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 2
Transactional Liability Insurance Transactions (ex. Merger, Recap, Asset Purchase) Purchase and Sale Agreement (PSA) Seller Buyer Agreement Unknown issues: - Representations and Warranties policy Seller Representations & Warranties - Either buyer side or seller side Seller Specific Indemnities / Covenants Known issues: Indemnification (limitations, survival, etc.) - Tax Indemnity Policy - Contingent Liability / Risk policy - Loss Portfolio Transfer Disclosure Schedules - Litigation Buyout 3
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. 4
Use of Reps & Warranty Insurance Buyers Sellers • Increase seller cap on liability or extend • Corporate Sellers – do not want to be survival period for warranties hampered with liabilities from disposals of non core assets as funds required by the • Corporates: concern over counterparty business security risk - need to meet minimum security levels for board approval • Clean exit for sellers (particularly individuals) • Private buyers: use insurance strategically to improve their bid position in auction or • Private equity seller avoids tying up funds protect key relationships in escrow • 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 5
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) 6
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 of debts/accounts receivable 7
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. 8
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 others, 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. 9
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 10
R&W Insurance - State of the US Market 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 11
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 12
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 13
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 14
Example: R&W Opportunity Transaction: Private Equity firm selling Healthcare Management Company firm to another Private Equity firm for > $100m Gap in negotiation based on Compliance Rep Seller PE wants clean break Solution: Seller Side Blanket Rep or Specific Rep policy Underwriting: Hired counsel to review relevant state statutes Premium: 3.5% ROL based on $20m limit Benefits: Helped bridge both deal “gaps” 15
Example: LPT/ERP Opportunity Transaction: Regional Medical Center (Private Trust) being bought by large Hospital Network (Public Company) Seller looking to move > $1m SIR Buyer looking for clean acquisition LPT/ERP solution Underwriting: Detailed analysis of claim history and risk management Premium: est. $5m based on underwriting Benefits: Creates clean transaction for parties 16
Example: Contingent Liability Transaction: large Healthcare Technology company being purchased by a Private Equity firm for > $400m Data Breach case pending / Insurance impaired Negotiation gap between buyer and seller Loss Mitigation (LMU) insurance solution Underwriting: Hire outside counsel to evaluate case Premium: $5m limit excess $20m retention for est. $650,000 Benefits: Moved deal impediment away 17
• Contact Information 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 18
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