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October 2024

M&A Q4 2024 – Market Update

Appetites, Trends, and Innovation

The landscape of Warranty and Indemnity (W&I) insurance is evolving, with pricing trends, policy structures, and claim activity seeing notable shifts across key regions. From the softening of pricing to insurers adapting retention levels and expanding coverage, businesses across Europe, the Middle East, and Southern Europe are navigating a dynamic environment. Below we will explore the current trends in pricing, policy retentions, regional activity, and claims in W&I and related insurance markets.

Pricing: Warranty and Indemnity (W&I) insurance pricing continues to soften, even as both claim frequency and severity rise. Ballpark rates (premium expressed as % of the limit of liability) are hovering around 0.75% – 0.90% for UK and European operational businesses but there are outliers where rates fall below this band. Multi-national transactions continue to represent the majority of our engagements and whilst rates are slightly higher at c. 0.90% – 1.20% , significant competition between insurers has kept pricing competitive. As noted in the section below, volume and severity of claim activity in W&I and Contingent Risk has increased materially over the past 12 months. While we do not expect to see any impact to rates during 2024, it is quite possible that the market may seek to move rates back to a level that they had been before the M&A slowdown.

Policy Retentions: Retentions—the amount of loss the insured must incur before accessing the policy—are a key point of differentiation among insurers. For UK and European transactions, retentions can be as low as 0.15% to 0.25% of the enterprise value. 18 months ago a tipping to nil structure at this level was uncommon, however we are now seeing multiple underwriters offer both tipping to nil and dropping retentions, with minimal uplift in cost. Increasingly, insurers are willing to offer nil retentions on single jurisdiction operational businesses in UK and Europe.

Southern Europe: In line with wider European trends, we experienced a roughly 15% decrease in the number of M&A transactions last year. However, the total value of those deals rose, reflecting a concentration on fewer, but larger acquisitions, with a clear focus on high-quality, strategic consolidations.

Major sectors such as financial services and technology continued to drive M&A activity, largely fuelled by ongoing digital transformation and the demand for innovation. The tech industry, in particular, maintained its pivotal role.

Investment in ESG-driven initiatives and renewable energy projects saw significant growth, as sustainability remains a core objective for many Southern Europe firms, drawing interest from investors aiming to align with environmental and regulatory standards. The real estate sector in Southern Europe is moving toward fewer but larger deals, focusing on high-quality assets and strategic consolidation. Demand for logistics and industrial spaces grew, while the office sector revealed a split between strong performance in prime locations and rising vacancies in peripheral areas.

Pricing and retention levels remained consistent, holding at their lowest points.

Middle East: M&A activity in the Middle East has been variable, with a noticeable increase in mid-market transactions which has consequently fuelled additional insurance capacity to move into the region. In particular, more M&A activity has been visible in Saudi Arabia and, as a result, more insurers have realigned their underwriting guidelines to cater for such transactions. Whilst insurers still continue to compete on terms, such as the size of retentions, premium rates remain around 1% of the policy limit. Insurers are beginning to be more creative on coverage terms where, for example, what were typical standard exclusions, such as end of service benefits, are now being considered as an underwriting areas of focus. This in turn provides more fulsome coverage for the insured party.

Claims: There has been a marked uptick in claims notifications on W&I policies during the first half of 2024, with insurers reporting increases in both the number of successful claims and the settlement amounts. We see the most frequent claims still stemming from: (i) compliance with laws; (ii) material contracts; (iii) tax (R&D, employment-related securities); (iv) IP; and (v) aggressive revenue recognition practices. Separate from W&I, there has been numerous significant claims and settlement in the class of “contingent risk” policies, which have consequently led to a number of insurers materially limiting underwriting appetite and/ or exiting the space. We would expect to see some challenges for contingent risk insurers, when they are seeking to renew certain areas of capacity with reinsurers.

Tax Risk Policies: The tax insurance market remains active, with appetite expanding to include South American, Indian, and Thai tax risks, given a strong positive tax opinion. While tax insurers continue to provide large-limit coverage in countries such as Italy and Spain, capital providers have started to ask more questions which could reflect a more cautious approach flowing on from the significant claims in the contingent risks space.

Tax insurers are also reviewing the extent of the defence costs they are willing to cover under the policy, particularly in territories with an aggressive tax authority that may raise spurious enquiries or audits. Some insurers may choose to apply a higher retention for defence costs or exclude defence costs incurred in the early stages, until a formal assessment is issued by the tax authority.

As we move through 2024, the W&I insurance market continues to adapt to rising claims and changing M&A landscapes. With pricing remaining competitive and insurers offering increasingly flexible coverage options, businesses are benefiting from a broad range of protections, even as challenges emerge in contingent risks and tax policies. Maintaining a close watch on these developments will be crucial for navigating the evolving market dynamics in the year ahead.