Transaction Liability Insurance Past, Present & Future

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Presentation transcript:

Transaction Liability Insurance Past, Present & Future Aon Strategic Advisors & Transaction Solutions Henk Bijl

What is transaction liability insurance? Insurance solutions that increase deal value by converting deal risk to a one-off premium cost that is transferred to the insurance market. Policies can cover risk such as: Breach of warranty - Warranty & Indemnity insurance Uncertainty around tax-structures - Tax opinion insurance Uncertainty about pending litigation - Litigation buyout insurance Environmental liability - Environmental insurance Prospectus liability in case of IPO - IPO insurance Exotic issues W&I insurance is the most well-known and widely used insurance product within the category we call transaction liability insurance. Others are…. Key features W&I insurance (note, name is misleading since indemnities are generally not covered)

Why talk about transaction liability insurance? Use of transaction liability insurance continues to increase, also in corporate M&A W&I insurance is the most well-known and widely used insurance product within the category we call transaction liability insurance. Others are…. Key features W&I insurance (note, name is misleading since indemnities are generally not covered)

Strategic use of W&I insurance What drives growth? Residual acquisition price Risk for buyer Contractual Liability Threshold / de-minimis Risk for buyer Seller’s Policy Seller’s Policy Residual acquisition price Risk for buyer Contractual Liability Threshold / de-minimis Risk for buyer Buyer’s Policy Buyer’s Policy

Strategic use of W&I insurance Why W&I cover? Well, it's cheaper! Purchase price EUR 100m, sold for EUR 200m after 4 years Standard escrow of 11% of purchase price for 18 months Standard warranty cap of 30% Relatively high W&I premium of 1.5% of EUR 60m (plus 21% Insurance Premium Tax), paid by Seller Year Traditional W&I Cover Investment -100,000,000 Return 1-3 4 178,000,000 196,911,000 5,5 22,000,000 2,000,000 I.R.R. 18.2% 18.7% Using W&I cover is more economic, even in the absence of any claims!

Strategic use of W&I insurance Other drivers for cover Return on investment when selling with buyer's W&I insurance is significantly higher than when selling with escrow Improve terms of bid in controlled auction process Reduce potential for future conflicts in situations where buyer & seller have a future co-operation (e.g. Joint-Venture, seller is future employee / manager) Need to reinvest proceeds immediately Major shareholder does not want remaining liabilities after closing Risk transfer Achieve greater comfort in cross border transactions Demonstrate risk management / corporate governance Local authorities are reluctant to provide warranties as they are not involved in daily business and large payments under warranties would trigger significant negative media attention Received offers easier to compare

Increased use of transaction liability Tax insurance Situation 1 A Dutch multinational spun off a U.S. business unit in a tax-free manner. Shortly after, the unit became part of a divestment. Potential tax liability if IRS would contest the spin off would be approx. USD 250m. Due to the magnitude of the risk, client desired tax insurance to protect against a successful IRS challenge of the tax-free nature of the spin-off. Situation 2 As a consequence of the Anti-base erosion and profit shifting (BEPS) initiative of the OECD, a company intends to restructure. The steps in the advisors report associated with the restructuring, carry a significant tax risks. Those unexpected tax risks may be covered. Situation 3 The result of a divestment is the breaking-up of a fiscal unity. Seller and buyer may now be responsible for ‘the other part’ of the fiscal liabilities. Cover for this risk was obtained. Situation 4 The 3% tax in real estate deals in Belgium and France.

What are transaction liability insurances? Increase experience with more traditional transaction liability insurances have caused insurers to be more willing to insure exotic transaction risks Litigation buy-out Break-fees Public to private Under insured events ….any other ideas? W&I insurance is the most well-known and widely used insurance product within the category we call transaction liability insurance. Others are…. Key features W&I insurance (note, name is misleading since indemnities are generally not covered)

Conclusion Transaction Liability Insurance Use as an additional strategic tool in negotiations Can help unlock deals and be an alternative deal financing tool The best is yet to come! Henk Bijl +31 10 448 7968