Transaction risk coverage prices, volume falls sharply

The amount of insurance limits placed to cover M&A debt and the cost of the coverage fell significantly last year as the underlying market for M&As slowed, according to a report by Marsh LLC.

In its transaction risk report released on Tuesday, Marsh said the volume of representations and warranties it placed globally in 2022 fell to $59.3 billion from $81.2 billion in 2021. Representations and warranty policies cover breach of claims in M&A contracts.

In North America, Marsh’s margins fell to $18.9 billion last year from $37.9 billion in 2021, and the number of deals Marsh worked on fell to 608 from 999, the report said.

Macroeconomic issues such as rising inflation and interest rates, the war in Ukraine and volatile stock markets led to a 38% drop in M&A deals in the region last year, Marsh said.

Pricing also fell with the reps and warranty premium coming from a high in January 2022 of 5.7% – calculated by dividing the premium by the policy limit – and falling to 3.5% in December.

“The insurance-friendly rate environment is expected to continue in the short to medium term. Many of the 2022 macroeconomic headwinds are also evident this year, and there is ample underwriting capacity in North America that has been bolstered by new entrants to the transaction risk market joining an already crowded underwriting landscape,” says the report.

In Europe, the Middle East and Africa, where M&A deal volume remained in line with 2021 in some markets but fell in others, total margins from Marsh fell to $31.2 billion in 2022 from $35.9 billion a year earlier.