M&A Insurance: Forever Changing the
Way Businesses are Bought and Sold
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• Ira Weisman, Managing Director, Cerberus
Operations and Advisory Company, LLC
Responsible for Cerberus’ portfolio
companies’ insurance & risk management;
utilizes insurance to solve deal issues.
• Jay Rittberg, Senior Vice President, AIG
Leads AIG’s Merger & Acquisition Insurance
Group for the Americas; responsible for M&A
insurance products, including representations
and warranties insurance.
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What to Expect
After completing this program you should
understand how deal makers and their advisors
use M&A insurance to (1) protect buyers and
sellers of businesses, (2) reduce seller post
closing deal obligations, (3) help buyers win
competitive auctions and (4) protect
relationships. You should also appreciate
lessons from actual M&A insurance claims and
the rapid evolution of M&A insurance.
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Agenda
1) M&A Insurance Basics
2) M&A Insurance at Work
3) Summary and Q&A
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M&A Insurance Basics
• M&A insurance facilitates mergers, acquisitions, divestitures and other business
transactions
• What does an M&A deal look like without M&A insurance?
• What are Buyers and Sellers fighting about?
• Provides access to the insurance industry’s capital and allow the transfer of certain
transaction-related risks to the insurance markets
• How does M&A insurance change an M&A deal?
• Case Study- The Deodorant Auction
• Key Products:
• Representations & Warranties Insurance
• Tax Liability Insurance
• Contingent Liability Insurance
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Key Trends in M&A Insurance
•Maturing Market; Rapid Growth Rate
AIG Number of Policies Bound in Americas
130
150
95
100
50
59
35
0
2011
2012
2013
2014E*
• Current Trends in M&A Insurance:
• Buyers and sellers remain risk averse in a seller’s market
• Broad coverage and favorable terms in more jurisdictions
• Rapid response time and efficient underwriting process
• Greater awareness, understanding, and recognition of product from the M&A
community-private equity, corporations and individuals
• Proven claims paying ability
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Representations and Warranties Insurance
Marketplace
• Representations and Warranties Insurance- Protects a party from financial losses
resulting from inaccuracies in the representations and warranties made about the
target company or business
• Key representations typically include compliance with law, no undisclosed
liabilities, accuracy of financial statements and tax
• Not intended to cover known breaches, working capital adjustments
• Coverage Highlights
• Two Types of Policies: Buyer-Side Policy (includes fraud protection) and SellerSide Policy
• Amount of Coverage: Up to $300+ million for any one transaction available
through layered insurance programs
• Price of Coverage: Generally 2% to 4% of the limit of liability
• Retention: Generally 1% to 3% of the transaction value
• Policy Period: Can be extended beyond survival in underlying agreement
• Coverage Candidates: M&A Deals $20 million to $2 billion in purchase price
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Why Buyers and Sellers Use Representations and
Warranties Insurance
•Why Buyers Request Coverage:
• Enhance Amount/Duration of Indemnity
• Distinguish Bid in Auction
• Protect Key Relationships
• Ameliorate Collection Concerns
• Protect the Deal
• Reduce Contingent Liabilities
• Why Sellers Request Coverage:
• Distribute Sale Proceeds
• Increase Purchase Price
• Supplement Disclosure Process
• Protect Passive Sellers
• Insure Certainty of Purchase Price
• Expedite Sale
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Other Practical Considerations for Risk
Managers
• Are there stakeholder requirements that need to be addressed?
• Does the Company’s Board of Directors or officers require a certain amount of
indemnification protection for M&A deals?
• Who will pay for the insurance?
• How does Representations and Warranties Insurance change the purchase price
and where money flows on a transaction?
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How Do I Obtain M&A Insurance?
1.
2.
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3.
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4.
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5.
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6.
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Execute NDA
Provide Submission to Insurer
Requested information includes acquisition agreement, financial information, offering
memo
Obtain quote within 1-3 days
No cost to obtain quote
Pay underwriting fee
Typically between $15,000 and $30,000 – used for outside counsel fees
Underwriting process: 3-10 days
High level review of due diligence process (if buyer-side) or disclosure process (if sellerside)
Access to legal, financial, tax DD reports (if buyer-side)
Conference call(s) with deal team
Policy negotiations
Concurrent with underwriting process
Work closely with brokers and outside counsel
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Claims
• Claims notices have been received on 23% of the policies issued by AIG in North
America since 1998- Millions of dollars paid
• Claims Examples
• Accounts Receivable- Seller-side policy responds to a claim brought by buyer
for breach of the financial statements R&Ws in connection with the target’s
issuance of over $1mm of gift certificates which had not been recorded in the
financial statements
• Patent Infringement- Seller-side policy responds to claim brought by buyer for
breach of the IP R&Ws resulting from a third party claim of patent infringement
• Recently paid approximately $10mm for a financial statements related claim
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M&A Insurance at Work
• How do dealmakers use M&A Insurance to avoid roadblocks on transactions?
• What is the impact of M&A Insurance on negotiations and financial
considerations?
• What is the current M&A landscape for allocation of risk between buyers and
sellers?
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M&A Insurance Challenges
• What are the key challenges of using M&A insurance as a buyer?
• What are the key challenges of using M&A insurance as a seller?
• Case Study- Buyer with no M&A Insurance experience
• Case Study- Use of M&A Insurance with a family owned business
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M&A Insurance Lessons, Impact and Outlook
•Key lessons learned from incorporating M&A Insurance into deals
• Post-deal outcomes for buyers and sellers compared to deals where insurance was
not utilized
• Outlook for M&A Insurance market in 2014 and beyond
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Questions, Final Comments and
Contact Information
Contacts:
Ira Weisman
212.909.1431
Iweisman@cerberusoperations.com
Jay Rittberg
212.458.6203
Jay.Rittberg@AIG.com
Recording of this session via any media type is strictly prohibited.
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