Warranty and indemnity (W&I) insurance claims are likely to be a constant feature in mergers and acquisitions (M&A) deals going forward, with almost one in five policies receiving a claim notification this year, according to analysis by AIG.
The company’s third annual W&I report looks at claims arising from AIG policies that cover breaches in representations and warranties for M&A deals with a total value of $700 billion.
AIG said that with such a high claims frequency (19.4%), it is clear that even the most thorough due diligence process can fail to uncover potential sources of dispute and litigation.
It added that the product is now more often used as a deal facilitator, although there are some sectors that are more prone to certain W&I risks than others.
The report showed that breaches relating to compliance with laws were most common for Health & Pharma (31%), while financial statements breaches were most common for Financial Services (25%) and Manufacturing (17%), and tax breaches for Technology firms (25%).
AIG also found that the biggest deals tend to have the highest average claims frequency (24%) and the largest average claims ($19 million), although the size of claims on smaller deals is increasing.
“Our aspiration,” said Mary Duffy, Global Head of M&A Insurance at AIG, “is that over time – as we build and refine this claims data – it can be used to help clients and their counsel to negotiate better deals. By better understanding where deals get tripped up, they may be able to refine the way they carry out their due diligence.”
The value of global M&A exceeded $3 trillion for the fourth consecutive year in 2017, with global deal making approaching $900 billion by the end of March 2018, an 18% increase compared to Q1 2017.
While there are incentives in place for buyers to conduct a thorough due diligence process, increased competition for targets together with demands from investors to deploy capital, put additional pressure on deal timetables.
Cross-border deals that involve multiple jurisdictions are also a driver of warranty breaches, particularly in developing markets, as these transactions tend to more complex.
AIG added that an influx of new M&A insurers into the specialist W&I space has led to softening rates and broadening coverage, warning that carriers need to careful to ensure the market remains sustainable in the long term.
