M&A insurance professionals are welcoming the return of activity in Asia as business confidence picks up.
Widespread uncertainty and the disruption to regional business travel made it difficult to generate new deals during most of 2020, but there are signs that Asia is off to a brighter start in 2021.
“We are now seeing not only deal flow, but also a number of deals that have progressed beyond the indication stage into formal underwriting,” says Will Seccombe, who heads transactional risks for Lockton in Asia. “It is very welcome news and we think that the market as a whole is confident of further opportunity as the level of vaccination increases.”
Insurers are also taking a more measured approach to underwriting Covid exposures, after initially imposing blanket exclusions.
“Complexity can benefit the risk profile of a transaction in a class where one size seldom fits all.” Will Seccombe, Lockton
Underwriters are now asking relevant questions, such as how the pandemic is affecting contract fulfilment and earnings, or whether companies have used government subsidies correctly and complied with the relevant employment legislation.
The additional disclosure is not getting in the way of deal-making as M&A insurance is underwritten on a case-by-case basis anyway, with Covid exposures simply one element among many others.
“This ironically is a good example of how complexity can benefit the risk profile of a transaction in a class where one size seldom fits all,” says Seccombe.
Competition
In another sign of mounting optimism for the sector, BMS Group launched (opens a new window) its Asian broking operation with an initial focus on M&A insurance earlier this month.
There is also plenty of competition among insurers after significant expansion of capacity in 2019, which has helped rates for warranty and indemnity (W&I) cover in the region fall by up to 30% during the past two years, according to Seccombe.
The largest drops have been seen on big-ticket real estate deals, which tend to have few moving parts and are operationally straightforward.
A rise in distressed deals is expected as the economic effects of the pandemic continue to be felt.
In Australasia, average premium rates dropped slightly in 2020 to 1.18% of insured limits, down from 1.32% during the previous two years, according to a report by Gallagher.
Across mature Asian markets, rates are expected to be stable in 2021, though increases are likely for more challenging risks — such as for complex or distressed deals, or those involving parties in less attractive jurisdictions.
Needless to say, a rise in distressed deals is expected as the economic effects of the pandemic continue to be felt. In such circumstances, investors may take advantage of less vanilla options such as synthetic warranties.
The market may also see capacity reductions. Despite the lull in deal activity (or perhaps because of it), 2020 was a record year for W&I and representations-and-warranties notifications, said Gallagher, which speculates that buyers have used the pandemic “to forensically analyse what they have purchased”.
Within the insurance sector itself, several significant deals are on the radar, including the sale of Axa’s Singapore business (opens a new window) for a reported US$700 million and the up to US$500 million auction of Hong Kong Life Insurance (opens a new window).
As the region strives for a return to business as usual, insurers have a key role to play in helping to de-risk M&A deals and get investment flowing again.