Introduction to Warranty and IndemnityInsurance – 18 October 2012Mergers & Acquisitions Insurance GroupAdrian Furlonge – Assistant Vice PresidentSvetlana Soroka – Senior Underwriter

Introduction

• BackgroundWho we areWhat is Warranty and Indemnity Insurance?

• Insurance ProcessCoverage & exclusionsWhat the Insurer needs

• Claims• Other Transaction Liability Products

Who are we?

Largest, longest established and most experienced team in the global

transactional insurance market;

Provide bespoke insurance solutions for transactions: Warranty &

Indemnity, Tax Liability and Litigation Buy-Out risks;

Our global team of seventeen underwriters consists of corporate lawyers

and litigators drawn from private practice and based in Australia, France,

Germany, Spain, Sweden, the UK and USA;

We have global capacity with offices in all jurisdictions with Chartis

offices; and

We have placed insurance on 700 plus transactions (ex North America)

in 32 different jurisdictions.

Chartis History of GWP & Policy Count excl. US

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

US

D m

'

Po

licy

Co

un

t

GWP by Country 2012

Korea0.8%

Czech Republic0.6%

Austria0.6%

Sw itzerland0.4%

China0.3% Belgium

0.3%

New Zealand0.3%

Hong Kong1.5%

Italy1.5%

India1.3%

Finland1.7%

South Africa2.5%

Sw eden2.3%

Thailand2.2%

Japan1.2% Netherlands

1.1%

Spain4.1%

Singapore5.0%

Germany7.9%

France12.4%

Australia18.1%

UK34.1%

What is Warranty & Indemnity Insurance?

• We can insure either the buyer or the seller. • We insure:

share sales; and asset sales

• Premiums are generally 1% to 2% of the limit (subject to minimum premium of £40k).

• Maximum Chartis Limit USD50,000,000 • The policy will generally take five working days to

underwrite and bind.

What does it Cost?

• Considered Expensive

• Uncertainty of pricing

• Lack of competition

• Significant comparative reduction

• Supply side expansion

• Underwriting analysis vastly

improved

• Underwriters understand the M&A Industry

Pricing: 1% - 2% of policy limit; one off premium

Average Rate On Line - UK W&I

0

0.5

1

1.5

2

2.5

3

3.5

2007 2008 2009 2010 2011

Seller’s

risk

Buyer’s

risk

Policy of indemnity

Insurance

policy

Sale & Purchase Agreement

Limitation of liability for breach

of warranty under the

SPA

Transaction value

Policy limit

•Insured: The warrantors

•Objective: To provide coverage in the event that the buyer sues the seller for a breach of warranty or indemnity

•Structure: Can insure up to the warranty cap as defined by the sale document

•Policy of indemnity: Seller still retains liability under sale document, therefore is liable for any breach not picked up by the insurance policy

Sell – Side Policy

Seller’s

risk

Buyer’s

risk Policy to protect against financial loss

Insurance

policy

Sale & Purchase Agreement

Limitation of liability for breach

of warranty under the

SPA

Transaction value

Policy limit

(buyer’s risk

appetite to determine

limit)

•Insured: The buyer

•Objective: To provide coverage against financial loss suffered as a result of a breach of the seller’s warranties

•Structure: Warrantors give warranties but these are capped at a lower amount, the insurance policy sits in excess of this

•First party policy: Policy is independent of the seller, therefore the buyer is entitled to make a claim directly against the policy

Buy - Side Policy

Motivations for InsuranceSeller Side

• Sellers unwilling or unable to give financial support behind warranties

e.g. secondary buy-outs, acquisition from insolvent sellers;

• Reluctance of sellers to retain proceeds in escrow;

• Optimising a “clean” exit;

• Sale under a turnaround situation.

Buyer Side

• Investing in new or unfamiliar jurisdictions or industry sectors;

• Enhancing bidder status;

• Alternative to contractual recourse for a particular issue;

• Best practice risk management / corporate governance;

• Comfort to debt finance providers.

W&I Insurance - Policy Cover

• Bespoke policy tailored to the transaction• Back-to-back with the SPA

Breach of insured warranties - aim for full cover Duration matches survival period under SPA at a minimum Matching de minimis/thresholds under SPA Specific indemnities?

• Enhanced buyer protection: Removal of awareness qualified warranties Increase survival periods Reduce claims thresholds

• Defence costs• Fraud by the seller on a buyer-side policy• No requirement to pursue the seller before claiming under the policy

on a buyer-side policy

W&I Insurance - Exclusions Known issues

Completion account adjustments

Fines and penalties to the extent they are uninsurable by law

Fraud by the seller on a seller-side policy

Forward-looking warranties

Pensions Underfunding

Transfer Pricing

Post completion voluntary acts

Potentially transaction specific issues

Underwriting process

Day 1 Initial submission

Internal review

Heads of terms

Engagement letter

Detailed underwriting

Negotiate cover

Binding policy

Policyreview

Deal Signs

Ideally this will be about 14 days, but can be from 2

days to 18 months

Submissiona)Details of the Buyer and Seller

b)Details of the Target business

c)Transaction value

d)Limit of indemnity sought - Chartis capacity up to USD50,000,000

e)Retention insured is prepared to accept - N.B market standard is 1% of transaction value

f)Does the insured want cover for both the warranties and a tax covenant (if applicable) and any other transaction specific indemnities that are being given by the Seller.

g)Estimated signing or completion date of the transaction

h)Attach the following documents:

a) SPA

b) Disclosure Letter

c) Tax Covenant/Deed (if there is one)

d) Due diligence (not always available on Seller side)

e) Data room index

Underwriting Considerations

Identity of the buyer, seller and their advisors

Target business and location

Quality of the transaction process

Value of transaction

Scope of the insured warranties - buyer or seller friendly?

