M & A

M&A experts worldwide are using an insurance policy known as a Representation and Warranty (R&W) to transfer risk from the parties in a transaction to an insurance company. R&W policies are designed to, "step in the shoes" of a seller to pay indemnification claims made by the buyer for inaccuracies of the representations and warranties outlined in the purchase/sale agreement. Due to the low cost of R&W insurance, sellers are driving the demand for these policies rather than accept large, lengthy escrow or withhold terms. Buyers are discovering how R&W insurance can enhance their bid without having to raise their offer.

For the seller:

1. An R&W policy replaces the indemnification provision and reduces the escrow to 1% or less of the purchase amount.
2. Enables early and final distribution of proceeds to investors.
3. Locks in the return and provides a clean exit as contingent liabilities are covered.
4. Expedites the sale by getting the Indemnification issue "off the table".

For the buyer:

1. Distinguishes bid in a competitive auction, without raising the offer price.
2. Eases concerns about collecting on seller's indemnification.
3. Preserves relationship with seller. In the event the seller is remaining with the company, the buyer pursues the R&W insurer, and NOT the seller in the event of a breach.
4. Expedites the sale by getting the Indemnification issue "off the table".

Underwriting & Placement Process:

1. Secure information for underwriters:
   • Acquisition agreement (draft version is acceptable)
   • Seller's audited financials
   • Seller's disclosure statements (if available)
   • Offering memo
2. Within 3 to 5 business days, a no cost, no obligation, non-binding indication (NBI) is provided.
3. Due diligence process is commenced with selected market - requires payment of non-refundable underwriting fee.
4. Conference call is arranged between the underwriters and the applicant's attorneys.
5. Final terms are issued within 2 business days of the final conference call.

POLICY BASICS

Limit Capacity - Up to $100M on a single policy. Excess capacity up to an additional $400M available as needed.

Retentions - commonly 1% to 3% of the purchase price. Reduces over time

Premium - 3% to 4.5% of the limits purchased (including taxes and fees). Minimum premium is $300,000

Underwriting Fee - From $25,000 to $35,000 in addition to the premium. Covers the cost of Insurer's attorney's fees and due diligence costs to review and manuscript a policy. Non-refundable.

• Seller's policy - checks how seller developed R/W
• Buyer's policy - checks how buyer vetted the Seller's R/W

Terms - designed to match the survival period. Post survival extensions available upon request.