Korea M&A Insurance

South Korea M&A values (public and private) broke records in the number and value of deals completed in 2021. Despite lackluster transaction activity this January, M&A professionals remain optimistic for 2022 as the key macro trends that drove last year’s records continue:

• Conglomerates, start-ups, and private equity seeking growth prospects
• Realignment of conglomerate business portfolios generating more carve outs
• Corporate restructuring and M&A are accelerating for digital transformation, decarbonization, resilience, ESG, and global expansion
• Succession issues for family businesses
• Shareholder activism pushing transactions
• Private equity has significant capital to deploy and ample aging investments to exit
• Real estate investors thirst for overseas assets
• Pandemic driven opportunities

However, the auspicious Year of the Tiger will have its challenges:

• Hastening inflation momentum and interest rate hikes
• Increased stock market volatility and uncertainty
• More restrained financial conditions
• Geo-political worries especially in our Asia neighborhood
• Growing government intervention in M&A and more tangible regulatory burdens
• Some countries taking their time to emerge from the pandemic

With this elevated risk environment, quality due diligence and well-tailored transaction insurance solutions go-hand-in-hand and will be critical for deal success in 2022.

Warranty and Indemnity Insurance (W&I)

Representation and Warranty Insurance (RWI)

1. The sheer number of inquiries and policies secured for Korea domestic and overseas transactions in 2021 demonstrates the growth and acceptance of W&I in Korea however, Covid-19, incredible deal volume, and insurer resource issues have complicated the underwriting process, most notably:

• Buyers should expect that W&I insurers will want to confirm that the transaction parties have considered the effects that Covid-19 and new variants could have on all aspects of the deal including its direct impact (if any) on the target business. 
• Most W&I insurers will push for some version of a Covid-19 exclusion; however, the exclusion wording needs to be carefully vetted and “narrowed” through proper negotiation.  Clearly Covid-19 is a known issue, but its longer-term impact is less clear.
• Ample W&I capacity remains available however, underwriters are swamped with inquiries and their teams are stretched so policies take more time to negotiate. Plan accordingly and start the underwriting process as early as possible.
• Underwriters have reduced appetite for deals with an EV below KRW 100 billion. The availability of audited financials is critical for transactions of this size.

2. In 2021, W&I premium rates rose in Korea and abroad due to increased policy demand and, accordingly, increased claim frequency and severity costs. In response, insurers are investing in additional underwriting and claims handling resources. Premium rates are stabilizing but ARIA will be closely monitoring them as 2022 progresses.
3. Demand for W&I for cross-border deals continues to be strong, especially by strategics and real estate investors. Pursuit of distressed assets is often a key motivator and W&I is being used to facilitate such transactions, for example, 363 sales in the US.
4. Distressed / insolvency deal inquiries are up but W&I underwriters will review these deals very selectively. Insurance can be secured but it is critical to get the narrative and structure right before taking it to insurers. W&I is being used where a buyer has credit risk concerns about a seller’s ability to stand behind its indemnity obligations or where a seller is unwilling or unable to provide indemnification.
5. Insurers have been cautious about covering secondary transactions, but underwriters are adapting their approach to the unique risk profile of these deals and are embracing them in a more significant way. For example, insurers previously would not cover Excluded Obligations for various reasons but have now started offering coverage. Knowledge qualifiers remain a challenge in secondary transactions, but we are seeing underwriter flexibility with the issue. For the best coverage outcome, the GP needs to be active in the underwriting process and be available with their internal and external compliance teams to discuss fraud and timing risks with underwriters.
6. Inquiries for minority investments is steady with W&I protection being structured so that minority investors are covered for their pro-rata share of a company level loss.
7. Take privates can be done but W&I insurer appetite will be affected by the deal structure and involvement of controlling shareholders and management who have requisite knowledge.
8. Insurance brokers of all sizes in Korea continue to push W&I but most lack experience and in-country M&A legal knowledge to negotiate favorable coverage wordings and to strategically settle claims. Korean offices of the large global brokers still largely rely on regional expertise, but turnover and resourcing issues continue to be a challenge so be sure to lock in the “A” team from start to finish. As mentioned, this is a difficult insurance market, so you need to avoid having your deal handed-off to a less experienced team. Regarding broker remuneration, full transparency can be an issue as some brokers are charging fees in addition to the commissions that are included in the premium.
9. Along with the increasing number of W&I policies issued for Korea transactions, W&I claims in Korea are also increasing. We expect W&I claim activity to grow in Korea and across the region as economic realities impact portfolio companies that were covered by long-term multi-year W&I policies. Currently, various insurers report that roughly 20% of their W&I policies globally receive a claim notification and that claim amounts are growing, especially for complex transactions.   

Tax Liability Insurance (TLI) – Korea M&A Insurance

1. TLI coverage enables an insured to reduce or eliminate a known contingent tax exposure arising from a tax treatment of a transaction, investment or other tax position that may be challenged by the NTS or foreign tax authorities.
2. Interest in tax insurance is steadily growing as tax authorities become more aggressive to address Covid-19 driven budget issues …. and M&A transactions (past and present) are an area of focus.
3. We continue to see new and creative applications of the product to address a range of tax concerns and ARIA has been successful in structuring several complex tax policies over the past few years. In Korea, capital gains tax applicability and the identification of beneficial owners is a common concern that TLI can address. GP-led secondary transactions can also create unique tax issues that TLI can be structured to ringfence. 
4. For cross-border deals, tax is a growing area of concern for buyers as tax authorities are putting corporations’ tax arrangements under greater scrutiny, especially those with multi-country operations.
5. On distressed deals, tax insurance can protect the debtor and/or buyer from unexpected tax liabilities relating to a debt restructuring, cancellation of debt income, ability to use a target company’s NOLs, etc.