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Financial statement mishaps top culprit in M&A claims

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About one in seven merger and acquisition insurance policies resulted in a claim, and misrepresentations in financial statements were the leading cause, concluded a study released Thursday.

The study, by American International Group Inc. of its data, examined claims on transaction purchase representations and warranties insurance it underwrote between 2011 and 2014 in some 1,000 deals worth more than $200 billion, AIG said.

Overall, nearly 14% of the M&A coverage resulted in a claim. Financial statement misrepresentations accounted for 28% of claims; tax errors or misrepresentations, 13% of claims; and contract discrepancies, 11% of claims, according to the study.

The study showed that companies in deals worth $1 billion and clients in the Asia-Pacific region were the most likely to file a claim during the period.

In addition, buyers accounted for 75% of M&A insurance purchased during the period, AIG said.

“A deal can come back to haunt,” Mary Duffy, global head of M&A insurance, said in a statement. Despite companies’ due diligence efforts in a merger, “even the most sophisticated and largest companies can and do miss critical issues during the deal process.”