TRANSACTIONAL RISK INSURANCE USING TRANSACTIONAL RISK SOLUTIONS TO CLOSE THE DEAL

Transcription

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

2 Agenda Transac8onal Risk Insurance Overview Representa8ons & Warran8es Insurance Tax Indemnity Insurance Con8ngent Liability Insurance Appendix A Contact Informa8on and Biographies MARSH 1

3 TRANSACTIONAL RISK INSURANCE OVERVIEW 2

4 Transac,onal Risk Insurance Overview Created to facilitate M&A transac,ons by addressing indemnifica,on issues that arise during the nego,a,on of the transac,on or during due diligence that may prevent the deal from signing: Representa8ons and warran8es insurance Tax indemnity insurance Con8ngent liability insurance Transac,onal risk insurance is used to protect or mi,gate two types of risks that typically arise from M&A transac,ons: Unknown and unforeseen loss Representa8ons and warran8es insurance - Buyer- side policy - Seller- side policy Iden8fied and known risks Iden8fied tax issues Other con8ngent risks (e.g., successor liability) MARSH 3

5 Transac,onal Risk Insurance Overview Significant growth in North America during last 6 years $4.26 billion in limits / 159 bound transactions $2.73 billion in limits / 130 closed transactions $1.34 billion in limits / 66 closed transactions $1.43 billion in limits / 51 closed transactions $767 million in limits / 45 closed transactions $387 million in limits / 25 closed transactions North America Market Statistics for Marsh $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 Limits Placed ($ in millions) Deal Volume MARSH 4

6 Transac,onal Risk Insurance Overview The transac,onal risk insurance market has con,nued to evolve in recent years and can provide more innova,ve insurance solu,ons than ever. The market now offers: Broader coverage Streamlined process Increased limits of liability Reduced premium rates and deduc8ble levels Marsh has an es,mated 35% global market share Global Market Sta,s,cs for 2015 (Marsh) US$ AMERICAS EMEA ASIA PACIFIC TOTAL Limits of insurance placed ($) No. of policies placed Private equity policies (as % of policies placed) Corporate policies (as % of policies placed) Seller- side R&W policies (as % of R&W policies placed) Buyer- side R&W policies (as % of R&W policies placed) 4,256,000,000 4,914,000,000 2,053,000,000 11,223,000, % 61% 35% 55% 41% 39% 65% 45% 6% 5% 7% 6% 94% 95% 93% 94% MARSH 5

7 REPRESENTATIONS & WARRANTIES INSURANCE MARSH 6

8 Reps & Warran,es Insurance Overview Provides coverage for financial losses resul,ng from breaches of representa,ons and warran,es made by target company or sellers contained in purchase agreement Protects an insured from unan8cipated (unknown) losses that may arise subsequent to the closing Reps & warran8es insurance generally covers all reps & warran8es in the purchase agreement Either buyer or seller can be the insured under the policy Reps & Warran,es Insurance: Typical Uses Buyers Increase maximum indemnity / extend survival period for breaches of reps & warran8es Provide recourse when no seller indemnity possible Dis8nguish bid in auc8on Protect key rela8onships Elimina8on of seller post- closing credit risk Sellers Reduce con8ngent liabili8es enabling distribu8on of sale proceeds Include R&W insurance as the sole remedy in drad agreements in auc8ons Aeract best offers by maximizing indemnifica8on Protect passive sellers MARSH 7

9 Reps & Warran,es Insurance: Policy Considera,ons Dura8on of Policy Policies generally survive for longer periods than in the underlying acquisi8on agreement Cost and Coverage Limits Premiums typically are 3% to 4% of the policy limit (one- 8me payment) and insureds are able to purchase coverage in excess of amount available via tradi8onal indemnity Reten8on / Deduc8ble Reten8ons on R&W policies are typically between 1 and 2% of enterprise value Defini8on of Loss Carriers are typically willing to be silent with respect to consequen8al and mul8plied damages (as opposed to having exclusions for those types of damages) Materiality Scrape Exclusions 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 MARSH 8

