December 2023 in Brief: Mergers & Acquisitions

Reps & Warranties Insurance Claims Results: 2023

By Yelena Dunaevsky, Esq., SVP & Partner, Transactional Insurance

Last month, AIG and Euclid Transactional, two very large players in the representations and warranties insurance (RWI) market, released their annual RWI claims studies. To put things in perspective, AIG has paid $1.4 billion in RWI claims over the last 20 years, insuring 7,000 deals globally since the late 1990s. Euclid bound over 5,800 policies and paid over $660 million in claims. Earlier in the year, Liberty GTS, another large carrier that averages 1,500 M&A deals per year globally, also released its annual study. A few interesting trends emerged and will be instructive for all M&A practitioners as they begin to plan deal structures and negotiating strategies for 2024.

• The presence of sophisticated buyers and sellers does not diminish risk. 90% of Euclid’s paid losses were from claims involving target companies with audited financials, and more than 33% of paid losses involved a top 25 private equity firm (ranked by assets under management) on at least one side of the deal.
• Claims come quickly. Euclid noted that claims that were noticed within 12 months of closing constituted 71% of paid losses. Similarly, Liberty noted that 73% of its notifications were received within the first two years of the policy period. Interestingly, Liberty also noted that in the past 12 months, 27% of notifications were made more than two years after the policy, compared with 14% for the preceding 12 months.
• Small deals can cause big problems. Smaller deals resulted in 60% of loss dollars for AIG, and many of those claims were severe relative to the size of the transaction.
• Underwriters don’t love emerging markets. Compared to 7% of global losses, 38% of AIG’s claim payments within the emerging markets segment were over $10 million.
• What are typical claim sizes? Sizes of claims differ, but as an example, Euclid’s average claim payment was $5.8 million, which constituted 34% of the limit bought, and its largest payment was $36 million.
• Which reps result in claims?
  • Liberty noted that it saw a substantial rise in claim notifications involving condition of asset issues.
  • Smaller deals struggled with the “compliance with law” representation more than larger deals, according to AIG. Liberty has also seen more issues with the compliance with laws reps.
  • Financial statements reps have traditionally been leading claims in the RWI market, and Liberty noted that its largest claims continue to stem from accounting and financial issues. Euclid noted that breaches of reps related to financial statements and customers and contracts (“mostly relating to the loss of a customer or the failure to deliver what was contractually promised”) were its two most severe categories of claims, representing 66% of their paid losses. Interestingly, Euclid noted that it received financial statement claims for target companies with audited financials at a higher rate than on unaudited target companies.
  • Liberty expects to see an uptick in material contract claims and third-party claims due to the current economic environment.
  • Liberty has also seen an increase in notifications involving IP and tax issues.
• Were there more claims in 2023? Liberty’s Americas region was the only region to register an increase in RWI claim notification count in 2023. AIG noted that its global claim notification frequency has moderately declined from one in five to one in six, but it also noted that the number of claims with loss payments has been steadily increasing since 2012. Euclid’s claim frequency has held relatively steady over the years at around 20%.
• How many claims get denied? Euclid notes that out of the 1,040 claims it has received since 2016, it denied less than 3%.

AIG’s study is available here. Euclid’s study is here. Liberty’s study is here.