Liberty Global Transaction Solutions (Liberty GTS) has announced findings from its inaugural Mergers & Acquisitions claims study.

“Having issued more than 2,000 policies since 2010 and managed over 300 notifications of warranty breaches across the globe, we are in a unique position to uncover M&A claim trends that can help deal makers and advisors better understand and manage their exposure,” said Liberty GTS President Rowan Bamford. “This is vitally important now as the M&A insurance industry grapples with four key challenges: an over-supply in capacity, a significant drop-off in deal flow, an increase in claims activity and the emerging risks caused by COVID-19.”

Key study findings include:

Impact of COVID-19

While COVID-19 has yet to result in a noticeable increase in M&A claims activity, it is possible that the pandemic may result in certain types of claims becoming more common, such as those related to labor issues or key customer insolvency.

Notifications are rising

There has been a noticeable uptick in notifications over the last few years, with about 19% of policies now receiving a notification.  However, no more than 25% of these notifications result in actual claims – a statistic that has remained relatively consistent over the years, despite rising notification frequency.

Smaller deals produce more notifications

Deals with an estimated value of $250 million or less are more likely to result in notifications and account for the largest paid claims, compared to deals valued at more than $1 billion. They have also resulted in the most pay-outs of policy limits.

Notifications are being made sooner

Notifications are being made more quickly than in the past. However, there is a notable divergence when it comes to deal size, with most notifications on smaller deals being made in the first year of the policy period, while the majority of notifications on the largest deals happen in the second year of the policy period.

Common breaches leading to notifications and claims

The most frequent notifications involve tax-related breaches, although many of these are filed as a precaution and rarely develop into substantive claims. Claims relating to breaches of financial statement warranties continue to be common, and the value of these claims can be significant. Claims relating to breaches of material contracts warranties – already common in the Americas – are becoming more frequent in other regions, making it the fourth most frequent breach type globally.

High severity claims are still rare

Claims for an amount in excess of $10 million are relatively uncommon – they made up just 8% of notifications globally, although the Americas has seen slightly more of these types of claims compared to the Asia Pacific and Europe, Middle East and Africa regions.

New claims trends are emerging

Recently, there has been a large number of claims relating to stock and inventory issues, as well as claims involving more niche issues, such as software licensing shortfalls and the failure to comply with health and safety legislation.

“We issued our first claims study during a year in which we have seen a great amount of uncertainty in the Mergers & Acquisitions space,” said Bamford. “It’s fitting that it comes at a time when potential insureds – with good reason – are focused more than ever on the strength of an insurer and its approach to claims.”