Gross Written Premium Geographical Split – 2011 (non-US)
Middle East 2%
UK & Ireland 25%
Asia/Pacific 34%
Insurer ACE
Ambridge* AWAC* Beazley* Chartis* Chubb HCC
Europe 39%
Pembroke / Ironshore* Zurich* TOTAL
W&I • • • • • • • • •
£
10m 60m 20m 15m 35m 15m 10m 30m 20m
200m+ Estimated March 2012: (* able to underwrite US risks)
The estimated gross written premium outside the U.S. last year, was approximately US$200 million. The average net rate per million of insurance of the risks placed by Willis last year was 1.4% (with a range from 0.56–6%) and therefore an estimated US$14.3 billion of capacity was utilised of which over 50% would have involved private equity selling or buying. This compares to a total gross written premium of US$7 million in 1997 and capacity of approx. US$0.7 billion.
Given the size of the potential North American market, the U.S. private equity funds have been slow to take to “reps and warranty” insurance, this is generally perceived to be because:
n Unlike their European counter-parts, private equity funds in the U.S. have been party to sellers indemnification and warranty provisions, and often these are backed by an escrow.
n Insurers appetite, process and premium rates are higher, generally because of the perceived increased risk profile of U.S. deals – being written on an indemnity basis, plus potential litigious culture.
It would appear that the more bespoke one-off coverage in the U.S. has seen significant growth in the last few years (such as bespoke tax risks eg. to cover FIN 48 exposure).
Demand still remains in the mid-market sector, (US$50–US$500 million), with average capacity of US$20 million per deal representing approximately a quarter of the target enterprise value. In recent years however, Fortune 500 and FTSE 100 companies have started to use the product, particularly when buying from PE Funds or where they have concern over their ability to recover a claim from the sellers. In the current market, not surprisingly 66% of the
premium underwritten by one of the key insurers was dominated by buy-side policies as buyers seek additional security and protection, where it may be unavailable from sellers. Brian Hendry from Willis highlighted “42% of the 70 deals which we placed in London last year involved private equity sellers, whereas trade buyers were the dominant buyer”.
Hendry continued “In the past, it would be in the last few weeks of the bidding process before the parties realised there was potentially a gap between the level of warranty protection that sellers were willing or able to provide and buyers expectations and the lawyers acting on the sale documentation would contact us to try to resolve the deadlock. Now, more often, our instructions come directly from the private equity house at very early stages and sometimes before the sale process has been launched, particularly in the UK and Europe.
“Some boutique corporate finance houses and some investment banks have become attuned to the potential benefit to their clients and are building it into the auction process and even their own pitch documents (if the target is private equity owned)”, advised Hendry.
In the current economic environment, there is enormous pressure to provide LP’s with returns. The ability to maximise potential return is paramount and any delay or deferral can impact on fund performance – the use of warranty insurance is making a strategic difference. As highlighted by one Portfolio Director, who sold the last 7 companies in order to close their 2005 fund, 85% of the proceeds of which were realised on selling companies where transactions were covered by warranty insurance. “In these very much more difficult times warranty insurance cover has been absolutely instrumental in getting a deal done”. n
“We have now utilised warranty insurance 8 times, 5 times when we were selling and
3 times when we have been buying.” Investment Director, UK private equity fund.
Risk and Insurance in Private Equity and M&A 2012/13
Tax • • • • • • • • •
£
10m 50m 15m 15m 15m 10m 10m 10m 20m
150m+
Company Profile
Willis Group Holdings plc is a leading global insurance broker. Through its subsidiaries, Willis develops and delivers professional insurance, reinsurance, risk management, financial and human resource consulting and actuarial services to corporations, public entities and institutions around the world. Willis has more than 400 offices in nearly 120 countries, with a global team of approximately 17,000 employees serving clients in virtually every part of the world. Additional information on Willis may be found at
www.willis.com.
Author Viewpoint 35
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