M&A activity unlocks this hot new business opportunity

Global mergers and acquisitions (M&A) activity over the past five years — which reached a total value of almost $3.5 trillion in 2018 — led to a starburst of transactional insurance last year.

Transactional risk insurance covers risks related to M&A, including representations and warranties (R&W) insurance, tax indemnity insurance and contingent liability insurance.

In a new report, Marsh JLT Specialty says it placed transactional risk insurance on behalf of clients in 1,089 global M&A transactions last year — a 37% increase over 2017.

In Canada and the U.S., transactional risk insurance limits placed by Marsh JLT Specialty soared by 53% last year (from US$10.7 billion in 2017 to US$16.56 billion in 2018). Marsh JLT Specialty placed transactional risk insurance for 504 North American deals in 2018, up 40% over the previous year.

Why the explosion of transactional risk insurance placements?

It’s not solely because the number of corporate and strategic buyers is up, says Marsh JLT in its June 2019 Transactional Risk Insurance Report. At a time when pricing in so many insurance markets is going up, pricing in transactional risk insurance is on its way down.

Pricing reductions for R&W insurance in North America declined 11% in 2018, which followed a 13% price reduction between 2016 and 2017. “With more insurers entering the market in 2018, Marsh Specialty JLT anticipates that this trend will continue in 2019, albeit at a more modest pace.”

Using R&W insurance for larger M&A deals accounted for the increased limits in this specialty line last year, Marsh JLT reports. In North America, the average enterprise value for Marsh JLT-insured transactions was US$402 million, an increase of 29% over 2017. And there was “a significant increase in the number of transactions with an enterprise value in excess of US$1 billion.

Capacity for transactional risk insurance in North America increased last year, with more than 20 insurers now able to offer primary terms for placements. Capacity is now available for placements of limits greater than $1 billion for a single deal.

“Overall capacity expansion is likely in 2019,” Marsh JLT Specialty reports, “along with modest pressure for rate reductions and continued policy innovation.

“Trends to follow include increased use of synthetic warranties (which are provided by the insurance carrier and not the buyer), broadening of policy forms across geographies, increased use of tax insurance, and parity between PE (private equity) and strategic investors.”