Our outlook on the industry

War, Sanctions and Inflation: Reflections on the First Quarter

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Russia’s invasion of Ukraine and the sweeping economic sanctions that followed have upended economic growth, oil prices, commodity markets – and, as a result, introduced uncertainty to 2022’s business outlook.

In our market, we are watching developments closely and advising clients as they navigate these challenging times.  While it’s too early to draw lasting conclusions about how the conflict will affect activity in R&W insurance and the M&A market, we can make a few observations.

The first is that sanctions are producing a heightened need for transparency during transactions.  It’s vital to know if a sanctioned individual is involved in a proposed deal, and given the reach and complexity of many Russian oligarchs this often is not a simple task.

The new laws bar payments to sanctioned individuals and insurers will not be part of a transaction if a sanctioned individual is involved on either side; that’s clear enough.  But insurers may face an added challenge if a seller is added to the growing list of sanctioned individuals after the transaction closes.  In the event of a breach of a representation, it’s unlikely the insurer could bring a successful subrogation claim against the seller in such an instance.

On the whole, we see the emphasis on transparency as a good thing, and the practices now being adopted will serve the market well as it continues to grow.

Wars are unpredictable, and the war in Ukraine is no exception. The R&W insurance market is responding to the uncertainties arising out of the war in much the same way it reacted to Covid-19.   Underwriters are willing to underwrite most transactions without an exclusion for the impacts of the war when they quote deals, but will exclude any direct nexus to Russia, Belarus or Ukraine discovered in underwriting.

As we saw over the past two years, however, the pandemic created far-reaching disruptions that went well beyond health impacts in a particular geographic area.  So when China’s Hubei province shut down, the ripple effects were felt around the globe.  In much the same way, the war in Ukraine is affecting energy, fertilizer and agriculture markets that reach well beyond Europe. Ironically, the experience of the pandemic made market participants accustomed to looking at these second-order effects.  So, in addition to any direct links to Russia, Belarus or Ukraine being excluded from coverage, the war’s knock-on effects to the target may also be subject to exclusions.

Third, while M&A activity in the first quarter was lower than a year ago, it’s unclear what role, if any, the war in Ukraine has had on deal volume.  Total deal volume fell in the first quarter compared to a year earlier, mainly because of a drop in mega deals, but smaller transactions continued apace.  That’s the market segment where R&W insurance often has a role to play.

As we’ve seen in the past, uncertainty doesn’t halt deal activity; it simply changes it.  Appetites cool for large deals, but smaller ones still move ahead.  We’re keeping a close eye on inflation, the pace of Fed interest rate hikes and the looming risk of a recession in the US. Those factors present a more potent threat to the debt financing environment and overall economic sentiment that are factors in deal-making.

In the weeks ahead we will continue to watch developments in Europe, working closely with clients through the underwriting process to complete deals that address their needs.

At the same time, we are mindful of the war’s human tragedy. We are trying to help in our own way, by making a donation to the Ukrainian National Women’s League of America and by contributing to the purchase of an ambulance to aid Ukrainians, thanks to the efforts of Gennadiy Kharif of Howden M&A and others. We encourage our colleagues and clients to support organizations that are providing humanitarian relief to Ukraine and look forward to an end to the conflict.