Transcript Document

Introduction to Warranty and Indemnity
Insurance – 18 October 2012
Mergers & Acquisitions Insurance Group
Adrian Furlonge – Assistant Vice President
Svetlana Soroka – Senior Underwriter
Introduction
• Background
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
Who we are
What is Warranty and Indemnity Insurance?
• Insurance Process
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Coverage & exclusions
What the Insurer needs
• Claims
• Other Transaction Liability Products
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.
USD m'
Policy Count
Chartis History of GWP & Policy Count excl. US
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
GWP by Country 2012
Italy
1.5%
Hong Kong
1.5%
Finland
1.7%
India
1.3%
Japan
Czech Republic
1.2% Netherlands
0.6%
1.1%
Korea
0.8%
Thailand
2.2%
Austria
0.6%
Sw itzerland
0.4%
China
0.3%
Belgium
0.3%
New Zealand
0.3%
Sw eden
2.3%
UK
34.1%
South Africa
2.5%
Spain
4.1%
Singapore
5.0%
Germany
7.9%
France
12.4%
Australia
18.1%
What is Warranty & Indemnity
Insurance?
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•
We can insure either the buyer or the seller.
We insure:
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•
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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.
What does it Cost?
• Uncertainty of pricing
• Significant comparative
reduction
• Supply side expansion
• Lack of competition
• Underwriting analysis vastly
improved
• Considered Expensive
• Underwriters understand the
M&A Industry
 Pricing: 1% - 2% of policy limit; one off premium
Average Rate On Line - UK W&I
3.5
3
2.5
2
1.5
1
0.5
0
2007
2008
2009
2010
2011
Sell – Side Policy
•Insured: The warrantors
Transaction
value
Sale & Purchase
Agreement
•Structure: Can insure up to the warranty cap as defined
by the sale document
Buyer’s
risk
Limitation
of liability
for breach
of
warranty
under the
SPA
•Objective: To provide coverage in the event that the buyer
sues the seller for a breach of warranty or indemnity
•Policy of indemnity: Seller still retains liability under sale
document, therefore is liable for any breach not picked up
by the insurance policy
Policy
limit
Seller’s
risk
Policy of
indemnity
Insurance
policy
Buy - Side Policy
•Insured:
Transaction
value
Sale & Purchase
Agreement
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
Limitation
of liability
for breach
of
warranty
under the
SPA
Seller’s
risk
Policy to
protect against
financial loss
Insurance
(buyer’s
risk
appetite to
determine
limit)
policy
•First party policy: Policy is independent of the seller,
therefore the buyer is entitled to make a claim directly
against the policy
Motivations for Insurance
Seller Side
•
Sellers unwilling or unable to give financial support behind warranties
e.g. secondary buy-outs, acquisition from insolvent sellers;
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Reluctance of sellers to retain proceeds in escrow;
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Optimising a “clean” exit;
•
Sale under a turnaround situation.
Buyer Side
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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.
W&I Insurance - Policy Cover
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•
Bespoke policy tailored to the transaction
Back-to-back with the SPA
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Enhanced buyer protection:
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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?
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
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
Underwriting process
Day 1
Initial submission
Internal review
Heads of terms
Engagement letter
Detailed underwriting
Deal Signs
Ideally this will be about
14 days, but can be
from 2 days to 18
months
Negotiate cover
Binding policy
Policy
review
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
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?
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).
- 160 alleged breaches
- France sees highest claim frequency.
- less than 5% of claims fall outside of the remit of the Warranty
& Indemnity policy
2010-2011
- 11 notifications on UK policies in 2010/2011 of which:
- 2 claims paid
- 7 circumstances
- 2 third party demands being defended in conjunction with
Insured
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%
Claims: Delay between policy date and
claims date (global (ex-U.S.))
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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 24+ 15%
Months 0-3 16%
Months 12-24
19%
Months 3-6 12%
Months 6-12
38%
Tax Insurance – motivation
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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
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Risk of tax audit/future litigation is transferred to insurer
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Gives certainty as to the quantum of a contingent liability
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Can be used pre or post transaction
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Can facilitate a sale or acquisition by providing certainty and managing
negative financial impact
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Can resolve deadlocks in negotiations and avoid escrow arrangements
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Can be used where parties have not obtained prior clearance from a tax
authority due to time constraints or commercial considerations.
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)
Tax Insurance - policy
Coverage:
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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
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Chartis’ capacity is £15 million
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Policy negotiated on a case by case basis with Insured
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Structured to ensure alignment of interest between taxpayer and Chartis
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Pricing usually between 4% - 8% of the limit of liability
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Deductible or excess starting point is generally based upon estimated defence
costs or ‘best case’ scenario
Indemnity Insurance
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Enables liabilities to be ring-fenced which may arise from a current or
anticipated litigation, other dispute or identified risk.
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Eliminates obstacles in the way of a pending sale or dispute
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Term runs from the transaction closing date until settlement or final
adjudication of the dispute.
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Prospects of a favourable outcome need to be good.
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Typical underwriting period is 2 to 3 weeks from the date of the first
enquiry.
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Limit £1.5m to £15m aggregate limit of liability.
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Premium 4-8% of the limit purchased
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Retention to be agreed by reference to the deal specifics.
Any questions
Mergers & Acquisitions Insurance Group
Chartis Europe Limited
You can find further information about our M&A Insurance Group and our products
on our homepage
http://www.chartisinsurance.com/_911_217012.html
Please feel free to contact us to discuss any questions you may have about our products.
Adrian Furlonge
Assistant Vice President
Tel: +44 20 7954 4955
[email protected]
Svetlana Soroka
Senior Underwriter
Tel: +44 20 7954 8383
[email protected]
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 1486260. 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 www.chartisinsurance.com\uk.
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