5th M&A Insurance Summer Forum: Highly dynamic market

The 5th edition of the M&A Insurance Summer Forum demonstrated the immense breadth of the topic: experts from law firms, insurers, MGAs, brokers and service providers discussed the current topics and trends.

At the latest during the lively discussions on the roof terrace (which host Dr. Christoph Schmitt, partner and site manager of Advant Beiten, rightly described as the “ideal location for the event” during his welcome address), it became clear: The interdisciplinary basic structure of the “W&I-Police” solution allows and encourages creative implementations whose constantly improved fit creates added value for users and thus maintains or even expands the use of the tool at a high level. “The market is inventive,” stated Mirjam Boche (Arqis).

That is one way of looking at a growing market that is attracting more players in the meantime. At the same time, it became abundantly clear that the shrinking of premiums while simultaneously expanding coverage cannot continue. “Will there be consolidation?” asked moderator Robert Engels (WTW), but the experts found it difficult to give a clear answer. “We have been expecting it for a long time,” said Peter Ratz (Howden) rather doubtfully. New players are finding it increasingly difficult to gain a foothold in the DACH market, noted Boche, because the barriers to market entry are constantly rising as the quality of the policy increases.

This quality must and will be reflected in the premiums, stressed Niki Demirbilek (Amaniki). The MGAs in particular are suffering, in the UK there were policies as low as 0.2%, in the DACH region up to 0.5%, “at the same time the terms are being watered down and insured to the point of gross negligent ignorance.” This contradiction – in demand, value-added, useful, tailor-made product/solution, but falling or disappearing margin – was observed throughout the evening. But whether, when and to what extent a cleanup will take place, premiums will rise and the market will turn around, had to remain open.

There is, however, agreement on the design of the policies: the insurers will not be able to recoup the so-called enhancements, for which no premium is usually charged. The scope of cover will also tend to remain broad.

Positive outlook for the M&A market

In all of this, the W&I market is relying on M&A activities. This is why Markus Rieger, CEO of the capital market platform GoingPublic and inaugurator and curator of the Summer Forum, invited two experts, Michael Drill (Lincoln International) and Klaus-Martin Haussmann (Grant Thornton). Drill stated that “there is currently a lack of euphoria in the market,” but he is nevertheless expecting deal growth of 20% next year, “driven primarily by strategic investors in the mid-cap sector.” In general, he is optimistic because his preferred leading indicator has worked: “The prices of listed M&A banks have risen across the board.”

Haussmann also believes that the DACH market has bottomed out, and there has already been a significant upturn in the small cap segment in particular. The EV/EBITDA multiples for the valuation of targets have fallen somewhat, specifically from 21.8x to 18.7x, but this is still a high level. His conclusion: “We can look forward to a nice increase in deal activity for the rest of the year and in 2025.”

Graig Gröbli, co-founder of DealCircle, was convinced that these deals will increasingly be handled with the help of AI tools: “A fundamental change in the M&A process is imminent.” Gröbli explained that AI will gradually seep into the workflows in order to reap the greatest benefits: increased efficiency, improved decision-making and improved risk structure. But: “Human expertise and judgment remain crucial.”

A deeper look into the engine room of the deals

Marco Niehaus (Aquinex), Boris Dürr (Heuking), Irina Novikova (Deloitte) and Dr. Heiko Bertelmann delved deep into the engine room of the deals. Niehaus's comments on US elements in W&I policies in Germany underlined the flexibility and further development of the product. For him, the implementation of certain procedures relating to disclosures and guarantee catalogues is primarily about improving transparency. “The interaction between insurance companies, brokers, lawyers, etc. determines the quality of this transparency.” Overall, he sees interdisciplinary cooperation on the right track.

Boris Dürr spoke about the intricacies of the W&I police in public deals. He sees some very interesting listed targets. The main problem: guarantees for the takeover of blocks of shares are hardly possible for numerous reasons. “At this point, the W&I policy builds bridges and can act as an enabler.” His comments on the BAFin, which actually incorporates the policies into the evaluation of any takeover offers, aroused particular interest.

Irina Novikova looked at deals from the perspective of an auditor and explained the different quality levels of audits. Her urgent advice: “As a buyer, you have to pay very close attention to which guarantees the seller gives on the basis of which audit.” Heiko Bertelmann devoted himself to the still niche market of distressed M&A, which is on the rise. In this segment too, guarantees from the seller, usually the provisional or final insolvency administrator, are not available. A fully synthetic W&I policy could serve as a solution. He hopes that insolvency administrators will change their minds: “If there were guarantees or at least minimum standards for the preparation and presentation of documents, then the administrators would tend to be able to achieve higher sales prices.”

Claims: How they arise and are enforced

Patrick Müller (PwC) assumes that the number of claims will continue to rise, particularly in the tax and accounting guarantees that are already the most common. It can already be observed that bidders are checking more strictly and that the financial DD is being interpreted more thoroughly. If a claim does arise: “An analytical and financially sound claim greatly increases the chances of success.” Victor Gontard (Clyde&Co) used three examples to illustrate how breaches and claims can arise. In one case, 87% of a group's business area was taken over in a carve-out, but the overhead costs only fell by a fraction of this amount. “In such and other cases, it is very important to formulate very precisely when something is guaranteed.”

Trends in the M&A market

During the round of trends, the development of premiums was of course also discussed. “The claim rate will rise, which puts pressure on premiums,” said Peter Ratz. Niki Demirbilek also expects premiums to rise, because the policies are currently simply not sufficient. Mirjam Boche expects both standardization and individualization of the market, which is not a contradiction: “Standardization affects the topics of AI and especially the small cap area, here it is about reducing costs.” At the same time, individualization is progressing, for example in the areas of distressed or public M&A.”

Tax – without this topic it cannot be done

A Summer Forum without the tax area is unimaginable. The trends: For Anne-Catherine Lorek, the topics are becoming increasingly complex, a consequence of the fact that the financial structures of companies are also becoming more complex. Patrick Löffler (AIG) sees strong growth in tax police, especially currently in southern Europe. “Even in Italy, where tax policies were unthinkable for a long time.” Uwe Eppler (MHL) observed an increasing number of procedures “in which the tax authorities are already involved.” For him, despite all the complexity, tax risks can still be insured, “better quality of the audit documents would be very helpful in this regard.”

The panel participants agreed that claims in this area will also increase, simply because the tax authorities are carrying out more intensive and more intensive checks. Nevertheless, a drop in prices has also been seen in tax policies. Lorek believes that the lower end has been reached: “When so much complexity comes into the market, it must be clear to everyone that it cannot go below 2% in the tricky areas.”

CONCLUSION

Not only has the W&I policy become established, but also the Summer Forum. Planning for the 6th edition has begun. Or as the participants said during their farewell: “See you next year!”

Stefan Preuss

Stefan Preuss has been working as an editor in the capital markets environment for more than 25 years. The trained daily newspaper editor also gained experience as an investor relations manager. He is a permanent member of the editorial team at GoingPublic Media AG, focusing on IPOs, asset investments and succession solutions. As editor-in-chief, he was responsible for the later special editions “Employee Participation” and “M&A Insurance”.