23% M&A deals over USD1bn end in a claim: AIG

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 USD20 million, according to an American International Group, Inc. (AIG) study of its representation and warranty (R&W) claims.

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 USD100,000) during the period were USD1 million or more.

A closer look at the distribution of material claims showed a substantial amount of dollars paid across the severity spectrum. Slightly fewer than 47 percent of claims were between USD100,000 and USD1 million, with an average payout of USD300,000. About 47 percent were between USD1 million and USD10 million, with an average payout of USD3.5 million. Slightly fewer than seven percent were more than USD10 million, with an average payout of USD22 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.”

The study found one-in-four policies written on deals over USD1 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.

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.