10 Reps & Warran,es 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 aeorneys work on deal 8meframes Interna8onal capabili8es Target transac,ons and market trends Transac8ons between $50M $2B+ Limits available up to $500M+ per transac8on Generally no restric8ons on industry sector Current market trends Insurer commitment MARSH 9

11 Reps & Warran,es Insurance: Underwri,ng Process Days 1 2 Engage broker (earlier in the process is beeer) Broker and poten,al underwriters execute NDAs Days 3 6 Obtain quotes from underwriters In order to get quotes, we d need recent drad acquisi8on agreement, informa8on 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 underwri8ng ($25K $40K) Days 6 to 12+ Underwri,ng of policy Underwriter to gain access to data room and legal, financial, tax and other diligence reports (subject to non- reliance leeers) Conference call with deal team and advisors Policy nego,a,ons Done in parallel with underwri8ng; outside counsel typically involved MARSH 10

12 Frequently Made Claims Representa,ons rela,ng to financial statements, taxes and contracts are the most frequently alleged to have been breached. 30% 25% 20% 15% 10% 5% Percentage of Claims 0% Source: AIG s Representa8ons and Warran8es Insurance Global Claims Study Covering 2011 to 2014 MARSH 11

13 Timing of Claims More than half of all claim no,ces are received within the first 12 months of the policy s issuance Time Lapse Between Closing and Timing of Claim 12% 36% 52% 0-12 months months 24+ months Source: AIG s Representa8ons and Warran8es Insurance Global Claims Study Covering 2011 to 2014 MARSH 12

14 Claims Paying Experience? Asahi Related to Asahi s 2011 acquisi8on of Pacific Equity Partners and Unitas - - $180M paid by insurers Lixil Related to Lixil s 2013 acquisi8on of Grohe Group M 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 inves8gated the magnitude of the damages (including the degree to which future EBITDA would be adversely affected) and amicably resolved the claim using a mul8ple- based calcula8on amoun8ng to approximately $7.5 million above the applicable reten8on 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 calcula8on of covered Loss Consequen8al damages covered (i.e., coverage for amount that insured overpaid based upon inaccurate informa8on/breached rep). MARSH 13

15 Reps & Warran,es Insurance Sample Scenario $250M EV Transac/on Without Insurance $250M EV Transac/on With Insurance Background Buyer: US private equity firm Target: Distribu8on company Seller: US private equity firm Enterprise value: $250 million $197.5M (79%) Buyer assumed risk $197.5M (79%) Buyer assumed risk Issue Buyer wanted to differen8ate its bid in a highly contested auc8on Seller wanted a clean exit at closing to maximize closing date proceeds Solu,on $25M (10%) Addi8onal Seller Indemnity $25M (10%) Escrow Seller s liability $50M (20%) R&W Insurance Policy Insurer s liability Buyer- side reps & warran8es insurance policy Limit: $50 million Premium: $1.8 million Policy term: 3 years for general reps / 6 years for fundamental and tax reps $2.5M (1%) Deduc8ble Buyer s liability $3.75M (1.5%) Reten8on Can be split between buyer and seller MARSH 14

16 TAX INDEMNITY INSURANCE MARSH 15

17 Tax Indemnity Insurance Overview Coverage Insures against the financial consequences of an intended tax treatment being disallowed by relevant tax authority in situa,ons where: There is no clear precedence or guidance Tax authority approval (e.g., PLR) is not available or cannot be received in required 8me frame Poten8al downside is significant rela8ve to transac8on size / financial model does not allow for margin for error Tax indemnity insurance most commonly used to: Typical Uses Insure the conclusion of a tax opinion or backstop / replace the subject maeer of a tax indemnity 355 spin- offs 338(h)(10) elec8ons/s- Corp issues Cancella8on of indebtedness NOL protec8on Successor liability Tax- free reorganiza8ons Liquida8ng trust status Capital gain v. ordinary income treatment MARSH 16

18 Tax Indemnity Insurance Overview Covered Items Addi8onal tax liability Fines and penal8es Interest Legal cost Tax gross- up Key Coverage Issues Cost: Generally 4% to 8% of policy limit, but varies depending on facts and circumstances Deduc8ble: Varies based par8cular risk (oden no deduc8ble required) Underwri8ng: Varies by insurer (but similar to R&W underwri8ng process); tax opinion is not required MARSH 17

