AIG: Post-Merger Problems Driving M&A Coverage Claims

Nearly 14 percent of the M&A policies that American International Group wrote globally between 2011 and 2014 resulted in a claim, the insurer reported last week.

The period studied covered more transactions than in the past, a trend that AIG said reflected increased M&A activity and also higher use of representations and warranties insurance as part of the process.

AIG based its findings on a study of representation and warranties insurance claims data. The insurer said the results point to a big number of M&A transactions around the world developing post-closing issues involving breaches of deal terms.

Mary Duffy, global head of M&A insurance, said that transactions appear to remain risky for companies even with due diligence.

“A deal can come back to haunt,” Duffy said in prepared remarks. “Even the most sophisticated and largest companies can and do miss critical issues during the deal process.”

M&A insurance covers representations made by a buyer or seller. Specifically, buyers purchase representation and warranties insurance to protect against breaches of representations and warranties made by a seller, innocent or otherwise, during the deal process. In turn, sellers buy the insurance so they have protections against buyers claiming those kind of breaches.

Here are some additional findings:

• Financial statement misrepresentations accounted for 28 percent of all M&A claims filed during the period AIG studied—the leading cause of this class of claims.
• Tax errors or misrepresentations accounted for 13 percent of filed claims—the second most frequent claim type.
• Discrepancies that emerge from a company’s contracts were the third leading cause of M&A claims.
• Companies involved indeals worth $1 billion or more were the most likely to file claim damages after a transaction closes, with 19 percent of policies covering this deal size seeking a claim.
• Companies involved in transactions under $100 million were the next likeliest to file claims damages, with 15 percent of policies covering this deal size seeking a claim.
• Asia Pacific-based clients were most likely to file claims, but clients in Europe, the Middle East and Africa had the lowest rate of claims.
• Buyers in a transaction were more likely to buy an M&A policy—that’s 75 percent of policy purchases. Of that number, 13 percent reported a claim after a deal closed.
• About 25 percent of sellers bought policies, with nearly 19 percent (1 in 5), reporting a claim post-deal.

Buyers may not be as likely to file claims, but they were among the worst AIG dealt with. The insurer said that most of its top 15 claims reported during the study period came from buyer-owned policies.

About 74 percent of claims filed by policyholders hit within 18 months of a deal close; 26 percent were filed after the 18-month mark.

AIG studied a total of 132 claims covering approximately 1,000 deals worth more than $200 billion.

Source: AIG