Insurance in the M&A Industry

Transcription

1 For Audio Participation Dial: Passcode: * * Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients but may be representative of clients 321 N. Clark Street, Suite 2800, Chicago, IL Insurance in the M&A Industry September 16,

2 Housekeeping Items 3 Call for technology assistance Dial *0 (star/zero) for audio assistance Questions can be entered via the Q&A tab located on your menu bar at the top of your screen. We will have ample time to address them at the end of the program We encourage you to maximize the PowerPoint to full screen usage: Hit F5 on your keyboard; or Select View from the toolbar menu and click Full Screen To print a copy of this presentation: Click on the printer icon in the lower right-hand corner Convert the presentation to PDF and print as usual Foley will apply for CLE credit after the Web conference. If you did not supply your CLE information upon registration, please it to [email protected] Today s Presenters 4 Gordon Davenport Foley & Lardner LLP Mary Duffy Aon Private Equity & Transaction Solutions Ethan Lenz Foley & Lardner LLP 2

3 Insurance in the M&A Industry Outline of Topics Common Types of Commercial Insurance 5 Due Diligence Issues Tail and other Post-Closing Issues Drafting Insurance-Related Provisions Transaction Insurance Reps & Warranties Insurance Tax Insurance Other insurance, e.g. Litigation Buyout, Contingent Liability, Environmental First Party Common Types of Commercial Insurance Property (Buildings and Business Personal Property) 6 Time Element (Loss of Business Income/Extra Expense) Crime (Employee Theft, Off Premises Thefts, etc.) 3

4 Third Party Common Types of Commercial Insurance Commercial General Liability (CGL) Workers Comp/Employers Liability Directors & Officers Liability Fiduciary Liability Employment Practices Liability Professional Liability/E & O Umbrella/Excess Liability 7 Common Types of Commercial Insurance Occurrence-Based Liability Policies 8 Cover occurrences taking place during policy period regardless of when claim is filed e.g., 2007 policy covers liability from bodily injury that occurred in

5 Common Types of Commercial Insurance Claims-Made Liability Policies 9 Cover claims-made during the Policy Period regardless of when injury or act giving rise to injury took place e.g., 2009 policy covers claim made this year even though it s based on 2006 financials Beware of Retroactive Dates Common Types of Commercial Liability Insurance Commercial General Liability Insurance 10 Property Damage and Bodily Injury Separate limits for products/completed operations Personal Injury and Advertising Injury Typically Occurrence Based Coverage 5

6 Common Types of Commercial Liability Insurance Workers Compensation and Employers Liability Workers Compensation Statutory benefits for bodily injury by accident or disease No other limits Medical expenses Lost wages Accident must occur during policy period or last exposure to conditions causing disease must occur during policy period 11 Common Types of Commercial Liability Insurance Workers Compensation and Employers Liability (cont d.) Employers Liability Other damages arising from occupational injuries Third-party-over actions Loss of consortium Dual capacity claims 12 6

7 Common Types of Commercial Liability Insurance Directors & Officers Liability Insurance Non-indemnified/Non-Indemnifiable Claims Company Reimbursement for Indemnified Claims Entity Coverage Limited coverage for publicly-held companies Securities claims Employment practices claims (sometimes) Typically claims-made coverage 13 Common Types of Commercial Liability Insurance Miscellaneous Fiduciary Liability Employee Benefit Plans 14 EPL Discrimination, Harassment, etc. Professional Liability Liability from Provision of Professional Services 7

8 Alternative Arrangements 15 Large Deductible Plans Retrospectively Rated Plans Captive Insurance Companies Alternative Arrangements 16 Captive Insurance Companies Formalized Self-Insurance Change of Control Issues Financial Stability Issues Financial Statements Reserve Adequacy/Actuarial Analyses 8

9 Commercial Insurance Considerations/Applications Acquisition Due Diligence 17 Insurance Policy Archeology Asset Acquisitions Schedule of all liability policies for last 7-10 years Exception = some claims-made policies Stock Purchase Schedule of all liability policies since formation Same exception Commercial Insurance Considerations/Applications Acquisition Due Diligence (cont d.) 18 Copies of all occurrence-based liability policies for at least last 3 years (preferably 6) Copies of all current property and claimsmade policies Copies of all policies with pending claims 9

