Liberty Publishes Report on M&A Risks & Claims

Liberty Global Transaction Solutions (GTS), part of Liberty Mutual Insurance, has published its 2021 M&A claims briefing.  This is the second annual briefing based on the company’s analysis of Liberty GTS’s own M&A insurance claims for the past decade.

The report looks at M&A insurance claims by industry, by region and by cause, giving detailed data about the types of deals and from which industry are most likely to lead to a claim, as well as highlighting current trends.

Headline takeaways from the 2021 report include:

• COVID has changed the M&A risk landscape fundamentally

• Claims are being made earlier. 57% of claim notifications were made in the first twelve months of the policy period in 2020, a significant increase compared to 48% of claims in 2019.

• “Large” claims are being discovered and notified more quickly than in the past.  52% were notified in the first twelve months of policies written in 2018 – 2020, as opposed to 41% in 2015 – 2017. They are also getting larger.  Within the category of claims grouped together under the banner ‘large’, the overall value is increasing, with a notable increase in $50m plus claims in 2020 compared to 2019.

Liberty GTS President Rowan Bamford commented: “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.  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.  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 briefing examined the commonest causes for claims and found some interesting trends:

• Tax-related matters are the cause of one-third of pre-claim notifications in Europe and Asia-Pacific, but actual large tax losses remain rare.

• Accounting and financial issues make up 41% of “high” severity claims.  Many of these involve stock control, or revenue recognition issues.

• Cyber claims, claims relating to failed IT projects and claims around class-action wage disputes are all increasing in frequency.

• A number of “high” severity claims have involved ‘founder’ sales, and some of these have involved suspected fraud.  Overall, the most common type of fraud involves management fabricating revenue to boost the bottom line.

Liberty GTS President Rowan Bamford commented “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.” 

“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.”

“For clients there is comfort in the fact that notifications about tax matters on policies rarely proceed through into large claims, suggesting that although investigations occur regularly, most key tax issues and liabilities are being successfully picked up during underwriting due diligence.”

“Using this research, our clients can take comfort from the fact that, not only do our underwriters work to understand exactly the risks dealmakers face, but that we share this information back to help our clients know where their due diligence time and energy can most usefully be spent.  The ultimate comfort is, of course, the cover, and the knowledge that we paid out over $45m in claims to our clients in 2020.”