TRANSACTIONAL RISK INSURANCE USING TRANSACTIONAL RISK SOLUTIONS TO CLOSE THE DEAL

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Agenda

• Transactional Risk Insurance Overview

• Representations & Warranties Insurance

• Tax Indemnity Insurance

• Contingent Liability Insurance

• Appendix A – Contact Information and Biographies

TRANSACTIONAL RISK INSURANCE OVERVIEW

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Transactional Risk Insurance Overview Created to facilitate M&A transactions by addressing indemnification issues that arise during the negotiation of the transaction or during due diligence that may prevent the deal from signing:

• Representations and warranties insurance • Tax indemnity insurance • Contingent liability insurance

Transactional risk insurance is used to protect or mitigate two types of risks that typically arise from M&A transactions:

Unknown and unforeseen loss

Identified and known risks

Representations and warranties insurance - Buyer-side policy - Seller-side policy

Identified tax issues Other contingent risks (e.g., successor

liability)

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Transactional Risk Insurance Overview

2015 • $4.26 billion in limits / 159 closed

transactions

2014 • $2.73 billion in limits / 130 closed

transactions

2013 • $1.34 billion in limits / 66 closed

transactions

2012 • $1.43 billion in limits / 51 closed

transactions

2011 • $767 million in limits / 45 closed

transactions

2010 • $387 million in limits / 25 closed

transactions

Significant growth in North America during last 6 years

North America Market Statistics for Marsh

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

0

20

40

60

80

100

120

140

160

180

2010 2011 2012 2013 2014 2015

Limits Placed($ in millions)Deal Volume

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Transactional Risk Insurance Overview

The market now offers: • Broader coverage • Streamlined process • Increased limits of liability • Reduced premium rates

and deductible levels

Marsh has an estimated 30% global market share

Global Market Statistics for 2015 (Marsh)

The transactional risk insurance market has continued to evolve in recent years and can provide more innovative insurance solutions than ever.

US$ AMERICAS EMEA ASIA PACIFIC TOTAL

Limits of insurance placed ($)

4,256,000,000 4,914,000,000 2,053,000,000 11,223,000,000

No. of policies placed 186 170 94 450

Private equity policies (as % of policies placed)

59% 61% 35% 55%

Corporate policies (as % of policies placed)

41% 39% 65% 45%

Seller-side R&W policies (as % of R&W policies placed)

6% 5% 7% 6%

Buyer-side R&W policies (as % of R&W policies placed)

94% 95% 93% 94%

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REPRESENTATIONS & WARRANTIES INSURANCE

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Reps & Warranties Insurance Overview Provides coverage for financial losses resulting from breaches of representations and warranties made by target company or sellers contained in purchase agreement

• Protects an insured from unanticipated (unknown) losses that may arise subsequent to the closing

• Reps & warranties insurance generally covers all reps & warranties in the purchase agreement

• Either buyer or seller can be the insured under the policy

Reps & Warranties Insurance: Typical Uses

Buyers Sellers

• Increase maximum indemnity / extend survival period for breaches of reps & warranties

• Provide recourse when no seller indemnity possible

• Distinguish bid in auction

• Protect key relationships

• Elimination of seller post-closing credit risk

• Reduce contingent liabilities enabling distribution of sale proceeds

• Include R&W insurance as the sole remedy in draft agreements in auctions

• Attract best offers by maximizing indemnification

• Protect passive sellers

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Reps & Warranties Insurance: Policy Considerations

Duration of Policy

Cost and Coverage Limits

Retention / Deductible

Definition of Loss

Materiality Scrape

Exclusions

Policies generally survive for longer periods than in the underlying acquisition agreement

Premiums typically are 3% to 4% of the policy limit (one-time payment) and insureds are able to purchase coverage in

excess of amount available via traditional indemnity

Retentions on R&W policies are typically between 1 and 2% of enterprise value

Carriers are typically willing to be silent with respect to consequential and multiplied damages (as opposed to having

exclusions for those types of damages)

Carriers are typically willing to recognize materiality scrapes for purposes of determining the existence of a breach of a

rep and losses related thereto

Policies contain “Actual Knowledge” exclusion and exclusions for forward looking statements, working capital adjustments,

asbestos and PCBs, and pension underfunding

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Reps & Warranties Insurance: State of the Market Increased popularity and well-developed market

