Study looks at policies covering approximately
1,600 deals worth more than $400 billion in deal value
The frequency of M&A insurance claims is rising as large
deals prove risky and the average payout on the most severe
category of claims tops $20 million, according to an American
International Group, Inc. (NYSE:AIG) study of its representation
and warranty (R&W) claims. AIG is one of the largest writers of
R&W insurance globally.
This Smart News Release features multimedia.
View the full release here:
http://www.businesswire.com/news/home/20170420005723/en/
(Photo: Business Wire)
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 $100,000) during the
period were $1 million or more.
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 Mary Duffy, Global
Head of M&A Insurance, AIG. “We are paying sizeable claims,
sometimes writing eight-figure checks in different
geographies.”
CLAIMS FREQUENCY
The study found one-in-four policies written on deals over $1
billion resulted in a claim. Overall, 18 percent of all global
R&W policies written by AIG during the 2011 to 2015 period
resulted in a claim.
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 Michael Turnbull, Americas M&A Manager, AIG.
“At the same time, we’re seeing claims across the board in terms of
severity, which means that the product is responding to a host of
different situations.”
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 $400 billion in
deal value, though the number of material claims was smaller.
Policies written during the study period still hold the potential
for a claim.
American International Group, Inc. (AIG) is a leading global
insurance organization. Founded in 1919, today AIG member companies
provide a wide range of property casualty insurance, life
insurance, retirement products, and other financial services to
customers in more than 80 countries and jurisdictions. These
diverse offerings include products and services that help
businesses and individuals protect their assets, manage risks and
provide for retirement security. AIG’s core businesses include
Commercial Insurance and Consumer Insurance, as well as Other
Operations. Commercial Insurance comprises two modules – Liability
and Financial Lines, and Property and Special Risks. Consumer
Insurance comprises four modules – Individual Retirement, Group
Retirement, Life Insurance and Personal Insurance. AIG common stock
is listed on the New York Stock Exchange and the Tokyo Stock
Exchange.
Additional information about AIG can be found at www.aig.com and
www.aig.com/strategyupdate | YouTube: www.youtube.com/aig |
Twitter: @AIGinsurance | LinkedIn:
http://www.linkedin.com/company/aig. These references with
additional information about AIG have been provided as a
convenience, and the information contained on such websites is not
incorporated by reference into this press release.
AIG is the marketing name for the worldwide property-casualty,
life and retirement, and general insurance operations of American
International Group, Inc. For additional information, please visit
our website at www.aig.com. All products and services are written
or provided by subsidiaries or affiliates of American International
Group, Inc. Products or services may not be available in all
countries, and coverage is subject to actual policy language.
Non-insurance products and services may be provided by independent
third parties. Certain property-casualty coverages may be provided
by a surplus lines insurer. Surplus lines insurers do not generally
participate in state guaranty funds, and insureds are therefore not
protected by such funds.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20170420005723/en/
AIGMediaMatt Gallagher,
212-458-3247matthew.gallagher2@aig.comorJessica McGinn,
212-458-4215jessica.mcginn@aig.comorInvestorsLiz Werner,
212-770-7074elizabeth.werner@aig.com
American (NYSE:AIG)
Historical Stock Chart
From Mar 2024 to Apr 2024
American (NYSE:AIG)
Historical Stock Chart
From Apr 2023 to Apr 2024