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GUIDE TO
Private Equity & Venture Capital Insurance Services
BVCA Guides
The secret behind successful merger and acquisition deals and the people who insure them.
Mind over risk:
The complex risks surrounding a corporate level transaction, such
as a merger or acquisition, can hinder or impede the deal itself.
HCC offers bespoke risk transfer solutions that not only smooth
negotiations, removing potential “deal-breakers”, but enhance your
position in negotiations.
As well as holding extensive experience and in-depth knowledge
of worldwide transaction risk related issues, our dedicated
transaction risk insurance team of underwriting, lawyers and
claims specialists, offers a fast and efficient service. Being
internationally focused means that wherever you are based, we
have the intelligence to help you close the deal successfully.
Transaction Risk Insurance: Warranty and Indemnity • Tax Indemnity • Contingent Risk Transfer
Contact [email protected] Global Torre Diagonal Mar, Josep Pla 2, 10th Floor, 08019 Barcelona, Spain
main +34 93 530 7300
A subsidiary of HCC Insurance Holdings, Inc. hcc.com
HCC Global
HCC Global Financial Products, S.L. - Sole Shareholder Company - ES B-61956629 - Mercantile Registry of Barcelona, volume 31639, sheet 159, page B-196767 is an Exclusive Insurance Agency of HCC International Insurance Company PLC, Spanish Branch, registered with the Spanish General Directorate of Insurance and Pension Funds (Dirección General de Seguros y Fondos de Pensiones) in their Special Register for Insurance Intermediaries, Reinsurance Brokers and their Senior Posts under the code E0191B61956629.
hcc.com/global
TRI advert 0224_FN.indd 1 3/6/12 11:35 AM
3
Contents
A complex risk environment 4
Key Person Assurance Protection 6
Cyber Liability: A growing concern 8
Private Equity Management Liability Insurance (PEML) 10
Private equity insurance portfolio programme’s coming of age 12
Warranty Insurance for Mergers and Acquisitions 14
Contents
A complex risk environment 4
Key Person Assurance Protection 6
Cyber Liability: A growing concern 8
Private Equity Management Liability Insurance (PEML) 10
Partners who perform 12
Warranty Insurance for Mergers and Acquisitions 14
The secret behind successful merger and acquisition deals and the people who insure them.
Mind over risk:
The complex risks surrounding a corporate level transaction, such
as a merger or acquisition, can hinder or impede the deal itself.
HCC offers bespoke risk transfer solutions that not only smooth
negotiations, removing potential “deal-breakers”, but enhance your
position in negotiations.
As well as holding extensive experience and in-depth knowledge
of worldwide transaction risk related issues, our dedicated
transaction risk insurance team of underwriting, lawyers and
claims specialists, offers a fast and efficient service. Being
internationally focused means that wherever you are based, we
have the intelligence to help you close the deal successfully.
Transaction Risk Insurance: Warranty and Indemnity • Tax Indemnity • Contingent Risk Transfer
Contact [email protected] Global Torre Diagonal Mar, Josep Pla 2, 10th Floor, 08019 Barcelona, Spain
main +34 93 530 7300
A subsidiary of HCC Insurance Holdings, Inc. hcc.com
HCC Global
HCC Global Financial Products, S.L. - Sole Shareholder Company - ES B-61956629 - Mercantile Registry of Barcelona, volume 31639, sheet 159, page B-196767 is an Exclusive Insurance Agency of HCC International Insurance Company PLC, Spanish Branch, registered with the Spanish General Directorate of Insurance and Pension Funds (Dirección General de Seguros y Fondos de Pensiones) in their Special Register for Insurance Intermediaries, Reinsurance Brokers and their Senior Posts under the code E0191B61956629.
hcc.com/global
TRI advert 0224_FN.indd 1 3/6/12 11:35 AM
4Private Equity & Venture Capital Insurance Services
A complex risk environment The private equity industry is becoming more complex. With increased competition around the sale of assets, and managers looking to expand into new markets, actively managing risks, in an increasingly challenging operating environment, is attracting more focus.
