Building A Better Research Toolbox: Effective Insurance Due Diligence In Todays M

1
Building A Better Research ToolboxEffective
Insurance Due Diligence In Todays MA Environment

• October 4, 2002

2
What Is Happening In The MA Market?

• Small increase in merger and acquisition activity
  in the middle market.
• Private equity portfolio performance is
  inconsistent across markets and sectors.
• Increased focus on creating operational value.
• Liquidity for investments remains poor.
• Tight senior debt market.
• Equity contributions remain high as a percentage
  of the capital structure for leveraged buyouts.
• Greater discipline by both strategic and
  financial buyers during due diligence.
• Select buyers understand post closing
  liabilities.
• Heightened sensitivity towards insurance premium
  projections.

3
Private Equity Funds Raised, 1999 - 2001
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How Has The Leveraged Buyout Environment Changed?

• Tremendous competition among investors to place
  recently raised large funds to work in fewer good
  opportunities.
• Many investors are trying to differentiate
  themselves in the market by establishing industry
  or product specialties.
• Investors are hampered in recent months by
  restrictive policies of the Fed and their impact
  on the senior financing markets.
• Despite difficult economic conditions, private
  equity funds need to invest in new companies to
  perpetuate business.

5
How Do You Use Your Insurance Due Diligence
Toolbox?

• Hammer away for
• Copies of all current insurance policies
• Copies of historical purchase and sale agreements
• 5 years historical loss runs for all lines of
  coverage
• Property values
• Workers compensation data broken down by state
  and class code
• Use the measuring tape to calculate the
• Valuation of accruals
• Go forward premium projections
• Nail down the
• Adequacy of the current coverage
• Need for additional coverage based on investment
  parameters
• Use the level to balance
• Price versus terms
• Insurer financial security (A.M. Best/SP ratings)

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Effective Due Diligence Strategies (cont.)

• Use the All Purpose duct tape to
• Wrap insurance around reps and warranties/tax
  liabilities
• Investigate aborted bid cost insurance
• Address environmental risks (cost cap/risk
  transfer)
• Transfer accrued liabilities (loss portfolio
  transfer/loss mitigation coverage)
• Add run-off insurance

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What Are The Nuts/Bolts Of Insurance Due
Diligence?

• Do
• Meet with as many underwriters as possible.
• Describe the investment/growth thesis (ie.
  organic growth versus growth through
  acquisition).
• Be up front about loss history.
• Give yourself a minimum of 60 days from start to
  finish to complete the needs assessment and
  marketing efforts.
• Analyze comparable public companies.
• Understand the impact of change in control
  provisions in the sellers insurance policies.

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Nuts/Bolts Of Insurance Due Diligence (cont.)

• Dont
• Underestimate the difficulty of obtaining surety
  bonds in the current hard insurance
  environment.
• Be afraid to answer questions regarding a
  negative net worth on the companys balance sheet
  or address other negative financial news.
• Forget to blanket the entire universe of
  prospective insurance carriers.
• Overlook the importance of a comprehensive
  employee benefits/health care review.

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Who Is Equity Risk Partners?

• Entrepreneurial company founded in 2001.
• First full-service risk management and insurance
  brokerage firm focused exclusively on private
  equity.
• Areas of focus due diligence, insurance
  brokerage, risk management consulting and
  transactional solutions.
• Headquartered in San Francisco with offices in
  Chicago and New York.
• Firms principals have completed over 300
  successful private equity transactions.
• Select Midwest clients - American Capital, Baird
  Capital, Kirtland Capital, Lake Capital, Prospect
  Partners, Prairie Capital, Ridge Capital,
  Shoreview Industries, SKMGI, Waud Capital,
  William Blair Mezzanine, Wingate Capital and
  Wynnchurch Capital.
• Recent accomplishments Alarm Acquisition Corp.
  (NW Capital Appreciation/Waud Capital), Roman
  Adhesives (Prairie Capital).

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Your Equity. Your Risk. Your Partner.

• For more information
• Christopher J. Veber
• [phone]
• cveber_at_equityriskpartners.com