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AIG study says nearly 14% of deals covered by M&A policies resulted in a claim

Nearly 14% of M&A policies written globally by American International Group, Inc. resulted in a claim, according to a study of the global 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.

"A deal can come back to haunt," said 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 $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.

The study also found:

Buyers in a transaction were most likely to buy an M&A policy, accounting for 75% of policy purchases. Approximately 13% of them reported a claim after a deal closed.

Sellers accounted for 25% of policy uptake. They were much more likely to report a claim, with nearly 1 in 5 (19%) doing so.

While buyers were less likely to file a claim, their claims were more severe. The majority of the top 15 largest claims reported to AIG during the study period were from buyer-side policies.

The study 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. Interestingly, the data showed the tail on this type of M&A policy can extend well more than a year beyond a deal’s closing date.

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.

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.
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.

"More and more, M&A insurance is becoming part of the transaction process worldwide. Companies see it as a better alternative to closing a deal than contentious negotiations to allocate potential risks and unknowns," Ms. Duffy said.