• 1,000+ deals completed annually (split between corporate and PE buyers) • Insurers / brokers staffed by former attorneys – work on deal timeframes • International capabilities

Target transactions and market trends • Transactions between $50M – $2B+ • Limits available up to $500M+ per transaction • Generally no restrictions on industry sector • Current market trends

Insurer commitment

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Reps & Warranties Insurance: Underwriting Process

1 2 3 4 5 6 7 8 9 10 11 12+

Days 1 – 2 Engage broker (earlier in the process is better)

Broker and potential underwriters execute NDAs

Days 3 – 6 Obtain quotes from underwriters • In order to get quotes, we’d need recent draft acquisition agreement, information memorandum and target’s financials • No cost to obtain quotes

Day 6 Select underwriter • Broker to discuss pros and cons of proposals • Insurer diligence fee become payable upon entering underwriting ($25K – $40K)

Days 6 to 12+ Underwriting of policy • Underwriter to gain access to data room and legal, financial, tax and other diligence

reports (subject to non-reliance letters) • Conference call with deal team and advisors

Policy negotiations • Done in parallel with underwriting; outside counsel typically involved

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Frequently Made Claims Representations relating to financial statements, taxes and contracts are the most frequently alleged to have been breached.

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0%

5%

10%

15%

20%

25%

30%

Percentage of Claims

Source: AIG’s Representations and Warranties Insurance Global Claims Study Covering 2011 to 2014

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More than half of all claim notices are received within the first 12 months of the policy’s issuance

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Timing of Claims

52% 36%

12%

Time Lapse Between Closing and Timing of Claim

0 -12 months

12-24 months

24+ months

Source: AIG’s Representations and Warranties Insurance Global Claims Study Covering 2011 to 2014

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Claims Paying Experience? Asahi Related to Asahi’s 2011 acquisition of Pacific Equity Partners and Unitas -- $180M paid by insurers

Lixil Related to Lixil’s 2013 acquisition of Grohe Group -- €360M claim

Anecdotal

“AIG paid three claims in excess of $20 million in 2014 for financial statements related breaches and over $100 million for R&WI related claims around the world.”

“Concord investigated the magnitude of the damages (including the degree to which future EBITDA would be adversely affected) and amicably resolved the claim using a multiple-based calculation amounting to approximately $7.5 million above the applicable retention amount, which Concord then promptly paid.” Ageas v. Kwik-Fit

• Breach of financial statement rep – two aspects of bad debt reserves inaccurate. Coverage dispute over calculation of covered Loss – Consequential damages covered (i.e., coverage for amount that insured overpaid based upon inaccurate information/breached rep).

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Reps & Warranties Insurance – Sample Scenario

$25M (10%) Additional

Seller Indemnity

$25M (10%) Escrow

$2.5M (1%) Deductible

$197.5M (79%)

Seller’s liability

Buyer’s liability

Buyer assumed

risk

$250M EV Transaction

Without Insurance

$50M (20%) R&W Insurance

Policy

$3.75M (1.5%) Retention

$197.5M (79%)

Insurer’s liability

Can be split between buyer and seller

Buyer assumed

risk

$250M EV Transaction With

Insurance Background

• Buyer: US private equity firm • Target: Distribution company • Seller: US private equity firm • Enterprise value: $250 million

Issue

• Buyer wanted to differentiate its bid in a highly contested auction

• Seller wanted a clean exit at closing to maximize closing date proceeds

Solution

• Buyer-side reps & warranties insurance policy • Limit: $50 million • Premium: $1.8 million • Policy term: 3 years for general reps / 6 years for

fundamental and tax reps

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TAX INDEMNITY INSURANCE

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Tax Indemnity Insurance Overview Coverage

Insures against the financial consequences of an intended tax treatment being disallowed by relevant tax authority in situations where:

• There is no clear precedence or guidance • Tax authority approval (e.g., PLR) is not available or cannot be received in required time frame • Potential downside is significant relative to transaction size / financial model does not allow

for “margin for error”

Tax indemnity insurance most commonly used to: • Insure the conclusion of a tax opinion or backstop / replace the subject matter of a tax

indemnity

Typical Uses

• 355 spin-offs • 338(h)(10) elections/S-Corp issues • Cancellation of indebtedness • NOL protection

• Successor liability • Tax-free reorganizations • Liquidating trust status • Capital gain v. ordinary income treatment

