M&A/Transactional Liability Insurance Emerging Insurance - - PowerPoint PPT Presentation

M&A/Transactional Liability Insurance

Emerging Insurance Solutions

RIMS Atlanta 2013

Discussion

1) Transactional Liability Primer 2) Representations and Warranties Insurance

• A. Claims
• B. State of the Market

3) Tax Liability Insurance 4) Contingent Liability 5) TL Insurance examples

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Transactional Liability Insurance

Purchase and Sale Agreement (PSA) Seller Buyer Unknown issues:

• Representations and Warranties policy
• Either buyer side or seller side

Known issues:

• Tax Indemnity Policy
• Contingent Liability / Risk policy
• Loss Portfolio Transfer
• Litigation Buyout

Transactions (ex. Merger, Recap, Asset Purchase)

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Agreement Seller Representations & Warranties Seller Specific Indemnities / Covenants Indemnification (limitations, survival, etc.) Disclosure Schedules

Reps and Warranty Insurance Policy

• A non-renewable policy that covers unidentified financial loss arising from

breaches of Seller representations

• Designed to bridge the gap between buyer and seller
• R&W insurance can be purchased by either the buyer or the seller in the

transaction.

• The insurance is not a substitute for the normal negotiations and due diligence

that you would expect to be conducted in an M&A transaction.

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Use of Reps & Warranty Insurance

Buyers

• Increase seller cap on liability or extend

survival period for warranties

• Corporates: concern over counterparty

security risk - need to meet minimum security levels for board approval

• Private buyers: use insurance strategically

to improve their bid position in auction or protect key relationships

• Can be used if the buyer has concerns

about the ability of the seller to service claims (distressed seller)

• HR dynamics - if Management is

continuing on to NewCo

Sellers

• Corporate Sellers – do not want to be

hampered with liabilities from disposals of non core assets as funds required by the business

• Clean exit for sellers (particularly

individuals)

• Private equity seller avoids tying up funds

in escrow

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Key Features of the Reps & Warranty policy

• Manuscript policy tailored to the transaction
• ‘Back-to-back’ with the PSA
• Covering breach of insured representations
• Duration matches survival period under PSA (at a minimum)
• Covering defense costs
• Covering fraud by the seller on a buyer-side policy
• No requirement to pursue the seller before claiming under the policy

(buy side = first party)

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The R&W policy will not cover

• Known issues (i.e. matters in the disclosure letter/buyer’s due diligence)
• Price adjustment features
• Fines and penalties
• Fraud by the seller on a seller-side policy
• Forward-looking warranties e.g. warranty guaranteeing future collectability
• f debts/accounts receivable

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R&W Claims examples

Example #1: Sale of stock in target by three individual shareholders to a large company for over $73 million. Seller-side policy responds to a claim brought by buyer for breach of the intellectual property R&Ws resulting from a third party claim of patent infringement.

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R&W Claims examples

Example #2: Acquisition of a retail chain by a strategic purchaser for over $128 million. Seller-side policy responds to a claim brought by buyer for breach of, among

• thers, the financial statements and accounts receivable R&Ws in connection with

the target’s issuance of over $1.5 million of gift certificates which had not been recorded in the financial statements.

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R&W Underwriting Process

• 1. Receive submission from broker once executed necessary NDA’s;

Submission:

• a. Audited Financials for Target Company;
• b. Current Acquisition Agreement,;
• c. Disclosure Schedules (if available)
• 2. Issue Non Binding Indication (NBIL)
• 3. If selected proceed with review of legal, financial and tax due diligence reports and

disclosure process;

• 4. Using Legal Engagement Fee, instruct outside counsel to review diligence/disclosure
• 5. Underwriting call with Insured
• 6. Draft and subsequently negotiate policy (parallel track)

Process works with deal timeframe

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Capacity, pricing and markets

• Limits available up to $300M per deal
• AWAC, AIG, Concord - RT Specialty, Hartford, Ambridge, Ironshore and

Beazley

• 2 to 4% premium ROL for normal deals (+DDF)
• 1% of deal value retention (minimum)

Increased popularity

• US volume estimated to double each year
• Marsh - $4B global placements for 2012, $1.4B in US (up 86% from 2011)
• Deals coming from Private Equity relationships & existing corporate

relationships

• Law firms are recommending the coverage as a strategic solution
• Banks are recommending the coverage as a catalyst to financing

R&W Insurance - State of the US Market

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Tax Liability Insurance

Known issue

• Designed to help a taxpayer reduce or eliminate a contingent tax exposure

arising from the tax treatment of a transaction, investment or other activity where the underlying conclusions supporting that tax treatment may be subject to future challenge by the relevant tax authorities

• Tax issues arising out of a wider corporate transaction
• Not where the tax issue is already subject to an audit or an adverse ruling

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Tax Liability Insurance - Underwriting

• Need a strong opinion from a law firm or accountancy firm
• Representation letter from the insured as to the underlying facts of the

transaction – we do not assume the implementation risk of the structure under the policy

• Premium range typically of 4% - 10% of limit of liability
• Policy retention – should equal estimate of potential defense costs

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Contingent Liability

• Insurance coverage intended to take risk (or contingency) away from the

transaction

• Litigation Buyout examples include existing litigation – Securities Litigation,

Cyber Breach, Employment Practices Litigation, etc.

• Will cover defendants or potential defendants only
• Coverage breadth key is “trigger” or attachment
• Premium range is typically 10 to 15% of limit
• Significant retentions generally apply

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Example: R&W Opportunity

Transaction: Private Equity firm selling Healthcare Management Company firm to another Private Equity firm for > $100m

Underwriting: Hired counsel to review relevant state statutes Premium: 3.5% ROL based on $20m limit Benefits: Helped bridge both deal “gaps”

Gap in negotiation based on Compliance Rep Seller PE wants clean break Solution: Seller Side Blanket Rep or Specific Rep policy

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Example: LPT/ERP Opportunity

Transaction: Regional Medical Center (Private Trust) being bought by large Hospital Network (Public Company)

Underwriting: Detailed analysis of claim history and risk management Premium:

• est. $5m based on underwriting

Benefits: Creates clean transaction for parties

Seller looking to move > $1m SIR Buyer looking for clean acquisition LPT/ERP solution

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Example: Contingent Liability

Transaction: large Healthcare Technology company being purchased by a Private Equity firm for > $400m

Underwriting: Hire outside counsel to evaluate case Premium: $5m limit excess $20m retention for est. $650,000 Benefits: Moved deal impediment away

Data Breach case pending / Insurance impaired Negotiation gap between buyer and seller Loss Mitigation (LMU) insurance solution

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Jeff Anderson, JD, CPCU

Senior Vice President / Southeast Branch Manager North American Mergers & Acquisitions Practice Leader 3424 Peachtree Rd NE, Suite 550 Atlanta, GA 30326

• jeff. anderson@awac.com

678-704-8445

• Contact Information

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