The Impact of COVID-19 on the M&A Insurance Market

As the COVID-19 pandemic evolved over the past months, public markets have reacted in dramatic fashion. There is now a heightened desire to renegotiate deal terms and uncertainty remains over the long-term economic impact of the COVID-19 pandemic. Below, we discuss some key observations on emerging trends in the Warranties & Indemnities (W&I) insurance market.
Impact on M&A Deal Flow and Timelines
While a number of transactions are proceeding as normal, we have seen several deals stalled or delayed, and in particular in the following sectors:
  • Healthcare and Aged Care;
  • Tourism, F&B and Hospitality;
  • Logistics and Supply Chain; and
  • Oil and Gas.
This is likely due to four key factors observed:
  • Border closures and business interruptions resulting in re-evaluations of target companies’ existing business models and financial forecasts;
  • Delays caused by restrictions on travel and meetings which have adversely affected the ability to conduct proper due diligence;
  • Unprecedented volatility in the stock markets affecting valuation of (listed) target companies; and
  • Difficulties in securing deal financing arrangements, with some lenders pulling financing due to concerns over debt ratio and cash flow.
We would expect that deals delayed or halted by the first two key factors will restart once social distancing measures and border controls are rolled back. It remains to be seen if and how deals affected by the last two factors will be restarted.
Regardless of the COVID-19 restrictions imposed globally, we continue to see healthy levels of deal activity in the real estate sector across all spectrums of land use (including hotels), technology sector, as well as in the infrastructure and renewable energy sectors. Deal activity in certain North-Asian jurisdictions (in particular, South Korea) has already recovered to near pre-COVID-19 levels.
As we witness the increasing trend of companies seeking capital to improve liquidity, this will inevitably bring to the table PE funds and other investors specialising in the turnaround space. Given the stock market volatility, PE funds will also be seeking value in take-private transactions.
Insurer Appetite
While insurers are not flagging a significant change in their appetite for insuring M&A transactions as a result of COVID-19, until the picture becomes clearer, we anticipate that insurers will take a more cautious approach to the jurisdictions and target sectors currently most affected by COVID-19.
Nevertheless, we do not envisage an upward trend of premiums as competition between insurers will intensify amid lower deal flow. In fact, we have already seen more competitive pricing from insurers as they vie for a smaller pool of business.
This year, Sandra is looking to continue to build a sustainable team that will be able to grow the business in unchartered areas, complete with challenging targets and global economic uncertainty.
COVID-19 Coverage Concerns
We are increasingly seeing insurers react to the risks presented by COVID-19 through enhanced underwriting and/or additional potential exclusions from coverage from the outset. In the first instance, certain insurers have now flagged the potential need for exclusions from cover in the event they are unable to gain comfort on the impact of the pandemic on the warranties, particularly in relation to warranties to be given at completion.
From our observations, insurers are usually more concerned over businesses where supply chain and cash flows may be impacted, or where there may be a threat of closure of business. If we can demonstrate that the target business is not significantly exposed to such threats, we may be able to justify removal of such exclusions.
In addition, insurers who now have the time and opportunity to analyse the impact of COVID-19 have started to take a more commercial approach with respect to a mandatory COVID-19 exclusion. Such blanket exclusion may not be required where an insurer can tailor specific warranties to be amended to address their concerns. Some examples of these specific warranties may include:
  • Warranties relating to employment and compliance with laws;
  • Delays caused by restrictions on travel and meetings which have adversely affected the ability to conduct proper due diligence;
  • Warranties relating to customer / supplier contracts in the context of potential supply chain concerns and ability to fill orders; and
  • Warranties relating to solvency, particularly given the new thresholds for bankruptcy and issuing of statutory demands.
Ultimately, if a COVID-19 exclusion is insisted upon by insurers, insureds will need to ensure that it is drafted as narrowly as possible to address the underwriters’ specific concerns, and avoid it applying too broadly across the entire suite of warranties.
Areas of Increased Underwriting Focus
Since the progression of the pandemic, we have also seen insurers with a heightened underwriting focus in areas such as general supply chain risks, financial stability, business continuity and disaster recovery plans. This increased focus, especially in sectors highlighted above, stems from a health & safety concern, as well as the potential of defaults in business, as more countries move from containment policies to delay-based strategies.
Employment issues, such as coverage for unpaid wages, sick leave and data protection related to employees and health, will also become a key area of focus. For transactions structured with a split signing and completion in particular, insurers will consider the target company’s material contracts, with a focus on the ability of performance, together with the consequences of non-performance.
We are advising our clients to ensure they update their diligence exercises accordingly, including taking into account the following:
  • a detailed analysis of the target company’s insurance program and, in particular, confirmation that business interruption cover in policies do not contain epidemic / pandemic exclusions; and
  • a detailed analysis of whether any coronavirus-related claims will be covered by the key health-related insurances.
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