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Merger and acquisition claims on the rise: AIG

Posted On: Apr. 20, 2017 2:28 PM CST

Merger and acquisition claims are becoming more frequent, as large deals prove risky and the average payout on the most severe category of claims tops $20 million, American International Group Inc. said Thursday.

In a statement, AIG said its 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, and found that more than half of all material claims — defined as those incurring more than $100,000 in claims — were $1 million or more during the period.

AIG said that slightly fewer than 47% of claims were between $100,000 and $1 million, with an average payout of $300,000. Forty-seven percent were between $1 million and $10 million, with an average payout of $3.5 million. Just under 7% were more than $10 million, with an average payout of $22 million, the study said.

The severity findings are based on claims paid, while the frequency findings are based on claims received, AIG said.

One in four policies written on deals over $1 billion resulted in a claim, the study said. Overall, 18% of all global representation and warranty policies written by AIG during the 2011 to 2015 period resulted in a claim.

AIG said the main driver of the increase was a 7-percentage-point jump in the claims count from policies written in the 2011 to 2014 period to 21% compared with the prior-year study. 

R&W policies have potential claims tails as long as seven years, meaning policies written in the 2011-2014 period are still subject to claims. AIG said this explains the higher claims percentage in this year’s study versus the 14% reported for the same policy period in last year’s global M&A insurance claims study.

“The bigger and more complicated a deal is, the more likely there is an unknown liability lingering,” Mary Duffy, AIG’s London-based global head of M&A insurance, said in the statement. “We are paying sizeable claims, sometimes writing eight-figure checks in different geographies.”

While 27% of claims are reported in the first six months following a deal, AIG said, 48% are reported between six and 18 months after a transaction. Seventeen percent of claims were reported in the 18-24 month period following a deal, while 8% were reported after 24 months or later.

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, AIG said.

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 seller side, AIG said these do result in a much higher frequency of claims, at 29% versus 18% on the buyer side.

The top five breaches claimed, according to the study, include financial statements at 20%; compliance with laws at 15%; discrepancies in a company’s contracts at 14%; tax-related at 14%; and intellectual property at 8%.

AIG said that claim triggers were mostly steady year-over-year with the exception of compliance with laws, which jumped to 15% of alleged deal breaches, compared with just 5% last year, making it the second-leading claims trigger.