A Look at Recent Trends in Tax Insurance

With the first quarter of 2024 now behind us, it's a perfect time to reflect and take stock of the tax insurance market since I joined Euclid Transactional in 2019.?

Euclid Transactional ’s tax team has grown from its first dedicated tax hire in June 2019 to one the largest in the transactional insurance industry today.? Comprised of 13 professionals located in the U.S. and Europe, the team’s experience spans a wide range of M&A and strategic tax related issues, in addition to tax credit risks in the renewable energy, historic, and other tax credit sectors.? The size and breadth of our tax team uniquely enables us to allocate significant resources toward understanding and solving our clients’ most complex tax challenges, while delivering results on the timeline our clients expect.? The tax team is further supported by Euclid’s 21 person claims team, the largest dedicated claims team in the industry, who have helped our clients recover more than $750MM in total loss.

Euclid Transactional bound ~280 tax insurance policies globally since 2019.? 90 of those policies were bound in 2023, the most in any year in our ~5-year history, and 2024 is off to a stellar start with 28 bound tax insurance policies in 1Q23 alone. ?

Consistent with the increase in policy bindings, submission volumes have dramatically grown year over year.? Globally, we’ve averaged 45% submission growth year over year.? More recently, submission volumes increased more than 35% in North America and 39% in EMEA from 2022 to 2023.? In 1Q24, we saw a staggering 293 global tax submissions (157 in EMEA and 136 in North America) putting us on pace to see over 1,100 tax submissions this year.

Tax insurance submissions typically fall into 4 distinct categories: (i) transactional – opportunities related to the structure of a pending M&A transaction and/or related to a tax position associated with a target company; (ii) strategic management – opportunities taken by a taxpayer outside of an M&A transaction such as internal reorganizations or whether an instrument is properly classified as debt or equity; (iii) tax credits – mainly investment tax credits (ITCs) and production tax credits (PTCs) but encompasses all credits including historic tax credits and R&D credits; and (iv) tax return – an opportunity to insure the filing positions of a taxpayer over a specified historical period of time.

When reviewing North American submission mix year over year, we see the significant impact the Inflation Reduction Act, passed in August 2022, has had on tax credits associated with renewable energy.? The share of tax credit submissions increased to over 45% of all N.A. tax submissions in 2022 and 2023, up from ~30% in 2021 and 2022.? The slow M&A market has also resulted in a decline of transactional opportunities from 40+% in 2021 and 2022 to less than 16% in 2023 and 2024-YTD.? It is Interesting to note that as more taxpayers and their advisors have gained a better understanding of the product, the share of strategic management submissions increased to a high of 39.5% in 2023, up from ~27% in 2022.

The growth of the tax insurance space has been remarkable and Euclid Transactional’s tax team would not be where it is today without the unwavering support of our dedicated broker, lawyer, and client partners; all of whom have been indispensable on our path to success.

Do our numbers align with your experiences?? Feel free reach out to Euclid Transactional to discuss these or any other topics.