Global merger and acquisition activity has been on the rise in recent years. Though the pandemic has created a slowdown on activity, many expect deals to rebound in the near term. Reports from 2019 have shown that M&A deals have resulted in more than $10 trillion in domestic transactions since 2013.
Historically, M&A buyers would seek indemnification from the seller, including an escrow of approximately 10% of the purchase price as a backstop against such indemnification obligations.
Enter representations and warranties insurance.
Used to help protect against financial losses arising from a breach in representations by the seller, reps and warranties insurance provides both buyers and sellers with a solution that can help reduce financial risks arising from the transaction and assists in facilitating clean exits from investments on both the buy- and sell-side.
Anna Rozin, North America M&A manager for AIG, has seen the R&W product grow: “AIG has been underwriting R&W insurance for over 20 years, and we have now really seen the product come to maturity,” she said.
This deep understanding of the product has enabled AIG’s team to recognize and develop strategies to help in R&W claims management.
“We’ve seen the complexities of an R&W claim and how they can have a lasting impact on the target business,” said Rozin.
For several years, AIG’s team of M&A experts has released a global representations and warranties claims study to give the marketplace a snapshot of R&W claim trends.
For the 2020 edition of the study, entitled “M&A: A rising tide of large claims,” the global AIG team have identified the biggest trend to keep an eye on moving forward: A rise in the severity of R&W claims.
Here’s what the team learned.
The AIG study reviewed claims made during the study period spanning policies written between 2011 and 2018 covering approximately 3,500 deals worth more than $1.3 trillion in deal value. In that time frame, there were close to 700 claims made. What the AIG team gleaned from their findings is that there has been a significant increase in the severity of representation and warranties claims in the last several years.
“We saw an uptick in the portion of claims made that are over $10 million,” Rozin said. “And we found that there are a few reasons contributing to that increase in severity.”
These claims tend to assert breaches of financial statements and material contracts representations, according to the study.
“The financial statements and material contracts claims increased on a percentage basis, significantly, when we look at claims over a million dollars,” Rozin said.
Looking back at previous years, the AIG team was also able to see just how much claims have grown in terms of magnitude.
In 2017, for example, the portion of material claims that were over $10 million was around 8% of material claims. Now, looking at the data collected as of 2019, 19% of material claims are over $10 million.
“That’s a big jump in a short period of time,” said Rozin.
“We’ve seen enough now over a long enough period to know that this claims experience is not an anomaly. The focus needs to shift to the sustainability of the product for the long term, rather than the continued deterioration of rate that we’ve seen in the market in years prior.”
AIG’s study provides a deeper look at claims severity, as well as reviewing other key trends that are impacting the R&W claims space. The study equips buyers, sellers and M&A advisers with a clear snapshot of R&W claims activity, further providing them with the tools they need to make informed decisions.
But as the representations and warranties claims landscape changes and shifts alongside M&A activity, those searching for coverage should also be looking for a partner in their insurance carrier.
“Reps and warranties insurance policies have a long tail, and the claims can be very complex,” said Rozin. “When selecting a carrier, insureds should think about partnering with a team that has proven experience in handling those claims and has made the investment to be in the M&A insurance business for the long term.”
To learn more, visit: https://www.aig.com/business.
This article considers M&A claims in the context of an AIG insurance program only. Reliance upon, or compliance with, any of the information, suggestions or recommendations contained herein in no way guarantees the fulfilment of your obligations under your insurance policy or as may otherwise be required by any laws, rules or regulations. The purpose of this document is to provide information only and you should not take any action in reliance on the information contained in this document. This document is not a substitute for you undertaking your own investigations and obtaining professional or specialist advice. No warranty, guarantee, or representation, either expressed or implied, is made as to the correctness or sufficiency of any representation contained herein. AIG does not accept any liability if this document is used for an alternative purpose from which it is intended.
The scenarios described herein are offered only as examples. Coverage depends on the actual facts of each case and the terms, conditions and exclusions of each individual policy. Anyone interested in the above products should request a copy of the standard form of policy for a description of the scope and limitations of coverage.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with AIG. The editorial staff of Risk & Insurance had no role in its preparation.