Taxing Times for M&A Insurance
AIG’s latest study of its Warranty & Indemnity claimsRead the 2019 Report
Mergers and acquisitions (M&A) are both aspects of corporate strategy dealing with the buying, selling and combining of separate companies with the intention of generating growth within an existing market or expansion into a new market without having to create and develop a new entity from the ground up or enter into a joint venture.
An M&A deal is considered successful when both parties emerge from the negotiations having created value of their shareholders, whilst being aware of the potential risks and realisable benefits. In order to achieve such a result, the parties will have to identify which aspects of the business are important to them from an operational and valuation perspective. Once identified, these will form the backbone of the agreement between the parties.
The reasons behind M&A activity vary widely. Common rationales include: seeking economies of scale and distribution; enhancing value through combining businesses; increasing market share through the acquisition of competitors; and rationalising corporate and tax structures.
M&A insurance is a highly specialised field of cover that facilitates the smooth running of the M&A process. It does so by transferring certain potential risks of the transaction (whether already foreseen or which may surface at a later date) to an insurance policy. M&A insurance can also enable sellers to realise the benefits of the transaction sooner by avoiding the need for a retention or escrow account. This is particularly useful for managed funds who need to return funds to their investors, but has the potential for a significant time-value gain for any seller.
AIG has the knowledge and experience to create bespoke M&A insurance solutions.
See what AIG brings to the deal table in our brochure
Any company considering a merger, acquisition or restructure may wish to consider specialist M&A insurance.
AIG offers a range of bespoke M&A insurance products, specifically designed to solve commercial risks arising from M&A transactions. AIG’s highly specialised M&A insurance products are underwritten by an international team of skilled insurance and M&A professionals who integrate closely with negotiating parties and their advisers to create tailored solutions that can facilitate commercial objectives whilst minimising deal risk.
Some examples include:
Warranty & Indemnity (W&I) insurance is a tailored product from AIG Europe’s M&A team which covers either the buyer or the seller for loss arising from breach of the warranties and indemnities given in an acquisition agreement (SPA).
Sellers can obtain a clean exit by using W&I insurance to ensure that the sale proceeds can be returned to investors and avoid the need of an escrow account.
Buyers can procure warranty protection on transactions where the seller is reluctant to give warranties or where there is doubt over the seller’s ability to satisfy a claim.
Any company considering a merger or acquisition.
Features & Benefits
W&I Insurance enables a buyer to:
W&I Insurance enables a seller to:
The W&I policy, whether seller-side or buyer-side, will indemnify the insured party for loss resulting from a breach of a seller warranty in an SPA or breach of the seller’s obligations in a tax deed of covenant.
Tax Liability Insurance from AIG can reduce or eliminate a loss arising from the successful challenge by a tax authority of a taxpayer’s position. Potential tax risks are typically identified during due diligence pursuant to a potential acquisition of a company and may have lied dormant within a target for many years.
A buyer may have to proceed with a transaction or investment where there is uncertainty in the application of tax law or inadequate time to obtain an advance tax ruling. The risk for the buyer is that the tax position of the target could be challenged by a tax authority, which could lead to a material reassessment of their liability to tax and could include interest, fines and penalties. Similar issues could arise where a group is rationalising its or its targets corporate structure either pre or post an M&A transaction.
Any company considering a merger, acquisition or restructuring with an identified tax issue.
Features & Benefits
Bespoke Tax Liability Insurance can also address:
Litigation Buyout Insurance (LBI) is a tailored insurance product from AIG Europe’s M&A team that quarantines a client from the uncertainties inherent in outstanding litigation whether those uncertainties relate to the outcome or to the eventual amount of damages awarded. LBI will either cap an insured’s financial exposure or remove it altogether and will be designed to meet the particular needs of the insured and the specific characteristics of the dispute.
LBI enables clients to ring-fence liabilities which may arise from any current or anticipated litigation, arbitration or other dispute. This may be particular useful in an M&A context where an unresolved dispute would otherwise prevent an acquisition proceeding or would have a significant impact on the purchase price. An LBI policy can transform the inherently uncertain liability of litigation into a quantifiable insurance cost which can enable the parties to the transaction to focus on the business being acquired.
Underwriting and cover are tailored to each case, allowing the policy to be adapted to a dispute, regardless of its subject matter. As such, LBI can be adapted to cover proceedings ranging from a simple breach of a supply contract, a more complicated employment issue through to highly complex securities litigation and intellectual property disputes.
Any company considering a merger or acquisition or companies with large, identified contingent liabilities.
Features & Benefits
Through our partnership with Shariah-compliant managing general agent Cobalt Underwriting, we offer a range of market-leading Islamic insurance solutions for M&A transactions. Whether insuring the buy or sell side, we work with clients to understand, measure and mitigate transactional risks, helping to reduce uncertainty and close deals quickly.
Whether a requirement from your finance provider or a key part of your investment criteria, we provide Sharia-compliant M&A insurance policies, reviewed and certified by a certified Shariah scholar in consultation with their Shariah supervisory board.
We offer three main Islamic M&A products, with limits of up to US$30 million per policy available:
Contingent Liability Insurance
Tax Liability Insurance
These products are issued by AIG, having been approved as Shariah-compliant by Cobalt.
AIG has a dedicated claims team in every jurisdiction where we issue policies. This means that any claim made under an M&A policy will be dealt with by an experienced member of our claims team who has particular expertise in dealing with claims in the jurisdiction of the insured.
The local claims handler works closely with the underwriting team to provide a uniquely efficient claims handling process that is tailored to respond appropriately to the complexities of any claim.