Sell-side n Clean exit from deal – no ‘tail’ of liability n Can remove the need to hold significant amounts of cash in escrow


n Allows for rapid divestment or reinvestment of cash raised from sale.


Both Parties n Facilitates deal, removing barriers to deal completion


n Bid differentiation via amendments to warranty caps and warranty survival periods.


Typical policy structure Policies can be placed before, during or after a transaction has taken place.


Insureds will typically buy a limit of indemnity to cover 20-50% of the enterprise value depending on the required risk transfer and the conditions of the acquisition agreement.


The price of a policy ordinarily falls between 1–2% of the policy limit. The precise pricing depends upon the nature and geography of the risk as well as the general context surrounding the transaction. Minimum premiums tend to start at around £17,500.


A deductible of 1% of the enterprise value is usually retained by the insured.


The policy period matches that of the acquisition agreement, although it is possible to extend cover beyond the agreement, up to a maximum of 10 years.


Policy wordings are bespoke to each transaction ensuring that the policy is ‘back-to-back’ with the acquisition agreement, including definitions.


Exclusions n Forward-looking warranties n Fraudulent behaviour carried out by the insured n Fines/penalties (uninsurable by law) n Any known breaches prior to inception of cover.


Underwriting considerations


It is important to note that the policy does not replace any negotiations between the buyer and seller during an M&A transaction.


Observing a well negotiated process with thorough due diligence and full disclosure is integral to the underwriting of the policy.


Example – a buy-side Representation & Warranties policy


In what was a competitive transaction with several bidders, an American-based software firm eventually negotiated a winning deal, purchasing a UK based microchip producer for US$100 million.


Indications were correct for the market at the time of going to print. This provides an overview of the product, and the information is not intended to be taken as advice with respect to any individual situation and cannot be relied upon as such.


During negotiations the buyer initially demanded a warranty cap of US$20 million backed up by an escrow account; the seller resisted, insisting on a US$10 million cap.


Following discussions, the buyer purchased a Transactional Liability Insurance Policy. This limited the liability of the seller to US$1 million (1% of the enterprise value) and removed the need for an escrow account, allowing for immediate realisation of the sale proceeds. The policy limit covered the US$20 million of risk the buyers initially demanded for a premium of US$200,000 (1% of the policy limit).


The buyers decided to proceed with insurance as it provided cover for the vast majority of their risk whilst simultaneously enhancing their bid by reducing the seller’s contractual liabilities from US$10 million to US$1 million and removing the need for an escrow account.


With much of the world’s growth now focused upon the emerging market economies, many corporates and private equity firms are starting to look further afield for acquisition opportunities. Whilst domestic demand for Transactional Liability Insurance in these regions has yet to come to the fore, the increasing volume of Western investment has in turn contributed to a significant number of new Transactional Liability Insurance enquiries, particularly from Asia, entering the London market.


If economic growth trends continue in their current vein, it is likely that the demand for Transactional Liability Insurance related to emerging market acquisitions will rise in tandem. The London market looks to be in a good position to respond to this phenomenon, with greater capacity than ever before, and strong competition resulting in underwriters willing to look at ever more complex and exotic deals. A few years ago these deals would have seemed impossible to place, and some regions remain off the risk appetite of most underwriters, although they are not impossible to place.


Despite the growth opportunities further afield, closer to home the uncertainties surrounding the Euro and its future are likely to be the greatest threat to M&A appetite this year. Whilst this saga continues to drag on, the number of Transactional Liability Insurance enquiries coming to the market remains high, and it looks to be another busy year for insurers. n


Company Profile


Howden are an ambitious, dynamic and highly competitive global provider of a range of specialist insurances, and have specialised in financial lines products for the financial institutions sector ever since it was first formed.


We have more specialists dedicated solely to the asset management sector than any other London market broker; we provide cover for 36% of the UK PE/VC market, 30% of the Top 50 Euro Hedge Funds, 25% of the UK BVCA membership and have 700+ Investment Funds and manager clients.


Starting with one office in 1994, we’ve extended our reach significantly; we’re now a specialist broker with over 35 offices in 20 countries.


Our group comprises a wholesale and reinsurance model built on a series of global hubs, and a local retail capability in a number of countries. Our overseas locations share our values; at the same time, each business stands on its own and adds value in its own right. Our structure, our culture, and our people in offices across the world allow us to solve tough problems for clients, wherever they are. The keys to our success: industry- leading expertise and exceptional service.


Howden Insurance Brokers Limited is an FSA authorised Lloyd’s Broker and part of the Hyperion Insurance Group, a UK headquartered and independent private equity backed insurance business.


Howden were named Insurance Broker of the Year at the 2011 British Insurance Awards.


Risk and Insurance in Private Equity and M&A 2012/13


Author Viewpoint 29


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