Representations & Warranties Transaction Liability Insurance Discussion April 8, 2014

TRANSACTIONAL INSURANCE

STATE OF THE MARKET

• Maturing market; rapid growth rate

• Turbulent economic conditions have resulted in more risk adverse buyers and sellers

• Broader coverage and more favorable terms exist

• Rapid response time and efficient underwriting process

• Greater awareness, understanding and recognition of products from the M&A community

• Available capacity in underwriting markets

FREQUENCY OF CLAIMS MADE

North America (1998 – 2013): Of the policies issued, nearly 1 in 3.5 policies saw claims (or 28%)

EMEA and APAC (2002 – 2013): Of the policies issued , nearly 1 in 8 policies saw claims (or 12%)

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REPRESENTATIONS & WARRANTIES OVERVIEW

REPRESENTATIONS & WARRANTIES OVERVIEW

REPRESENTATIONS & WARRANTIES INSURANCE

What are Representations & Warranties?

• Representations: statements of past and existing facts

• Warranties: promises that existing facts are true

Can a Seller be sued for the Representations & Warranties made?

• Yes, if it is discovered after the closing that the seller has breached one or more of the representations and warranties.

• The representations made by the seller provide a basis for the buyer’s right to indemnification and other remedies. Indemnification terms

and conditions are detailed in the agreement.

What is Representations & Warranties Insurance?

• Protects parties to a merger or acquisition from liability arising out of alleged breach of a representation or warranty contained in the

transaction document

• Seller-Side Coverage: protects the Seller from claims by the Buyer arising out of the alleged breach of a representation or warranty

• Buyer-Side Coverage: protects the Buyer on a first-party basis from financial loss due to the Seller’s alleged breach of a representation or

warranty

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REPRESENTATIONS & WARRANTIES OVERVIEW

REPRESENTATIONS & WARRANTIES INSURANCE (CONTINUED)

Key Representations & Warranties of Seller

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• Financial Statements

• Accounts Payable

• Inventory

• Tax Law Compliance

• No Undisclosed Liabilities

• No Material Adverse Change

• Compliance with Laws

• Employee Benefits

• Litigation

• Environmental

• Intellectual Property

• Customers/Suppliers

REPRESENTATIONS & WARRANTIES OVERVIEW

REPRESENTATIONS & WARRANTIES INSURANCE (CONTINUED)

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Why Buyers Request Coverage Why Sellers Request Coverage

• To enhance Amount / Duration of Indemnity

• To distinguish bid in auction

• To ameliorate collection concerns

• To protect key relationships

• To protect the deal

• To insure certainty of purchase price

• To reduce or eliminate the need for escrow

• To address stakeholder concerns

• To distribute sale proceeds

• To increase purchase price

• To supplement disclosure process

• To protect passive sellers

• To expedite sale

• To reduce contingent liabilities

• To reduce or eliminate the need for escrow

• To address stakeholder concerns

REPRESENTATIONS & WARRANTIES OVERVIEW

REPRESENTATIONS & WARRANTIES INSURANCE (CONTINUED)

Who Does It Cover?

• The selling company’s reps & warranties (can be a buyer or seller based policy)

• Any designated directors, officers, employees or shareholders identified on the Declarations page

• Spouses of all Insured persons

• There must be at least one party who is obligated to indemnify the Buyer for breach of representations and warranties

What Does It Cover?

• Damages

• Judgments (some policy forms include punitive damages - most favorable venue)

• Settlements

• Defense Costs

Exclusions:

• “Absolute” Pollution (can be deleted after underwriter review and acceptance of the exposure)

• “Absolute” Fraud

Necessary Underwriting Information

• Purchase / Transaction Agreement

• Seller’s Financials

• All Disclosure Schedules and Attachments

• Discussion with Counsel

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SOLUTIONS

SOLUTIONS

REPRESENTATIONS & WARRANTIES SOLUTION: Example 1 – Subsidiary of a Fortune 100 Company

Requirement:

• Buyer was concerned with creditworthiness of Seller and Seller’s ability to indemnify Buyer in the event of breach of representations and

warranties made by Seller.

