A quarter of M&A deals over $1bn end in a claim: AIG

The number of M&A insurance claims is increasing and large transactions are proving to be riskier with the average pay-out topping $20 million, according to a study of representation and warranty (R&W) claims by American International Group (AIG).

The study previously looked into claims severity between policy years 2011 and 2015, however this year, it found that more than half of all material claims – those incurring more than $100,000 – during the period were $1 million or greater.

Just under 47 percent of the claims were between $100,000 and $1 million, with an average pay-out of $300,000.

Another 47 percent were between $1 million and $10 million, with an average pay-out of $3.5 million.

Slightly fewer than seven percent were more than $10 million, with an average pay-out 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 at AIG. “We are paying sizeable claims, sometimes writing eight-figure checks in different geographies.”

Michael Turnbull, Americas M&A manager at AIG, added: “A maturing market mixed with pressure to execute transactions quickly could be a leading factor behind the increase in frequency. 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 27 percent of claims were reported in the first six months after a deal, a majority of 48 percent of claims were reported between six and 18 months afterwards.

The study showed that claim triggers were mostly steady year-on-year with one exception, “compliance with laws”, jumping to 15 percent of alleged deal breaches, compared to five percent last year.

Top five commons breaches claimed included financial statements (20 percent), compliance with laws (15 percent), discrepancies in a company’s contracts (14 percent), tax related (14 percent), or intellectual property (8 percent).

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