GLOBAL M&A INSURANCE INDEX 2017
2 GLOBAL M&A INSURANCE INDEX 2017 KEY TRENDS IN M&A INSURANCE 16% $100m 60% Greater protection for clients: Average limit of insurance purchased increased by 16% for all transactions outside the US Increasing capacity: Several insurers with over USD 100 million per deal and over USD 1 billion available in the market 60% increase in number of policies placed globally 11% BUYER SIDE POLICIES PREVAIL 40% 93% Drop in premium rates from 2015 to 2016 40% of policies are initiated by the sell-side 93% of policies list the buyer as the named insured KEY SECTORS BY VOLUME OF DEALS 1ST 2ND 3RD REAL ESTATE MANUFACTURING IT/TECH/COMMS
www.jltspecialty.com 3 FOREWORD BEN CRABTREE Partner, Mergers & Acquisitions We are delighted to welcome you to our third annual mergers and acquisitions (M&A) Insurance Index. In this report, we examine M&A insurance activity during 2016 and discuss predictions for 2017. Our findings are based upon deals completed by JLT Specialty s global M&A team in 2016. This year, we are pleased to be able to provide additional insight into the US market, after the first full year of activity by our US M&A team. Our team are based in Houston, New York and San Francisco. Given the differing nature of the M&A insurance market in the US, this report separates US statistics from the rest of the world. A unique section at the back of this report focuses solely on the US M&A insurance market s activity. 2016 was a year of change and uncertainty, with the decision to leave the EU notably affecting M&A activity in the UK and elections causing instability further afield. The events have served as a test of maturity for the M&A insurance market, which perhaps surprisingly, has continued to soften further, both in terms of premium rates and policy retention levels, when compared with 2015. This underlines the fact that competition between insurers remains at unprecedented levels.
4 GLOBAL M&A INSURANCE INDEX 2017 2016 OBSERVATIONS 50% 40% 30% KNOWN RISK UNKNOWN RISK 20% 10% 0% BLENDED HYBRID POLICY Europe USA Japan Singapore RISING LIMITS OF INSURANCE In times of economic uncertainty it is common for buyers to seek greater financial protection. For deals outside of the US, we saw the average limit of insurance (as a percentage of the enterprise value (EV)) increase by 16% in 2016 from the previous year. This equates to an average insured limit of 29% of the total deal value. This may be a reaction to perceived investment risk, but certainly reflects falling premium rates as today it is possible to get more protection for less premium. Levels in the US were lower at 23% of deal value (although this is still higher than would typically be expected on an uninsured deal). Japan and Singapore saw the highest levels of protection, at 30% and 34% of deal value respectively. EXPRESS COVERAGE AND KNOWN RISKS Historically, warranty and indemnity (W&I) insurance was used to protect against losses stemming from unexpected breaches of warranty or tax indemnity claims. Increasingly, insurers are moving away from the strict interpretation of this unknown risks only principle, and are willing to provide cover within the W&I policy for identified low risk items. A good example of this is express coverage for potential real estate tax liabilities linked to residency or trading versus investment. This blended approach allows the insured to have a single policy at a significantly reduced overall cost, whereas previously two policies would be required and two separate policy excesses would have applied. Practically, this also helps to reduce counterparty risk (by dealing with a single insurer) whilst also minimising the time spent on policy negotiations.
www.jltspecialty.com 5 $1 bn PER DEAL Existing insurers and managing general agents (MGA) are significantly increasing their individual line sizes Average pricing remains higher in the US compared to the rest of the world SUPER-SIZED INSURERS As the overall market capacity has increased (largely from new insurer entrants), it is notable that existing insurers are also significantly increasing their individual line sizes, with a number now able to deploy USD 100 million plus per deal. This allows higher limits of insurance to be met by a single (or smaller number of insurers) - before a layered programme would have been necessary with multiple insurers involved. This has advantages both from an execution risk perspective, as well as potential benefits in the event of a claim. Insurers specialising in real estate deals are keen to deploy their capacity and several will provide terms for coverage for the fundamental warranties up to the full deal size (for a proportionately cheaper premium rate). USA, USA, USA! The growth of M&A insurance in the USA outstrips all other territories. The local insurance market is now better equipped to handle the number of deals requiring cover, and coverage positions are improving constantly. Whilst average pricing and retentions remain higher than outside the US (2.98% rate on line and 1.4% of EV respectively) the available coverage is arguably broader. Elements of these coverage enhancements are now crossing the Atlantic and are being included in European deals, albeit for an increased premium.
