M&A Insurance

Insurance policies for corporate mergers and acquisitions (M&A) grew at a rapid pace in Central Europe in the past year. In Germany, they appear to have become a standard tool for medium- and large-scale M&A transactions. The major reason for this success story is that in many transactions these policies allow the seller's overall liability risks to be insured, with quick, flexible and highly professional risk assessment.

Number of M&A deals in Germany …

… from 2002 to 2017

Source: Statista

Volume of M&A deals in Germany …

… from 2002 to 2017

Source: Statista

Market Situation

An M&A insurance policy enables the buyer to insure the warranty risks associated with M&A transactions, without having to build up provisions for possible warranty breaches. This is why sellers often insist on taking out an M&A policy, irrespective of whether they are a private equity company, a private individual or a corporate seller. In an increasingly strong sellers' market, many sellers are even making transactions conditional upon the buyer taking out an M&A policy beforehand.

The cornerstone of any M&A insurance concept is a Warranty & Indemnity (W&I) policy. This policy covers a scenario where a guarantee given by the seller turns out to be false. Policies concluded by the buyer also cover false guarantees given by the seller with fraudulent intent. Another advantage of an insurance policy taken out by the buyer is that the policyholder may take direct recourse against the insurer, without previously having to take recourse against the seller under the purchase agreement. However, one of the main advantages of an M&A insurance policy for the buyer is that, in particular in the current sellers' market, such a policy is often the only way to receive substantial guarantees from the seller. A W&I policy also allows the provision of insurance amounts that are higher than the seller's liability limit, and with durations longer than the limitation periods agreed under the corporate acquisition contract. Moreover, for the buyer, the insurer is a professional and solvent debtor against whom the buyer has a direct right of action.

Outlook

The European market for M&A policies is set to grow further. In this context, the private equity sector in particular will remain a driver for demand and innovations in the M&A insurance line. Corporate clients who were still hesitant about M&A policies until a few years ago are now using them increasingly in their transactions. This trend is expected to continue in the coming years.

Market Trends

The main reason why M&A policies have become much more popular is the increased competition among insurers. Numerous new providers have entered the market in recent years, still trying to win market shares by offering favourable rates. There are currently about 25 insurers offering M&A policies in Germany, with around half of them having opened an office in Germany, hired German lawyers for risk assessment purposes and even offered their policies in German in recent years. This is a minor revolution because the European W&I insurance market was dominated by London as recently as five years ago. Accordingly, the first policies offered in Germany were largely tailored to English law (although German law applied for the most part). In recent years, however, policies have increasingly been adapted to the special features of the German legal system. Today, it is often possible to conclude policies in the language of the corporate acquisition contract, thereby potentially avoiding frictions caused by the use of different contract languages.

As for the M&A segment, the insurance industry has learnt much over recent years, bringing more W&I policies onto the market that neatly meet the requirements of M&A transactions. It has been recognised that the integration of an M&A policy into contract negotiations should not impede but support the transaction in question. Many underwriters and brokers operating in the M&A insurance line have an M&A background. They negotiate the policies in parallel with, and with the same dynamism as, the M&A contract, meaning that the respective parties are able to sign the final policy and the transaction agreement at the same time.