M&A & Insurance

Mergers & Acquisitions Capabilities Presentation

RIMS Fairfield/Westchester Chapter

May 14th, 2013

WILLIS M&A VALUE PROPOSITION

Experience of M&A Team– FRESH SET OF EYES!– Understand how risk impacts returns across all industries regardless of size.– Expertise gained through over 5,000 transactions of experience enables us to

anticipate and move quickly.

Definition of Due Diligence– Go far beyond the “commodity” of insurance products.– Perform review of financial, legal, and risk management exposures, quantify those and

provide opportunities to control costs both on and off balance sheet.

Fully integrated production and execution resources providing single point of contact delivering resources where and when needed.

Transaction Insurance Products

Representations & Warranties

Insures a seller or a buyer for loss arising from a breach of warranties &/or indemnities in an acquisition agreement

TaxInsurance to protect the insured against liability to pay additional tax, fines and penalties, typically relating to an identified specific contingent tax issue or treatment

Environmental

Insurance against historic or operational environmental liability or loss arising from a pollution or contamination event

Contingent RisksInsurance for contingent liabilities identified in a transaction e.g. litigation buy-out or possible legal interpretation

Current Market ConditionsR&W Insurance: Market for R&W and other transactional risk has evolved New entrants in the market driving competition – better pricing R&W Insurance coverage has improved substantially in recent years and has become more aligned with acquisition agreements and underlying indemnification provisions (actual knowledge, removal of subject matter exclusions, lower pricing and overall better policy terms available)

M&A Market Activity and Demand: Increased demand for Representations and Warranties Insurance. In excess of 350 policies were placed in the entire market in 2010 and over 500 in 2011 and 2012. Willis placed in excess of 150 policies globally in 2012. Strategic utilization of R&W insurance increasing Growth in strategic transactions and need for “security” Lenders driving interest in securing indemnification rights Increased sensitivity to risk and risk transfer capabilities

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R&W Insurance

Protects against financial losses resulting from inaccuracies in the representations and warranties relating to the target company or selling shareholders

Buyer-side and Seller-side policies – knowledge implications Capacity to insure limits from $1 million to $300,000,000+ Pricing generally 2% to 4% of the limit of liability – more often in range of

2% to 3% of limits in current market Policy period typically matches survival period in acquisition agreement (up

to 6 years) or extends survival period up to 6 years Retention: Generally 1% to 3% of the transaction value

- Drops down as escrow is released Items not covered: forward looking statements and projections, covenants

(can be considered in some situations), known or disclosed items (may be addressed via a separate contingency policy)

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Reasons for Using R&W Insurance Indemnification dynamics – seller versus buyer objectives

Strategic use by buyers and sellers- Distinguish a bid in a competitive auction- Build into seller offering to achieve cleaner exit

Increase the size or length of indemnity for a buyer – e.g. supplement escrow/cap with additional indemnification and/or increase survival term

Protect passive investors

Allow seller to limit indemnification – lower escrows/caps and shorter survival

Strategic buyer / Private Equity seller applications

Security where concern over collecting indemnification

Provide indemnification in non-recourse deals such as bankruptcy sales, take private transactions, and ESOP transaction

TRANSACTIONAL SOLUTIONSREPRESENTATIONS &

WARRANTIES INSURANCE

– Seller Side Policy.– Buyer Side Policy.– Can be structured in conjunction

with a bid to offer more preferred deal terms.

– Assists in facility deal process where there might otherwise me an impasse.

– Waiver subrogation against seller (except fraud) so that seller parties can provide more complete reps.

TAX INSURANCE

– Insurance Proceeds avoid negative cashflow

– Disclosure issues backstopped– Respond to tax positions– Provides a solution in a transaction

where a specific tax position might be in question

CONTINGENT LIABILITY INSURANCE

– Successor Liability Insurance– Legislative Contingency– Specific Peril Contingency

LITIGATION BUYOUT COVERAGE

– Loss Portfolio Transfer– Contingent Exposure Coverage– Can be structured to respond excess

over existing insurance– Can provide a catastrophic cap over a

calculated damage analysis– Can be fully transferred to a 3rd party