Liberty Global Transaction Solutions (GTS), part of Liberty Mutual Insurance, published its 2023 M&A claims briefing today. This is the fourth annual briefing based on the company’s analysis of Liberty GTS’s own M&A insurance claims since 2019.
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 sector are most likely to lead to a claim, as well as highlighting current trends.
Headline takeaways from the 2023 report include:
• The global Representation & Warranty (R&W) notification count increased once again in 2022, but has fallen back in 2023 YTD. This increase reflects the substantial rise in the number of risks that were insured at the end of 2020 and throughout 2021 off the back of record deal activity in that period. However, the indication is that the significant drop-off in deal flow in the last 18 months is starting to feed into fewer claims.
• The early indication is that notification frequency has picked up slightly on the 2021 Year of Account (YOA) after dropping back on the 2020 YOA.
• There has been an increase in the number of R&W notifications being made more than two years post-inception of the policy.
• We are seeing more R&W notifications involving multiple issues being made just before expiry of the general warranty period.
• R&W notifications where the (potential) loss exceeds the retention have fallen, but this is expected to be short-lived given the pressure that retentions have come under recently.
Liberty GTS President Rowan Bamford commented: “Whilst the last 12 months may have been quiet from a dealmaking perspective, the same cannot be said from a claims perspective. The predicted uptick in R&W claims based on the heightened M&A activity of 2021 and early 2022 is now upon us. This is the time where insurers that have invested in their claims function by building out a specialist in-house team dedicated entirely to servicing their claims, like Liberty GTS, will really differentiate themselves from their competitors.”
Causes of claims
The briefing examined the most common causes of claims and found some interesting trends:
• Tax related issues continue to account for a large number of notifications. In 2022, they made up 28% of notifications compared to 21% in 2021. However, this was to be expected as national and local governments look to increase tax revenues significantly to fund their borrowing and expenditure in connection with COVID-19-related measures.
• The largest claims continue to stem from accounting & financial issues. These made up 12% of notifications in 2022 (up from 9% in 2021). These types of claims are often for large amounts as demonstrated by the fact that they accounted for 28% of $1m+ claims over the last 18 months – the highest of any breach type by a significant margin.
• Claims involving intellectual property issues are becoming increasingly common and costly. The notifications involve trade secret theft and IP infringement claims. These made up 9% of notifications in 2022 (up from 6% in 2021). Unsurprisingly, they are most common in the IT, pharma, and consumer products sectors.
• A noticeable increase in R&W claims involving condition of asset issues over the last 12 months.
• A rise in the number of notifications involving third party claims means that M&A insurers are facing an increased exposure from defense costs spends which is compounded by the current inflationary environment.
Bamford commented “The claims picture for M&A insurance has developed this year. We are still seeing a number of tax-related claims notifications, however, this year we have also seen a significant uptick in the number of claims related to condition of asset issues. The current economic environment creates the conditions for this trend to continue as some companies may look to reduce CAPEX spend on new assets or defer planned maintenance on older assets to free-up cash.
“Looking ahead, with many condition of asset claims being quantified as the cost of repairing or replacing the relevant asset, the current high inflation economic environment is likely to drive-up the size of these claims further. The result is that condition of asset claims are at the forefront of many M&A insurers’ minds this year. However, our underwriters are there to support our clients through their transactions in these challenging economic times.”
Liberty GTS Claims Briefing 2023
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