April 5, 2021
Transactional Insurance: The Year in Review
This Marsh report reviews the transactional risk insurance market in the U.S. & Canada during 2020. The report notes that despite the challenges created by the pandemic, the marketplace for RWI & other transactional risk insurance remained strong, with new entrants to the market and existing insurers continuing to deploy capital. The report reviews other notable market trends during 2020. Here’s an excerpt discussing some of them:
– No seller indemnity structures: A long-term trend that persisted in 2020 is an increase in the number of transactions that feature no seller indemnity, meaning that the seller does not have any contractual liability to buyer for breaches of representations and warranties, other than fraud. This structure — also known as a “public-style” deal — historically represented a small fraction of the overall private company transaction universe and was typically reserved for only very large transactions (typically $1 billion or more of enterprise value). But it has become far more prevalent in recent years, driven by usage in smaller transactions — even some valued at less than $100 million. In 2020, almost half (49%) of the transactions in Marsh’s transactional risk portfolio featured no seller indemnity structures, up from less than 25% in 2015. We anticipate that this trend will continue in the short- to medium-term.
– Deductibles: Deductibles held steady at approximately 1% of enterprise value for most transactions in the middle market, with a dropdown feature to 0.5% of enterprise value at the 12-month anniversary of closing. On larger transactions — those with enterprise values of $400 million or more — it is common for the deductible to be 0.75% of enterprise value, or possibly even lower on transactions with an enterprise value in excess of $2 billion, with the same dropdown feature.
– Transaction size vs. limits purchased: The average and median enterprise value per insured transaction in the US and Canada was consistent with the prior year, at $345 million and $130 million, respectively. Average policy limits — as a percentage of enterprise value — also remained steady across Marsh’s portfolio, at just over 10%. There were, however, sharp divergences in the relative amount of limits purchased depending on the size of the deal. For smaller deals — below $50 million in enterprise value — buyers purchased limits on average equal to 18.7% of enterprise value. In midsize deals — $100 million to $250 million — buyers purchased coverage limits on average equal to 10.9% of enterprise value. In large deals — $2 billion or more — buyers purchased limits on average equal to 6.1% of enterprise value. In 2019, corporate insureds purchased more limits than private equity insureds on similarly sized deals. This trend continued in 2020 and is expected to persist in 2021.
– Tax insurance: Demand for tax insurance remained solid throughout 2020. While aggregate tax insurance limits and the number of tax insurance policies placed by Marsh were on par with 2019, the range of matters covered by tax insurance expanded significantly.
In 2019, the majority of tax insurance limits were placed in the renewable energy sector, ahead of the planned expiration of investment and production tax credits for industry participants. Congress, however, passed legislation to extend the tax credits, while the Treasury department enacted pandemic-driven updates to safe-harbor guidance, which has provided renewable energy developers additional runway. Accordingly, tax insurance limits bound in 2020 were more concentrated to placements in connection with M&A. Tax insurance was also increasingly used to effect non-transactional balance sheet risk management.
Total policy limits and the number of completed tax deals were fairly flat year-over-year, but the number of policies bound increased substantially, a sign of what might be in store in 2021. As additional underwriters continued to enter the market, average premium rates in 2020 fell slightly, which — coupled with added flexibility of policy terms — signals that tax insurance may strengthen its foothold as a cost-effective risk management tool going forward.
The report also says that the number of claim notices from Marsh clients more than doubled in 2020, and that this growth in claims is expected expected to steadily increase as the volume of insured transactions grows. The good news for policy holders is that the increase in claims has been accompanied by a corresponding increase in claims payments.
– John Jenkins