Making sure your investments are protectedAs one of the world’s largest insurance companies, our experience tells us that a significant proportion of companies who suffer a major loss do not recover to their pre-loss position – even if they have insurance for their property. This is because other key assets such as market share, first mover advantage, key people, share price and reputation are real exposures for companies but cannot be insured.
The key focus for investors is on improving the value and strength of the operations they purchase, and a major incident at such a company could delay and / or reduce the value of the asset to a significant degree. Products that can insure property, credit lines, liabilities etc., is vital but prevention is as important as cure.
Our proposition is to offer more than insurance
– it is to help our clients maintain business continuity through loss prevention engineering, risk management and claims solutions. We would, for example, be able to advise an insured on the critical risks to the wellbeing of their organisation, help prioritise the risks, bring to their attention exposures to natural perils or supply chain exposures and support them in planning to ensure the resilience of their business in the event that the worst happens.
Making an easier exitOverall, the private equity industry has a significant number of unrealised investments. Managing the exit overhang has now become a priority. With the IPO market picking up in 2014, private equity is starting to consider this route as an alternative way to get returns on their funds. Improving economic conditions are also making companies more willing to think about acquisitions. Private equity investors
Jordane Wood Client Director Client Engagement - UK
jordane.wood@ aig.com
+44 (0)20 7954 7053
AIG 58 Fenchurch Street London EC3M 4AB
5
should be aware of some of the risk mitigation strategies available on exit.
Liabilities and solutions
Last year saw a flurry of IPO activity, with a global increase in both value and volume compared to 2013. The listing can, however, bring with it a number of risks and liabilities. For example, a prospectus must explicitly confirm that the people responsible for it have taken reasonable care to make sure the information is true, and they can face civil and criminal liabilities if such statements are inaccurate, incomplete or misleading, particularly if they cannot prove that proper care was taken preparing it.
Those responsible for false representation in a prospectus may also be liable under the UK Fraud Act 2006, punishable by a fine or imprisonment of up to 10 years. Any of the parties involved with a prospectus can be held responsible for its content, including company directors and anyone who is stated as accepting responsibility in the prospectus.
Protection is available in the form of prospectus liability insurance, a transaction specific insurance coverage that covers issuers, its key individuals and selling shareholders against claims (where insurable by law) arising from an offering of a company’s securities, including any statements made directly in connection with the public offering during the road show process.
Coverage is also available for the company’s liability to the underwriters of the transaction itself, and for a variety of transactions, including equity or debt issues, both initial and secondary, whether public and private placements. While not available market-wide, at AIG we can offer various policy periods to ensure that our clients are protected for the entire length of the statute of limitations in their territory or up to a period of 15 years.
For private exit transactions warranty and indemnity cover is available. This is a segment of the market in which we have seen significant growth in demand recent years, particularly from private equity houses which are empowered to use insurance to minimise exposures.
A complex picture There is no doubt that insurance can play a vital role in protecting the value of an investor’s assets, as well as helping to facilitate a variety of exit strategies. The key is to find a supplier who can offer the breadth of products and range of preventative measures to create the optimal solution.
A complex risk environment
“ Insurance can play a vital role in protecting the value of an investor’s assets, as well as helping to facilitate a variety of exit strategies”
6Private Equity & Venture Capital Insurance Services
Key Person Assurance Protection Key Person Assurance Protection (or Key Man Insurance) is designed to protect a company against the impact of being deprived of the services of a key employee through illness or death.
Whilst Key Person Assurance Protection can be purchased as part of a standard insurance programme, the initial catalyst is often an MBO or M&A transaction where the purchaser is motivated, or mandated, to ringfence this exposure within the acquisition target. The decision to purchase Key Person Assurance Protection is frequently taken at a time-critical stage in the deal, so the quotation, underwriting and placement process is often under the microscope with speed as a critical factor.
Insurance market selectionWith 36 years’ experience as a specialist adviser delivering Key Person Assurance Protection contracts, Deal Assured constantly reviews the protection market, as it is rapidly changing and evolving. Private equity houses
require deal-critical advice supported with comprehensive Key Person Assurance Protection contracts and detailed, real-time progress reporting.