10 Commercial Insurance Considerations/Applications Acquisition Due Diligence (cont d.) 19 What to Look for (Third Party Policies) Types of coverage Insurer name A.M. Best rating Are they solvent? Insureds Target and all subsidiaries, etc. Commercial Insurance Considerations/Applications Acquisition Due Diligence (cont d.) 20 What to look for Additional insureds Policy period Premiums Retrospectively rated? Subject to audit? Policy limits and deductibles Captive arrangements 10

11 Commercial Insurance Considerations/Applications Acquisition Due Diligence (cont d.) 21 What to Look for (First Party Policies) Schedule of all current policies Locations covered Insurer and insured Mortgagees/loss payees Limits/deductibles Policy period Commercial Insurance Considerations/Applications Acquisition Due Diligence (cont d.) 22 Claims Loss Runs Identify extraordinary claims Denied claims Are any limits exhausted/severely depleted? 11

12 Post-Closing Issues 23 How will coverage be maintained for acquired entities? Integration Stand-alone Post-Closing Issues 24 Change of Control Issues Do policies contain Change of Control Provisions? Check all policies D & O, EPL, Fiduciary are most common Possibly Professional Liability 12

13 Post-Closing Issues 25 Change of Control Issues (cont d.) Provisions typically put claims-made policies into run-off Run-off continues for remainder of policy period Only covers claims based on pre-closing Wrongful Acts Post-Closing Issues 26 Tails What they do Extend time to make claims under claims-made policy Typically 1, 3, or 6 years Usually only get remaining limit Who pays for it? Premiums can be significant %+ is common 13

14 Post-Closing Issues 27 Tails (cont'd.) Usually purchase from current insurer Many pitfalls with buying from other insurers Insurance-related Provisions For Deal Agreements Usually Most Important to Acquirer 28 But tail issues usually of greater importance to seller 14

15 Insurance-related Provisions For Deal Agreements Reps and Warranties Adequate insurance is and has been maintained Schedule of current policies Prior years occurrence-based policies Policies with pending claims Sound insurers A.M. Best ratings Adequate funding of captive 29 Insurance-related Provisions For Deal Agreements Reps and Warranties (cont'd.) 30 Identification of occurrence-based policies with significant depletion of limits Identification of policies with pending cancellations/non-renewals Identification of material claims issues 15

16 Insurance-related Provisions For Deal Agreements Tails 31 Who will pay for the tail? Consider caps How long will the tail(s) be? Reps & Warranties Insurance Elements of Purchase Agreement 32 Seller makes statements regarding the business being sold Reps & Warranties Buyer wants financial recourse against the Seller if statements aren t accurate & Buyer sustains a loss Indemnification Seller seeks to: Limit the length of time it s on the hook for breaches of R&W Survival Period of R&W Define the maximum amount of the indemnification The Cap Make sure the Buyer pays a minimum amount before requesting indemnification The Basket Buyer wants security that there will be financial resources to back up Seller s indemnification obligations and/or Escrow R&W Policy 16

17 Reps & Warranties Insurance 33 Reps & Warranties Insurance can insure either buyers or sellers in M&A transactions for liability arising out of a breach of a rep or warranty about the target company or business discovered post-closing. Buyer-side policy pays the buyer directly for such losses and can be used to supplement the seller s escrow / indemnification cap. Seller-side policy reimburses the seller for such losses and can be used to backstop the seller s escrow / indemnification cap. R&W Policies can cover all reps & warranties in Purchase Agreement (environmental reps limited to a few insurers) Structure depends on objectives of parties Buyers Reps & Warranties Insurance Increase maximum indemnity / extend survival period for breaches of reps & warranties Distinguish bid in auction Protect key relationships Ease collection concerns Provide recourse when no seller indemnity possible (public company sales, bankruptcy) Why buy R&W Insurance? Sellers Reduce contingent liabilities Distribute sale proceeds Protect passive sellers Expedite sale process Attract best offers by maximizing indemnification 34 17

18 Reps & Warranties Insurance Global market State of the Market Over 600 R&W policies issued worldwide in past decade Aon is global leader in policies brokered 35 Increased capacity Up to $150 million readily available per transaction Additional capacity available if needed Improved pricing and deductibles Premium typically 2% - 4% of limit of liability Deductibles generally 1% - 2% of transaction value Carrier commitment to sector AIG, The Hartford, Zurich, Lloyd s of London, CNA Reps & Warranties Insurance Diverse client base State of the Market Balanced mix of PE firms and corporate clients Numerous repeat buyers Utilized on acquisition and disposition of portfolio companies 36 Candidates for coverage Transactions from $15 million to $1 billion Any industry space manufacturing, financial, energy, retail, technology Carrier cooperation Improved policy forms = broad coverage and favorable terms More efficient underwriting process Proven claims paying ability 18