19 Tax Insurance Case Study Background Buyer: Portolio company of US PE firm Seller: Individual shareholders of target Target: Retail clothing company Issue Buyer wanted to make a 338(h)(10) elec8on to take advantage of certain tax deduc8ons it could take ader the deal closed, but was concerned about poten8al difficulty collec8ng on an indemnity claim in the event the IRS challenged that S- status and subsequently invalidated the 338(h)(10) elec8on Solu,on Tax indemnity insurance policy provided to buyer and no indemnity from seller was required Limit: $17.5 million Reten8on: $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) elec8on Policy covered the future tax savings that the buyer would lose as a result of the elec8on invalida8on MARSH 18

20 Tax Insurance Case Study Background Seller: US PE firm Buyer: US PE firm Target: Portolio 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 8me created a deal point Solu,on Tax insurance policy provided to buyer and no indemnity from seller was required Limit: $20 million Reten8on: $50,000 (for defense costs only) Policy period: 6 years Buyer u8lized insurance strategically to improve its bid by not requiring an indemnity from the seller in rela8on to the iden8fied tax risk MARSH 19

21 CONTINGENT LIABILITY INSURANCE MARSH 20

22 Con,ngent Liability Insurance Con,ngent liability insurance covers one- off iden,fied poten,al exposures that have not yet crystallized Recent examples Successor liability Specific indemni8es Fraudulent conveyance Other legal, legisla8ve or regulatory risks Three things necessary to insure a risk: Quan8fiable risk Probability analysis No moral hazard Cost, limits and deduc,bles vary based on the par,cular risk MARSH 21

23 Con,ngent Liability Insurance Case Study 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 distribu8on Sellers were concerned that in the event the target was to become insolvent, the distribu8on could be determined to be an avoidable transfer Solu,on Con8ngency insurance policy was purchased Limit: $50 million Reten8on: $250,000 (for defense costs only) Policy period: 6 years for all reps and warran8es Sellers u8lized insurance to limit their exposure to poten8al avoidable transfer claims MARSH 22

24 APPENDIX A CONTACT INFORMATION AND BIOGRAPHIES MARSH July 12,

25 Craig A. Schioppo Managing Director, FINPRO Office: Cell: Current Responsibili,es As leader of Marsh s Transac8onal Risk Group, Craig is known as an expert in the insurance of financial and transac8on risk, regulatory and li8ga8on risks. Craig is constantly involved in the development of dedicated insurance products that facilitate mergers, acquisi8ons and other corporate transac8ons. He is also involved in nego8a8ng the terms and condi8ons of all of the Transac8onal Risk Solu8ons. Experience Craig began his career as a Staff Accountant at Anchin Block & Anchin LLP in Ader spending two years as an auditor, Craig spent the next five years as a Supervisor in the Tax Department where he was in8mately involved in both corporate and individual tax planning and compliance. During his last four years as an accountant, Craig aeended New York Law School as an evening student and was a Notes and Comments Editor of the law review. Upon gradua8ng law school, Craig spent the next four years prac8cing corporate and securi8es law at Kramer Levin Nadalis & Frankel LLP. As a corporate aeorney, Craig had a diverse transac8onal- based prac8ce with significant experience in domes8c and cross- border mergers and acquisi8ons, joint ventures, securi8es and general corporate maeers. Educa,on BS, Accoun8ng, State University of New York at Albany JD, magna cum laude, New York Law School MARSH 24

26 Craig P. Warnke Managing Director, FINPRO Office: Cell: Current Responsibili,es Craig Warnke works in the Private Equity and Mergers and Acquisi8ons group within the FINPRO Prac8ce. He is an expert in the field of transac8onal risk insurance, responsible for advising clients on representa8ons and warran8es insurance, tax insurance, and other insurance products addressing con8ngent liabili8es encountered on M&A deals. Craig is also involved in the development of dedicated insurance products that facilitate mergers, acquisi8ons, and other corporate transac8ons. In addi8on, Craig advises private equity, venture capital, and hedge fund clients on management and professional liability insurance issues and solu8ons, 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 transac8onal risk insurance solu8ons 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 warran8es insurance, tax insurance, and other transac8onal risk products. Ader gradua8ng from law school, Craig was a corporate aeorney at Willkie Farr & Gallagher, LLP where he represented both public and private companies in M&A transac8ons, as well as having served as issuer s counsel in connec8on with both equity and debt offerings. Educa,on BA, English and History, cum laude, Georgetown University JD, University of Virginia School of Law MARSH 25