Recommendations should be based on a number of key material factors:
n Scope and range of benefits and features;
n Overall ability to deliver extreme speed of service to deliver on deal-critical requirements;
n Appetite for type of risk and whole of market capacity;
n Unfettered access to senior underwriters providing flexible, in-depth quality underwriting;
Stavros Neocleous Founder and Managing Director
+44 (0)1132 470 470
Deal Assured Limited 2nd Floor Harcourt House Chancellor Court The Calls Leeds LS2 7EH
7
n Willingness for information exchange, (share complicated medical & lifestyle underwriting);
n Re-assurance options and a survival period where critical illness is included;
n Competitive premiums, pre and post underwriting;
n Views on financial underwriting and a positive claims outlook;
n Life assured’s age and general state of health, family history, lifestyle, country of residence, occupation and industry sector.
Key considerations and process for underwritersDepending on the facts (i.e. sum assured, scope and range of benefits and features, client’s age, medical history and lifestyle) there are three core aspects to underwriting: medical, lifestyle and financial.
Once we have received the completed proposal forms, we can begin the underwriting process by submitting the proposals to the provider. The provider will request a General Practitioner’s report or Subject Access Request to confirm medical history. The choice of preferred provider will determine which extended team will contact management directly to obtain their availability and to coordinate and confirm the appropriate routine medical and lifestyle underwriting requirements and associated tests. Appointments are arranged at a suitably convenient time and accommodated at a local facility. Once all the relevant data is captured, the premium and policy terms are agreed, and the insurable interest required by Law must be demonstrated at the exact point when risk is assumed, ensuring a valid contract. This can only be timed (new deals) during the completion meeting which we refer to as the “eclipse”.
As a long-established adviser in the market, Deal Assured offers a comprehensive choice of competitive providers and are able to confirm which provider is offering the lowest pre-underwriting indicative monthly premiums. The key is highlighting the preferred provider whilst making a full recommendation of potential providers capable of delivery.
Immediate cover and special circumstancesOn the completion and submission of a clean proposal form to the provider (i.e. individual has no terminal, critical illnesses or adverse family history), the provider will assume risk when instructed by us for a period of sixty days, enabling the full underwriting process to be completed swiftly whilst risk has been assumed, allowing the deal to be completed without delay. All these factors influence our ultimate recommendations which require relationships, experience, skill and knowledge.
Due to medical underwriting requirements, there are 1% of cases in which we are unable to secure terms at any premium with traditional providers. Faced with this dilemma and the possibility of a deal not completing, we can turn to Partnership (www.partnership.co.uk), a specialist provider of Impaired Lives Life Assurance. Partnership underwrites, creates and costs their own very special protection products. Whilst premiums under these circumstances are several multiples of ordinary premium rates, these are modest in comparison to the consequences of aborting a private equity deal.
Market developmentsPrivate equity deals – particularly MBOs – have influenced and shaped the commercial landscape over the past decade, requiring Deal Assured to adapt to deliver appropriate, deal-critical total solutions. It is also important for investors to review Key Person Assurance for their existing portfolio companies.
With deal size increasing (demanding higher sums assured), lifestyles becoming ever more complex, international business travel, threats of terrorism and potentially hazardous pursuits, underwriting is becoming increasing difficult and complex, leading to escalating premiums. As private equity houses will continue to demand transparency about the management teams they invest in, specialist service providers will play an increasingly important role.
Key Person Assurance Protection
“ Private equity houses require deal-critical advice supported with comprehensive Key Person Assurance Protection contracts and detailed, real-time progress reporting”
8Private Equity & Venture Capital Insurance Services
Cyber Liability: A growing concern The media has made us aware of some high profile data breaches and it is evident these can affect a company’s ability to trade, its revenues and reputation. With the growing dependency on technology, cyber risks have increased significantly in recent years.
To ensure best protection of balance sheets and reputation, it is recommended that companies need to consider the following as integral components of their risk management programme:
n Risks associated with, and data managed by, the IT infrastructure
n Controls currently in place to mitigate these risks including disaster recovery/business continuity planning
n Insurance to contain the cost of such events
Who is at risk of a cyber attack?It is evident that any organisation operating a website, conducting business in cyberspace or holding/processing personal data needs protection from an increasing array of risks such as theft, loss, destruction of critical data, libel, defamation, copyright or trademark infringement, vandalism, threats, denial of service and many more. As more business is transacted online, use of mobile electronic devices increases and ‘Big Data’ gets bigger, the risk of data breaches becomes more likely.