Seller’s liability under the SPA

Gap between signing and completion?

Why do they want insurance?

Do both parties know about insurance?

Claims

Based on claims information for the period July 2000 to April 2012 from all non-US jurisdictions:

- Claim frequency of 13% (i.e. 1 in 7 policies).

- 160 alleged breaches

- France sees highest claim frequency.- less than 5% of claims fall outside of the remit of the Warranty &

Indemnity policy

2010-2011- 11 notifications on UK policies in 2010/2011 of which:- 2 claims paid- 7 circumstances- 2 third party demands being defended in conjunction with Insured

Claims: Warranties alleged to have been breachedThe majority of alleged breaches relate to tax/financial statements warranties

0%

5%

10%

15%

20%

25%

30%

Type of w arranty breach

Multiple - 16% Tax - 25% Financial Statements - 16%

IP - 6% Compliance - 4% Litigation - 4%

Employee - 4% Other - 22%

Claims: Delay between policy date andclaims date (global (ex-U.S.))

• 16% of claims are notified during the first 3 months following inception• 28% of claims are notified during the first 6 months following inception• 66% of claims are notified during the first 12 months following inception

Months 12-24 19%

Months 24+ 15%

Months 3-6 12%

Months 0-3 16%

Months 6-12 38%

Tax Insurance – motivation

A policy to enable a taxpayer to reduce/eliminate tax exposure arising where the underlying legal advice supporting a particular tax treatment may be subject to future challenge by tax authorities

Risk of tax audit/future litigation is transferred to insurer

Gives certainty as to the quantum of a contingent liability

Can be used pre or post transaction

Can facilitate a sale or acquisition by providing certainty and managing negative financial impact

Can resolve deadlocks in negotiations and avoid escrow arrangements

Can be used where parties have not obtained prior clearance from a tax authority due to time constraints or commercial considerations.

Tax Insurance – appetite

✓ Questions of law. We do not insure the facts relevant to the taxpayer’s position; we place reliance on the taxpayer’s factual representations

✓ Issues relating to the legal interpretation of tax legislation, administrative rulings or case law as applied to the facts presented

✓ Commercial purpose/M&A transaction related

✓ Strong opinion required from law firm, QC or accountants

✗ Promoter driven, repetitive or purely tax motivated transactions

✗ Transactions or issues already under audit or in litigation with tax authorities

✗ Legislative changes

✗ We don’t offer insurance in certain jurisdictions (where unstable or potential enforcement issues)

✗ Review of tax authority decisions (whether on technical or procedural grounds)

Tax Insurance - policyCoverage: Tax payable as a consequence of the transaction (after deducting off-setting

benefits) Defence costs (i.e. professional adviser expenses) may be paid in advance “Gross-up” of taxes payable with respect to the tax liability insurance proceeds Interest and non-criminal fines or penalties in the event of a non-favourable

determination

Policy to cover gap between “best case” and “worst case”

Policy Form: Period can be up to 7 years

Chartis’ capacity is £15 million

Policy negotiated on a case by case basis with Insured

Structured to ensure alignment of interest between taxpayer and Chartis

Pricing usually between 4% - 8% of the limit of liability

Deductible or excess starting point is generally based upon estimated defence costs or ‘best case’ scenario

Indemnity Insurance Enables liabilities to be ring-fenced which may arise from a current or

anticipated litigation, other dispute or identified risk.

Eliminates obstacles in the way of a pending sale or dispute

Term runs from the transaction closing date until settlement or final

adjudication of the dispute.

Prospects of a favourable outcome need to be good.

Typical underwriting period is 2 to 3 weeks from the date of the first

enquiry.

Limit £1.5m to £15m aggregate limit of liability.

Premium 4-8% of the limit purchased

Retention to be agreed by reference to the deal specifics.

Any questions

You can find further information about our M&A Insurance Group and our products on our homepage

http://www.chartisinsurance.com/_911_217012.html

Please feel free to contact us to discuss any questions you may have about our products.

Adrian Furlonge Svetlana SorokaAssistant Vice President Senior UnderwriterTel: +44 20 7954 4955 Tel: +44 20 7954 8383adrian.furlonge@chartisinsurance.com svetlana.soroka@chartisinsurance.com

Mergers & Acquisitions Insurance Group

Chartis Europe Limited

27

Chartis is a world leading property-casualty and general insurance organisation serving more than 70 million clients around the world.  With one of the industry’s most extensive ranges of products and services, deep claims expertise and excellent financial strength, Chartis enables its commercial and personal insurance clients alike to manage risk with confidence.  Within the UK, Chartis Europe Limited is one of the largest providers of general insurance. With offices throughout the country, we insure many of the UK’s top businesses, thousands of mid sized and smaller companies, as well as many public sector organisations and millions of individuals. For additional information please visit our website at www.chartisinsurance.com\uk.

Whilst every effort has been taken to ensure the accuracy of the information in these pages, we make no representation and/or warranty express or implied that the financial information and/or information is correct, complete or up to date.  The financial information and/or information is subject to change at any time without notice.  You should not take (or refrain from taking) any action in reliance on the financial information and or information and we will not be liable for any loss or damage of any kind (including, without limitation, damage for loss of business or loss of profits) arising directly or indirectly as a result of such action or any decision taken.  Chartis Europe Limited is authorised and regulated by the Financial Services Authority. Registered in England: Company Number 1486260. Registered Address: The Chartis Building, 58 Fenchurch Street, London EC3M 4AB

Disclaimer

© Copyright Reserved 2011