Defying political headwinds

Transcription

1 A year of change Defying political headwinds Mergers & Acquisitions Insurance Howden 2015 insights Mergers & Acquisitions Insurance Howden 2016 insights 1

2 2016: A year of smooth sailing on rough water Market forces Despite political uncertainty on both sides of the Atlantic, 2016 was a year of continued growth for the M&A insurance market. The referendum on Britain s EU membership weighed heavily on insured transaction volumes in the first half of the year, most notably in the real estate sector. This was counterbalanced by a number of insurance backed private equity buy-out deals in the UK and Europe. We further added to our technical expertise during the year, hiring dedicated specialists in both our London and Frankfurt offices. From potential tax liabilities associated with employee share plans, to the risk of a third party enforcing an historic restrictive covenant - our experts understand the issues and negotiate firmly to secure the right cover. On the carrier side, a number of insurers launched M&A teams in including Arch, Chubb and Fidelis. Alongside new market entrants, existing M&A insurers added resources and capital to increase market capacity and expertise - most insurers increased their maximum policy limit per deal. The increase in market capacity continued to apply downward pressure on premium rates and deductibles, this greater competition has also provided us with opportunities to improve terms and secure policy wording enhancements for our clients. In the real estate sector, heightened scrutiny of the risks associated with offshore structures resulted in increased demand for specific tax risk insurance. In 2016, we secured cover for a range of identified tax risks from German real estate transfer tax to an identified Portuguese VAT liability arising from construction costs. In the private equity sector, an M&A market that has continued to favour sellers has resulted in management teams negotiating nil recourse structures and blanket awareness qualifiers on warranty deeds. Financial sponsors increasingly turned to stapled insurance in 2016 recongising the value of the product in bridging the gap between management and prospective buyers. 2

3 2016 Statistics In the following pages, we provide an insight into the key W&I policy parameters, using data collected from policies we placed during We have included commentary on changes from 2015 to illustrate changing trends. The statistics are divided between deals in the real estate sector and deals involving operational businesses (which are often private equity portfolio companies). 72% increase in the number of policies placed, supporting transactions with an aggregate value of 33.4bn across the private equity and real estate sectors. 3

4 Policy limit The policy limit is the insurer s maximum liability for all loss. We typically place policies with a limit ranging from 10-30% of the purchase price (but it is possible to insure up to 100%). Whilst historically operational businesses have opted to insure a greater proportion of the overall purchase price than real estate deals, this year Howden saw a convergence to an average of c. 20% of the purchase price for each sector. For transactions in the real estate sector, we have seen an increase in the use of title/real estate policies which provide cover for title to shares and property in excess of the W&I policy. These policies are a much more cost effective solution when limits of 100% of the purchase price are required. Average policy limit as % of deal value Key Operational business 21.23% 30.57% 2016 average 2015 average Key Real estate 20.54% 18.15% 2016 average 2015 average Media and Telecommunications Industrial 20.50% 21.93% 18.00% 11.98% Consumer Goods and Services Logistics 23.11% 19.15% 31.08% 17.61% Financial Services Office 30.00% 28.21% 19.76% 19.38% Healthcare Residential 17.50% 19.62% 22.52% 20.83% Manufacturing Retail % 21.44% 32.85% Energy & Utilities Hotels 12.27% 27.80% 10.00% 10.20% Technology Student 33.20% 45.20% 13.33% 48.03% Infrastructure 21.41% 25.19% 4

5 Deductible The deductible (also known as an excess or retention) is the aggregate amount of loss incurred before the insurer is liable to pay under the policy. It is often the case that the deductible matches the liability of the sellers or management under the SPA and there is significant variation across operational and real estate sectors. Real estate deductibles often tip to nil and are increasingly zero, whilst operational deductibles are normally 0.5-1% of the purchase price and rarely tip to nil. The exception to the rule would be transactions where an operational business has significant value in the real estate (i.e. hotels). In these deals, we regularly secure deductibles which are equivalent to 0.5% of the purchase price tipping to nil. Whilst we regularly obtain nil deductibles on UK and Western European real estate transactions, the higher averages set out below reflect a significant number of South European real estate deals. On such deals insurers typically require a higher deductible. In the USA, deductible levels are consistently offered at 1.5% of the purchase price and tend to tip to 1% after months. Real estate deductibles have decreased on average over the past year by 50% (excluding hotels), reflecting increased insurer capacity and sellers requirements for nil liability. Average deductible as % of deal value 1.5% 1.2% 1.04% 1.03% 0.99% 0.93% 0.9% 0.73% 0.65% 0.56% 0.6% 0.3% Operational business 0.06% decrease 0.85% average 0.91% average Key % Media & Telecomms Consumer Good & Services Financial Services Healthcare Manufacturing Energy & Utilities Technology 1.0% 0.8% 0.6% 0.4% 0.2% 0% 0.08% Industrial 0.27% Logistics 0.13% 0.23% 0.30% 0.34% Office Residential Retail Hotels Real estate 0.14% decrease 0.27% average 0.41% average Key

