Following a surge of deal making throughout the world during the Covid-19 epidemic, the cost of insurance to cover situations involving M&A has nearly quadrupled in only two years, according to underwriters and brokers.
Potential buyers purchase insurance to protect themselves against concerns like a target’s misrepresentation of its performance or order book, while sellers purchase cover to ensure a smooth exit.
After years of declining prices due to fierce competition, M&A insurance premiums in 2021 were the first to climb since the industry began more than two decades ago, according to Andrew Johnson, director of M&A at broker Paragon.
According to some in the insurance sector, a lack of due diligence has resulted in an increase in claims, while the mergers and acquisitions boom has resulted in dramatically higher rates.
“From August/September last year, we saw incredible deal volumes, that has encouraged insurers to raise rates,” said James Swan, a partner at insurance broker McGill and Partners.
With companies prepared for life after Covid-19, M&A activity globally reached a record $4.33 trillion during the first nine months of the current year, which was 97 per cent higher compared to $2.2 trillion worth of deal making in the first nine months of a pandemic-hit 2020.
Swan stated that the M&A insurance market had grown to more than $5 billion from less than $3 billion just about a year ago, and that a contract he was working on in Europe was priced at roughly 1.9 per cent of the available cover, which was higher from around 1 per cent a few years ago.
According to Caroline Rowlands, an executive director at insurance broker Howden, premiums for some transactions in the United Kingdom have climbed to 1.5 per cent of the cover offered, compare dot previous rates of about 1 per cent.
Insurer Mosaic’s global head of transactional liability, William Monat, stated that rates for some U.S. agreements have increased to about 4% of cover, up from below 3% previously.
According to industry insiders, where M&A insurance had previously been mostly purchased by private equity firms, corporates were increasing the amount of coverage they purchased.
According to Rowan Bamford, president of Liberty Global Transactions Solutions, COVID resulted in claims being processed faster.
“With the pandemic and issues round doing proper diligence on businesses, perhaps there’s been some corner-cutting on process,” he said, adding that buyers were not able to visit businesses easily due to restrictions, while competition for deals may have encouraged haste.
According to a recent study from Liberty, the time it took to execute due diligence was sometimes cut in half.
Adrian Furlonge, a partner at Hemsley Wynne Furlonge, noted that on a few of M&A deals, the broker received knowledge of a potential lawsuit fairly shortly after closure, implying that there was inadequate investigation done beforehand.
“Everybody has been doing too much in too small a timeframe”, Furlonge said.
According to industry insiders, manufacturing and healthcare were among the industries that have witnessed a high number of claims, with labour and supply chain issues causing firms to not always deliver on their promises.
The majority of M&A insurance issues are resolved behind closed doors, with public disclosure occurring only if arbitration fails. However, since the epidemic began, no such claims have been filed, according to sources.
(Adapted from Reuters.com)