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

2. 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)

3. 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)

4. 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

5. 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!

6. 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

7. 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.

8. 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)

9. 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