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Tax Indemnity Insurance Overview Covered Items

• Additional tax liability • Fines and penalties • Interest • Legal cost • Tax gross-up

Key Coverage Issues • Cost: Generally 4% to 8% of policy limit, but varies depending on facts and circumstances • Deductible: Varies based particular risk (often no deductible required) • Underwriting: Varies by insurer (but similar to R&W underwriting process); tax opinion is not

required

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Tax Insurance Case Study Background

• Buyer: Portfolio company of US PE firm • Seller: Individual shareholders of target • Target: Retail clothing company

Issue • Buyer wanted to make a 338(h)(10) election to take advantage of certain tax deductions it could take after

the deal closed, but was concerned about potential difficulty collecting on an indemnity claim in the event the IRS challenged that “S-status” and subsequently invalidated the 338(h)(10) election

Solution • Tax indemnity insurance policy provided to buyer and no indemnity from seller was required • Limit: $17.5 million • Retention: $250,000 (for defense costs only) • Policy period: 6 years • Insurance would respond in the event the IRS challenged the target’s “S-status,” which would invalidate

buyer’s 338(h)(10) election • Policy covered the future tax savings that the buyer would lose as a result of the election invalidation

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Tax Insurance Case Study

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Background • Seller: US PE firm • Buyer: US PE firm • Target: Portfolio company of the seller • Purchase price: ~$170 million

Issue • During diligence, it was discovered that the target inadvertently failed to comply with the consent

requirement for the filing of consolidated federal income tax returns from 2007 onward • Target requested relief from the IRS for such inadvertent failure; however, the uncertainty as to whether the

IRS would grant such relief and the expected four to six month response time created a deal point

Solution • Tax insurance policy provided to buyer and no indemnity from seller was required • Limit: $20 million • Retention: $50,000 (for defense costs only) • Policy period: 6 years • Buyer utilized insurance strategically to improve its bid by not requiring an indemnity from the seller in

relation to the identified tax risk

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CONTINGENT LIABILITY INSURANCE

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Contingent Liability Insurance Contingent liability insurance covers “one-off” identified potential exposures that have not yet crystallized

Recent examples • Successor liability • Specific indemnities • Fraudulent conveyance • Other legal, legislative or regulatory risks

Three things necessary to insure a risk: • Quantifiable risk

• Probability analysis • No moral hazard

Cost, limits and deductibles vary based on the particular risk

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Contingent Liability Insurance Case Study

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Background • Sellers: 5 individuals that founded the target • Buyer: US PE firm • Target: Direct sales marketer of apparel business of sellers • Purchase price: ~$200 million

Issue • Buyer purchased 88.5% of the target (management rolling over the remaining) • Purchase price funded with $100 million in debt, $80 million of which was used to pay sellers via a

distribution • Sellers were concerned that in the event the target was to become insolvent, the distribution could be

determined to be an avoidable transfer

Solution • Contingency insurance policy was purchased • Limit: $50 million • Retention: $250,000 (for defense costs only) • Policy period: 6 years for all reps and warranties • Sellers utilized insurance to limit their exposure to potential “avoidable transfer” claims

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APPENDIX A – CONTACT INFORMATION AND BIOGRAPHIES

MARSH

Managing Director, FINPRO Office: 212.345.6492 Cell: 917.825.0351 craig.schioppo@marsh.com Current Responsibilities • As leader of Marsh’s Transactional Risk Group, Craig is known as an expert in the insurance of financial and transaction risk,

regulatory and litigation risks. Craig is constantly involved in the development of dedicated insurance products that facilitate mergers, acquisitions and other corporate transactions. He is also involved in negotiating the terms and conditions of all of the Transactional Risk Solutions.

Experience • Craig began his career as a Staff Accountant at Anchin Block & Anchin LLP in 1993. After spending two years as an auditor,

Craig spent the next five years as a Supervisor in the Tax Department where he was intimately involved in both corporate and individual tax planning and compliance. During his last four years as an accountant, Craig attended New York Law School as an evening student and was a Notes and Comments Editor of the law review.

• Upon graduating law school, Craig spent the next four years practicing corporate and securities law at Kramer Levin Naftalis & Frankel LLP. As a corporate attorney, Craig had a diverse transactional-based practice with significant experience in domestic and cross-border mergers and acquisitions, joint ventures, securities and general corporate matters.