6 GLOBAL M&A INSURANCE INDEX 2017 W&I ANALYSIS: SECTOR INSIGHT PREMIUM AS A % OF LIMIT PURCHASED 3.0 2.5 2015 2016 1.54% 1.37% 2.0 1.5 2015 1.0 2016 0.5 0 Automotive Business Services Education Electricity, Power & Utilities Engineering, Building & Construction Entertainment / Media Financial Services Food & Agriculture Healthcare IT / Technology Communications Leisure & Hospitality Manufacturing Real Estate Retail & Consumer Transport & Logistics Pricing reduced by 11% from 2015 to 2016 reflecting the commercial competition pressures felt by insurers during 2016. This reduction was even more evident in the UK where the average rate reduced by 33%. AVERAGE RETENTION AS A % OF EV 2.5 2.0 2015 2016 0.8% 1.0% (*0.8%) 1.5 1.0 0.5 2015 0 2016 Automotive Business Services Education Electricity, Power & Utilities Engineering, Building & Construction Entertainment / Media Financial Services Food & Agriculture Healthcare IT / Technology Communications Leisure & Hospitality Manufacturing Real Estate Retail & Consumer Transport & Logistics *Notably, policy retention rates in the electricity, power & utilities and engineering, building & construction sectors were higher compared to other sectors. In each sector, two of the seven deals we insured had an especially high policy retention mirroring large seller liability caps under the sale and purchase agreement (SPA). Excluding these two deals in each sector reduces the average retention rate across all sectors to 0.8% (consistent with the average in 2015).
www.jltspecialty.com 7 AVERAGE LIMIT AS A % OF EV 60 50 2015 2016 25% 29% 40 30 2015 20 2016 10 0 Transport & Logistics Retail & Consumer Real Estate Manufacturing Leisure & Hospitality IT / Technology Communications Healthcare Food & Agriculture Financial Services Entertainment / Media Engineering, Building & Construction Electricity, Power & Utilities Education Chemicals Business Services Automotive Our data tells us that in 2016 parties in a deal were buying an average of 16% more insurance versus 2015. When you calculate cost, taking into account the reduction in premium rates, we can see that clients are electing to buy more insurance but are paying almost exactly the same for their policy. EXAMPLE DEAL VALUE = GBP 50 MILLION 2015 2016 Average limit purchased 25% = GBP 12.5 million 29% = GBP 14.5 million Average premium rate 1.54% 1.37% Average cost for average limit GBP 192,500 GBP 198,650
8 GLOBAL M&A INSURANCE INDEX 2017 SELLER / BUYER APPROACH 7 % Number of seller policies Seller / Buyer policy Seller / Buyer facilitated policy 93 % 60 % Number of buyer policies Buyer facilitated 40 % Seller facilitated Whilst the seller commences the insurance process 40% of the time, it is the buyer that is the insured party on 93% of deals. This reflects a strong seller marketplace where selling parties have been able to negotiate reduced liability under the sale agreement and offer a W&I insurance policy to the buyer instead. PREDICTIONS FOR THE YEAR AHEAD Growth in Germany, Fewer programme Heightened claims activity Increased use of US/ Netherlands and Denmark. placements (involving multiple and worsening loss ratios for Mid-Atlantic coverage we have noted steady insurers) as single insurers insurers. We have seen an positions in European deals. increases in the number of look to use their full capacity. increase in claims notifications Removal of the general insured deals in the three Blended cover available for and paid losses in 2016. disclosure of the data room listed territories. This is fundamental warranties As the number of written and due diligence reports expected to continue up to the full deal value. policies increases, it is adding greater clarity of into 2017. not unusual for claims coverage. notifications to also increase. This may impact insurance premium ratings towards the second half of 2017.