6 Tipping to nil deductible explained Insured liable to pay Insurer liable to pay Fixed deductible Tipping to nil Loss amount Deductible level Once the aggregate amount of loss exceeds the deductible level, the insurer is only liable for loss above the deductible level Once the aggregate amount of loss exceeds the deductible level, the insurer will pay the entire amount of loss Deductible mechanics by nature of target Operational business Real estate 5.88% Tipping to Nil 2.94% Tipping 91.18% Fixed 3.23% Tipping 51.61% Tipping to nil 45.16% Fixed/nil 6

7 Premium The rate on line is the one-off premium expressed as a percentage of the policy limit. Premium rates showed a year-on-year reduction in 2016, a result of new market entrants and increased insurer capacity. The rate reduction was most pronounced in the real estate sector, in which we report a 21.2% drop in premium rates across all real estate asset classes. Deals involving operational businesses saw an overall reduction, with Southern Europe and USA being the exception. Pricing continues to vary significantly across jurisdictions, but Asian deals saw the most significant drop in premium rates. UK and DACH operational businesses saw premium rates reduce by 18%, reflecting increased insurer competition in these regions. Outliers in 2015 statistics contributed to the USA increase this year the market has observed modest drops in USA rates on line in The higher real estate averages reflect a number of platform deals which Howden secured insurance on in in the latter part of the year we regularly secured <1% rates for core real estate deals in Central Eastern Europe and the Nordics. DACH real estate rates >1% reflect inclusion of policy enhancements extending the standard tax cover. Average rate on line Operational business 1.17% Real estate 0.84% Key UK 1.44% 1.22% 1.28% 1.29% DACH region 1.56% 1.39% 2.21% 1.39% Southern Europe 1.65% 1.58% 1.50% 1.19% Central Eastern Europe 1.60% 1.52% 1.52% 1.44% Nordics 1.55% 1.44% 1.79% Asia 2.57% 2.41% 3.56% 3.65% USA 2.43% 7

8 Policy period The policy period matches the survival periods in the underlying agreement, but a buyer-side policy offers the flexibility to extend such caps. The graphic illustrates the different survival periods by the classification of the warranty general, fundamental (typically title and capacity) and tax. Increased insurer competition has allowed us to obtain longer periods in % of our policies contained survival periods of 24 months or more for general warranties, up from 56.65% in % of policies contained survival periods of 7 years or more for fundamental warranties, up from 35.40% in This reflects the shift over the last 4 years in fundamental survival periods - historically matching general warranties (24 months or less) today typically matching tax (7 years). This change has largely been driven by the use of W&I insurance on deals. General warranties 11.83% less than 18 months 76.34% 11.83% months Fundamental warranties 11.83% 4-7 years 22.58% less than 4 years 24 months or more 19.69% increase 65.59% 7 years or more 30.19% increase Tax warranties 12.63% less than 4 years 81.05% 7 years 23.53% increase 6.32% 4-7 years 8

9 Tax covenant For the purpose of a W&I Policy, the tax covenant is qualified by matters fairly disclosed in the disclosure letter and the due diligence reports. We have continued to secure affirmative cover for key tax risks, disregarding any disclosure for these key items. On real estate deals these are typically matters such as residency, trading v. investment, trading through a permanent establishment and transactions in land. The graphic illustrates the percentage of the deals we placed during 2016 in which the underlying deal contained a tax covenant. If a tax covenant was agreed between the parties, it was almost always insured. % of deals with underlying tax covenant Operational business Yes 70.97% 0.03% decrease No 29.03% The decrease in deals containing a tax covenant for real estate deals reflects the lower percentage of UK real estate deals as a proportion of our portfolio of insured deals. DACH, Central Eastern Europe, Nordics and Southern Europe accounted for a higher proportion of our insured real estate deals in 2016 than Transactions in these territories are less likely to contain a standalone tax covenant (instead protection is provided through tax warranties). Real estate Yes 55.56% 15.44% decrease No 44.44% 9

10 Jurisdictions Our global expertise supported transactions in 32 different countries last year. Whilst fears over the referendum weighed on UK transaction volumes in the first half of the year, we had a record breaking year in Germany where awareness and demand for the product continues to grow. Insured deal volume in Southern Europe rose again, with increases focused on the real estate sector. We also experienced a steady increase in USA insured deal volume. Australia Austria Belgium British Virgin Islands Canada China Croatia Czech Republic Denmark Finland France Germany Hong Kong Hungary Iceland Ireland Italy Jersey Luxembourg Norway Poland Romania Singapore Slovakia Spain Sweden Switzerland The Netherlands United Arab Emirates United Kingdom USA 10

