Frequency and Size of M&A Insurance Claims Continue to Rise

AIG, in its recently published 2018 M&A Claims Report, explored the rising number of representations and warranties (R&W) claims in the M&A market by examining AIG policies written between 2011 and 2016. During this period, AIG wrote policies for approximately 2,000 deals, representing a total deal value of over $700 billion from which more than 400 claims have resulted as of the date of the report. The insurance provider observes trends in the frequency and size of claims based on deal size, industry sector and geography, and posits that R&W insurance has become the “new normal” in M&A transactions.

Source: Norton Rose Fulbright | Published on September 20, 2018

Insurance M&As slow down

Almost one in five policies AIG wrote during the period of the study has received a claim notification which is a slight increase from AIG’s 2017 M&A Claims Report we reported on previously. AIG attributes this increase, as well as the following trends observed from the data, to a better understanding on the part of policyholders of how the product works as R&W insurance becomes more common place in transactions, as well as to the relatively more complex nature of larger transactions:

  • Frequency of claims increases with deal size, with the largest claims being made in relation to transactions with a deal size of over USD 1 billion
  • Claim size increases with deal size and has increased across the board
  • Claims are coming in earlier with 33% of claims notifications being made during the first six months

Across industry sectors globally, AIG observed the following frequency of claims for the five most common breach types:

  1. Financial statements: 18%
  2. Tax: 16%
  3. Compliance with laws: 15%
  4. Material contracts: 14%
  5. Employee related: 9%

For the first time, AIG also included statistics in its report on breach type by industry sector. The following are the top three types of breaches observed for each of the following industry sectors:

  1. Manufacturing: financial statements (17%); material contracts (16%) and tax (13%)
  2. Health & pharma: compliance with laws (31%), tax (20%) and financial statements (15%)
  3. Technology: tax (25%), intellectual property (19%) and financial statements (12%)
  4. Financial services: financial statements (25%), material contracts (23%) and compliance with laws (13%)

AIG’s observations with respect to trends in the R&W insurance market are useful for purchasers and their advisors for focusing their due diligence processes on heightened areas of risk and negotiating better deals.

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