Liberty Global Transaction Solutions (GTS), part of Liberty Mutual Insurance, has released its 2021 M&A claims briefing, based on the company’s analysis of its own M&A insurance claims for the past decade. The report examines M&A insurance claims by industry, region and cause and gives detailed data about the types of deals and from which industry are most likely to lead to a claim.
Key findings of the report include:
- COVID-19 has not led to the predicted surge in “buyer’s remorse” claims – but it has fundamentally changed the M&A risk landscape
- Claims are being made more quickly after policy inception. Fifty-seven per cent (57%) of claims were made in the first 12 months of the policy period in 2020, up from 48% in 2019
- Medium-severity claims ($1 million to $10 million) were Liberty GTS’s fastest-growing type of notification in 2020, with the number of claims in that category nearly doubling over 2019. The company saw a slight drop in the number of high-severity claims ($10 million and above), but those it did receive were for higher amounts
“Concern that partially completed M&A deals that were finalized during COVID – when business fundamentals changed rapidly and due diligence was harder to undertake – might lead to increased numbers of claims has not yet materialized,” said Rowan Bamford, president of Liberty GTS. “However, the rapidly changing environment did disrupt underwriting norms, fundamentally changing the nature of some previously well-understood risks – travel, hotels and real estate, to name but three. We expect new COVID-related claims trends to emerge in the next few years as a result.
“The increasingly early notification of claims partly reflects the fact that many lawyers are beginning to carry out a post-deal review of the target business as a matter of course with the specific objective of identifying potential breaches for a possible claim,” Bamford said. “Claims processes for deals are now becoming ‘institutionalized,’ and we see the results, although most important for clients is the fact that our statistics show that claims made in the first year are the most likely to be paid.”
Causes of claims
The report examined the most common causes for claims. Among its findings:
- Tax-related measures are the cause of one-third of pre-claim notifications in Europe and the Asia-Pacific region, but actual large tax losses are rare
- Accounting and financial issues make up 41% of high-severity claims. Many of these claims involve stock control or revenue recognition issues
- Cyber claims, claims related to failed IT projects and claims related to class-action wage disputes are all on the rise
- A number of high-severity claims have involved “founder” sales, with some of these involving suspected fraud. The most common type of fraud involves management fabricating revenue to boost the bottom line
“It has been fascinating to study the industry-by-industry and region-by-region differences in M&A cover and claims. The results give us detail on exactly what really leads to claims in a whole variety of different scenarios,” Bamford said. “Of particular interest has been our analysis of the growth in cyber and IT-project claims, reflecting the critical importance of digital infrastructure to all types of business today.”
Bamford said that clients could take comfort in the fact that notifications about tax matters on policy rarely resulted in large claims, suggesting that although investigations occurred frequently, most tax issues and liabilities were caught during underwriting due diligence.
“Using this research, our clients can take comfort from the fact that not only do our underwriters understand exactly the risks dealmakers face, but we share this information back to help our clients know where their due diligence time and energy can be most usefully spent,” Bamford said. “The ultimate comfort is, of course, the cover, and the knowledge that we paid out over $45 million in claims to our clients in 2020.”