Does M&A insurance close the gap? German M&A and Private Equity Forum March Clemens Küppers Private Equity and M&A Practice

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1 Does M&A insurance close the gap? German M&A and Private Equity Forum March 2015 Clemens Küppers Private Equity and M&A Practice

2 Marsh & McLennan Companies delivers advice and solutions that help clients protect and enhance shareholder value. We provide the advantage of four market-leading brands operating as one business partner to address clients needs in the areas of risk, strategy, and human capital. Insurance and Risk Advisory Services Reinsurance Services Talent, Health, Retirement, Investments Management Consulting Key Facts: Market Cap $26 Billion; 2013 Revenues > $12 Billion; Employees 54,000 (480 in MENA); Premium Placed $60 Billion+ Marsh serves 87% of the Fortune Global 500 and manages three or more lines of coverage for 92% of the Fortune 100. Sample Awards for Excellence in 2013 Best Broker in Middle East by Global Finance Best Trade Credit Broker in Middle East, by Trade Finance Magazine Global Infrastructure Insurance House by the Global Infrastructure Investment Community LEED Gold Certification Carbon Trust standard 2011 Marsh Ltd 1

3 Marsh - Private Equity, Mergers & Acquisitions (PEMA) Dedicated Worldwide Resources A team of over 190 dedicated deal advisory professionals 2011 Marsh Ltd North America New York (North America hub) Atlanta, Boston, Chicago, Ft. Lauderdale, Los Angeles, Philadelphia, Phoenix, San Francisco, Toronto Latin America Miami (Latin American hub) Argentina Brazil Chile Columbia Mexico Europe London (EMEA hub) Amsterdam, Athens, Birmingham, Brussels, Copenhagen, Dublin, Edinburgh, Frankfurt, Glasgow, Hamburg, Helsinki, Istanbul, Leeds, Madrid, Manchester, Milan, Moscow, Munich, Oslo, Paris, Prague, Stockholm, Warsaw, Zurich Middle East Dubai (MENA hub) Tel Aviv Africa Johannesburg Asia Hong Kong (Asian hub) Beijing, Mumbai, Seoul, Shanghai,Singapore, Taipei, Tokyo Pacific Sydney (Pacific hub) Auckland, Melbourne Regional Hub

4 Structuring Transactional Risk Solutions The Transactional Risk Team Established in 1999, the Transaction Risk team is part of Marsh s Private Equity, Mergers & Acquisitions practice Global team of 30 individuals with over 50 years of placing transaction risk insurance with backgrounds in law, investment banking, tax and insurance Remit is to advise, structure and execute bespoke insurance solutions which enhance or facilitate M&A transactions In 2014 PEMA advised on over 700 transactions Placed $7.7bn of limit into the market globally ($3.9bn placed through the EMEA team) Largest deal size was $2.4bn Largest limit placed was $350m 2011 Marsh Ltd 3

5 Transactional Risk Solutions Insurance to protect or mitigate from two types of risk typically arising from M&A transactions: Unknown and Unforeseen Loss Contingent Specific Risks Warranty & Indemnity Insurance Tax insurance Environmental Litigation Buyout 2011 Marsh Ltd 4

6 Cover for Unknown and Unforeseen Loss Warranty & Indemnity Insurance Warranty & Indemnity Insurance is not there to 2011 Marsh Ltd 5

7 Transactional Risk Solutions Application: Motivations for Use W&I Insurance is used as a strategic tool increasing competition in the M&A market. S E L L E R M OT I V A T I O N S Reluctance to retain proceeds in escrow Reluctance to accept high liability cap Private equity involvement Optimise transaction value CLEAN EXIT B U Y E R M OT I V A T I O N S Enhance bidder status Increase recourse available Extend time limitations Maintain management relations Unfamiliar jurisdiction / industry Concerns over strength of Seller s financial covenant Concerns over known risks 2011 Marsh Ltd 6

8 Warranty and Indemnity Insurance Buyer-side Policy: Case Study (Top-up Cover) $350m Enterprise Value SPA Policy Frequently policies placed in the name of the buyer are initiated by a seller seeking a clean exit Buyer s Liability Buyer s Liability Mechanics of cover $75m Seller introduced buyer-side policy as a means to exit with limited financial liability, whilst not effecting the potential transaction value $3.5m Seller s Liability Transfer of risk Buyer s W&I Policy $71.5m Limit Seller s Liability Large UK listed corporate buying for c. $350m from PE, and requiring $75m recourse against the warranties Policy structure $71.5m buyer-side policy in excess of 3.5m (the seller s cap) 2011 Marsh Ltd 7