• Seller wanted to reduce agreed upon escrow amount. Additionally, Buyer was concerned about potential pollution exposures associated

with acquired facilities.

Background:

• Fortune 100 Subsidiary is purchasing energy terminal assets.

• The selling shareholders of Seller will receive a distribution in excess of the escrow. The selling entity has no significant additional assets. It

was conceivable the selling entity would cease to continue as a going concern.

• Environmental representations expired at closing.

• Seller had terminated an agreement with a supplier and believed the supplier was in material breach of the agreement; therefore, Seller

believes it had the contractual right to terminate the agreement.

Solution:

• Structured a three-year buyer-based insurance policy covering all representations and warranties of Seller excluding pollution.

• Coverage was included for the representation of the cancelled agreement.

• Additionally, in order to provide separate dedicated limits for the pollution exposures, a separate pollution insurance policy was structured

and placed.

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SOLUTIONS

REPRESENTATION & WARRANTIES SOLUTION: Example 2 – Limited Liability Company

Requirement:

• Insurance to cover breach of representations and warranties. One of the major representations of Seller was an Intellectual Property

Representation for a computer network-based application.

Background:

• Buyer wants to reduce the purchase price by $2,500,000. This money is intended to be placed in Escrow for indemnification as respects all

representations and warranties.

• Seller is required to indemnify Buyer for up to $6,000,000 for the Intellectual Property Representation.

• Seller is comprised of numerous investors in the original company and the $6,000,000 liability would obligate these investors in the event of

a breach of the Intellectual Property Representation.

Solution:

• Structured two-year Seller-based Representations & Warranties Insurance program to indemnify Buyer for alleged breach of all

representations and warranties in Purchase Agreement. This includes the Intellectual Property representation.

• The $6,000,000 liability was transferred to the Insurance Carrier, and investors were not saddled with this future obligation.

• Cost of insurance policy was less than $200,000.

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SOLUTIONS

REPRESENTATIONS & WARRANTIES SOLUTION: Example 3 – Fertilizer Manufacturer/Distributor

Requirement:

• Insurance to cover breach of all Seller’s representations and warranties, as well as certain post-closing indemnity obligations.

Background:

• Buyer believed risk existed in excess of escrow amount and was also concerned Seller may not be around to satisfy indemnity obligations

pertaining to environmental and tax matters.

• Buyer wanted escrow increased from $2,000,000 to $5,000,000 and also wanted insurance to guarantee certain post-closing indemnities

owed by Seller (environmental, tax, existing discrimination litigation).

• Seller was motivated to sell, but was unwilling to increase escrow amount and was very concerned about nature of requested indemnity for

post-closing matters.

Solution:

• Structured a six-year Seller-based Representations & Warranties Insurance program to indemnify Buyer for alleged breach of any and all

representations and warranties in Purchase Agreement.

• Secured agreement from insurer to extend coverage under Representations & Warranties Insurance for Seller’s obligation to indemnify

Buyer in the aforementioned areas of environmental, tax and litigation. Insurance was structured to sit excess of $2,000,000 escrow and

utilize the escrowed amounts as the insurance policy deductible.

• Upon expiration of the escrow in two years, insurance policy aggregate deductible droped from $2,000,000 to $500,000.

• Parallel six-year Environmental Liability Insurance Policy in the amount of $5,000,000 was placed on behalf of Seller to specifically indemnify

Seller for any claims brought by any third party (other than the Buyer, i.e. Environmental Protection Agency).

• Seller was protected from lawsuits brought by the Buyer or any other third party.

• Cost of both insurance policies was less than $400,000.

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SOLUTIONS

REPRESENTATIONS & WARANTIES SOLUTION : Example 4 – Privately held Computer Software Designer

Requirement:

• Seller seeks Representations & Warranties Insurance in the full amount of the Transaction - $30,000,000. Seller wants insurance policy to

mirror its indemnity obligations in Agreement - $3,000,000 cap and 18 month survival for all representations and warranties (except

Intellectual Property representation), and $30,000,000 for 60 months for Intellectual Property representation. Escrow of $3,000,000 is

agreed upon between Buyer and Seller. Initially, Seller seeks insurance to respond in excess of Escrow Fund. After numerous rounds of

negotiations with Buyer, it becomes apparent Buyer and Seller are having significant difficulty agreeing upon specific terms of Escrow Fund.

