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European companies drive surge in M&A claims during Q1

European companies filed more notifications against merger and acquisition (M&A) policies in the first quarter of 2021 than for the whole of the second half last year, according to new analysis of global M&A claims by Liberty Mutual’s Liberty Global Transactions Group (GTS).

The EMEA region also booked the most high-severity claims worth more than $10m in the first quarter, which GTS says will “add to growing calls for rate increases” in Europe.

Based on the company’s own M&A insurance claims data, the report reveals that M&A notifications jumped by 40% worldwide in 2020, but Covid-19 is not thought to have been such a big driver of claims as first feared. In the EMEA region, M&A claim notifications were up 17% last year.

Higher claim notifications may have peaked in Q1 2021 though, and are less likely to be a sustained trend driven by the pandemic, GTS says.

President of Liberty GTS Rowan Bamford said concerns that partially completed M&A deals finalised during disruption caused by Covid-19 – which hindered due diligence and raised fears that buyers had overpaid – might lead to a “flood” of M&A claims, have not yet materialised.

“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,” Mr Bamford said. He predicted an uptick in claims involving financial statement issues, given the difficulties of auditing targets offsite.

Mr Bamford said lawyers have started to routinely conduct post-deal reviews of acquisitions, with the “specific objective” of identifying potential breaches for a claim. “Claims processes for deals are now becoming ‘institutionalised’,” he said.

Despite the increase in notifications, GTS says in its report that the number of claims paid has held steady at 25% of notifications.

Liberty GTS says it insured a record number of M&A deals in the second half of 2020, with the number of insured risks up 45% to 550 after deals earlier in the year were put on ice as the pandemic took hold.

Mr Bamford said some of the increase in claim notifications reflects the growth in its M&A portfolio, particularly in the US where claim notifications surged by 40% in 2020. Mr Bamford said M&A deals have continued apace in all regions during 2021, driving a high demand for M&A insurance but that is also certain to be followed by an increase in claims activity.

Smaller M&A deals below $250m accounted for 49% of Liberty GTS’s claim notifications between 2018 and 2020, down from 62% between 2015 and 2017. During the same period, the number of notifications for larger deals worth more than $500m has increased from 30% to 39%, which the company said reflects growth in its cover for larger risks.

The majority of paid claims from 2019 (65%) have been against smaller risks of less than $250m. The company says it has seen far fewer payments on deals worth more than $500m, which accounted for 18% of claims paid since 2019, given higher retention on larger M&A transactions. GTS found that accounting and financial issues accounted for 41% of high-severity claims worth more than $10m, with many involving stock control and revenue recognition problems.

In the EMEA region, tax is the leading driver of claim notifications at 35%, although many are precautionary, followed by accounting and financial at 13% and litigation at 10%. The EMEA region has accounted for 39% of loss locations globally since 2018, according to GTS figures. The UK is the leading European loss location, accounting for 22% of notifications, followed by Germany at 16% and France and Italy both at 11%.

Cyber claim notifications are an “emerging area of risk”, says GTS, which has received several notifications involving cyberattacks during the past 12 months. However, it says M&A insurers expect businesses to have bespoke cyber policies and it has in many cases excluded cover for cyber-related issues in M&A policies, or applied limits.

GTS also found an increase in claims around wage disputes, particularly in the US and Australia, and raised concern over a number of high-severity claims around ‘founder’ sales, with some involving suspected fraud. Overall, the most common type of fraud is rooted in management revenue fabrications, GTS says.

The report also reveals that claim notifications are being made earlier, with 57% of claim notifications filed in the first 12 months of the policy period in 2020, up from 48% in 2019. Large claims are also following this trend, with 52% notified in the first 12 months of policies written in 2018 to 2020, up from 41% during 2015 to 2017.

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