Research sponsored by the Department for Business Innovation & Skills revealed that in the UK 83% of large and 87% of small organisations had a security breach in 2012. Costs incurred as a result of security breaches ranged between £450,000 and £850,000 for large organisations to £35,000 to £65,000 for small businesses.
How can a business protect itself?Property, liability, directors & officers and crime policies can provide partial protection but more extensive and specific cover is provided by cyber insurance policies which are intended to mitigate losses from a variety
of cyber-related incidents including cyber extortion, network and system damage and data breaches.
Due to the range and complexity of cyber-related incidents, more companies are exploring insurance protection. The proposed EU Data Protection Regulation, expected to come into force in 2014/15, will almost certainly impose expensive and time-consuming breach notification requirements.
Fines associated with breaches are also set to increase and will start from €250, 000 (or 0.5% of turnover) to €1 million (or 2% of annual worldwide turnover).
Unsurprisingly, the Department for Business Innovation & Skills stated that 81% of senior management teams in large organisations are concerned about security and see it as a high priority.
Who offers cyber liability insurance and what should you look for?With increasing cyber risks and exposures, and high profile losses, the insurance market is responding. Cyber insurance products are developing rapidly to address and respond to the evolving nature of cyber risks and new insurers are entering the market.
There are two key strands to cyber insurance:
n First-party cyber liability refers to a data breach of a company’s own information and services, e.g. website hacked or denial of service attack.
n Third-party cyber liability refers to a data breach which puts at risk customer or partner information the organisation is contracted to keep safe, e.g. a website hack results in exposure of customer credit card details.
Daniel Binns Corporate Broker
+44 (0)113 220 7507
Jelf | Insurance Partnership 3rd Floor 84 Albion Street Leeds LS1 6AG
Insurance Partnership
9
Both forms can be equally damaging. First-party liabilities impact upon the capability of the business to continue to trade, whilst third-party liabilities could impact the entire reputation and brand of the business.
Cyber liability protection essentially falls into three distinct areas of cover:-
n Loss or damage of data
n Cyber extortion (denial of service)
n Command and control
OpinionThere is a phrase in information security circles: “There are two kinds of people: those who have suffered a data breach and those who don’t realise they’ve suffered a data breach.”
Should a breach occur, responding effectively is of vital importance and understanding the process for notification and crisis management can help reassure customers and stakeholders alike that a recovery strategy is in place and is effectively deployed.
Cyber liability insurance, if designed correctly, will provide assistance to businesses at a potentially vulnerable time and protect it against unforeseen financial losses, whilst at the same time minimising damage to brand and reputation.
Cyber Liability: A growing concern
“ Cyber insurance products are developing rapidly to address and respond to the evolving nature of cyber risks”
Jelf Insurance PartnershipJelf and Jelf Insurance Partnership are trading names of The Insurance Partnership Services Ltd (Reg No. 3937509) which is part of Jelf Group plc (Reg No. 2975376) and is authorised and regulated by the Financial Conduct Authority (FCA). Registered address: Hillside Court, Bowling Hill, Chipping Sodbury, Bristol BS37 6JX (Registered in England and Wales). Not all products and services offered are regulated by the FCA. www.jelfgroup.com
10Private Equity & Venture Capital Insurance Services
Private Equity Management Liability Insurance (PEML) The potential liabilities faced by private equity firms can originate from many sources and have become increasingly complex in nature. An effective PEML insurance programme will protect the private equity firm and its individuals against claims resulting from activities performed in managing and providing services to the fund(s).
