6.2. Increasing competitive pressure from additional insurers
Just a few years ago, only the large and established insurers were prepared to insure carve-out transactions. Even then, they employed large teams of experienced underwriters who could execute underwriting of the significantly more complex carve-out transactions in a timely manner and without negatively impacting other transactions. While the number of insurers offering W&I insurance on the German market also increased as the popularity of the product grew, many providers also strengthened their teams by adding underwriters. This increased the number of insurers able to smoothly underwrite complex carve-out transactions. The combination of additional providers and the increasing professionalism of existing market participants led to increasing competition among insurers. This, in turn, had a positive effect on the product of W&I insurance in carve-out transactions in the form of increasing professionalisation. Today, and given the process is properly prepared, underwriting of a carve-out transaction can be completed in a similar timeframe to an ordinary M&A transaction (approximately seven to 14 days). At the same time, sellers and potential acquirers benefit from the increased number of experienced and reliable W&I insurers, especially in auction processes where several bidders need to work in parallel on W&I insurance for the same target.
6.3. Insurers’ increased risk appetite and falling insurance costs
The increased competition among insurers in turn led to an increase in the risk appetite of many insurers. In addition to the established providers, comparatively smaller insurers are now also seeking to insure carve-out transactions with mostly large values. In terms of scope of insurance cover, they are often more flexible and acquirer-friendly than their established competitors. This has also had an impact on insurance premiums, which have been declining for a long time and are still very attractive despite slightly higher costs compared to the pre-Covid times.
7. Current market environment and outlook
With markets having recovered significantly from the Covid-19 shock during 2021 and the German DAX40 index reaching a new all-time high in early 2022, the outlook for 2022 was very promising. There were rumours that some major carve-outs of leading German companies, which had been put on hold during the Covid-19 crisis, would resume and the businesses concerned would come to market during 2022. With the outbreak of the Russian-Ukrainian war and the disruption of global supply chains as a consequence of the strict Covid lockdowns in China, both of which in themselves already entail serious adverse consequences for economies and stock markets, the general uncertainty has returned. It is still not fully foreseeable what impact both events will have on Western economies and stock markets. The German transaction market is currently divided. While the small and mid-cap segment appears to be largely unimpressed, some transactions in the upper large-cap segment have been paused or postponed for the time being. This is mainly due to differing views on valuation and difficulties in concluding large-volume financings, for which uncertainties in the capital markets are not very supportive.
The use of W&I insurance in carve-out transactions is today the market standard. Provided that the specifics of due diligence are taken into account, carve-out transactions can be insured adequately and without major gaps in insurance coverage. However, knowledge qualifications of certain warranties cannot be avoided in some cases due to the complexity of carve-outs, especially in the context of the “sufficiency of assets” warranty. Due to the professionalization of insurers, a policy can also be concluded in a carve-out transaction within a period of approximately seven to 14 days.