M&A Insurance Insights from 2023

Claims processing and pay-outs

As at Q2 2024, for Aon-placed policies we have now seen more than 1,000 claims filed in North America, and aggregate paid claims (net of deductibles erosion) of more than $1.25 billion for Aon clients in North America.

For the same period – as at Q2 2024 – in EMEA, we have seen approximately 300 claims for Aon-placed policies notified, and aggregate paid claims (net of deductibles erosion) of approximately $140 million for Aon clients in EMEA.

Warranty hot spots

Figures 3 and 4 illustrate certain warranty hot spots based on Aon’s claims data for the last seven and nine years for EMEA and the US, respectively. Broad categories of warranty which cluster the highest number of claims under both R&W policies in the US and W&I policies in EMEA placed by Aon are:

compliance with laws (16.3% US; 5.5% EMEA); financial statements (14.4% US; 17.8% EMEA); tax (11.5% US; 28.3% EMEA); and material contracts (9.9% U.S.; 5.0% EMEA)

In addition, a relatively high number of claims are made under R&W policies for breach of undisclosed liabilities representations (11.9%) in the U.S. and a relatively high number of claims are made under W&I policies for breach of litigation (7.8%) and employment (5.0%) warranties in EMEA.

There is some parity between the U.S. and EMEA in terms of average claims pay-out for certain types of warranty breach over the same seven- and nine-year period, with breaches of financial statements (37.0% U.S.; 30.9% EMEA) and material contracts (30.70% U.S.; 12.9% EMEA) attracting the most paid loss in both regions. It is notable that both these areas show a much higher proportion of actual claims paid relative to claims made, suggesting a lower claims volume but significantly higher financial impact.

Given that losses arising from breach of financial statements and material contracts tend to impact the purchase price paid for the acquired company (and loss may be claimable on a multiplied basis, depending on the European jurisdiction), it is perhaps not surprising that these warranties represent the biggest drivers of loss.

Given this pattern across both the U.S. and EMEA regions from this claims analysis, we suggest a valuable ‘feedback loop’ can be identified which helps clients and their advisers factor this experience into their diligence scoping and materiality thresholds at the kick-off stage for the next M&A deal.

Awareness of this feedback loop ensures not only that R&W/ W&I cover can be optimized for the client by positioning and calibrating the due diligence appropriately from the outset; it also means that some of the potential underwriting hotspots referred to under Coverage can be anticipated to achieve more efficient deal execution.

Tax

Tax insurance continues to be the go-to solution globally to address known tax risks excluded by R&W and W&I policies and today can also be used around the world to add certainty to tax outcomes facing companies and other tax-payers where there is no third party transaction, such as an internal corporate reorganization or transfer pricing concerns.

In the U.S., tax credits have long been a favoured way of incentivizing investment and part of the tax insurance landscape. In fact, protecting purchasers of investment tax credits in the 1980s was the objective of the original tax insurance policies. Today, the renewable energy industry is heavily relying on tax insurance as a means to facilitate the tax equity financing of renewables projects.

The recent enactment of the Inflation Reduction Act (IRA) in the U.S. is spurring huge growth in investments in renewable energy projects and has secured tax credits as one of the primary federal incentives to encourage investment in solar, wind, and other renewable energy asset classes. With the introduction of the ability to transfer the tax credits as a result of the IRA, we are now also seeing tax credit buyers and tax credit sellers protected by tax credit insurance.

As a result of the IRA, the amount of tax credits that are being insured on any given project are increasing primarily as a result of the new tax credit ‘adders’.⁴ These adders allow for a project to qualify for a higher tax credit percentage than they otherwise would have prior to the passage of the IRA. Some of the types of adders available include projects that use domestic content (products produced in the U.S.), projects that are located in an ‘energy community’ (i.e., an area with significant employment related to coal, oil, or natural gas), and/or that the project is in a low-income community. Tax credit insurance is providing certainty that projects will qualify for these adders.

This article was written by Aon’s M&A and Transaction Solutions team as contribution to the Global M&A Intelligence Report 2024 by DLA PIPER.