This past year was marked by shifting narratives and unexpected outcomes. The early optimism of new vaccines and a promising economic outlook was dampened by new coronavirus variants, supply chain constraints and pressure from inflation.
Amidst this uncertain economic environment, M&A managed to post an unprecedented level of deal activity. Global M&A volume topped $5 trillion in 2021, a record-setting level sparked by high valuations and low interest rates. About 15% of PE deals last year were done at a valuation multiple of 30x or more, according to Pitchbook, the highest share since 2018.
This growth extended to the Representations and Warranties Insurance (RWI) market, where deals using RWI surpassed all previously seen volumes. Globally in 2021, Euclid Transactional bound 1,270 RWI policies, more than twice its previous highwater mark. Deal sizes grew larger, too, with 2021 transactions reaching an average enterprise value of nearly half a billion dollars. Client requests for RWI policies, a good gauge of the total market, neared 9,000, 60% more than in any prior year.
Euclid’s branches outside of the U.S. were a part of 2021’s record breaking pace. Last year we wrote 119 RWI policies in Canada, up from 51 in 2020, and 290 in Europe, the Middle East and Africa (EMEA), versus 126 in the EMEA region a year earlier.
The unparalleled RWI policy volumes of this past year reflect the growing adoption of RWI among clients, deal lawyers and bankers. The RWI market has established itself as an effective tool for managing risk and facilitating fast-paced deal timelines. The elimination of complex indemnification provisions funded by escrows and the reduction of the negotiation of representations and warranties in the acquisition agreement have made deals easier for buyers and sellers.
Deals led by private equity firms continue to account for the vast majority of RWI policies, but interest among strategic buyers is growing as corporations recognize the benefits of the product. And there is plenty of room for corporate adoption to grow. According to PwC, more than 60% of M&A deals did not involve a private equity firm. As companies and their advisors gain experience with the underwriting process, we will see more use of RWI in strategic deals.
The product has continued to prove itself as markets demonstrate repeated claims paying ability – relieving clients from potentially damaging litigation with their business partners. Euclid Transactional paid over $100 million in claims in 2021 and grew its claims team to the largest in the industry. Since the firm’s founding, Euclid’s claims team has strived to be a commercial-minded deal partner and has facilitated over $325 million in claims payments to our clients. We estimate the market has paid over a billion in claims over the past decade.
Product acceptance and the strong pace of deal activity in the market has led to increased insurance premiums, with global RWI prices rising by approximately 35% compared to 2020. Higher premiums support the expansion of underwriting and claims handling teams to meet elevated demand and we expect this will be necessary to appropriately pay claims that develop in the future. Euclid Transactional added 54 people to our global team last year and have grown to over 110 team members during this period of market wide expansion.
As noted in our latest blog, policy bindings in January slowed after a blistering December, likely due to many people taking well-earned breaks, but we expect activity to be strong in 2022. With $2.9 trillion in dry powder, private equity is poised to continue its deal-making pace. A recent Deloitte survey of executives at US corporations and private equity firms found that 92% expected M&A volume in 2022 to increase or stay the same compared to 2021.
Along with the substantial pace of deal work, the year ahead is likely to see an increase in claims reported. The influx of deals over the past year should result in more claims, even if diligent underwriting manages to keep claims in line with historical rates of frequency. A rise in claims could put pressure on markets that lack the experience, expertise and problem-solving skills necessary to handle claims quickly and effectively. For clients, it is imperative to choose markets with proven claims credentials that understand paying claims is an integral and necessary part of any insurance marketplace.
The claims experience will drive pricing in the coming year. We have started to see more differentiated pricing based on transaction size, complexity, diligence quality and other risk factors. As the market continues to incorporate lessons from claims, pricing will reflect the unique characteristics of each transaction and the parties involved.
Several external factors could influence the market this year, too. Uncertainty is a constant, and the market often can find a way to thrive in spite of it, as 2021 demonstrated. Concerns about the Fed’s inflation-fighting plans, tensions over Ukraine, and kinks in the supply chain all bear watching. Public markets will be the first to react to new developments, but private markets tend to respond in similar fashion.
The market will also be on the alert for possible changes in tax law. While federal tax changes did not materialize in 2021, the emergence of new proposals could spur dealmakers to complete transactions before any tax change takes effect.
We’re confident about the market’s growth – and our own – as we look ahead. With a great product, a strong team and valued partners, we are well positioned to serve the needs of our clients.