What does it cover?The PEML solution provides a bespoke and blended insurance programme for private equity firms. A typical PEML programme is likely to include:
n Management liability: protects the directors, officers and key individuals of the private equity firm, its subsidiaries and related entities (i.e. funds, General Partners, investment holding companies, special purpose vehicles) against alleged errors, omissions, misleading statements, and breach of trust or breach of warranty
n Outside directorship liability: covers directors and officers or employees for wrongful acts while operating at portfolio level
n Professional liability covers claims arising from failure in performing professional and financial services.
n Employment practices liability: protects the firm, its officers and employees against employment suits, e.g. alleging wrongful termination, harassment, failure to hire or promote, and discrimination.
n Crime: protects the firm and its funds against loss caused by fraudulent acts including computer hacking.
Who are the potential claimants?Claims have been initiated by:
n Investors
n Directors or employees of portfolio companies
n Lenders to private equity
n Minority shareholders
n Sellers and buyers of portfolio companies
n Portfolio company creditors and liquidators
n Portfolio company co-investors
n Portfolio company customers
What are the types of claims?Allegations have typically included:
n Breach of fiduciary duty
n Breach of regulatory rules
n Breach of good faith and/or trust
n Breach of duty of a director
n Mismanagement
n Misrepresentation, especially to purchasers of portfolio companies
n Breach of confidentiality
n Breach of investment agreement
n Negligent advice
n Employment disputes
It is important that cover is tailored to ensure that the insurance pays before a fund indemnity. The policy should stipulate that insurers shall not exercise rights of subrogation against the fund after paying a claim. These areas are often overlooked or not fully understood by those seeking to procure insurance protection.
Market developmentsRecent developments in claims trends, risk exposures, and insurance solutions need to be continually monitored. Examples include:
n Cyber-related risks: both direct loss and third party liability
James Convey Senior Vice President
+44 (0)20 7357 1000
Marsh Ltd 1 Tower Place West London EC3R 5BU
11
n Recent litigation: this has demonstrated the value to insureds of being able to mitigate loss before a third party actually brings a claim (an important insurance wording consideration).
n Implementation of the Alternative Investment Fund Investment Directive (AIFMD): this prescribes specific coverage requirements applicable to professional indemnity insurance
n Prospectus Liability: how should the risks associated with recent trends in the IPO of portfolio companies be effectively managed?
n Claims statistics: the evolving claims picture shows an increased incidence of class actions, regulatory investigations, tax issues, and vendors bringing claims following aborted deals
What about directors and officers (D&O) liability exposures of portfolio companies?It is important that careful consideration is given to risks that could be covered at the firm level and those which are catered for at the portfolio company level, as well as the adequacy of the protection available. The interaction between insurance arrangements covering both areas should be properly understood and policies should be structured to ensure optimal interaction and coverage.
Common pitfalls include the risk of aggregation of limits of insurance, inappropriate application of insolvency, and major shareholder exclusions and portfolio company policies that are not tailored to pick up the specific risk profile of having private equity involvement.
In addition to the specific risks catered for at the firm level, there are a variety of solutions available at the portfolio level to ensure insurance coverage is tailored to a private equity investment context.
Solutions include:
n D&O diagnostic tools: this is an audit tool to assess the effectiveness of a portfolio company’s D&O liability insurance programme against prioritised ‘best in class’ parameters, specifically in the private equity context
n D&O portfolio company products: these products are tailored for private equity investment, including ‘per claim’ limits (rather than annual aggregate yearly limits) and pre-agreed run-off costs/capacity in the event of a transaction
n D&O portfolio procurement solutions: to design and execute a portfolio-wide procurement programme. This ensures consistency of cover and maximises the portfolio’s buying power
This is a complex area and one that is continually evolving due to changes in the regulatory and legal environment. It is recommended that private equity firms ensure they seek up-to-date advice on policy wordings and the level of cover to meet their specific needs.
Private Equity Management Liability Insurance (PEML)
“ There are a variety of solutions available at the portfolio level to ensure insurance coverage is tailored to a private equity investment context”
12Private Equity & Venture Capital Insurance Services
Partners who perform Historically, insurance portfolio programmes created for private equity funds by brokers have achieved mixed results and typically failed due to the sponsors being either unwilling or unable to mandate the change required within their portfolio companies.
In recent times there has been a transformation in the process, pioneered by Macquarie with their investments, resulting in over US$125 million of savings on insurance premium achieved with optional participation for the companies, on a broker-neutral basis. The shift has been significant enough for the top two global insurance brokers to create internal teams to coordinate and support this new portfolio procurement structure known as the Macquarie Insurance Facility or MIF.
