Nearly 14% of merger and acquisition (M&A) insurance policies written globally by American International Group (AIG) resulted in a claim, according to a study of the company’s representation and warranties (R&W) claims data.
The study assessed data from 2011 to 2014 and found a significant number of M&A transactions worldwide saw 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, reported AIG.
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 Angus Marshall, M&A manager, UK, AIG.
“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,” he added.
Buyers in a transaction purchase R&W Insurance to protect against breaches of representations and warranties, 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 $1bn 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 $100m were the next likeliest with 15% of policies covering this deal size seeing a claim.
The study also found buyers already involved in transaction talks were most likely to buy an M&A policy, accounting for 75% of policy purchases; 13% of them reported a claim after a deal closed.
Sellers accounted for 25% of policy uptake, reported AIG. They were more likely to report a claim, with nearly one in five (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.
Looking at geographic trends, the study found 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.
Europe, the Middle East and Africa (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
“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,” Marshall said.