27 Yem T. Mai Senior Vice President, FINPRO Office: Cell: Current Responsibili,es Yem works in the Private Equity and Mergers and Acquisi8ons group within Marsh s Financial and Professional Liability Prac8ce. He is an expert in the field of transac8onal risk insurance, responsible for advising clients on representa8ons and warran8es insurance, tax insurance and other insurance products addressing con8ngent liabili8es encountered on M&A deals. Yem currently resides in Marsh s SF office. Experience Prior to joining Marsh in 2013, Yem was a regional underwri8ng manager at AIG in their M&A Insurance Group, focusing on representa8ons and warran8es insurance, tax insurance and other transac8onal risk products. Prior to AIG, Yem was an aeorney at Jones Day s New York office in their M&A group and DLA Piper s Silicon Valley office in their Corporate & Securi8es group. While prac8cing, he specialized in domes8c and cross- border mergers and acquisi8ons, securi8es, emerging growth and general corporate maeers. Educa,on BS, Business Administra8on, University of California, Berkeley JD, University of Southern California MARSH 26

28 Sean P. Crnkovich Senior Vice President, FINPRO Office: Cell: Current Responsibili,es Sean works in the Private Equity and Mergers and Acquisi8ons group within Marsh s Financial and Professional Liability Prac8ce. He is an expert in the field of transac8onal risk insurance, responsible for advising clients on representa8ons and warran8es insurance, tax insurance and other insurance products addressing con8ngent liabili8es encountered in M&A transac8ons. Experience Prior to joining Marsh in 2014, Sean was a senior associate at Simpson Thacher & Bartlee LLP in their M&A group. While prac8cing, he specialized in domes8c and cross- border mergers and acquisi8ons, securi8es and general corporate maeers. Educa,on BS, Finance and Accoun8ng, summa cum laude, Georgetown University JD, cum laude, New York University School of Law MARSH 27

29 Ashley E. Parsa Senior Vice President, FINPRO Office: Cell: Current Responsibili,es Ashley works in the Transac8onal Risk group within Marsh s Financial and Professional Liability Prac8ce. She is an expert in the field of transac8onal risk insurance, responsible for advising clients on representa8ons and warran8es insurance, tax insurance and other insurance products addressing con8ngent liabili8es encountered on M&A deals. Experience Prior to joining Marsh in 2015, Ashley was an underwriter at AIG in the Mergers and Acquisi8ons Insurance Group. She was responsible for underwri8ng representa8ons and warran8es insurance policies and other transac8onal risk insurance products. Prior to AIG, Ashley was an associate at Jones Day in their Mergers and Acquisi8ons prac8ce group. Educa,on BA, Poli8cal Science, summa cum laude, Russell Sage College JD, summa cum laude, Albany Law School MARSH 28

30 This document and any recommenda8ons, analysis, or advice provided by Marsh (collec8vely, the Marsh Analysis ) are intended solely for the en8ty iden8fied as the recipient herein ( you ). This document contains proprietary, confiden8al informa8on of Marsh and may not be shared with any third party, including other insurance producers, without Marsh s prior wrieen consent. Any statements concerning actuarial, tax, accoun8ng, or legal maeers are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accoun8ng, tax, or legal advice, for which you should consult your own professional advisors. Any modeling, analy8cs, or projec8ons are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assump8ons, condi8ons, informa8on, or factors are inaccurate or incomplete or should change. The informa8on contained herein is based on sources we believe reliable, but we make no representa8on or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obliga8on to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representa8on or warranty concerning the applica8on of policy wordings or the financial condi8on or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. MA Copyright 2016 Marsh Inc. All rights reserved MARSH 29