Protean Partners operates successful portfolio insurance programmes for global private equity funds, many of them BVCA members. Protean acts as an extension of the fund team bringing specialist insurance procurement knowledge gained from the experience of working in both broking and underwriting communities. Protean
undertakes the role of programme coordinator working with the fund, the portfolio company, their broker and MIF to ensure purchasing leverage is applied to achieve the desired result.
The primary objective is to reduce insurance spend in the portfolio by an average of 10% to 20% across all lines of general insurance, without a cost to the fund or the portfolio company, whilst working in conjunction with their existing broker.
With MIF now influencing upwards of US$750 million of aggregated purchasing leverage, MIF’s global insurance partners are highly motivated to offer ‘portfolio pricing’ for participating portfolio companies on an open market basis. The breakthrough has been the broker-neutral process, the very low time cost and, most importantly perhaps, a choice of participation for the portfolio companies.
Jason Edwards Director
+44 (0)20 3763 5360
Protean Partners No.1 Gracechurch Street London EC3 0DD
Protean Partners is a trading name of Protean Investment Risks Limited which is authorised by the Financial Conduct Authority, Firm Number 479839.
13
Quantitative and qualitative benefits
Efficiencies in terms of premium savings do not need to come at a cost to the scope of insurance coverage, whilst qualitative benefits can be derived from the access to the global insurance partners at senior levels such as enhanced claims leverage, for example.
Key advantages to the private equity sponsor:
n Value creation within the portfolio
n Evidential savings monitored and reported by Protean Partners
n No financial cost to the private equity sponsor or portfolio company
n Minimal time input from the private equity sponsor.
Key advantages to the portfolio company:
n Retained choice of broker/adviser
n Potential for savings and programme efficiencies
n Independence of the insurance programme maintained
n Confirmation that the existing program is optimised
n Opportunity to maintain below market rates at future renewals
n Access to additional claims leverage
n Retained access to the programme post-exit
n No reduction in the broker’s fees/brokerage.
The growth trend of leveraged buying programmes looks set to continue, especially those which exhibit a symbiotic relationship with existing entities in the purchasing chain. MIF is already the largest global buying programme for insurance in existence and we anticipate its annual premium influence could surpass the US$1bn mark during 2015/2016.
For more information or a discussion about participation, please contact Jason Edwards.
Partners who perform
Global private equity fund case study
Head office: North America
Geographical scope: Global
Funds raised: Over US$40 billon
Portfolio size: 40+ companies
UK financial services company £142,221 saving (23%)
UK media management company £120,647 saving (26%)
US retail company US$715,629 saving (34%)
US manufacturing company US$150,998 saving (21%)
US business software company US$216,376 saving (22%)
“ Our Macquarie investments have saved over US$125 million on insurance premium since we set up the MIF programme in 2008 and these benefits are now being enjoyed by private equity funds and portfolio companies globally. Our highly successful partnership with Protean allows us to deliver a seamless service to the ever-growing population of funds and portfolio companies accessing MIF to achieve preferential terms on their insurance purchasing.” Mark Vorbach, Macquarie Infrastructure and Real Assets (Europe) Limited
“ The engagement with Protean Partners and MIF has been positive for Cinven and our portfolio companies with a number having saved significant amounts to date. Feedback from our portfolio companies has been good and the ability for us to leverage our portfolio spend without creating any tension has proved rewarding.” Antoine Guillen, Cinven Partners LLP
“ Following the introduction by Protean, we have found the MIF relationship to be very effective in achieving procurement efficiencies in our portfolio companies with several saving over 20% on their annual spend.” Top 10 Global Private Equity fund
“ In addition to creating savings for our portfolio companies, Protean/MIF were able to resolve a higher level issue between a portfolio company and their insurer which resulted in the release of $2.5m capital held by the insurer.” Alex Kesseler, PAI Partners SAS
“ We are at the early stages of our relationship with Protean/MIF but have already found their interaction with our portfolio companies has been positive.” Ryan Macaskill, Terra Firma Capital Partners Limited
14Private Equity & Venture Capital Insurance Services
Warranty Insurance for Mergers and Acquisitions Why would warranty insurance add value to your deal? Warranty and Indemnity (W&I) Insurance is often employed to effectively bridge the gap between the deal parties’ positions (typically between buyer and seller) and at times can even enhance them.
