Surging global M&A activity in 2021 leads to a record number of notifications

• Notifications are being made later, with claims being notified after 18 months rising considerably from 10% to 38%
• Covid-19 did not bring about a surge in the volume of notifications anticipated at the outset of the pandemic
• Operational deals continue to produce more notifications than real estate deals
• Material Contracts and Financial Statements continue to be two of the most commonly notified warranty breaches
• The number of notifications validly declined has increased to 26% from 13%, partly due to insureds' increased willingness to notify insurers on a precautionary basis

15 December 2021, London – Howden M&A, the international M&A insurance broker, has today released its annual M&A Insurance Claims Report, analysing the key trends that emerged across the UK and Europe over the course of the Covid-19 pandemic. Increased deal activity and use of M&A insurance has led to a record rise in the number of notifications, but the coronavirus outbreak did not bring about a surge in the volume of claims or the number of coronavirus-related break events that had been anticipated at the outset.

Notifications

The report reveals that ‘large cap’ transactions (those transactions with an enterprise value of at least €1bn) attract a higher notification rate when compared to smaller deals, with notifications within the large cap deal class increasing from 18.5% to 21% between 2019 and 2020/21.

However notifications as a percentage across all deals over a six-year period (2015-2021) stands at 12%.  

The report finds that notifications are being made later than in previous years. Howden’s 2020 Claims Report found that 90% of notifications were made within the first 18 months of policy inception, compared to a figure of 62% for the 2020-21 reporting period, as the proportion of claims notified after 18 months rose considerably from 10% to 38%. This may be explained by the insurance market offering longer warranty periods, meaning policyholders have more time to uncover issues. Howden M&A is also seeing a rise in tax claims, which typically benefit from longer warranty periods.

Regional spikes

Generally, notifications have been relatively stable across jurisdictions, although the data uncovered a notable increase within the Nordics for both operational and real estate deals. Whilst the Nordic region has generally had the lowest notification rate in Europe, the severity of the notifications has been substantial, with the M&A insurance market seeing a number of full policy limit losses. The report also highlights the Iberia region as seeing a considerable surge in notifications, as sophisticated policyholders took advantage of the protections offered by W&I insurance policies.

Breach events

Across all deals, Material Contracts and Financial Statements continue to be two of the most commonly notified warranty breaches. However, the report revealed a noticeable increase in notifications relating to Compliance with Laws warranties, with the rate of these notifications increasing from 3% in 2020 to 18.4% in 2021.

Although the top three warranty breaches are consistent no matter when a breach is notified, data shows that it takes longer for Tax matters to be notified given audit cycles and the extended warranty periods.

Payment of claims

Howden’s data shows that W&I insurance responds,  with 74% of claims resolving positively (57% resulting in a payment and 17% eroding the retention, where the quantum did not exceed the policy retention).

The number of notifications validly declined has increased to 26% from 13%. This can likely be explained by insureds' increased willingness to notify insurers on a precautionary basis as they become more familiar with the product.

Outlook for 2022

1. Absolute number of notifications will increase: Transactions are being undertaken at a record pace, meaning issues may be missed or not uncovered during the due diligence process. With that in mind, notifications are expected to increase.


2. Pricing adjustments: Recent hikes in W&I pricing have been driven principally by capacity constraints in the market (in the face of unprecedented demand). However, with insurers continuing to gather ever more insightful W&I claims data, Howden M&A anticipates that W&I claims history will play an increasingly important role in driving future price rises. In particular, we expect to see further pricing divergence at sector level, with those sectors with higher historical loss ratios being impacted disproportionally.


3. M&A insurance claims beyond W&I insurance: Howden M&A is placing an increasing number of policies covering ‘known issues’ and the Claims & Advocacy Team has started to see a rise in notifications being made under these policies, particularly title  and tax. In the next 12 to 18 months, Howden M&A expects to see an increased proportion of its claims portfolio be made up of claims under these policies.


4. Increasing claims severity:  With Howden M&A advising on an increased number of €1 billion+ deals (15 in H1 2021 vs 10 in the whole of 2020), given the increased frequency of claims for these higher deal sizes and generally, it expects to see a greater range in the complexity and its average claim size.

Drew Wardrope, Managing Director at Howden M&A said: “2021 has been an unprecedented year for M&A insurance claims activity. The Covid-19 pandemic may not have brought about the influx of claims or breach events expected.  However, the increased deal activity and use of M&A insurance has led to an increase in the number of notifications.  Price adjustments are therefore inevitable, particularly at sector level.”

Anna Robinson, Head of Claims & Advocacy at Howden M&A added “Looking ahead, the absolute number of notifications will continue to increase, especially on policies covering known issues.

At Howden M&A, we have witnessed a year-on-year increase in deal flow and placed more policies than ever before, with these transactions translating into a record number of notifications. In response to an increase in notifications, we are looking forward to growing our claims team to ensure our clients continue to receive high quality, diligent and timely advice.”