’With such opportunities comes a different set of challenges,’ says managing director  

Notification rates following merger and acquisition deals (M&A) deals rose in 2022 and could continue to increase following the M&A boom in 2021.

That was according to specialist M&A broker Howden M&A, which analysed the key trends across the UK and Europe in its latest annual M&A insurance claims report.

Notification rates refer to the percentage of insurance claims that the insured party notifies the insurance company of within the coverage period and act as a measure of the M&A insurance sector.

In M&A transactions, buyers commonly purchase a representation and warranty insurance policy to protect against losses arising from breaches to the representations and warranties made by the seller during the acquisition.

Howden M&A’s report, published last week (3 April 2022), said that while the surge in M&A activity seen in 2021 receded, the deal market remained “highly active”, with M&A volumes and values in 2022 in line with pre-pandemic levels.

However, it also said 26% of notifications in 2022 were made more than 24 months after policy inception – up from 13% in 2021 – ”reflecting a sharp uptick in third party claims which cannot easily be foreseen”.

Notification rates were expected to rise over the coming year and beyond due to the natural lag between transactions and notifications of a claim, Howden added.

Daniel Stock, managing director of Howden M&A, said: “As we enter a period of greater economic uncertainty, we expect more opportunities for deal makers to take advantage of current market conditions.

“With such opportunities comes a different set of challenges.

“The value of M&A insurance is clearer than ever in protecting buyers for undisclosed risk that goes to value.”

’Precautionary approach’

While the volume of M&A transactions eased during 2022, Howden said the market expectation was that deal sizes would continue to increase.

It predicted that the increasing use of warranty and indemnity in the biggest M&A deals would be a significant trend in the years ahead, “providing an opportunity for growth for insurance providers and delivering security and protection for the biggest dealmakers”.

However, Howden warned that as the global economy continues to encounter significant headwinds, transactions during economic downturns were more likely to result in unexpected outcomes.

“Businesses being acquired are more likely to be in distress and acquirers will be keeping a closer eye on cashflow,” it said.

“In these times, policyholders are expected to take a more precautionary approach and will be increasingly ready to trigger a notification when there is a potential for loss.”