WARRANTY & INDEMNITY INSURANCE <br />FOR FINANCIAL SPONSORS<br />8 October 2010<br />
EXECUTIVE SUMMARY<br /><ul><li>W&I insurance is used by a buyer or seller to insure the liability created by the warrantie...
Buyers enhance their bidder status by accepting lower warranty caps and providing a clean exit
Sellers can distribute proceeds rather than be subject to an escrow.
Increased usage and acceptance as a result of competition and development of the product:
reduced pricing – premiums of 1.5%- 2.5% of limit purchased;
simplified underwriting – Minimal effort required from the deal team.
enhanced coverage – able to mirror SPA.
Mega Capital is one of the leading advisor and arranger of W&I (and other transactional) Insurance in Australia and has ac...
M&A team includes 3 executives with combined 40 years insurance experience</li></li></ul><li>WARRANTY & INDEMNITY INSURANC...
Available for off market transactions only
Applies to sale of company or asset sale
Can only be based on Warranties in the SPA including, e.g.
undertakings for the future
accuracy of Information (past, present facts about business)</li></li></ul><li>MOTIVATIONS BEHIND PURCHASING A W&I POLICY<...
Reluctance of sellers to retain proceeds in escrow, optimising a clean exit
Upcoming SlideShare
Loading in...5
×

WARRANTY & INDEMNITY INSURANCE FOR FINANCIAL SPONSORS

2,503

Published on

WARRANTY & INDEMNITY INSURANCE
FOR FINANCIAL SPONSORS

Published in: Economy & Finance
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
2,503
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
0
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

