Introduction to Warranty and Indemnity Insurance 18 October 2012

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1 Introduction to Warranty and Indemnity Insurance 18 October 2012 Mergers & Acquisitions Insurance Group Adrian Furlonge Assistant Vice President Svetlana Soroka Senior Underwriter

2 Introduction Background Who we are What is Warranty and Indemnity Insurance? Insurance Process Coverage & exclusions What the Insurer needs Claims Other Transaction Liability Products

3 Who are we? Largest, longest established and most experienced team in the global transactional insurance market; Provide bespoke insurance solutions for transactions: Warranty & Indemnity, Tax Liability and Litigation Buy-Out risks; Our global team of seventeen underwriters consists of corporate lawyers and litigators drawn from private practice and based in Australia, France, Germany, Spain, Sweden, the UK and USA; We have global capacity with offices in all jurisdictions with Chartis offices; and We have placed insurance on 700 plus transactions (ex North America) in 32 different jurisdictions.

4 Chartis History of GWP & Policy Count excl. US USD m' Policy Count

5 GWP by Country 2012 Finland 1.7% Thailand 2.2% Italy 1.5% Hong Kong 1.5% India 1.3% Japan Czech Republic 1.2% Netherlands 0.6% 1.1% Korea 0.8% Austria 0.6% Sw itzerland 0.4% China 0.3% Belgium 0.3% New Zealand 0.3% Sw eden 2.3% South Africa 2.5% UK 34.1% Spain 4.1% Singapore 5.0% Germany 7.9% France 12.4% Australia 18.1%

6 What is Warranty & Indemnity Insurance? We can insure either the buyer or the seller. We insure: share sales; and asset sales Premiums are generally 1% to 2% of the limit (subject to minimum premium of 40k). Maximum Chartis Limit USD50,000,000 The policy will generally take five working days to underwrite and bind.

7 What does it Cost? Considered Expensive Uncertainty of pricing Lack of competition Significant comparative reduction Supply side expansion Underwriting analysis vastly improved Underwriters understand the M&A Industry Pricing: 1% - 2% of policy limit; one off premium

8 Average Rate On Line - UK W&I

9 Sell Side Policy Transaction value Sale & Purchase Agreement Buyer s risk Insured: The warrantors Objective: To provide coverage in the event that the buyer sues the seller for a breach of warranty or indemnity Structure: Can insure up to the warranty cap as defined by the sale document Policy of indemnity: Seller still retains liability under sale document, therefore is liable for any breach not picked up by the insurance policy Limitation of liability for breach of warranty under the SPA Seller s risk Policy of indemnity Insurance policy Policy limit

10 Buy - Side Policy Transaction value Sale & Purchase Agreement Insured: The buyer Objective: To provide coverage against financial loss suffered as a result of a breach of the seller s warranties Structure: Warrantors give warranties but these are capped at a lower amount, the insurance policy sits in excess of this Policy limit Buyer s risk Policy to protect against financial loss Insurance policy (buyer s risk appetite to determine limit) Limitation of liability for breach of warranty under the SPA Seller s risk First party policy: Policy is independent of the seller, therefore the buyer is entitled to make a claim directly against the policy

11 Motivations for Insurance Seller Side Sellers unwilling or unable to give financial support behind warranties e.g. secondary buy-outs, acquisition from insolvent sellers; Reluctance of sellers to retain proceeds in escrow; Optimising a clean exit; Sale under a turnaround situation. Buyer Side Investing in new or unfamiliar jurisdictions or industry sectors; Enhancing bidder status; Alternative to contractual recourse for a particular issue; Best practice risk management / corporate governance; Comfort to debt finance providers.

12 W&I Insurance - Policy Cover Bespoke policy tailored to the transaction Back-to-back with the SPA Breach of insured warranties - aim for full cover Duration matches survival period under SPA at a minimum Matching de minimis/thresholds under SPA Specific indemnities? Enhanced buyer protection: Removal of awareness qualified warranties Increase survival periods Reduce claims thresholds Defence costs Fraud by the seller on a buyer-side policy No requirement to pursue the seller before claiming under the policy on a buyer-side policy

13 W&I Insurance - Exclusions Known issues Completion account adjustments Fines and penalties to the extent they are uninsurable by law Fraud by the seller on a seller-side policy Forward-looking warranties Pensions Underfunding Transfer Pricing Post completion voluntary acts Potentially transaction specific issues

14 Underwriting process Day 1 Initial submission Internal review Heads of terms Engagement letter Deal Signs Ideally this will be about 14 days, but can be from 2 days to 18 months Detailed underwriting Negotiate cover Binding policy Policy review

15 Submission a) Details of the Buyer and Seller b) Details of the Target business c) Transaction value d) Limit of indemnity sought - Chartis capacity up to USD50,000,000 e) Retention insured is prepared to accept - N.B market standard is 1% of transaction value f) Does the insured want cover for both the warranties and a tax covenant (if applicable) and any other transaction specific indemnities that are being given by the Seller. g) Estimated signing or completion date of the transaction h) Attach the following documents: SPA Disclosure Letter Tax Covenant/Deed (if there is one) Due diligence (not always available on Seller side) Data room index

16 Underwriting Considerations Identity of the buyer, seller and their advisors Target business and location Quality of the transaction process Value of transaction Scope of the insured warranties - buyer or seller friendly? Seller s liability under the SPA Gap between signing and completion? Why do they want insurance? Do both parties know about insurance?