Education • BS, Accounting, State University of New York at Albany

• JD, magna cum laude, New York Law School

Craig A. Schioppo

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MARSH

Managing Director, FINPRO Office: 212.345.3332 Cell: 917.572.8348 craig.warnke@marsh.com Current Responsibilities • Craig Warnke works in the Private Equity and Mergers and Acquisitions group within the FINPRO Practice. He is an expert in

the field of transactional risk insurance, responsible for advising clients on representations and warranties insurance, tax insurance, and other insurance products addressing contingent liabilities encountered on M&A deals. Craig is also involved in the development of dedicated insurance products that facilitate mergers, acquisitions, and other corporate transactions.

• In addition, Craig advises private equity, venture capital, and hedge fund clients on management and professional liability insurance issues and solutions, placing their GPL and D&O/E&O programs into the marketplace.

Experience • Prior to joining Marsh in 2010, Craig spent four years at a global insurance broker, where he specialized in structuring and

placing complex transactional risk insurance solutions for clients as well as advising private equity and hedge fund clients on their management and professional liability programs. Previously, Craig was an underwriter at AIG in their M&A Insurance Group, focusing on reps and warranties insurance, tax insurance, and other transactional risk products.

• After graduating from law school, Craig was a corporate attorney at Willkie Farr & Gallagher, LLP where he represented both public and private companies in M&A transactions, as well as having served as issuer’s counsel in connection with both equity and debt offerings.

Education • BA, English and History, cum laude, Georgetown University

• JD, University of Virginia School of Law

Craig P. Warnke

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MARSH

Senior Vice President, FINPRO Office: 415.743.8198 Cell: 415.697.9227 yem.mai@marsh.com Current Responsibilities • Yem works in the Private Equity and Mergers and Acquisitions group within Marsh’s Financial and Professional Liability

Practice. He is an expert in the field of transactional risk insurance, responsible for advising clients on representations and warranties insurance, tax insurance and other insurance products addressing contingent liabilities encountered on M&A deals. Yem currently resides in Marsh’s SF office.

Experience • Prior to joining Marsh in 2013, Yem was a regional underwriting manager at AIG in their M&A Insurance Group, focusing on

representations and warranties insurance, tax insurance and other transactional risk products.

• Prior to AIG, Yem was an attorney at Jones Day’s New York office in their M&A group and DLA Piper’s Silicon Valley office in their Corporate & Securities group. While practicing, he specialized in domestic and cross-border mergers and acquisitions, securities, emerging growth and general corporate matters.

Education • BS, Business Administration, University of California, Berkeley

• JD, University of Southern California

Yem T. Mai

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MARSH

Senior Vice President, FINPRO Office: 212.345.4932 Cell: 646.659.1109 sean.crnkovich@marsh.com Current Responsibilities • Sean works in the Private Equity and Mergers and Acquisitions group within Marsh’s Financial and Professional Liability

Practice. He is an expert in the field of transactional risk insurance, responsible for advising clients on representations and warranties insurance, tax insurance and other insurance products addressing contingent liabilities encountered in M&A transactions.

Experience • Prior to joining Marsh in 2014, Sean was a senior associate at Simpson Thacher & Bartlett LLP in their M&A group. While

practicing, he specialized in domestic and cross-border mergers and acquisitions, securities and general corporate matters.

Education • BS, Finance and Accounting, summa cum laude, Georgetown University

• JD, cum laude, New York University School of Law

Sean P. Crnkovich

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MARSH

Senior Vice President, FINPRO Office: 212.345.5552 Cell: 347.410.1248 ashley.parsa@marsh.com Current Responsibilities • Ashley works in the Transactional Risk group within Marsh’s Financial and Professional Liability Practice. She is an expert in

the field of transactional risk insurance, responsible for advising clients on representations and warranties insurance, tax insurance and other insurance products addressing contingent liabilities encountered on M&A deals.

Experience • Prior to joining Marsh in 2015, Ashley was an underwriter at AIG in the Mergers and Acquisitions Insurance Group. She was

responsible for underwriting representations and warranties insurance policies and other transactional risk insurance products. Prior to AIG, Ashley was an associate at Jones Day in their Mergers and Acquisitions practice group.

Education • BA, Political Science, summa cum laude, Russell Sage College

• JD, summa cum laude, Albany Law School

Ashley E. Parsa

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