2021 was one of the most robust years for M&A activity, and with more deals the demand for M&A insurance has naturally increased.
Jason Stone (pictured), managing director of private equity and mergers and acquisitions at BMS Group, noted that there was a surge in the use of representation and warranty insurance, which has become a standard product in most M&A transactions.
“In both Canada and the US, we’re seeing close to 75% of private equity or private M&A deals use the product to facilitate their business,” he said.
Growth of what are now known as ‘pandemic-proof’ industries, such as technology and healthcare, is expected to continue moving into 2022 and Stone noted that, with respect to the latter, private equity companies will keep their foot on the gas to streamline the availability of a range of healthcare services.
“A lot of assessment has been done virtually, leading to a number of issues - but representation and warranty insurance providers have understood the dilemma and have been able to cope without causing much concern,” he said.
There are around 20 representation and warranty insurance carriers in Canada and, according to Stone, they have been able to adapt to demand, hire more staff and virtually manage risks. However, there have been difficulties along the way.
“Cyber coverage, for example, has been very difficult in a hardening market, we get a lot of push back when we ask clients about underlying cyber coverage, and oftentimes they can’t actually get the right product right now,” he said. “With representation and warranty insurance the intention is not to step on any toes so risk can be handled by other areas of the insurance market.”
It’s a delicate dance for M&A brokers, especially in a rapidly evolving technological environment. If an underlying company does not have cyber insurance, the representation and warranty market will not be willing to step in to pay out losses, which Stone said has been a difficult negotiating point.
“We work through the challenge, but it definitely raises eyebrows across the board,” he added.
The rep and warranty market has also hardened over the past 12 months. Stone explained that premium rates divided into the limit of insurance is currently 5-7%, whereas 18 months ago it was typically sitting at 2.75.
“It’s doubled and the reason for that is more claims activity, specifically with respect to financial statement, tax representation, material contracts and compliance with laws,” he said. “Those are the areas where claims have risen substantially, and carriers are trying to figure out appropriate pricing to remain profitable.”
Stone mentioned that reinsurers have taken a much closer look at this niche line of business compared to five years ago. As the entire industry becomes more familiar with this market, all eyes will be on claims and cost.
“The difference between this line of business is that we’re tied to the M&A market globally,” Stone emphasised. “With inflation driving up costs, there will be a bit more apprehension from private equity firms and sovereign wealth funds to engage in deals.”
Inflation, coupled with the ongoing pandemic, has made experts such as Stone believe that Q1 2022 will not flourish the same as Q1 2021 as clients find their footing in the economy.
“We want to make sure we’re preparing clients for the continuation of a hard market in 2022,” he said. “It comes down to getting in front of pricing rather than have clients experiencing sticker shock. It’s our job as brokers to make sure clients know what the cost will be well in advance and look at alternative risk strategies if the product is too expensive.”