www.jltspecialty.com CASE STUDY Our client was involved in the acquisition of a real estate portfolio valued at GBP 600 million. The fund sellers were not willing to provide financial backing for the sale agreement warranties, so a GBP 50 million W&I policy was arranged. Shortly before exchange, a tax issue was identified that had the potential to result in a GBP 60 million loss. Traditionally, such an issue would have been covered by a standalone tax insurance policy but in this case it would have added significant delays to the process (as well as disproportionate additional costs). We worked with the existing insurer to increase the policy limit and combine cover for the specific tax risk in the existing W&I policy, within the original deal timetable. The tax cover gave both parties the comfort required to do the deal whilst keeping tight control over the premium cost. 110m 600m - 60m GBP 110 million W&I policy arranged GBP 600 million deal size Potential GBP 60 million loss resulting from a tax issue 9
10 GLOBAL M&A INSURANCE INDEX 2017 W&I ANALYSIS: JURISDICTIONAL INSIGHT ASIA Globally, JLT s M&A team saw a 60% increase in in the number of policies it placed during 2016 compared to 2015. 2016 also saw a notable trend in the continued growth of M&A insurance in North America. We are pleased that our colleagues in New York, Houston and San Francisco are seeing a huge increase in both demand for insurance and available capacity. With this growth, we have seen cover improve, driven by experienced brokers and local legal counsel. The line between the US and European/Asian policy forms continues to blur as US-style policy enhancements filter in non-us transactions. Real estate continued to dominate the Asian W&I market; however, other sectors grew in popularity including the food & beverages sector. Sellers were the main drivers of insurance, requiring a clean exit from transactions with nominal residual liability. Whilst the majority of deals were seller initiated, over 75% of these resulted in policies taken out in the name of the buyer. The majority of insured deals occurred toward the end of 2016 with a large push from Japanese outbound investors. The use and interest of insurance saw new enquiries come from growing markets including Vietnam, Thailand and Indonesia. Momentum has continued into early 2017 with an expansion of sectors including: life sciences, commodities and energy.
www.jltspecialty.com 11 UK NORTHERN EUROPE Economic uncertainty and political change resulted in a fluctuating market in terms of deal timings and insurance policy requirements. New insurers and increasing competition drove down pricing and policy retentions across a number of sectors. Express coverage of known issues became increasingly common as clients sought to insure low risk issues arising in due diligence. The real estate sector continued to be one of the main users of insurance; however, activity slowed after the EU referendum. Seller introduced deals grew in prevalence once again as W&I insurance was commonly brought into the deal at an early stage, particularly in an auction sale process. This region saw a 50% increase in the number of insured deals during 2016 compared to a previous record number in 2015. Whilst private equity deals still represent the majority of insured transactions, industrial and retail markets are becoming increasingly frequent users. The seller often facilitates the use of insurance very early on in the deal process to optimise its exit from the transaction. Real estate continued to account for the largest share of transactions and written premium, although the product was used across numerous business sectors. A number of policy improvements were developed and employed and we expect this trend to continue in 2017.
12 GLOBAL M&A INSURANCE INDEX 2017 PREMIUM AS A % OF LIMIT PURCHASED 5.0 4.0 2016 1.58% 3.0 2.0 1.0 0.0 USA UK Thailand Sweden South Africa Singapore Norway Netherlands Lithuania Japan Ireland Germany France Finland Denmark Canada Australia North American deals incur the highest premium rates around the globe with average rates of 2.98% in the US. The average premium rate achieved in Continental Europe was 2% followed by Japan (1.82%) and Singapore (1.75%). Compared to 2015, average premium rates in the UK dropped by 33%. Year on year, average premium rates for buyer and seller W&I policies remained consistent worldwide (with an average of 1.19% in 2015 dropping slightly to 1.18% in 2016). RETENTION AS A % OF EV 2016 1.03% 3.0 2.5 2.0 1.5 1.0 0.5 0.0 USA UK Thailand Sweden South Africa Singapore Norway Netherlands Lithuania Japan Ireland Germany France Finland Denmark Canada Australia Due to two deals where the seller retained a particularly large % of liability, France saw its average retention as a % of EV higher than other jurisdictions. Retention rates in the UK fell by 22% (from 1.66% to 1.29%). This has been significantly impacted by competitive retention rates for real estate transactions, where nil retention rates are becoming increasingly commonplace. In the US, retention levels remain at the higher end of rates achieved.
