March 6, 2020

What Does a Tight Insurance Market Mean for M&A?

Insurance companies have taken it on the chin in recent years when it comes to claims experience, so many business find that policy costs & retentions are up sharply across most insurance lines.  This PwC blog says that these market conditions are likely to persist, and that buyers & sellers need to pay close attention to the potential implications of a much tighter coverage market when considering M&A transactions:

This hardened insurance market can directly impact buyers and sellers in mergers and acquisitions. In a recent carve-out transaction, the seller was spinning off a business with main locations in high-hazard zones – one on California’s San Andreas fault and another in a 100-year flood zone. The availability of property insurance for high-hazard risk, the cost of coverage and deductible levels were material deal considerations in the proposed transaction.

Stories like this may seem extreme, but they’re less rare. Both buyers and sellers should be aware of the insurance market and its potential deal implications. This includes asking questions such as:

– Have historical expenses been adjusted to reflect current premium rates and possibly higher levels of risk retention?

– Can a business carved out from a much larger parent stand alone in a commercially reasonable manner given the availability and cost of property insurance with locations in a high-hazard zone or with a poor loss history?

– Can a seller get ahead of potential buyer concerns by arranging with its insurers to insure the business separately?

The blog stresses that companies don’t have the same opportunity as they did during the recent past to lay risks off on to insurers. In this environment, companies need to take steps to mitigate their risks, and those that demonstrate effective risk management should fare better in a tight market than those that can’t.

John Jenkins