Nearly 14% of M&A policies written globally by AIG resulted in a claim, according to a study of the insurer’s representation and warranties (R&W) insurance claims data between 2011 and 2014. The study suggests a significant number of M&A transactions worldwide may see issues arise from breaches of deal terms discovered after closing.
Financial statement misrepresentations were the leading cause of these M&A insurance claims, accounting for 28% of all claims during the period. Tax errors or misrepresentations were the second most frequent claim type, accounting for 13% of filed claims, followed by 11% of claims filed due to discrepancies that emerge from a company’s contracts.
The study also revealed global variations in M&A claim frequency and severity, as well as the length of time it typically takes for a claim to be filed after a deal closes. EMEA had the lowest rate of claims reported, with 11% of policyholders submitting a claim. However, EMEA claims tended to be more severe, accounting for the majority of the largest claims paid out by AIG during the time period.
Clients in the Asia-Pacific region were the most likely to file claims. Some 18% of policyholders there reported a claim during the study period.
“A deal can come back to haunt,” said Ms Mary Duffy, Global Head of M&A Insurance. “From AIG’s perspective, transactions pose risks to a significant number of companies, despite the best efforts during due diligence. Even the most sophisticated and largest companies can and do miss critical issues during the deal process.”
Buyers in a transaction purchase R&W insurance to protect against breaches of representations and warranties (whether innocent or otherwise) made by a seller during the deal process. Sellers also purchase the insurance to protect against buyers claiming such breaches.
The study found that companies in deals worth US$1 billion or more were the most likely to claim damages following the close of a transaction, with 19% of policies covering this deal size seeing a claim. Companies involved in transactions under $100 million were the next likeliest, with 15% of policies covering this deal size seeing a claim.
While 74% of claims were filed by policyholders within 18 months of the close of transaction, a significant 26% were filed after the 18-month mark.