Representations and Warranties: helps protect either a buyer or seller against financial losses arising out of breaches or inaccuracies of the representations and warranties made by the sellers in an M&A transaction. R&W Insurance provides a powerful tool to help deal makers enter the turbulent waters of mergers and acquisitions – with the confidence of knowing that they have some protection against a wide range of losses resulting from these unknown risks. This form of insurance can significantly reduce both buyers’ and sellers’ inherent risk in doing a transaction, and in turn, help to minimize the time needed to reach an agreement and close the deal.
Tax Liability: helps reduce or eliminate financial loss arising from a tax authority’s successful challenge of the tax treatment of the transaction.
Contingent Liability: helps reduce or eliminate risk exposure related to the business of the seller or buyer arising out of an M&A transaction, thereby helping enable deals to close more quickly - and sales proceeds to avoid impairment.
All of our tax and contingent liability policies are underwritten 100% by AIG.
Available limits and capacity
R&W: up to $100M in limits of liability on a primary basis
$175K for R&W; $250K for tax liability
Price of coverage
R&W: 2%-5% of the limits of liability
R&W: 1%-3% of the transaction value
Classes, industries, geographies considered
We will consider risks in a wide range of classes, industries, and geographies
Transactions $25M - $4B in purchase price
A global manufacturer of sporting goods purchased a buy side Representations and Warranty (R&W) policy on an acquisition. The buyer calculated the purchase price by applying a multiple to the target company’s annual earnings as reported in the company’s audited financial statements. After the transaction closed, the buyer re-audited the financial statements of the company in anticipation of a public offering, resulting in a calculation of lower earnings.
The difference between the two earnings calculations arose in large part from a lower valuation of the company’s inventory and accounts that were prepared for the later public offering. The buyer argued that the higher valuation at the time of the transaction caused it to overvalue the company in the purchase price. More specifically, the buyer argued that the seller had breached its representation that the company’s financial statements complied with generally accepted accounting principles, and its separate representation that the company had an adequate system of accounting controls. The buyer also alleged breaches of representations that the company was in compliance with applicable laws, and that the company did not have any liabilities, commitments, or obligations that were not disclosed.
AIG engaged forensic accountants to work with the insured company’s accounting and internal financial personnel to evaluate the alleged breaches and quantify the amount of the buyer’s losses from any breaches found. AIG’s experts confirmed that breaches of representations had occurred and that the buyer had provided documentation to support its claim for loss. AIG quantified the amount of the buyer’s loss and paid a significant amount to cover the losses incurred by the buyer.
AIG insured an international industrials group in connection with the acquisition of an EMEA-based engineering services business. Following the transaction, the insured’s auditors identified a failure by management to make the correct adjustments in respect of the erroneous booking process for certain stock. As a result, the insured argued that accruals were understated in the target by several million dollars, which led to an overstatement of earnings.
The insured had therefore suffered loss by significantly overpaying for the target and sought recovery under its R&W policy. A breach of the financial statement warranties was claimed, and our M&A claims adjusters were able to quickly confirm a breach. A lack of evidence presented some challenges in quantifying the loss. However, by engaging forensic accountants, the adjusters were able to work proactively with the insured’s advisers to verify the analysis behind the claims against the evidence actually available. Following this review process, AIG paid out an amount in the tens of millions of dollars.
Heritage of Excellence: Deep institutional knowledge coupled with extensive transaction experience
Responsive Claims: As a single insurance carrier, we can settle claims quickly compared to a confederation of syndicates, and our experienced claims teams are aligned to our underwriting intent
Flexibility and Agility: Broad risk appetite and the ability to react quickly and practically to our clients’ needs
Global Capability: With capabilities across global markets, we are where our clients need us to be with knowledge of the nuances that govern local transactions
Forward Thinking: Creative and forward thinking solutions drawn from our capabilities across business lines and industry sectors
Primary Insurance Carrier with Capacity: Our ability to write large insurance limits allows us to be flexible and responsive to our clients’ needs