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  • TRANSACTIONAL RISK INSURANCE USING TRANSACTIONAL RISK SOLUTIONS TO CLOSE THE DEAL

  • MARSH 1

    Agenda

    Transactional Risk Insurance Overview

    Representations & Warranties Insurance

    Tax Indemnity Insurance

    Contingent Liability Insurance

    Appendix A Contact Information and Biographies

  • TRANSACTIONAL RISK INSURANCE OVERVIEW

    2

  • MARSH 3

    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)

  • MARSH 4

    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

  • MARSH 5

    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%

  • MARSH

    REPRESENTATIONS & WARRANTIES INSURANCE

    6

  • MARSH 7

    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

    PresenterPresentation Notes_________________________________________________________

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  • MARSH 8

    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

    PresenterPresentation Notes_________________________________________________________

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  • MARSH 9

    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

  • MARSH 10

    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, wed need recent draft acquisition agreement, information memorandum and targets 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

  • MARSH

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

    11

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    Percentage of Claims

    Source: AIGs Representations and Warranties Insurance Global Claims Study Covering 2011 to 2014

  • MARSH

    More than half of all claim notices are received within the first 12 months of the policys issuance

    12

    Timing of Claims

    52% 36%

    12%

    Time Lapse Between Closing and Timing of Claim

    0 -12 months

    12-24 months

    24+ months

    Source: AIGs Representations and Warranties Insurance Global Claims Study Covering 2011 to 2014

  • MARSH 13

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

    Lixil Related to Lixils 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).

    PresenterPresentation Notes_________________________________________________________

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