WARRANTY & INDEMNITY INSURANCE FOR FINANCIAL SPONSORS

  1. 1. WARRANTY & INDEMNITY INSURANCE <br />FOR FINANCIAL SPONSORS<br />8 October 2010<br />
  2. 2. EXECUTIVE SUMMARY<br /><ul><li>W&I insurance is used by a buyer or seller to insure the liability created by the warranties and indemnities in the sale and purchase agreement (SPA)
  3. 3. Buyers enhance their bidder status by accepting lower warranty caps and providing a clean exit
  4. 4. Sellers can distribute proceeds rather than be subject to an escrow.
  5. 5. Increased usage and acceptance as a result of competition and development of the product:
  6. 6. reduced pricing – premiums of 1.5%- 2.5% of limit purchased;
  7. 7. simplified underwriting – Minimal effort required from the deal team.
  8. 8. enhanced coverage – able to mirror SPA.
  9. 9. Mega Capital is one of the leading advisor and arranger of W&I (and other transactional) Insurance in Australia and has access to markets globally.
  10. 10. M&A team includes 3 executives with combined 40 years insurance experience</li></li></ul><li>WARRANTY & INDEMNITY INSURANCE (W&I)<br /><ul><li>Protects a seller or buyer from financial loss resulting from inaccuracies in the representations and warranties as part of an acquisition or sale of a company or a business.
  11. 11. Available for off market transactions only
  12. 12. Applies to sale of company or asset sale
  13. 13. Can only be based on Warranties in the SPA including, e.g.
  14. 14. undertakings for the future
  15. 15. accuracy of Information (past, present facts about business)</li></li></ul><li>MOTIVATIONS BEHIND PURCHASING A W&I POLICY<br />PURCHASERS<br />VENDORS<br /><ul><li>Sellers unwilling or unable to give financial support behind warranties e.g. secondary buy-outs, acquisition from insolvent sellers
  16. 16. Reluctance of sellers to retain proceeds in escrow, optimising a clean exit
  17. 17. Seller able to enhance auction sale process by offering more wholesome warranties
  18. 18. Mismatch in expectations relating to contractual recourse
  19. 19. Insure up to warranty cap
  20. 20. Enhancing bidder status e.g. by accepting lower warranty cap, offering ‘clean’ exit for seller
  21. 21. Investing in new or unfamiliar jurisdictions / industry sectors or acquisition from distressed seller
  22. 22. Alternative to contractual recourse for a particular issue
  23. 23. Best practice risk management / corporate governance
  24. 24. Comfort to debt finance providers</li></li></ul><li>Buyer’s<br />risk<br />Seller’s<br />risk<br />W&I – A SELL SIDE POLICY <br /><ul><li>Insured: The warrantors
  25. 25. Objective: To provide coverage in the event that the buyer sues the seller for a breach of warranty or indemnity
  26. 26. Structure: Can insure up to the warranty cap as defined by the sale document
  27. 27. Policy of indemnity: Seller still retains liability under sale document, therefore is liable for any breach not picked up by the insurance policy</li></ul>Sale & Purchase Agreement<br />Transaction value<br />Limitation of liability for breach of warranty under the SPA<br />Policy limit<br />Insurance<br />policy<br />Policy of indemnity<br />
  28. 28. W&I – A BUY SIDE POLICY<br /><ul><li>Insured: The buyer
  29. 29. Objective: To provide coverage against financial loss suffered as a result of a breach of the seller’s warranties
  30. 30. Structure: Warrantors give warranties but these are capped at a lower amount, the insurance policy sits in excess of this</li></ul>Sale & Purchase Agreement<br />Transaction value<br />Buyer’s<br />risk<br />Policy limit<br />(buyer’s risk appetite to determine limit)<br />Insurance<br />policy<br />Policy to protect against financial loss<br />Limitation of liability for breach of warranty under the SPA<br />Seller’s<br />risk<br /><ul><li>First party policy: Policy is independent of the seller, therefore the buyer is entitled to make a claim directly against the policy</li></li></ul><li>W&I – WHAT IS NOT COVERED?<br />Known matters i.e. issues disclosed in the due diligence process, data room, disclosure letter. <br /> However, insurance may be available for known contingent matters:<br />Litigation Buyouts - certainty to potential cost of contingent liabilities where unlimited / uncertain liability<br />Tax Liability - reduce/eliminate tax exposure arising from certain tax treatment where underlying legal conclusion subject to future challenge<br />Environmental solutions – certainty to potential costs of unknown contamination and known contamination issues (e.g. clean up issues)<br />Forward looking warranties or financial projections<br />Sell Side Only<br />Fraud, Bribery, Corruption, etc. <br />Non disclosure or misrepresentation in the sale process<br />
  31. 31. Appendix A<br />Illustrative Claim Examples<br />
  32. 32. 2010 Mega Capital W&I Transactions<br />See appendix for more detail<br />*Non Mega Capital Transaction<br />
  33. 33. W&I EXAMPLES – Sell Side A<br />Driver of Insurance <br />Sellers representative able to distribute funds rather than having an escrow<br />Warranty Cap: $40m<br />Tipping Retention : $2m<br />Total W&I program $40m<br />Price $500K (1.25% of limit purchased or 0.5% of transaction value)<br />Highlights<br />Insurance mirrored SPA tipping retention eliminating the need for an escrow.<br />Insurance included cover for Tax Claims from $0.<br />Included coverage for environmental exposures.<br />$100m<br />$40 m<br />Sell-side W&I policy<br /> $2 m<br />Policy Covers Retention<br />
  34. 34. W&I EXAMPLES – Sell Side B<br />$26m<br />Driver of insurance <br />Seller was a private equity fund wanting to distribute the funds<br />Warranty Cap: $24m<br />Tipping Retention : $0.5m<br />Total W&I program $24m<br />Price $275K (1.14% of limit purchased)<br />Highlights<br />Insurance mirrored SPA tipping retention eliminating the need for an escrow.<br />Insurance included cover for Tax Claims from $0.<br />$24m<br />Sell-side W&I policy<br /> $0.5 m<br />Policy Covers Retention<br />
  35. 35. W&I EXAMPLES – Buy Side A<br />Driver of Insurance <br />Oversees Vendor selling an AUS subsidiary and unable to provide financial support behind the warranties . Buy Side policy paid for by the seller<br />Purchase Price: $6m<br />Warranty Cap: $6m<br />Retention: $100K<br />Total W&I program: $6m<br />Price $120K (2% of limit purchased)<br />Highlights<br />Insurance mirrored SPA tipping retention eliminating the need for an escrow.<br />Insurance included cover for Tax Claims however the retention applied and the insurer was not willing to agree to tipping on tax claims.<br />$6 m<br />Buy-side W&I Policy<br />$0.1m<br />Policy partially <br />covers retention<br />
  36. 36. W&I EXAMPLES – Buy Side B<br />Driver of Insurance <br />Trade seller with several silent shareholders who were uncomfortable to have their proceeds subject to warranties and an escrow period. Seller paid for a buy side policy<br />Purchase Price: $12.5m<br />Warranty Cap: $12.5m<br />Retention: $250K<br />Total W&I program: $12.5m<br />Price $206K (1.65% of limit purchased and deal value)<br />Highlights<br />Insurance mirrored SPA tipping retention eliminating the need for an escrow.<br />Split limit for Title Warranties and Business Warranties<br />Insurance included cover for Title Warranties with no retention or threshold to mirror the SPA.<br />$12.5m<br />Title Warranties insured to 100% of transaction value<br />Business Warranties insured to 50% of purchase price<br />$0.25m<br />Policy partially <br />covers retention<br />
  37. 37. W&I AND CLAIMS<br /><ul><li>For the period 2001-08 approx.1 in 10 policies have produced a claim1
  38. 38. 1st Quarter of 2009 saw significant increase in claims notifications
  39. 39. Underwriter experience suggests < 5% of claims made fall outside of scope of cover of W&I1.</li></ul>1Claims data provided by Chartis<br />
  40. 40. W&I AND CLAIMS – CHARTIS CLAIMS STUDY2<br />2Chartis Global (ex US) Claims Study 2000-2008 <br />
  41. 41. ANY QUESTIONS?<br />Please contact Mega Capital<br /> Michael GottliebGavin Donner <br /> +612 9326 1171 +613 9500 2857<br /> +61 403 735 349 +61 413 575 994<br />michaelg@megacapital.com.augavind@megacapital.com.au<br />

×