Pacific.hideBetween 2010 and 2013 Marsh noted a 100% increase in policies bound for German transactions, while Asia Pacific experienced the greatest overall growth, with a nine-fold increase in the limits of insurance placed by the broker. "The development of the market over the last ten or twelve years has been phenomenal," said Lorraine Lloyd-Thomas, a Senior Vice President in Marsh's Private Equity and M&A (PEMA) Services Practice and Head of the UK Transactional Risk team. "The growth in the limits we have been placing in the market has been very dramatic, particularly over the last three-year period." "The transactional risk insurance market has rapidly evolved from being largely concentrated in western Europe and the US in 2010, into the global industry it is today. Risk appetite is key to this growth: while many firms are looking beyond their own borders for mergers and acquisitions opportunities, the unfamiliarity associated with doing deals overseas means they are taking a much more cautious approach to warranty exposure," she added. Transactional risk insurance aims to eliminate or mitigate risks typically found in M&As. The most common protection is called Warranty and Indemnity (W&I) insurance. It primarily protects either the seller or buyer in an M&A transaction against breach of warranty claims. In M&A transactions it is typical for sellers to give buyers warranties in the share purchase agreement. These are contractual promises about the business being sold. They encompass a huge range of issues at the target company, ranging from the validity of title to sell shares to complicated matters around property, employment, tax, contracts and legislation. If subsequently a buyer discovers that a warranty has been breached it can potentially sue the seller for a breach of warranty. Historically W&I insurance would cover the liability of the seller, but over the last decade the insurance market has developed buyer-side policies. These can be used proactively and aggressively, typically by corporate firms and private equity houses, and stapled into the M&A process, explained Ms Lloyd-Thomas. These coverages have been one of the key drivers of M&A insurance. Around 80% of policies are now buyer-side. This trend has been driven by a growing number of sellers offering a small, or in some jurisdictions a nil, cap on warranty liability. In these instances, instead of offering 20% or 30% of the transaction value as a warranty cap, sellers will offer a lower cap and a successful buyer will take out a W&I policy to provide it with recourse. The seller will generally part pay for that policy, but it enables them to exit the transaction and maintain cash flows whilst keeping bidders in the game. The private equity community has driven this development known within Marsh as the seller-buyer flip. "This has been particularly evident in the UK over the last three to four years and has really driven the market," said Ms Lloyd-Thomas. 'This type of thing has gone from something that seemed a bit aggressive in this market to a key motivation for clients with this type of insurance." At least a half of buyer side policies placed today involve instances where the seller has initiated the cover, said David Cooper, an Assistant Vice President in Marsh's PEMA Practice. According to Rebecca Wynn, Senior Vice President in Marsh's PEMA Practice: "The cover is effectively being stapled to the transaction in much the same way as finance used to be stapled to transactions to enable a clean exit for sellers while not deterring bidders from having a recourse." Ms Lloyd-Thomas said another key factor behind the surge in demand for transactional risk insurance is the increasingly global breadth of cover available. Where underwriters previously focused on deals in the US and the UK they have now pushed into new territories, including emerging markets. Within EMEA Marsh has placed a number of first transactional risk policies in countries such as the Czech Republic, Hungary, Poland, Slovenia and Croatia. "There really aren't that many places where insurers shy away from, particularly within the European community," said Ms Wynn. A third key driver in the market is favourable developments in pricing and conditions. Marsh reports that falling premiums have contributed to the growing popularity of W&I insurance globally. According to Marsh, a decade ago it was not uncommon to see Rates on Line (ROL) for transactional risk cover of 4% to 5%. Today they are around 1.55% in the EMEA region, down from 2.1% in 2010. Excess cover has typically reduced from 3% of the transaction value to 1% or even lower. Insurers have also removed many exclusions from M&A transaction policies. Ms Lloyd-Thomas explained: "New entrants to the market, coupled with falling premiums, has fuelled product innovation as insurers look for new ways to differentiate themselves from competitors and sustain their books of business. Clients are taking full advantage of this." The number of insurers offering cover in EMEA has risen from four or five a decade ago to around 10 on a primary basis and even more on an excess basis. "This has forced insurers to differentiate themselves in terms of premium, retention excess levels and exclusion," said Ms Lloyd-Thomas. She explained that the number of claims from transactional risk policies has increased over the last couple of years, particularly in Europe and the UK where they tend to emanate from financial issues. In the US, where class actions are rife, employment-related claims are more typical. Mr Cooper said demand for cover is 'sector agnostic'. A wide range of industries and companies of all sizes are taking out M&A transactional insurance policies with limits ranging between $5m and $5bn, he said. While aggressive private equity firms have extended the market's boundaries, sophisticated corporates are following their lead and placing cover. Of $5.1bn transactional risk cover placed by Marsh globally last year, 53% was placed for private equity firms and 47% for corporates.

Transactional risk market grows 155% in three years reports Marsh

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