W&I Insurance provides protection against financial loss arising due to the breach of warranties and indemnities given in a sale and purchase agreement (SPA). There are two types of W&I policies, ‘Buyer’ or ‘Seller’ side policies which are structured to meet the risk retention and recourse requirements of the deal parties and are set up to essentially mirror the SPA.
Seller-side Policies: Designed to provide cover to a seller and responds to claims made by a buyer. The Policy includes defence and investigation costs.
Buyer-side Policy: Structured to provide coverage for a buyer where they require an
enhanced level of protection through insurance, typically because the recourse against the sellers may be limited.
How can W&I insurance add valuen Enable the seller to limit exposure to liability
for any breach of warranties
n Protect the value of the buyer’s investments in the target
n Facilitate the transaction by removing potential ‘deal-breakers’ over risk allocation
n Reduce greatly, or eliminate, the need to escrow, delayed payments or loan notes
n Enhance the deal by providing security to support the warranties
n Distinguish a bid by supplementing contractual recourse with insurance
n Protect against the uncertainty of the seller’s status
Emily Almond Divisional Director, FINEX Global
+44 (0)20 3124 8584
Willis Limited 51 Lime Street London EC3M 7DQ
15
What does insurance offer protection against?A standard W&I insurance policy covers the Insured for loss which would fall within the scope of the (representations and) warranties in the SPA. It is intended to provide protection for matters which the Insured was not aware of at the time of signing the SPA / entering into the policy. Despite thorough due diligence there may remain unknown risks which could seriously damage the value of the business. Warranty insurance provides financial protection from such risks. In certain jurisdictions such representations and warranties are given on an indemnity basis either in entirety or for areas such as tax.
Legal costsCoverage is usually provided for costs of investigating a loss and defending a claim. For sellers, these costs are incurred in defending the buyer’s warranty claim. For buyers, these are incurred in defending a third party claim such as a tax authority. This is an important aspect of insurance protection as costs in this area can build up quickly and significantly.
Policy periodThe policy period normally mirrors the period provided in the SPA. Insurers can offer buyers an extended period of coverage beyond those negotiated in the SPA, for example in situations where sellers may have restricted their period of risk to less than what is normally negotiated.
Retention / excess / deductibleMost insurers require a policy retention / excess, whereby the policy coverage will not respond for the first amount of risk. The level of retention / excess is dependent on the deal size and claim limitations negotiated in the SPA eg. baskets, and de minimis.
Is cover for specific indemnities or matters identified in due diligence?During due diligence, matters will be identified which will be managed through disclosure and would therefore not be covered by a standard warranty insurance policy. However, contingent
risks are often identified which the buyer is not willing to accept and seeks specific protection for through indemnities &/or escrows.
If such risks are contingent, identifiable and assessable in quantum and likelihood, insurance cover may be available either within the warranty insurance policy or more typically separately as a bespoke solution dependent on the nature of the risk. As the insurance market has matured and insurers gained experience, they have become more sophisticated and there are now variations in the capabilities and solutions offered globally by insurers.
The Willis Global M&A Practice utilises years of experience, expertise and knowledge of the M&A market to guide you on policy coverage and the creation of bespoke solutions.
Warranty Insurance for Mergers and Acquisitions
“ Despite thorough due diligence there may remain unknown risks which could seriously damage the value of the business. Warranty insurance provides financial protection from such risks”
$100M90+
Years helping people insure
brighter tomorrows
63,000AIG employees
worldwide
$1.5BGlobal Property
per risk capacity
130oneWorld Trade Centre rebuilding as lead insurer
Average property casualty claims paid each
business day in 2013
Countries where AIG has clients
Insurance and services provided by member companies of American International Group, Inc. Coverage may not be available in all jurisdictions and is subject to actual policy language. For additional information, please visit our website at www.aig.com. AIG Europe Limited is registered in England: company number 1486260. Registered address: The AIG building, 58 Fenchurch Street, London, EC3M 4AB
People.Insurance isn’t about numbers. It’s about people. In our case, 63,000 people coming together to take on the impossible challenges. Because we believe that with the right people and the right attitude you can turn even the toughest today into the brightest of tomorrows. Learn more at www.aig.co.uk
What’s behind AIG’s numbers?