Background:

• Privately held computer software designer (Seller) is being acquired by publicly-owned company (Buyer). Seller is owned, in large part, by

two individuals - Chairman and President. Upon consummation of Transaction, Chairman will retire and President will remain with

combined company for a minimum of two years.

• Chairman would like Representations & Warranties Insurance to be procured to address all of Seller’s representations and warranties in

Agreement and Plan of Merger. Buyer has been actively acquiring companies over the past 10 years and has been burned before by

material misrepresentations made by selling, indemnifying shareholders. Buyer requires unlimited indemnity as respects the Intellectual

Property Representation. Seller’s representations and warranties shall survive 18 months after the Closing with the exception of the

Intellectual Property representation, which shall survive 60 months after Closing.

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SOLUTIONS

REPRESENTATIONS & WARRANTIES SOLUTION: Example 5 – Privately held Computer Software Designer (continued)

Solution:

• Structured an insurance option to Seller implementing a $250,000 aggregate deductible for the first year and then dropping to $100,000

after the first anniversary of the Closing. Buyer was then willing to reduce its indemnification payment floor from $200,000 to $100,000 to

mirror the deductible level provided in the insurance policy. Buyer was named as a Loss Payee under the Policy, and willing to entirely

eliminate Escrow provision from the Agreement and Plan of Merger.

• Upon consummation of the Merger, Chairman of Seller was able to retire with insurance in force to assume his risk as an Indemnifying

Shareholder. Buyer was comfortable that it would now have access to insurance for any alleged breaches made in Agreement, rather than

having to bring suit against individuals who may or may not be in a position to satisfy indemnity obligations at the time of a claim by the

Buyer.

• Cost of $30,000,000 six-year insurance policy was $1,000,000.

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SOLUTIONS

REPRESENTATIONS & WARRANTIES SOLUTION: Example 6 – Privately held Telecommunications/Technology Company

Requirement:

• All shareholders of Seller are polled to determine interest in procuring Representations & Warranties Insurance. A number of shareholders

elect not to purchase insurance, while a number of shareholders elect to purchase insurance. The only representation of concern to

Indemnifying Shareholders is the Intellectual Property representation. Buyer and Seller have agreed upon an Escrow Amount of 10% of the

Transaction value. In this case, Buyer is unaware of Seller’s interest in placing insurance.

Background:

• Privately held telecommunications / technology company (Seller) is being acquired by Fortune 100 publicly owned company (Buyer). Seller

is owned by approximately 100 shareholders and institutional investors. All shareholders are severally liable for the portion of their

respective liability equal to their ownership percentage in the company.

• Transaction is valued at close to $1 billion. A very large portion of the value is driven by technology of the Seller. The Seller has a number

of patents in force and many in various stages of registration.

Solution:

• Poll of indemnifying shareholders confirmed that those shareholders interested in purchasing insurance would buy approximately

$325,000,000 of insurance. The remaining indemnity obligation would remain self-insured by those shareholders not electing to buy

insurance.

• $325,000,000 Representations & Warranties Insurance was structured to respond once the Escrow Fund had been exhausted. The

insurance was structured to pay the proportionate amount of liability assumed by purchasing shareholders, and the remaining liability was

assumed by those shareholders not purchasing insurance. Hence, for a loss of $325,000,000 to occur, a total loss of the entire Transaction

value would’ve had to be imposed upon indemnifying shareholders. A condition of placing insurance was that such insurance cannot be

disclosed to the Buyer.

• Cost of insurance was approximately 3.5% rate on-line or $11,500,000.

