October 2022 / 5 Min Read

Maximizing Deal Opportunities with M&A Insurance in a Buyer’s Market

How effective use of M&A insurance as part of dealmaking strategy comes to the fore in times of uncertainty.

Key Takeaways

Given geopolitical, macroeconomic and other factors, a shift is underway in M&A as the dynamic swings from a seller's to a buyer's market.
Insurance remains a valuable instrument both for managing deal risk and enhancing investment performance in M&A.
Factoring in the scrutiny and approach in underwriting taken by M&A insurers to an insured’s due diligence process is key to effective deal preparation.

With 2021’s post-pandemic spike in mergers and acquisitions (M&A) activity and now 2022’s deal downturn taking hold, dealmakers face a crossroads: hang back while the clouds of macroeconomic uncertainty disperse, or act now despite market challenges and seize the day. Driven by a variety of extraneous factors, the M&A pendulum seems to be swinging from a seller’s to a buyer’s market.

“Appreciating the broader shift in bargaining position from sell-side to buy-side is important for the simple reason that not only does fortune favor the brave; in times of volatility, and with a macroeconomic outlook creating greater potential for downside risk, the ability to manage risk effectively becomes an even more important strategy for improving business performance and investor returns.”¹

The Continued Role M&A Insurance Plays to Help Improve Dealmaking

Against this backdrop, the value of insurance as an instrument both for managing deal risk and enhancing investment performance remains real.

More Like This

Article
Transaction Insurance Claim Study

Article
M&A Risk In Review 1H 2022

Article
The Business of Mergers and Acquisitions: An Industry Outlook

Looking Ahead: What to Expect from M&A Insurance in 2023

In 2021, managing deal volume, execution challenges and higher pricing for warranty and indemnity (W&I) insurance were the major challenges, but, as insurers leverage more data in their decision-making, the diversity of diligence, insurance claims history and capital allocation will be major pressures.¹

As M&A insurance becomes more deeply embedded, and claims experience better understood, due diligence will continue to be an area of utmost scrutiny. Deal principals and their advisors should consider:

Understanding and pre-empting diligence gaps at an early stage of the deal process can help reduce exposed areas of risk and, as a result, narrow possible exclusions to cover that only surface at a later – and more sensitive – point in the process. Don’t presume that a W&I insurance policy will comprehensively cover warranties that have not been subject to meaningful diligence performed by or on behalf of the buyer.
As digitalization continues to drive M&A growth, specialized areas of diligence (e.g., cybersecurity, data, source code and intellectual property (IP)) represent key workstreams for identifying risk, performance and value. Leveraging technical expertise in these areas can help provide W&I underwriters with a sufficient understanding of the relevant risk and comfort levels to improve W&I cover by lifting or narrowing exclusions.
Tax authorities in a number of jurisdictions are scrutinizing transactional activity, particularly in relation to private equity capital structures. The importance of tax due diligence cannot be overemphasized, both for improving buyer visibility on deal-related tax risks and mitigating any potential valuation impact by transferring them to the insurance market.

The Value of M&A Insurance: Are Policies Paying Out?

The emerging claims data is compelling. Aon’s Transaction Liability: Insurance Claims Study 2022 shows that:

In 2021, insurers paid out more than $560 million to Aon clients in North America, with only 4 percent of claims there since 2013 ultimately being denied by insurers.¹
In Europe, Aon’s clients have recovered closer to $100 million in claims in the past 18 months, with a similar amount remaining the subject of ongoing claims.¹

Both insurers and buyers of M&A insurance are re-evaluating their appetite for risk capital in varying ways, with temporary rate increases in Europe in 2021 not appearing to have curtailed buyer demand. How this trend develops, against the backdrop of a potentially prolonged period of economic and geopolitical uncertainty, remains to be seen.

“For sellers and buyers alike, uncertain times bring into sharper focus the value impact, in its broadest sense, of M&A insurance in its various forms, especially if distressed transactions become more prevalent or where the need to address known and contingent risks with tax or litigation insurance becomes more acute to maintain deal certainty.”¹

Read the full chapter in Lexology’s Getting the Deal Through – Private M&A 2023

In a year when global M&A deal value topped out at a record $5.9 trillion, representing a year-on-year increase of 64 percent in 2021, the M&A insurance market rose to the required capacity challenges and met unprecedented demand for capital.

Source: 2022, Piers Johansen, Dominic Rose and Elizabeth Blackwell, Caveat Vendor: M&A Insurance in a Buyer’s Market

¹ 2022, Piers Johansen, Dominic Rose and Elizabeth Blackwell, Caveat vendor: M&A insurance in a buyer’s market. Reproduced with permission from Law Business Research Ltd. This article was first published in Lexology Getting The Deal Through – Private M&A 2023, in October 2022. For further information, please visit: https://www.lexology.com/gtdt

General Disclaimer
The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Terms of Use
The contents herein may not be reproduced, reused, reprinted or redistributed without the expressed written consent of Aon, unless otherwise authorized by Aon. To use information contained herein, please write to our team.