Even though COVID-19 lockdowns disrupted some global merger and acquisition (M&A) deals in 2021, M&A activity grew significantly throughout the year, according to Gallagher's global M&A 2021 review.
In 2020, the COVID-19 pandemic left M&A insurers reassessing and innovating to prepare for their inevitable rebound as the global economy improved. As part of their reassessment, many M&A markets expanded their teams to add weight to their representations and warranties (R&W) and warranty and indemnities (W&I) and differentiate themselves with expertise in areas such as tax, IP, and contingent risks.
In its recent review, Gallagher found that 2021 has been the busiest M&A insurance market on record. For example, even though 35 insurers were better staffed for the onslaught of transactions (especially from the second quarter [Q2] onwards), the sheer volume was unprecedented, leading to what could be described as a “hard market” after many years of reducing premiums.
Claims did not outweigh premiums, but capacity in the M&A market started to dry up towards the beginning of the fourth quarter (Q4) of the year. As a result, many insurers had to close their doors by October after effectively writing too much business while managing general agency (MGA) capacity providers did not want to “extend the tape” any further – resulting in an increase in premiums and restricted appetites as those that still had capacity can “pick and choose” the deals they wanted to underwrite.
In addition, brokers needed to be strategic in their marketing approach, and leverage was used to squeeze out terms from insurers.
Despite tightening market conditions, Gallagher noticed that some insurers expanded into other territories and sectors that were formerly considered uninsurable.
In 2022, Gallagher expects M&A insurers to have big budgets due to the previous year's successes. However, it also expects insurers to be under increasing pressure to win deals.
“Even if deal flow was to remain as high as 2021, new entrants will inevitably enter the fray, and existing M&A insurers will continue to expand their teams, which, at the very least, should keep rates steady through 2022,” the report said.
Gallagher also expects transactional risk insurance to mature further and strengthen its place as a valuable component of how M&A is done.
“2022 will be another busy year, and we expect that there will be more exciting trends to report on this time next year as the product develops even more,” the report said.