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SOLUTIONS

REPRESENTATIONS & WARRANTIES SOLUTION : Example 7 – Fortune 50 Retailer

Requirement:

• Fortune 50 retailer is buying a commercial property site to build a new facility. Former owner lost the property in foreclosure. City

employee sent former owner a demand for back taxes owed by former owner. Former owner threatened inverse condemnation lawsuit,

and it was assumed such threat of litigation was a strategic attempt to have City absolve former owner of back-tax obligation.

Background:

• Buyer has hired a property development company to make the property purchase. If former owner understands that a deep-pocket, high

profile buyer is acquiring the property, it is likely to encourage litigation, bad publicity, and higher costs of all zoning and development costs

by local contractors.

Solution:

• Structured Real Estate Transaction Insurance to cover all pre-closing development, zoning and architectural costs of Buyer in the event the

transaction did not close due to bad publicity or litigation brought or threatened by the prior owner of the property.

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SOLUTIONS

REPRESENTATIONS & WARRANTIES SOLUTION: Example 8 – Real Estate Investor Group

Background and Requirements:

• Buyer is seeking to purchase an apartment complex that will be re-zoned from R-16 to mixed-use development district. As part of Purchase

Agreement, Seller is required to have the tenants vacate the property 60 days prior to Closing, such that the property is vacant when Buyer

takes ownership. In the event tenants are vacated and deal is not subsequently closed, Seller will absorb value of lost rents as well as costs

associated with re-renting properties. Seller wants to structure insurance to pay business interruption / lost rents / extra expense amounts.

Solution:

• Insurance was structured to pay all costs of Seller to put Seller in same economic position prior to vacating tenants, in the event the sale did

not close. Cost of insurance was negotiated and included in purchase price of transaction. Amount of insurance was $1,000,000 and cost

was $100,000.

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SOLUTIONS

TAX INDEMNITY INSURANCE SOLUTION: Example 9

Requirement:

• The credit committee of a lender has approved all aspects of a loan to a company, but has reserved final sign-off until it is satisfied that the

crystallization of a potential tax exposure will not impair the company's ability to repay the loan.

Background:

• The potential tax exposure relates to the spin-off by the company of its office supply business in a tax-free spin-off. While the company has

received a tax opinion from a reputable law firm that the spin-off should be tax-free, the analysis is based on "facts and circumstances"

analysis. As such, the lender is concerned the IRS may contend the business of the spun-off entity and that the remaining business of the

company should have simply been operated as two separate subsidiaries, and ultimately determine that there is insufficient business

purpose to support the tax-free spin-off.

Solution:

• A Tax Indemnity policy was purchased by the company, with the lender as a "loss payee", in the event the tax authority challenged the tax-

free nature of the spin-off and the company could not repay the loan.

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SOLUTIONS

TAX INDEMNITY INSURANCE SOLUTION: Example 10 – Investor Owned Utility

Requirement:

• Client was concerned that increased scrutiny by the IRS with regard to chemical change and placed-in-service requirements of synthetic fuel

would jeopardize the tax credits earned under Section 29 of the tax code.

Background:

• A latex binder is applied to coal, converting coal to a synthetic fuel, which is eligible for Section 29 tax credits due to the chemical change.

• The facility for the conversion of coal to synthetic fuel has a placed-in-service requirement of June 30, 1998.

• The IRS audit cycle for the client was not due for several years.

• In the early 2000’s the IRS publicly announced its intention to challenge the placed-in-service date and chemical change of all the facilities in

operation.

• An adverse ruling from the IRS on the Client’s facility would have significant cost implications to our client, as the company would lose the

credits taken in the current year and create the possibility of earnings restatement for prior years.

Solution:

• Company purchased a 6 year policy to respond in the event of a challenge by the IRS and provide coverage for:

– Contest Costs;

– Taxes;

– Interest;

– Gross-up;

– Penalties (where insurable).

• A favorable extended reporting period option was structured at the inception of the policy to allow additional time to report a claim in the

unlikely event the first IRS audit did not occur prior to insurance policy expiration.