9 Warranty and Indemnity Insurance Buyer-side Policy: Application Responds to the buyer s losses resulting from a breach of warranty under the acquisition agreement Trigger for policy responding is loss suffered by the buyer as a result of a breach of insured warranties or call under the tax indemnity In the event of a breach of warranty: BUYER SELLER / WARRANTOR INSURER Buyer suffers a loss and can claim directly against the policy; loss is paid directly to buyer. The buyer has full discretion as to whether they claim against the seller Buyer has to prove same level of loss to Insurer as they would to the seller Coverage for fraud of seller 2011 Marsh Ltd Key exclusion: Knowledge of buyer 8

10 Warranty and Indemnity Insurance Seller-side Policy: Application Responds to agreed contractual liability in the acquisition agreement Trigger for policy responding is breach of insured warranties/call on the tax covenant In the event of a breach of warranty: BUYER SELLER/ WARRANTOR INSURER Buyer claims against Seller/Warrantors as defined in the acquisition agreement, Seller claims against policy Insurer and warrantors work together to defend the claim Less common mostly sleep easy policies Key exclusion: Knowledge of warrantors 2011 Marsh Ltd 9

11 Warranty & Indemnity Insurance Coverage: Standard Coverage Positions Fundamental Warranties: Title & Capacity Account Warranties: Audited Accounts Management Accounts/Financial Statements Business Warranties: Financing Material Contracts Defined Benefit Pension Scheme Employees Compliance Tech/IP - Insurance - Litigation - Insolvency - Business since the accounts date - Real Estate Environmental: Compliance with Regulations and applicable permits Fines to the extent if they are insurable by law Tax Warranties Tax Covenant/Deed 2011 Marsh Ltd 10

12 Warranty & Indemnity Insurance Coverage: Market Standard Exclusions Knowledge of the insured (W&I policies are intended to provide cover for unknown issues only) Forward-looking warranties Criminal fines and penalties/punitive damages (to the extent they are NOT insurable by law) Deficiency in contribution pension schemes Price adjustments Post-close consideration adjustments/re-organisations and leakage Transfer pricing and secondary tax liabilities Anti-bribery and corruption Where applicable: Asbestos and construction defects on property Defective Products/Services Medical Malfeasance Fraud of the insured 2011 Marsh Ltd 11

13 Transactional Risk Solutions Market Update increased competition means transactional risk solutions are a cost effective option W&I Premiums % in W. Europe Specific tax issue 2 20% cover what is required by clients Broader coverage with the removal of generic exclusions New Breach Cover being offered now attach at low levels 1% as standard Less than 1% possible Policies written in new jurisdictions and industries fit with the transaction timeline are regularly paying claims Economic climate precipitated more claims notifications, more payments by insurers Mirrors transaction timetable / workflow Dedicated broking and underwriting teams, exm&a lawyers Often no insurer external legal review required Increased competition means greater pressure on them to pay out 2011 Marsh Ltd 12

14 Transactional Risk Solutions Process: Information Required Drafts of Acquisition Agreement (Typically start with 1 st /2 nd Buyers Draft) Drafts of Disclosure letter/materials Drafts of Tax Indemnity/Deed (if applicable) Accounts of the target Management accounts of the target (if warranted) Vendor due diligence (if commissioned) Information memorandum/management presentation (if available) Access to online dataroom Buyers due diligence reports prepared by professional third party advisers, essential to have: Legal, Tax, and Financial. Diligence must be performed on all parts of the business where warranties are given 2011 Marsh Ltd 13

15 Marsh Private Equity and M&A Practice Contact Details The Transactional Risk team at Marsh has been a leading figure in developing M&A risk insurance solutions in the European market over the last decade and is one of the most experienced broking teams in the market for this class of insurance. Clemens Küppers Vice President Clemens.Kueppers@marsh.com Phone +44 (0) Mobile +44 (0) Marsh Ltd 24 March

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