AIDA 6 November 2018 W&I insurance – how does it work?

Agenda Part 1: Background Part 2: Pricing Part 3: Process Part 4: Advantages Part 5: Claims study Part 6: Questions

Part 1: Background

Number of policies bound Product Overview Product Description Number of policies bound Outlook Covers unknown risks arising from breaches of the seller’s warranties under the SPA 85% - 90% Continued strong growth, primarily driven by an increased acceptance of W&I insurance 1 Warranty and Indemnity (W&I) Insurance Covers potential losses arising from known tax risks in a stand-alone policy 10% - 15% Increased number of requests in this area. 2 Tax Insurance Covers potential losses arising from known but uncertain or difficult to quantify risks in a stand-alone policy marginal Requested only occasionally 3 Contingent Risk Insurance

The W&I policy ”steps into the shoes” of the seller Definition W&I insurance responds to financial loss arising from UNKNOWN breaches of the seller’s warranties under the SPA (Share deal or Asset deal) UNKNOWN means: not identified in due diligence not disclosed in data room, SPA schedules not otherwise known to the insured The W&I policy ”steps into the shoes” of the seller Risk transfer Reduction of seller liability Strategic use Optimizing M&A strategy, particularly for auctions

Differentiation Broadly speaking: Not meant to replace the due diligence / an appropriate disclosure process Does not insure against the target performing poorly following the acquisition Not meant to cover risks identified in the due diligence Broadly speaking: The transaction should be managed, diligenced and negotiated as if there was no warranty and indemnity insurance

Part 2: Pricing

Premium, Retention, Limit Premiums for corporate deals Retention Limit 0.7% to 2% of the policy limit for share/asset purchases (real estate deals 0.6% to 1%) AIG minimum premium: DKK 650,000-700,000 Depending on: - Ratio of limit/deal value, retention and policy term - Parties (buyer, seller, advisors) - Target - Type of warranties Usually 0.4% to 1% of deal value AIG offers tipping retentions (usually 0.75% tipping to 0.25% and nil retention in real estate deals) Usually approx. 10% to 40% of deal value Maximum AIG limit: Up to USD 90 million (higher limits possible) Top-up för Title & Capacity

Coverage periods Warranties Policy period Insurable are warranties under the SPA at Signing / Closing Fundamental Warranties (Title/Capacity) usually up to 7 years, AIG can offer up to10 years General/Operational Warranties up to 2 years (longer periods possible in line with statutory provisions) Tax Warranties usually up to 7 years, AIG can offer up to 10 years Extension of limitation periods under the SPA

Part 3: Process

No insurance Insurance Claim Payment Claim Policy SPA SPA Seller Buyer Seller Buyer Payment Target Target

Inception Bring down of disclosures – review of the warranties by the Seller Signing warranties Signing No claims declaration Closing warranties Closing No claims declaration Disclosure process AIG on risk

Due diligence Scope of the DD reports has to be aligned with the requested warranty coverage. - Technical, environmental, legal, financial and tax analysis DD reports has to evaluate and assess the findings. Materiality thresholds have to be aligned with de minimis in the policy.

Part 4: Advantages

Advantages of W&I Insurance Advantages for buyers Advantages for sellers Distinguish a bid in a competitive auction Facilitate clean exit for sellers Protect relationships with sellers who may become the buyers’ key employees/business partners Eliminate need for an escrow Extend the duration and/or cap of warranties Free up sale proceeds for re-investment/ return to investors and shareholders Mitigate enforcement risk against distressed/remote sellers

Options in the M&A Process Buy-side policy Sell-side policy Option 1 Bridging the Gap Option 2 Sweeten the Bid Option 3 Stapled Insurance Option 4 - Buyer/Seller reach an impasse during deal negotiations and an insurance policy is used to bridge that gap In such cases insurance is typically introduced late in the process Late introduction into the process Buyer deliberately offers to cap the Seller‘s liability under the SPA to a low level Buyer’s bid now looks more favorable Buyer wins auction and secures protection via W&I insurance Seller “staples“ the W&I insurance to the deal Seller’s liability cap is very low, combined with draft insurance policy provided to bidders Once selected, the process will “flip“ to the Buy-side The Buyer will be the ultimate insured Seller is the insured under the policy Used if seller is not able to limit liability as expected Relatively uncommon but useful for closed end funds wishing to “wind up“

Part 5: Claims

Unique Insights From Almost 20 Years of Experience Review of W&I Claims Between 2011 - 2016 Frequency of claims by deal size. Severity of claims. Timing of claims reported. Common forms of breaches reported. Breaches by industry sector.

Almost 1 in 5 AIG W&I policies received a claim notification

Frequency of claims varies with the size of the deal

The largest deals see the largest claims The largest deals have the highest claims frequency – and the largest claims payouts. Although average payout in that claim size band was down from $22m to $19m, the potential impact of these breaches is clear.

Claims are more timely and better presented 18% of claims are reported after eighteen months. Almost 60% of all global claims reviewed were reported within the first year after a deal is closed.

Financial statements, tax and compliance with laws are the biggest breaches overall

Tax remains the biggest driver in EMEA – at 24%

Some clear differences in breaches by Industry

Part 6: Questions

Mergers & Acquisitions Insurance Group AIG Europe Limited Please feel free to contact us to discuss any questions you may have about our products. Thérèse Hamsten Senior Underwriter - Nordics Tel: +46 (0)70 913 73 40 therese.hamsten@aig.com

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