11 Wrapping up 2016 Despite strong headwinds in the form of political uncertainty on both sides of the Atlantic, the M&A insurance market continued to expand in Lower insured transaction volumes in the UK were offset by a more buoyant M&A market in Central Europe, particularly in Germany. Our Frankfurt team supported a number of large sponsor exits in 2016, as well as outbound German acquisitions, including USA targets. In the real estate sector, lower UK transaction volumes leading up to the referendum weighed on premium volume, but the year finished strongly with a number of pan-european platform deals run out of London. We continued to see a divergence in operational and real estate parameters: real estate deductibles in the UK are typically NIL and premium rates frequently less than 0.75%, whilst premium and deductible reductions for operational deals have been less dramatic. Throughout the year we capitalised on the expertise of a number of specialist insurance markets to secure optimal policy terms at the most competitive rates. One example of this involved the placement of a W&I policy in conjunction with a specialist environmental liability on a German trade buyer s acquisition of a US manufacturing business. A further example was the use of W&I, title/real estate, tax and environmental liability insurance policies on a pan-european real estate transaction. Last year s prediction of increased demand for tax risk insurance to support real estate deals materialised during 2016 we placed bespoke policies covering a range of identified tax risks including transfer pricing, SDLT, German RETT and VAT. On the claims front, we experienced a year-on-year rise in notifications. The majority of notifications arose from tax and financial statements breaches. Our in-house M&A claims team worked closely with our clients to secure a number of successful payments from insurers. 11

12 The forecast During 2017, we foresee US private equity investors capitalising on the strength of the dollar and deploying significant capital in Europe. Many of these investments will be supported by M&A insurance and the product provides a valuable tool in bridging the gap between US and European deal conventions particularly around disclosure standards. We anticipate continued growth in demand for bespoke tax risk insurance, driven by investors concerns over the increasingly proactive approach taken by tax authorities in challenging tax efficient structures. In particular, we are developing bespoke policies to protect against tax risks resulting from uncertainty over the interpretation of double tax treaties and economic substance. We expect a range of ancillary insurance products to become a more common feature of deals. We will build on our track record of accessing multiple insurance markets (W&I, tax, title/real estate, cyber and environmental) on a single deal to obtain the best cover available. We have recently hired a French M&A lawyer and, subject to the outcome of the election later this year, we expect a marked increase in demand for the product within both the real estate and private equity sectors in France. 12

13 About our team The Howden Mergers & Acquisitions team provides specialist insurance solutions for M&A risks. The twenty-two professionals that make up our dedicated team have backgrounds in corporate and tax law, investment banking, general industry and insurance. With offices in the UK and Germany, we focus on the private equity and real estate sectors, working with leading fund managers across Europe and North America. Our team has lawyers qualified in a wide number of jurisdictions including England & Wales, Germany, France, New York & New Zealand. We have native language capabilities that include French, German, Italian, Spanish and Russian. Our truly global team services our clients deals worldwide drawing upon our in-depth experience and local knowledge across multiple jurisdictions. Our expertise covers the design of a range of bespoke policies and their successful placement to support M&A transactions. We advise on a variety of insurance products including warranty & indemnity, tax liability, contingent risk, environmental liability and title/ real estate. Included in our placement fee (paid for by the insurer), we also provide a claim handling and advisory service to all of our clients. Our experienced team has a track record in obtaining M&A insurance claims pay-outs for our clients. 13

14 Key contacts 14 Richard French Director +44 (0) (0) Jamie Thomson Associate Director +44 (0) (0) Joe O`Brien Director +49 (0) (0) Nicholas Hanney Associate Director +44 (0) (0) Gennadiy Kharif Director Howden Germany +49 (0) (0) Linda Abad Associate Director Solicitor +44 (0) (0) Edward Brennan Director +44 (0) (0) Hélène Bastien Associate Director +44 (0) (0) Daniel Stock Associate Director Solicitor +44 (0) (0) Dr. Severin Zörgiebel Associate Director Howden Germany +49 (0) (0) Nicholas Pullen Associate Director Attorney +44 (0) (0) Johann Benesch Principal Howden Germany +49 (0) (0)

15 David Haigh Senior Associate +44 (0) (0) Thomas Clarke Junior Associate +44 (0) (0) Caroline Rowlands Senior Associate Solicitor +44 (0) (0) Ella Shillingford Junior Associate +44 (0) (0) Chiara De Vita Senior Associate +44 (0) (0) Lucie Bocel Associate Lawyer (Qualified in France) +44 (0) (0) Ben Prebble Associate Solicitor (Qualified in New Zealand) +44 (0) (0) Emma Williamson Operations Manager +44 (0) (0) Sven Lehnig Associate +44 (0) (0) Jessica Knowles Operations Associate +44 (0)

16 Howden M&A Limited 16 Winchester Walk, London, SE1 9AQ E info@howdengroup.com Part of the Hyperion Insurance Group Howden M&A Limited is an Appointed Representative of RKH Specialty Limited, part of the Hyperion Insurance Group. RKH Specialty Limited is authorised and regulated by the Financial Conduct Authority in respect of general insurance business. Registered in England and Wales under company registration number Registered Office: 16 Eastcheap, London, EC3M 1BD. Calls may be monitored and recorded for quality assurance purposes. 10/17 Ref: M0514