Transactional Risk Insurance Remains Robust Amid M&A Downtrend

Despite a downward trend in mergers and acquisitions (M&A) in 2023 due to macroeconomic and geopolitical challenges, transactional risk insurance remained resilient, according to a report by Marsh.

The firm’s North American team placed 1,046 transactional risk policies on 555 unique transactions, a 4% increase over 2022, insuring risk related to transactions with an aggregate enterprise value exceeding $160 billion.

A Softer R&W Sector

The report highlighted a softening in market conditions for representations and warranties (R&W) insurance buyers, driven by an expansion in supply and weaker demand due to a 24% drop in M&A transactions. This led to a decrease in R&W insurance rates throughout 2023, with primary layer R&W insurance rates more than 50% lower than the peak rates seen in early 2022.

Retentions on R&W policies have also experienced a reduction because of the soft market. In policy retentions that would typically maintain a 1% of enterprise value for middle market transactions, they experienced a drop to 0.5% of enterprise value “at the 12-month anniversary of closing,” according to the report.

The report also noted that larger transactions that have an enterprise value of $300 million or more also experienced a decline “on transactions with an enterprise value in excess of $2 billion.”

Looking at transactions from the private equity lens, North America numbers decreased by 7% in terms of deals, with aggregate transaction value decreased by 30%, marking “the lowest level of U.S. private equity deal value since 2016,” per the report.

“As a result, more underwriters were chasing fewer — and smaller — transactions in 2023, leading to dramatic changes to the R&W marketplace,” the report continued.

The soft market also resulted in reduced retentions on R&W insurance policies and impacted policy terms and conditions. Insurers offered “clean” quotes with limited commentary on the covered representations and warranties, providing better coverage for insureds than at any time in the product’s history in North America.

Despite a decrease in M&A activity, demand for transactional risk insurance remained robust and consistent across specific sectors.

The technology industry accounted for close to 20% of overall deal value in the region, with communications, media, and technology companies involved in more transactional risk placements than companies in any other industry.

Looking Ahead

The report anticipates an increase in M&A activity in North America in 2024, driven by expectations for a more favorable financing market and private equity firms sitting on more “dry powder” than ever before.

However, the prospects of a contested U.S. presidential election may dampen M&A activity post-Labor Day. Regardless of M&A market conditions, transactional risk insurance is expected to remain a key component of deals in North America.

To access the full report, visit Marsh’s website here. &