Asia: Insurance Provides Answers To M&A Risks

NU Online News Service, Oct. 7, 2:30 p.m. EDT

While insurance for merger and acquisition (M&A) risks is commonplace in the U.S. and Europe, Asia is just beginning to use similar risk transfer strategies for financial transactions, an executive with insurance broker Marsh said.

The observation came as executives from four subsidiaries of New York-based Marsh & McLennan Companies, the parent company of Marsh, held a press briefing today to discuss the changing M&A landscape.

Bill Trent, partner in the corporate finance and restructuring practice of Oliver Wyman, said the M&A environment is driven in cyclical patterns mirroring current economic activity. At its height in 2007, M&A investments had grown to $4 trillion fueled by cheap credit, stock market gains and overly optimistic management.

Although that came crashing down with the recession, driving investment activity to $1 trillion over the past 12 months, that figure remains more than double what it was 20 years ago, he noted.

Such activity produces risk, noted Karen Beldy Torborg, managing director of Marsh and global leader of the firm's private equity and M&A practice. To understand the extent of these risks and how to shield the buyer from exposures, executives have to perform due diligence to understand what their future liabilities could be and what their collateral requirements are to finance the deal and insurance advisors are becoming an integral part of the process.

Ms. Torborg said this is especially true for distressed deals that could open exposures for environmental liabilities and workers' compensation expenses if the acquired company was downsized through lay-offs.

The whole point of this exercise, she explained, is to "help these investors avoid unwanted surprises."

In parts of Asia, where M&A activity is growing, the use of risk management advisors to research deal risk and apply risk transfer solutions to problems, remains relatively new.

Globally, the primary transactional solutions, she noted, are representation and warranty insurance and contingent tax and environmental coverage. Insurers are willing to deploy capital to cover these risks.

Ms. Torborg said that while business leaders in parts of Asia have been aware of risk management advisors, what is growing is the amount of time that risk advisors are spending on due diligence. Ms. Torborg pointed out that one of the primary challenges for clients is making certain they have "consistent coverage across all assets." This is especially true for real estate investors making certain they have catastrophe coverage across all their holdings.

Mr. Trent noted Asia has become an important source for both capital and a destination for investment. M&A activity is growing in China, where there is more interest in purchasing distressed properties. He added that India also is becoming a significant player.

A rebroadcast of the conference is available at www.mmc.com in the news section.