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APPENDIX

MSW SOLUTIONS

USES FOR McGRIFF FINANCIAL SOLUTIONS ( MSW completed transactions)

• Removal of substantial balance sheet reserves

• Fund financial obligation with insurance as opposed to a line of credit which could impair the company’s bank covenants

• Reduce tax liability using a third party insurance carrier

• Guarantee tax credits generated from the production of synthetic fuel

• Loss mitigation – Directors and Officers Liability

• Spread loss program for transition from accrual accounting method to mark to market

• Structure insurance vehicle to cover/finance previously uninsured losses and allow for favorable accounting treatment

• Pollution Legal Liability and Environmental Remediation Cost-Cap

• Insurance to cover breach of representations & warranties as well as certain post-closing indemnity obligations

• Protect future earnings that could be impacted through operating in a deregulated environment

• Provide off-balance sheet mechanism to allow for AAA security to replace traditional uses of bank letters of credit

• Solution to address FASB 106 Buyout without a significant impact on client’s income statement and balance sheet

• Free up bank lending capacity

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FORTUNE 1000 CLIENT LIST

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Company Ranking Employees 2011 Revenues (B) Company Ranking Employees 2011 Revenues (B)

United Parcel Service 52 394,928 $53.105 Lexmark International 557 13,300 $4.173

Enterprise GP Holdings 62 6,900 $44.313 GenOn Energy 614 3,103 $3.614

Murphy Oil Corp. 98 5,900 $31.446 WPX Energy 569 1,200 $4.001

Halliburton Company 118 68,000 $24.829 Protective Life Corp. 619 2,317 $3.566

AMR Corporation 123 80,100 $23.979 Oil States International, Inc. 628 7,949 $3.479

Southern Company 152 26,377 $17.657 Torchmark Corporation 639 3,200 $3.377

NextEra Energy 172 14,800 $15.341 TECO Energy 640 4,290 $3.343

American Electric Power 176 18,710 $15.116 Pinnacle West Capital 653 6,663 $3.278

Dollar General Corp. 183 90,000 $14.807 Hawaiian Electric Industries Inc. 659 3,654 $3.242

Dominion Resources, Inc. 187 15,800 $14.379 American Eagle Outfitters 669 23,100 $3.160

Constellation Energy Group 199 7,900 $13.758 Watsco, Inc. 695 4,300 $2.978

Icahn Enterprises LP 223 59,559 $11.855 Flowers Foods, Inc. 734 9,400 $2.773

BB&T Corporation 267 31,800 $9.998 Brinker International 741 60,322 $2.761

KBR, Inc. 280 27,000 $9.261 WGL Holdings, Inc. 746 1,384 $2.752

NRG Energy, Inc. 284 5,193 $9.079 Exterran Holdings 757 10,400 $2.684

Progress Energy, Inc. 286 11,000 $8.907 Patterson-UTI Energy 784 8,200 $2.567

DTE Energy Co. 287 9,800 $8.897 Worthington Industries 802 4,900 $2.443

CenterPoint Energy, Inc. 305 8,827 $8.450 Cracker Barrel Old Country Store 804 67,000 $2.434

Goodrich Corporation 319 28,000 $8.074 HCC Insurance Holdings 818 1,874 $2.374

Stryker Corp. 323 21,241 $7.320 Service Corp. International 834 16,800 $2.316

Coca-Cola Enterprises Inc. 324 13,250 $7.939 Complete Production Services 844 7,000 $2.286

Williams Companies, Inc. 325 4,293 $7.930 Westar Energy, Inc. 874 2,424 $2.171

Tenneco, Inc. 350 24,000 $7.205 HealthSouth Corp. 888 17,500 $2.123

UGI Corporation 403 9,750 $6.091 DSW, Inc. 915 10,800 $2.024

MeadWestvaco 406 17,000 $6.079 Sun Healthcare Group 940 28,697 $1.936

NiSource Inc. 409 7,957 $6.019 Career Education Corp. 943 11,100 $1.916

Kelly Services Inc. 441 8,200 $5.551 Southwest Gas Corporation 948 5,754 $1.887

Con-way Inc. 459 27,800 $5.290 Global Payments Inc. 957 3,753 $1.860

Integrys Energy Group 508 4,600 $4.709 Portland General Electric 977 2,634 $1.813

