Dealing With A Safety Net

More M&A-insurance products are helping prepare risk-ridden merger candidates before the honeymoon.

In the purchase of the roofing- supply company, The United wanted to guarantee that the target’s pollution liabilities would not cause financial stress down the line. So ECS put together a single insurance policy with Reliance National Insurance, transferring the pollution risks of both the divested coal operations and the acquired roofing company. The insurance provides $4 million in aggregate protection above a $50,000 deductible. “Courts are getting broader by the day on pollution liability,” Griffin says. “This kind of insurance takes away any uncertainty, making business transactions run smoothly.”

Insurance companies also may need to cover their own M&A risks. When ACE Ltd., in Bermuda, considered buying the property/casualty insurance division of Cigna Corp. last year, it had concerns over the Philadelphia-based company’s environmental, asbestos, tobacco, and lead-paint liabilities. Cigna had restructured in 1996, putting all its liabilities prior to that year in the control of Brandywine Holdings Corp., a company Cigna formed just for that purpose. The new company was given $4 billion in capital assets to administer and to pay off the uncertain liability claims, giving Cigna some breathing room to continue normal operations.

But when Cigna sought to sell its property/casualty business to ACE, the conservative 14-year-old insurer had trouble with Brandywine claims going “back into the dark ages,” says John Burville, ACE’s chief actuary, who reports to CFO Christopher Marshall. “We don’t like claims that have a long tail. Consequently, we wanted to buy some ‘sleep’ insurance that effectively got rid of this liability before we would undertake the acquisition.”

Enter Berkshire Hathaway Inc., Warren Buffett’s diversified insurance and financial services concern. ACE cut a complicated deal with Buffett calling for Berkshire Hathaway to assume $1.25 billion of Brandywine’s assets and liabilities in return for $2.5 billion in insurance coverage. “We gave them some asset-earning investment income to receive the sleep-easy coverage, while retaining a big block of reserves that earn interest for us,” Burville says.

Why Just Cross Fingers?

The breadth of items covered in the M&A-risk marketplace seems limited only by the imagination. Partners in mergers that eventually fall apart can even obtain insurance to pay the costs they incurred putting the deal together. “We represent Lloyd’s of London on what we call aborted-bid cost insurance, which provides coverage for a merger that fails because of things outside the parties’ control, like pressure from regulators or labor unions killing the deal,” says Patrick Tatro, president of TOI North America Inc., a Carson City, Nevada, managing general agency.

Not every company likes M&A-risk insurance. “It’s a product designed to accommodate bad business decisions,” argues Gary Nelson, vice president of risk management and legal administration at Medtronic Inc., a Minneapolis medical technology firm with $5 billion in anticipated fiscal-year 2000 revenues. Although a broker tried selling him on M&A insurance strategies for the five major acquisitions Medtronic completed in 1998 and 1999, Nelson passed on the offer. “Insurance should not be an excuse for not doing the risk manager’s job,” he says.


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