Tim Grosso, Managing Director of Euclid Transactional, recently spoke with Insurance Business to provide a detailed overview of transactional insurance, with a particular focus on representations and warranties. He delved into the trends and evolving landscape of this niche area, and reflected on its journey and growth.

“I got interested very quickly in transactional liability insurance, particularly the subset of representation and warranty insurance. That’s what we call it here in North America. In Europe, it’s been around a little bit longer, and they call it warranty and indemnity insurance. But, you know, it’s a similar concept,” Grosso said, recalling being introduced to the field during an internship at Dechert LLP in 2014. At the time, the concept was still relatively new, particularly in the mid-market private equity M&A space, where it first gained traction in the United States.

The traditional way of handling M&A transactions involves setting aside a large portion of the purchase price in escrow to cover any potential breaches of representations made by the seller, Grosso said.

“It’s actually an inefficient use of capital because that money just sits there,” he said.

This method also created uncertainty for sellers, who were often unaware of any errors in their statements. The introduction of representation and warranty insurance addressed these problems by allowing sellers to take their money and walk away with confidence, while buyers were protected by the insurance policy.

“We can go in and review those statements,” Grosso said. “In general, we’re contracting with the buyer, so we’ll review all of his due diligence, and we’ll have a phone call with him and his client, to really understand the background of the deal.”

This process allows Euclid Transactional to issue a policy that covers the statements made in the transaction, excluding known issues. He noted that seller fraud is one exception where subrogation rights can be pursued, although this is rare.

A cornerstone of mergers and acquisitions

Speaking about the product’s evolution, Grosso noted that it has become a mainstay in M&A transactions, especially after 2018.

Over time, coverage has expanded as insurers have become more familiar with different companies and products. Initially, the COVID-19 pandemic slowed M&A activity, but the market has rebounded strongly, leading to one of the biggest boom cycles in 2020 and 2021.

This surge has led to capacity constraints and higher prices in late 2021. However, the subsequent influx of new entrants into the market in 2022 and 2023 has led to lower prices and expanded terms. “It’s a really great time to be a buyer in this market right now,” Grosso said.

From Tax Accountant to Transactional Liability

Grosso’s journey from tax accountant at Ernst & Young to law school and then into the specialty insurance industry offers valuable insights for professionals considering a similar path. “I’ve always been fascinated by the law,” he said.

His experience at Ernst & Young, where he worked closely with lawyers on tax structuring and regulatory matters, fueled his interest in the legal aspects of transactions. This led him to attend law school and then focus on mergers and acquisitions, where he found his niche in transactional insurance.

“Our insurance is primarily focused on ensuring the representations made in an M&A transaction,” Grosso said. “We also have a rapidly growing tax team, which is another really exciting area of ​​transaction liability insurance.” The tax team focuses on underwriting policies that cover the outcome of known discrete cases, giving clients peace of mind regarding their tax positions.

Impact of technology

Speaking about the impact of technology on transactional insurance, Grosso acknowledged that while the industry has not yet reached the stage where policies can be created solely through technology, great strides have been made.

“Technology is only as useful as the data that goes into it,” he added.

Euclid Transactional leverages a robust database of years of underwriting transactions to inform its decisions. The company’s recently released first-in-class claims study examines this data, providing valuable insights.

Euclid Transactional’s team growth, particularly during the M&A boom of 2020 to 2021, was also supported by advances in remote working tools.

“We’ve been able to leverage that as we’ve grown, which has helped us stay consistent,” Grosso said.

These tools have enabled the company to continue to provide a high level of service, even as the team expands rapidly.

looking forward

Grosso anticipates interesting times ahead as new companies face the challenges posed by claims. “As new companies enter the market, we’ll see how everyone responds to claims,” he said.

It is believed that customers, as they become more familiar with the product and its value, will continue to look for established markets with a proven track record.

“Our carrier partners have paid more than $800 million in claims (during) our eight-plus year history,” Grosso said. “We have also had minimal turnover in our team, which provides the added benefit of organizational continuity.”