GTS’ Americas region saw the smallest decline in R&W notification count in 2023 and was the only region to register an increase in notifications in Q1 2024. The Europe, Middle East and Africa region saw a notable drop in R&W notifications in 2023, but it was the Asia Pacific region that experienced the largest fall, with the lowest number of R&W notifications in three years
LONDON: Liberty Global Transaction Solutions (GTS), part of Liberty Mutual Insurance, published its 2024 M&A claims briefing on Wednesday.
The report looks at M&A insurance claims by industry, region and cause, giving detailed data about the types of deals and industries most likely to have claims, as well as highlighting other key trends.
This is the fifth annual report based on Liberty GTS’s M&A insurance claims since 2019.
Top takeaways from the report include:
• GTS’ global Representations & Warranties (R&W) claims notification count fell to 120 in 2023, a year-over-year decrease of approximately 21%. The decline continued in 2024, but it is unlikely that notification activity will drop much further from current levels as policy count has started to pick-up again, driven by the recent increase in deal activity, particularly at the lower to mid-end of the market.
• GTS’ Americas region saw the smallest decline in R&W notification count in 2023 and was the only region to register an increase in notifications in Q1 2024. The Europe, Middle East and Africa region saw a notable drop in R&W notifications in 2023, but it was the Asia Pacific region that experienced the largest fall, with the lowest number of R&W notifications in three years.
• Notification frequency fell slightly from 2022 year of account (YOA) and 2023 YOA. This could reflect the calmer deal environment in 2022 and 2023, with agreements taking longer to complete and buyers taking advantage of the less competitive landscape to scrutinize businesses more closely.
• A high proportion of R&W notifications involving an alleged breach of a general warranty are received within 12 months of closing and more notifications are made in the last few months of the general warranty period, especially in the Americas. This suggests that insureds are becoming more systematic about assessing whether they have a policy claim post-acquisition and have processes in place to do this, especially towards the beginning and end of the policy period.
Liberty GTS President Rowan Bamford commented: “High inflation and high interest rates in most global economies have reduced the viability of many private equity plays, and this has impacted the number of deals everywhere, especially at the larger end of the market.
“Despite these challenging market conditions, a number of new entrants have launched into the M&A insurance sector and several existing carriers have expanded their geographical footprint. These new entrants have attempted to win market share by cutting rates and broadening coverage.”
“However, this underwriting dynamic can’t be sustainable, and we expect that rates – having already bottomed out following the return of more normal dealmaking conditions – will now start to increase and coverage enhancements be pared back or become more expensive,” he said.
Causes of claims
The briefing also examined common causes for claims and found some interesting trends:
• Just five breach types produced 97% of the dollars GTS paid or reserved, even though, collectively, these breach types accounted for 72% of notifications received to date.
• Accounting & Financial issues made-up only 14% of notifications to date yet represented 59% of the dollars paid or reserved – the most of any breach type some considerable distance – at an average cost of around $15.5m per claim.
• Material contract issues made-up only 7% of notifications to date and resulted in a similar proportion of the dollars paid or reserved. However, while these claims were comparatively rare, they produced the highest cost of any breach type, with an average cost of around $20m per claim.
• While tax-related issues represented a large percentage of notifications, they produced a relatively small proportion of paid and reserved claims.
• Around 19% of third-party claims related to compliance with laws issues, with government investigations into past business practices the most predominant type of loss noticed. A further 7% involved intellectual property disputes, while wage & hour issues made up 13% of these claims. Defense costs for all of these types of claims presented M&A insurers with increasingly significant levels of exposure. This recent surge in costs were driven by macroeconomic factors, particularly inflationary pressures, which prompted law firms to increase their hourly rates, which drove up the overall cost of the claim for insurers.
Liberty GTS President Rowan Bamford commented,“While tax-related issues still make up a large proportion of notifications, we are increasingly seeing an uptick in third-party claims. This has significant implications as R&W policies will typically cover the costs associated with the defense of these claims, and these are rising steeply, increasing insurers’ costs.”
As a result, and as exposure to third-party claims becomes more frequent and more severe, we expect that many M&A insurers will apply more scrutiny at the underwriting stage around litigation risk in general and will start to take increasingly robust positions in respect of any potential exposures that are identified during due diligence, even if it is classified as being a low-risk item, he said.
This year saw GTS’ largest claims payment – €46m – which represents a watershed moment for the product. It demonstrates unequivocally that even the most severe claims are getting paid.
“We have paid out or reserved almost $340m in Insured Loss involving R&W claims,” said Bamford.
A significant proportion of this amount has been paid or reserved in the last 12 months as we are seeing an increasing number of claims that involve deals from the M&A boom of 2021 – when a record number of policies were written – maturing into paid claims. Indeed, we have paid out or committed to pay out around $125m this year alone through to the end of August. This demonstrates that buyers with good claims continue to derive significant value from their decision to purchase an R&W policy.