Let’s take a look at the updated data and emerging trends at RWI.
New Deal Activity in January and February 2022
Euclid Transactional Insurance’s always helpful filing figures clearly indicate how many transactions RWI is looking for across the full range of transactions. While this doesn’t tell us how many deals are going on, it does give us a good idea of how strong RWI is as a tool for traders and how much deal activity there is overall.
High global RWI policy filings put pressure on advisers and underwriters
As we can see, filings in January are higher in 2022 than in previous years, but are well below the September-November 2021 figures, putting significant pressure on M&A advisors and the M&A community. subscription.
It’s worth noting that some of these new introductions may be deals that couldn’t find homes in late 2021. They’re now being remarketed in hopes of better terms.
This shows us that M&A professionals using RWI continue to use the product in the face of temporary higher prices and tighter terms. It also implies that the market for mergers and acquisitions remains strong.
At Woodruff Sawyer, we saw new deal activity grow by almost 50% year over year between January 2021 and January 2022, suggesting that the need for RWI has not changed and that M&A has remained strong. February was slightly lighter than January, which is consistent with the general pattern of M&A activity we’ve seen in recent years.
RWI Statistics Everyone Should Know
In general, the news was good for our clients.
The lowest price we saw was 3.28%, a return to half of last year in terms of prices. It was an outlier of most quotes we saw still in the 4.5-5.5% range, but good to see nonetheless.
The average price dropped from 5.9 to 5.1, which is a significant drop. As an example, on a $10 million policy, this results in savings of $800,000 on average.
The average number of quotes increased from just over 2 to 2.5, showing the continued return of underwriting capacity. This could be due to reduced business flow or increased human capital.
As we saw earlier, the lowest price was 3.28, which is a significant drop. Just as noteworthy, its top price has also dropped from 6.6% last month to 6.2% in February, again a substantial saving for deals listed this month compared to the previous month.
“Elevated Risk” Trends: What They Mean for You
Anyone experienced in placing an RWI policy should be familiar with the highest risk areas listed in each NBIL. Underwriters focus on specific areas of the deal during their due diligence review by the buyer’s advisory team. If diligence is lacking in one of these areas, insurers will likely seek to include an exclusion in the policy for that portion of the risk.
Our goal is to keep you updated with the trends we see in the market. Next, let’s take a look at the often overlooked subject of underlying insurance and how it can affect your RWI policy.
A standard note you may see in the Higher Risk Areas section, commonly refers to cyber/data breaches or environmental issues. In that case, it would read something like “our hedge will be in excess and not wider than the underlying hedge.” [cyber or environmental] insurance policy.”
This is not new to the RWI market; in fact, it’s not even a trend. However, the current trend is the level of scrutiny underwriters apply to determine the adequacy of the underlying insurance. This could be problematic if the target company does not have a sufficient underlying limit.
The issue of underlying insurance is particularly relevant in spin-outs. In this situation, the insurance is often at the topco level and cannot be transferred. Also, more common in smaller businesses, sometimes there has been no historical policy at all. Depending on the risk, underwriters may seek to apply separate withholding equal to what the current insurance limit should have been. In that case, a broker who can talk about the appropriate/typical limits for the company is extremely valuable in keeping that hold realistic. Brokers who are not part of a full-service brokerage may not have the experience or credibility to provide comfort to the RWI underwriter, leaving the buyer at the whim of the underwriter to provide that hold.
Alternatively, we have seen cases of insurers trying to use this as a reason for a broad exclusion, denying coverage for that risk, which is obviously unacceptable.
In short, we urge our customers to gain an early understanding of Target’s insurance program to avoid last-minute surprises. It is worth noting that some brokers will charge an additional fee for an insurance due diligence report, Woodruff Sawyer does not and will not because we believe it is a vital part of placement.
Word on the street (insurance market)
A number of RWI carriers, brokers, attorneys and advisors came together for a conference focused on RWI in late February. They shared some of the most interesting developments and trends in the market. They agreed that while loss ratios continue as in previous years, areas highlighted in recent months included an increased focus on the adequacy and condition of assets and customer contracts. And, in fact, we’re seeing more questions from carriers about whether buyers are actually getting calls from key customers and suppliers to make sure those relationships continue after closing.
An interesting point of view from several panelists and conference participants was that there was actually no claim related to COVID-19, mirroring the WS observations. If these types of claims materialize, they are likely to come later in the year or in 2023.
There is much more emphasis on the precise language of the definition of Fraud in the purchase agreement, at least by attorneys representing carriers. Carriers want to make sure they reserve their rights when it comes to their ability to subrogate against the seller for fraud.
And finally, new tax insurance options are being developed in the market. Tax insurance in general is growing to cover not only tax problems arising from M&A activity, but also non-M&A related areas such as intercompany sales, tax controversy, tax audits and foreign tax credits.
Final Thoughts on RWI
To conclude, a lot has changed since the beginning of the month. The war in Ukraine has put interest rate hikes on the back burner. It also threatens to exacerbate supply chain problems that are driving up inflation, so it looks like the cycle will continue at least in the short term.
Since it is impossible to know how long this conflict will last, it is also impossible to predict the impact it may have on the negotiation in the near or medium future.
Objectives may change according to actions that have become more valuable in times of war, but we all hope that the conflict will end long before it has any long-term effects.