Industry-specific W&I Underwriting: trends and special features in the record year 2021

Contrary to all expectations, last year was a record year for transactions in the M&A and real estate sectors. In total, M&A deals worth USD 5.9 trillion were completed worldwide.1 This significantly exceeded 2007, the strongest year to date in this area (USD 4.55 trillion).2 In the field of real estate investment, 2021 was also another record year in Germany. According to real estate investor CBRE, EUR 111 billion worth of real estate was purchased in Germany, which is 40% more than in 2020.3 In a large number of these transactions, Warranty & Indemnity Insurance (W&I insurance) was purchased, showing the product is now an integral part of the acquisition process, especially in the context of bidding processes.

In this article, we highlight three sectors in M&A that have seen significant growth over the past year: (i) healthcare, (ii) utilities, and (iii) mail order. The reason for the increased demand in these sectors is likely to have been the Covid-19 pandemic. With this in mind, recent developments in the insured real estate transactions sector will be briefly explained against the backdrop of the Covid-19 pandemic.

1. Healtcare sector

Unsurprisingly, the Covid-19 pandemic was a strong driver for companies in the pharmaceutical sector (e.g. vaccine manufacturers and their suppliers) and medical devices/technology sector (e.g. test manufacturers, laboratory utensil manufacturers, medical software and laboratory diagnostics).

Within the context of these transactions, a particular focus of our review was on the sustainability of such investments. Clinical and biotechnological products that form the basis for novel mRNA vaccines are expected to remain in high demand due to advancing research in this area. On the other hand, demand for PCR and antigen testing is decreasing as new Covid-19 infections decline. The high demand for syringes, cooling facilities, etc., as part of the global Covid-19 vaccination campaign is also expected to level off in the foreseeable future.

As well as the importance of the quality of the clinical and biotechnological products, an increased focus in these transactions has been on the reliability of supplies. One of the lessons learned from early on in the Covid-19 pandemic was increased bottlenecks in what had previously been considered reliable supply chains. As a result, many companies broke this thus far prevailing trend and have, where possible, significantly ramped up their inventories. The problems that have occurred as a result of this, have highlighted that the historic reluctance of W&I insurers to insure losses arising out of inventory levels and quality, is appropriate.

2. Utilities sectors

The utility sector also continued to grow in 2021, with renewable energy dominating in particular. The ongoing shift to zero-carbon power generation helped wind and solar plant deals reach a new high last year. For example, investors and project developers of the largest wind farms in Europe focused the acquisition of onshore and offshore wind farms in Central Europe, which operate independently of raw material imports. Often, a so-called “sampling approach” is chosen in the review phase, whereby not all land permits of the wind farms have to be reviewed. As a result, a more efficient and cost-saving solution within the underwriting process could be found for the policyholder. To the extent that this approach indicates the systemic risks of the project, it can also be used to review the transaction from an insurance coverage aspect. In these circumstances, it may be necessary to raise the de minimis amount and/or the deductible accordingly.

In addition, the European “green deal” still aims to reduce net greenhouse gas emissions to 55% by 2030 and to invest a total of EUR 1.8 trillion in resource-efficient .4 This development is further strengthened by the consequences of the Ukraine conflict (the European journey to independence from Russian-produced gas and oil). It is therefore expected that there will also be many transactions in the field of renewable energies in the coming years.

3. Container and packaging

Finally, the container and packaging sector represents one of the major economic beneficiaries of the Covid-19 pandemic. A large portion of these transactions involved packaging materials. Furthermore, demand to acquire transport and logistics companies as well as IT solutions increased sharply. In the transport and logistics sector alone, there was a record number of mergers and acquisitions last year (322 deals globally with a total value of USD 291 billion).5 In addition, there was a boom in M&A activity involving food and beverage delivery services in the local sector.

The Covid-19 pandemic and its associated consequences largely restricted the lives of many people as well as the options companies had available to them to survive. Hence, online shopping and delivery services were particularly in demand. In addition, stable supply chains in the transportation sector became significantly more important for companies again for the aforementioned reasons. Strategic investors were very active in this area in particular.

Other than a risk of potential overvaluation of the target company, the main insurance risk focus is on the global structure that already exists. This requires a suitable comprehensive examination with the involvement of local consultants.

4. Real estate

Just under a third of the transactions we insured last year were in the real estate sector. Here too, the initial concern of a decline in transactions due to the Covid-19 pandemic has quickly dissipated. However, there is definitely a slight shift in the preferred real estate property types. Whereas shopping centres and retail parks previously enjoyed great popularity, demand in this area seems to have declined. Office properties also appear to have lost popularity. On the other hand, we saw a disproportionately large number of large residential portfolios and logistics portfolios (mainly as part of project developments) last year. In this respect, the growth in the mail-order sector, which has been boosted by the Covid-19 pandemic, is also making itself clearly felt in the real estate sector. Similar to the utilities sector, real estate portfolios often raise questions about how to structure the scope of the audit in a meaningful way, which insurers need to map.

1 https://www.bain.com/about/media-center/press-releases/2022/global-ma-report-2022/ 2 https://www.reuters.com/markets/us/global-ma-volumes-hit-record-high-2021-breach-5-trillion-first-time-2021-12-31/ 3 https://news.cbre.de/deutschlands-immobilieninvestmentmarkt-mit-neuem-umsatzrekord--transaktionsvolumen-von-mehr-als-111-milliarden-euro--40-prozent-ueber-vorjahreswert/ 4 https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal_de 5 https://www.pwc.de/de/pressemitteilungen/2022/transport-und-logistikbranche-reagiert-mit-m-and-a-rekordjahr-auf-die-corona-krise.html