AIG Global M&A Insurance Claims Study: 23 Percent of Deals over $1 Billion End in a Claim; Highest Severity Claim Payouts Average $22 Million
Study looks at policies covering approximately 1,600 deals worth more
than
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The M&A claims study, now in its second year, examined policy years 2011
to 2015. This year, the study looked into claims severity for the first
time, revealing that more than half of all material claims (those
incurring more than
A closer look at the distribution of material claims shows a substantial amount of dollars paid across the severity spectrum.
-
Slightly fewer than 47 percent of claims were between
$100,000 and $1 million , with an average payout of$300,000 . -
47 percent were between
$1 million and $10 million , with an average payout of$3.5 million . -
Slightly fewer than seven percent were more than
$10 million , with an average payout of$22 million .
“The bigger and more complicated a deal is, the more likely there is an
unknown liability lingering,” said
CLAIMS FREQUENCY
The study found one-in-four policies written on deals over
The main driver of the increase was a seven-point jump in the claims count from policies written in the 2011 to 2014 period (to 21 percent) compared to the prior year study. R&W policies have potential claims tails as long as seven years, which means policies written in the 2011 to 2014 period are still subject to claims, and this explains the higher claims percentage in this year’s study versus the 14 percent reported for the same policy period in last year’s Global M&A Insurance Claims study.
“A maturing market mixed with pressure to execute transactions quickly
could be a leading factor behind the increase in frequency,” said
While a good portion of claims (27 percent) are reported in the first six months following a deal, the majority of claims (48 percent) are reported between six and 18 months after a transaction. A substantial 17 percent of claims were reported in the 18-24 month period following a deal, and eight percent were reported 24 months or later.
CLAIM TRIGGERS
Claim triggers were mostly steady year-over-year with one standout exception: “compliance with laws” jumped to 15 percent of alleged deal breaches, compared to just five percent last year, making it the second leading claims trigger.
The top five common breaches claimed, according to the study include:
- Financial statements (20 percent)
- Compliance with laws (15 percent)
- Discrepancies in a company’s contracts (14 percent)
- Tax-related (14 percent)
- Intellectual property (8 percent)
Also new to this year’s study, AIG delved more deeply into claims involving financial statements. The top reasons given for this type of claim include:
- Accounting rules statement breaches (26 percent) and misstatement of accounts receivable/payable (25 percent) are the two most common reasons;
- Undisclosed liabilities (19 percent), misstatement of inventory (17 percent) and overstatement of cash holdings or profit (13 percent) are also ranked as reasons for financial statement claims.
“You can pick up all sorts of complex issues that are not flagged during the diligence process,” Ms. Duffy said. “We help cover these unknowns.”
R&W TRENDS
Buyers in a transaction purchase R&W insurance to help protect against financial loss arising from breaches of representations and warranties (whether innocent or otherwise) made by a seller during the deal process. Sellers also purchase the insurance to help protect against financial loss arising from buyers claiming such breaches. While the study found fewer policies are sold on the sell-side, these do result in a much higher frequency of claims, at 29 percent versus 18 percent on the buy-side.
About the Study: AIG is one of the largest writers of M&A policies in
the world. It has been writing M&A policies covering representation and
warranties since the late 1990s. The claims data between 2014 to 2015
cover a significantly larger pool of transactions than in prior periods,
reflecting an increase in M&A activity and the growing acceptance and
use of R&W policies as part of the deal process. The total number of
claims during the study period was approximately 300, spanning policies
covering approximately 1,600 deals, worth more than
Additional information about AIG can be found at www.aig.com
and www.aig.com/strategyupdate
|
AIG is the marketing name for the worldwide property-casualty, life and
retirement, and general insurance operations of
View source version on businesswire.com: http://www.businesswire.com/news/home/20170420005723/en/
Source:
AIG
Media
Matt Gallagher, 212-458-3247
matthew.gallagher2@aig.com
or
Jessica
McGinn, 212-458-4215
jessica.mcginn@aig.com
or
Investors
Liz
Werner, 212-770-7074
elizabeth.werner@aig.com