19 Situation Reps & Warranties Insurance Distinguish Bid In Auction Case Studies Strategic buyer was bidding on privately-held asset management company in a hotly contested auction Buyer expected all bids to be substantially similar on price (approximately $100 million) and wanted to distinguish its bid without raising price Solution Aon structured and negotiated principal terms of a Buyer-side R&W Policy prior to Buyer s bid being submitted Buyer submitted its bid with lower than customary indemnification request ($2 million escrow), confident that R&W Policy would be in place if it won the bid R&W Policy included as a condition to closing $15 million limit; $2 million retention (equal to escrow) 37 Obtaining Coverage: Phase I Procedures 38 Broker Selection Required documentation Acquisition agreement and disclosure schedules (if available) Financial statements of the acquired company or business Offering memorandum, if any Confidentiality agreement can be provided upon request Preliminary review of transaction Review of required documentation Conference call with applicant and its advisors to discuss Submission to Selected Insurance Markets Non-Binding Quotes Obtained (2 3 days) Outlines the general terms and conditions of the proposed R&W insurance Insurers do not charge a fee to provide a Non-Binding Quote -- once an applicant decides to move forward and executes the Quote, an underwriting fee ($10K-$25K) is required 19

20 Obtaining Coverage: Phase II Procedures 39 Select insurer(s) to commence Phase II Due Diligence Insurers conduct a high level review of the transaction Access to data room / review of transaction materials Conduct underwriting calls with the applicant and its advisors Review is akin to a second look or audit of the underlying due diligence / disclosure process Insurers make final coverage determination Manuscript policy is negotiated concurrently with Insurer Due Diligence Binder agreement Insurer(s) issue a binder agreement specifying the key coverage terms (e.g., premium, retention and limit of liability) The negotiated policy is attached as an exhibit to the binder agreement Phase II takes approximately 7 10 business days (can be faster, if necessary) Policy issued generally 30 days after the Closing, subject to satisfaction of conditions in Binder (can be faster, if necessary) Tax Insurance 40 Tax Insurance protects against failure of a transaction or situation, whether current or historical, to qualify for its intended tax treatment. 20

21 Tax Insurance 41 Representative Subject Matters for Tax Insurance Tax-free Reorganizations Section 355 Spin-Offs Tax-free Mergers Partnership Issues Section 388(h)(10) Elections/S Corporation Issues Employee Benefits Issues Section 280G Golden Parachute Issues Real estate acquisitions/sales NOLs Tax Credits (Synfuels, Low Income Housing, etc.) Tax Insurance 42 Why Buy Tax Insurance? Alternative to Private Letter Ruling Confidentiality Allocation of Economic Risk of Tax Loss Remove a Transaction Issue Security to Transaction Counterparty Credit Rating of Indemnitor 21

22 Tax Insurance 43 Situations for which Tax Insurance is Generally Not Available Transactions with no economic purpose, i.e., tax shelters Those solely involving: Tax rate changes Changes in law Prepackaged or off-the-shelf investment products Repetitive transactions for the same taxpayer Litigation Buyout Insurance 44 What is Litigation Buyout Insurance? A Litigation Buyout Insurance Policy is a specially designed insurance policy which affords coverage for past, current, or prospective litigation and claims which are either uninsured or underinsured. Can Be Structured to Cover: Defense Costs Settlements, Judgments and Defense Costs Judgments Only 22

23 Contingent Liability Insurance 45 What is Contingent Liability Insurance? Contingent Liability Insurance Policy is specifically tailored to afford coverage to any liability encountered on a transaction that don t fit into any traditional or transactional insurance products Used to Cover: Known or unknown liabilities Difficult to quantify liabilities Low frequency high severity issues 46 Questions & Answers 23

24 Presenter Contacts 47 Gordon Davenport, III Mary Duffy Ethan Lenz Mark Your Calendars 48 Please save the date for the remaining topic in the 2009 M&A Briefing Series November 5 Impact of the Transition to International Financial Reporting Standards on M&A Please visit to register and for more details 24

25 Thank You 49 A copy of the PowerPoint presentation and a multimedia recording will be available on our Web site within hours: We welcome your feedback. Please take a few moments before you leave the Web conference today to provide us with your feedback: 25