Insurers of mergers and acquisitions (M&A) are lowering their premiums and sweetening policy terms to win deals as eight cover providers often vie for the same business, the latest WTW M&A Insurance Australasian Report says.

The reduction in deals - and demand for associated cover - began last year, swinging the bargaining power back towards insureds and forcing insurers to offer more competitive terms in order to win deals.

So far in 2023, pricing has continued to decrease, and more insured-friendly positions are being negotiated by WTW with the M&A insurance market, the report says. An average gross premium charged by Warranty and Indemnity (W&I) insurers of around 1.9% in January-September fell to less than 1.4% in the fourth quarter.

“The back half of 2022 saw more competition between M&A insurers and a significant reduction in rates, which has continued through to the early part of 2023,” it said.

"Significant interest from multiple M&A insurers is being received on most deals presented to the market, giving insureds multiple options when considering who they wish to appoint. Seven or eight M&A insurers now regularly offer primary terms on any given transaction, versus only one or two on average at the beginning of last year.

“We expect this trend to continue as M&A market activity remains tepid and insurer capacity is high,” WTW said.

As competition to win deals has increased, WTW has seen M&A insurers lower their minimum premium charged in an effort to secure more work.

The average minimum premium charged by W&I insurers WTW regularly works with has now fallen to around $140,000. In times of limited capacity such early 2022, where insurers could afford to be more selective on the deals they offered terms for, minimum premiums of $200,000 or higher were often quoted, the report said.

Australasian transactions undertaken by the WTW M&A team almost halved to $23.9 billion last year on 263 deals, from an “outlier” record figure of $45.32 billion on 354 deals in 2021.

The average value for insured transactions remains in an upward trend, but there was a “notable drop-off" from 2021 as a result of fewer mega deals due to an increased cost of debt and more conservative lending. More than 45% of deals were under $100 million.

Whether larger deals again become prevalent in 2023 will depend on external factors such as interest rates, company valuations and general economic stability.

Russia’s war against Ukraine in late February last year, and increasing interest rate expectations, brought about economic uncertainty, bringing down valuations and activity. WTW says many deals were put on hold or fell over altogether, and timelines of active transactions were pushed out as dealmakers navigated headwinds.

WTW expects 2023 enterprise value to trend back towards pre-pandemic levels and says there were new entrants into the Australasian market as a handful of local and European M&A insurers began providing W&I insurance terms on a regular basis for transactions.

Consumer businesses were the busiest target sector for insured transactions last year, followed by technology and healthcare/medical. WTW expects that to continue long term.