JetBlue Airways Corporation 524 12,100 $4.504 Pool Corp. 986 3,300 $1.793

Atmos Energy Corp. 532 4,800 $4.428 National Fuel Gas Company 988 1,800 $1,779

SCANA Corp. 534 5,889 $4.409 Martin Marietta Materials 989 4,993 $1.778

REPRESENTATIONS & WARRANTIES OVERVIEW

Bene� ts: By replacing the escrow requirement with a reps & warranties policy, the buyer would have an insurance program to call upon in the event of a breach as opposed to having to negotiate with the seller to release the funds in escrow. � is product can also facilitate closing a transaction by allowing the seller to keep more of the deal proceeds.

Seller Based Policy responds to claims by the buyer for losses it has incurred as a result of any inaccuracy or breach of the representations and/or warranties made by the seller in the sale agreement.

Buyer Based Policy responds to losses the buyer has incurred as a result of the breach of representations and/or warranties made by the seller(s), to the extent that they exceed the seller(s) indemnity.

Process: A non-binding indication of interest from underwriters can be negotiated with a dra� of the asset purchase agreement and the target’s � nancials. If the terms of the non-binding indication are acceptable, a due diligence fee will be charged for additional underwriting which would engage the underwriter’s outside counsel and other consultants to research the information associated with the transaction. Depending on the transaction, this fee would range from $15,000 to $50,000.

Limits Available: Up to $350,000,000Retention Amount: 2% to 3% of the transaction amountPricing: Generally 2% to 5% of the limit of liability

A Century of Expertise – a Focus on the FutureWhile we trace our organization’s roots to 1886, McGri� , Seibels & Williams is � rmly focused on the future and helping our clients tackle risk management challenges head on. Our insurance experience is unmatched – and we’re uniquely positioned to help you protect your � nancial interests, while simultaneously delivering on your commitment to your employees and stakeholders.

Our team of experienced professionals work with some of the world’s most innovative corporations to develop and implement state-of-the-art solutions to executive liability challenges. Our philosophy of personal service and attention to individual needs puts clients at the top of our organizational chart. We work to make each relationship a long-term partnership that continues to grow in value.

$350 mm

2-3%oftransaction

Bene� ts of Representations & Warranty Coverage• Mitigate concern about � nancial ability of seller to

perform under agreed indemnity

• Provides solution when indemnity is not available because:

- target is public company

- seller is company reorganizing under Chapter 11

- seller intends to liquidate a� er closing transaction

• Buyer’s lenders require protection in excess of indemnity

• Facilitates transaction when:

- Seller unwilling to make any representations and warranties

- Non-management seller(s) unwilling to provide indemnity

- Seller cannot liquidate because of an indemnity given in an old transaction

Other Transactional Solutions Structured by McGri� , Seibels & Williams• Reduce tax liability using a third party insurance

company

• Guarantee tax credits generated from the production of synthetic fuel

• Spread loss program for transition from accrual accounting method to mark to market

• Structure insurance vehicle to cover/� nance previously uninsured loss and allow for favorable accounting treatment

• Protect future earnings that could be impacted through operating in a deregulated environment

• Provide o� -balance sheet mechanism to allow for AAA security to replace traditional uses of bank letters of credit

• Solution to address FASB 106 Buyout without a signi� cant impact on client’s income statement and balance sheet

• Transfer “termination for convenience clause” from seller to an insurance company

Greg McCollisterMcGri� , Seibels & Williams, Inc.404-433-1871 | gmccollister@mcgri� .com

www.mcgri� .com

Insurance products are o� ered by McGri� , Seibels & Williams, Inc., a subsidiary of BB&T Insurance Holdings, Inc. McGri� , Seibels & Williams, Inc.,

CA license #0E83682. CarePlus is a brand of F.B.P. Insurance Services, LLC, CA license #0747466.© 2013, Branch Banking and Trust Company. All rights reserved.