AIG13071 Brand Numbers BVCA Guide to Ins A5 Lanscape Ad FEB15.indd 1 13/02/2015 15:16
bvca.co.uk/membership
CONNECTEDto a global community of experts
BVCA BE CONNECTED A5 Advert.indd 2 06/03/2015 12:46:05
Our team experience in M&A Insurance stretches back over two decades, yet we pride ourselves on bringing a new & fresh approach to every deal. Challenge Protean to inject some Original Thinking into your transaction.
Specialists in:
Warranty & Indemnity Insurance
Tax Liability Insurance
Contingent Liability Insurance
Protean Investment Risks is authorised and regulated by the Financial Conduct Authority.
Original Thinking from Protean Risk
For more information and 24/7 deal support contact:
James M. Wilson Head of Transaction Solutionst: +44 (0)20 3763 5355 t: +44 (0)77 2036 1151 e: [email protected]
Nathan Sewell CEOt: +44 (0)20 3763 5353 t: +44 (0)78 0192 5692 e: [email protected]
www.proteanrisk.com/transaction-solutions/One Gracechurch Street, London EC3V 0DD
Protean HalfAd Dec14.indd 1 22/12/2014 10:31
There is a viable insurance solution to protect against this emerging threat; Cyber & Data Security Insurance provides the following covers:
To arrange a review of your current insurance cover, and to protect your company from this rising threat, please contact Daniel Binns on 0113 389 1156.
Cyber-crime is on the increase, and is now one of the most popular ways to commit fraud/theft of data and money. It can affect companies of all sizes, from SMEs to large corporates.
www.insurance-partnership.com
Jelf and Jelf Insurance Partnership, are trading names of The Insurance Partnership Services Ltd (Reg No. 3937509) which is part of Jelf Group plc (Reg No. 2975376) and is authorised and regulated by the Financial Conduct Authority (FCA). Registered address: Hillside Court, Bowling Hill, Chipping Sodbury, Bristol BS37 6JX (Registered in England and Wales). JIP0414b-vca
Public relations, crisis management, forensic and security specialist services
Information and communication asset recti cation costs
Cyber business interruption costs
Regulatory defence and penalties Privacy breach costs cover Dishonesty of employees Cyber extortion
0113 220 7507
Private Equity and Mergers & Acquisitions Practice
RISK, INSURANCE ADVISORY, AND TRANSACTIONAL SERVICESOur Private Equity and Mergers & Acquisitions Practice draws from Marsh’s in-depth global knowledge to deliver specialist services to the private equity, infrastructure, and alternative asset industry. We work with clients during the life-cycle of an investment advising on risks at acquisition, portfolio level, and through the exit process. Our global practice consists of more than 150 professionals based worldwide.
For further information on how Marsh can work with you, please visit uk.marsh.com, or call one of our experts below:
EDWIN CHARNAUD+44 (0) 20 7357 [email protected]
DANIEL MAX +44 (0) 20 7357 [email protected]
ANDREW HUNT +44 (0) 20 7357 [email protected]
PETER VERNON +44 (0) 20 7357 [email protected]
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Willis Limited, Registered number: 181116 England and Wales. Registered address: 51 Lime Street, London, EC3M 7DQ. A Lloyd’s Broker.
Authorised and regulated by the Financial Conduct Authority.
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www.willis.com
One of the largest and foremost Private Equity risk advisory practices, with dedicated members specialising in key risk management and mitigation solutions for the Private Equity industry Worldwide.
WILLIS PRIVATE EQUITYPRACTICE GROUP
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British Private Equity & Venture Capital Association
5th Floor East, Chancery House, 53-64 Chancery Lane, London WC2A 1QS T +44 (0)20 7492 0400 [email protected] www.bvca.co.uk
