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

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

3. Part 1: Background

4. 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

5. 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

6. 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

7. Part 2: Pricing

8. 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
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

9. 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

10. Part 3: Process

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

12. 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

13. 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.

14. Part 4: Advantages

15. 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

16. 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“

17. Part 5: Claims

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

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

20. Frequency of claims varies with the size of the deal

21. 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.

22. 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.

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

24. Tax remains the biggest driver in EMEA – at 24%

25. Some clear differences in breaches by Industry

26. Part 6: Questions

27. 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)

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