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Oct 2019

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Asia: Increased number of M&A leads to rise in transaction insurance

Source: Middle East Insurance Review | Sep 2019

The deal environment in Asia-Pacific is becoming more fully integrated with western markets, according to a study conducted by Aon and Mergermarket. With 4,569 M&A deals announced in Asia in 2018 and with targets mostly in Asia, Australia and New Zealand, the growth in transaction volume and cross-border deals continues its steady pace.
 
In 2018, Asia M&A activity increased slightly to 3,905 deals worth $678bn, up from 3,836 deals worth $675bn in 2017. In Australia and New Zealand in 2018, M&A activity increased to 754 deals worth $96bn, up from 731 deals worth $88bn in 2017.
 
Asian companies have become more active in acquiring businesses in Europe and the US, and in participating in auctions involving larger companies. The Asian deal market is projected to continue its growth trajectory, despite concerns around the impact of a Sino-US trade war and the expectation that the economic cycle may be peaking. Forty-four percent of respondents to the dealmaker survey said they expect the number of Asia Pacific deals to increase significantly (by more than 5%) over the coming year.
 
On the back of growth in the deal market, an analysis of Aon’s book of business shows that the number of deals utilising representations and warranties insurance (R&W insurance) – also known as warranty and indemnity insurance – is increasing dramatically. In Asia, following a period of double-digit growth since 2015, uptake in 2018 increased 40% y-o-y, Aon data showed.
 
The report said, “R&W issuance in Australia and New Zealand has also grown, providing an attractive solution for corporates, public companies, real-estate funds and private equity clients. Building on previous years, Aon reported y-o-y growth of 37% in the number of 2018 deals in the Antipodes using R&W insurance.”
 
As economic growth in the key industrial jurisdictions of China, South Korea, Singapore and Malaysia decelerates, and the Sino-US trade standoff escalates, dealmakers are increasingly concerned about key risks impacting a deal and are seeking to protect themselves against them.
 
The rise of transaction insurance
In the survey, respondents said that when it came to biggest challenges in completing deals on the buy side in 2019, 31% saw evaluating and managing macroeconomic and political risk as the top risk. Overcoming regulatory obstacles and securing financing on favourable terms tied for the number two spot, at 19%.
 
The survey also saw that R&W insurance was ‘stapled’ in transactions that dealmakers were involved in somewhat often (50% to 74% of the time), while 20% said it was done so occasionally (25% to 49% of the time). Thirty-eight percent of respondents said one of the top two factors in a deal becoming derailed on the buy side was a competing bid being made with better speed or certainty to close, underlining the importance of streamlining the deal process as much as possible.
 
Buy-side R&W policies have also grown in popularity across China and its Asian neighbours, not only as a tool for mitigating risk in domestic deals, but also as a tool to enhance cross-border bids in competitive foreign markets. M 
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