M&A activity involving Australian companies in the Pacific region totaled US$329.2 billion in 2021, according to Refinitiv. This represents a nearly six-fold increase compared with the preceding year, eclipsing the previous high-water mark of US$139 billion set in 2007. The strong bounce back, after a quiet 2020, was due to a number of factors. First, Australia and New Zealand successfully managed the first wave of the pandemic, allowing for robust economic recoveries in 2021. Second, large infrastructure deals became more common, partly due to superannuation and pension funds taking advantage of low interest rates to invest in assets with stable long-term returns. Third, after would-be buyers exercised a reasonable amount of caution in 2020, pent up demand and a large amount of impatient capital fueled a frenzy of buying activity. In concert, these factors formed the perfect storm for a supercharged deal environment in what ended up being a record-setting year.
Demand for W&I insurance and reliance on the product to facilitate transactions also reachedunparalleled levels in 2021. Over the course of the year, Marsh arranged US$2.5 billion in limits of liabilityfor our clients, an increase of 382% on the limits placed in 2020. In line with broader market conditions,this rise was due, in part, to the high number of large deals (those greater than US$1 billion in dealvalue) we worked on in 2021. We also placed insurance for more than three times the number of dealsbound in 2020, with the median deal value for insured transactions being just over US$212 million.
The average premium rate in 2021 was 1.51%. This is higher than in recent years, due mainly to the W&Imarket straining under the sheer weight of deals seeking W&I insurance, particularly in the third andfourth quarters. Insurers were taken by surprise by the unrelenting demand which caused capacity andbandwidth constraints, and led to steeper pricing across the market.
Notable 2021 trends
W&I insurance used for public deals
W&I insurance has become a common consideration for public transactions initiated under a scheme of arrangement, whereby a level of cooperation between the target and bidder enables the W&I process to be integrated within the deal structure. The growing reluctance of buyers to accept terms with no recourse against the selling shareholders has resulted in W&I insurance playing a critical role in de-risking these transactions and protecting the purchase price. In 2021, the combined deal value of public transactions insured through Marsh was US$4.5 billion and the average limit placed per deal was US$277 million.
Companies turn to W&I insurance
Private equity funds were early adopters of the W&I product. In recent years, however, W&I insurance has gained widespread popularity among other companies, ranging from small businesses, to the top Australian Stock Exchange (ASX)-listed corporate groups. Companies have become more sophisticated in how they utilize the product, and many have used W&I insurance to strategically aid the M&A process. In 2021, for the first time ever, our team was engaged by nearly twice as many corporates as private equity funds.
Claim notifications have increased twofold during the last three consecutive years, with nine claims filed with insurers in 2021. This is largely a function of the growing number of policies placed, as well as insureds becoming more sophisticated and aware of how their policy should respond when losses arise post-transaction. Consistent with recent years, the most common areas of warranty breach related to financial accounts, tax, and employment.
Outlook for 2022
Despite potential interest rate rises, we expect M&A activity to continue its strong run in the near term, with the market remaining buoyant on account of positive investor sentiment and the substantial uninvested capital yet to be deployed. With W&I insurance now being relied upon for a wider variety of deal types, and across all sectors, we foresee high demand for the product continuing unabated throughout 2022. Meanwhile, insurers are showing a renewed appetite to support deal participants, which should result in a robust W&I marketplace this year.