17 Claims Based on claims information for the period July 2000 to April 2012 from all non-us jurisdictions: - Claim frequency of 13% (i.e. 1 in 7 policies) alleged breaches - France sees highest claim frequency. - less than 5% of claims fall outside of the remit of the Warranty & Indemnity policy notifications on UK policies in 2010/2011 of which: - 2 claims paid - 7 circumstances - 2 third party demands being defended in conjunction with Insured

18 Claims: Warranties alleged to have been breached The majority of alleged breaches relate to tax/financial statements warranties 30% 25% 20% 15% 10% 5% 0% Type of w arranty breach Multiple - 16% Tax - 25% Financial Statements - 16% IP - 6% Compliance - 4% Litigation - 4% Employee - 4% Other - 22%

19 Claims: Delay between policy date and claims date (global (ex-u.s.)) 16% of claims are notified during the first 3 months following inception 28% of claims are notified during the first 6 months following inception 66% of claims are notified during the first 12 months following inception Months % Months % Months % Months % Months %

20 Tax Insurance motivation A policy to enable a taxpayer to reduce/eliminate tax exposure arising where the underlying legal advice supporting a particular tax treatment may be subject to future challenge by tax authorities Risk of tax audit/future litigation is transferred to insurer Gives certainty as to the quantum of a contingent liability Can be used pre or post transaction Can facilitate a sale or acquisition by providing certainty and managing negative financial impact Can resolve deadlocks in negotiations and avoid escrow arrangements Can be used where parties have not obtained prior clearance from a tax authority due to time constraints or commercial considerations.

21 Tax Insurance appetite Questions of law. We do not insure the facts relevant to the taxpayer s position; we place reliance on the taxpayer s factual representations Issues relating to the legal interpretation of tax legislation, administrative rulings or case law as applied to the facts presented Commercial purpose/m&a transaction related Strong opinion required from law firm, QC or accountants Promoter driven, repetitive or purely tax motivated transactions Transactions or issues already under audit or in litigation with tax authorities Legislative changes We don t offer insurance in certain jurisdictions (where unstable or potential enforcement issues) Review of tax authority decisions (whether on technical or procedural grounds)

22 Tax Insurance - policy Coverage: Tax payable as a consequence of the transaction (after deducting off-setting benefits) Defence costs (i.e. professional adviser expenses) may be paid in advance Gross-up of taxes payable with respect to the tax liability insurance proceeds Interest and non-criminal fines or penalties in the event of a non-favourable determination Policy to cover gap between best case and worst case Policy Form: Period can be up to 7 years Chartis capacity is 15 million Policy negotiated on a case by case basis with Insured Structured to ensure alignment of interest between taxpayer and Chartis Pricing usually between 4% - 8% of the limit of liability Deductible or excess starting point is generally based upon estimated defence costs or best case scenario

23 Indemnity Insurance Enables liabilities to be ring-fenced which may arise from a current or anticipated litigation, other dispute or identified risk. Eliminates obstacles in the way of a pending sale or dispute Term runs from the transaction closing date until settlement or final adjudication of the dispute. Prospects of a favourable outcome need to be good. Typical underwriting period is 2 to 3 weeks from the date of the first enquiry. Limit 1.5m to 15m aggregate limit of liability. Premium 4-8% of the limit purchased Retention to be agreed by reference to the deal specifics.

24 Any questions

25 Mergers & Acquisitions Insurance Group Chartis Europe Limited You can find further information about our M&A Insurance Group and our products on our homepage Please feel free to contact us to discuss any questions you may have about our products. Adrian Furlonge Svetlana Soroka Assistant Vice President Senior Underwriter Tel: Tel:

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27 Disclaimer Whilst every effort has been taken to ensure the accuracy of the information in these pages, we make no representation and/or warranty express or implied that the financial information and/or information is correct, complete or up to date. The financial information and/or information is subject to change at any time without notice. You should not take (or refrain from taking) any action in reliance on the financial information and or information and we will not be liable for any loss or damage of any kind (including, without limitation, damage for loss of business or loss of profits) arising directly or indirectly as a result of such action or any decision taken. Chartis Europe Limited is authorised and regulated by the Financial Services Authority. Registered in England: Company Number Registered Address: The Chartis Building, 58 Fenchurch Street, London EC3M 4AB Chartis is a world leading property-casualty and general insurance organisation serving more than 70 million clients around the world. With one of the industry s most extensive ranges of products and services, deep claims expertise and excellent financial strength, Chartis enables its commercial and personal insurance clients alike to manage risk with confidence. Within the UK, Chartis Europe Limited is one of the largest providers of general insurance. With offices throughout the country, we insure many of the UK s top businesses, thousands of mid sized and smaller companies, as well as many public sector organisations and millions of individuals. For additional information please visit our website at Copyright Reserved