www.jltspecialty.com 13 AVERAGE LIMIT AS A % OF EV 50 40 2016 28% 30 20 10 0 USA UK Thailand Sweden South Africa Singapore Norway Netherlands Lithuania Japan Ireland Germany France Finland Denmark Canada Australia The average limit across UK deals is noticeably higher than limits purchased on deals placed in other jurisdictions. This can be explained by the fact that we saw a number of smaller UK deals in 2016. Greater limits of insurance are purchased for deals below GBP 20 million. Our UK data shows that for an EV of GBP 20 million and lower the average policy limit is 75% but for deals over GBP 100 million the average policy limit is 15%. LIMIT OF INSURANCE PURCHASED BY DEAL SIZE IN 100 80 60 UK All ex-us 40 20 0 Less than 20m 21m - 100m 101m+
14 GLOBAL M&A INSURANCE INDEX 2017 US DEAL ANALYSIS: MARKET INSIGHT SELLER / BUYER FACILITATED 0 % Number of seller policies Seller / Buyer policy Seller / Buyer facilitated policy 100 % 88 % Number of buyer policies Buyer facilitated 12 % Seller facilitated AVERAGE LIMIT AS A PERCENTAGE OF EV AVERAGE PREMIUM RATE 2.98 % 23 % AVERAGE RETENTION AS A PERCENTAGE OF EV 1.4 %
www.jltspecialty.com 15 In 2016, nine insurers representing USD 355 million of per deal primary capacity began or resumed writing representations and warranties insurance in the U.S. This sudden expansion of capacity resulted in increased competition among insurers, which further led to a reduction in average premium cost, to more aggressive retention levels and structures, and to meaningfully more expansive coverage under U.S. representations and warranties insurance policies. In 2016, JLT s U.S. placements had an average premium rateon-line of slightly below 3%, a figure formerly viewed as a floor for pricing in the U.S. JLT s average retention level also fell in 2016 to just 1.4% of deal enterprise value. Among deals with at least some level of seller escrow and/or indemnification, JLT saw retention levels as low as 1.0% of deal enterprise value. 2016 also saw a significant increase in the portion of U.S. deals that were non-recourse to the seller, which generally are written at slightly higher retention levels, most often 1.5% of deal enterprise value. Reduced costs and improved terms led insureds to purchase a significant amount of insurance as a percentage of deal enterprise value in 2016: on average, 23%. This figure is well in excess of the average indemnity escrow amount in uninsured private company deals in the U.S.
CONTACTS BEN CRABTREE Partner, JLT Specialty +44 (0)20 7558 3824 ben_crabtree@jltgroup.com TERESA JONES Partner, JLT Specialty +44 (0)20 7558 3257 teresa_jones@jltgroup.com JLT Specialty s Mergers and Acquisitions team combines extensive transactional experience with a deep understanding of an evolving M&A insurance market. We create innovative solutions, delivered on time, tailored to meet the commercial needs of each deal. JLT Specialty Limited provides insurance broking, risk management and claims consulting services to large and international companies. Our success comes from focusing on sectors where we know we can make the greatest difference - using insight, intelligence and imagination to provide expert advice and robust - often unique - solutions. We build partner teams to work side-by-side with you, our network and the market to deliver responses which are carefully considered from all angles. JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW Tel +44 (0)20 7528 4000 Fax +44 (0)20 7528 4500 Lloyd s Broker. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No. 01536540. VAT No. 244 2321 96. April 2017 273881 www.jltspecialty.com