Tax Reform Uncertainty a Risk Insurance Can’t Yet Mitigate

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By Laura Davison

Companies use tax insurance more and more to alleviate uncertainty about how the Internal Revenue Service will tax transactions.

But insurers aren’t yet willing to take on the risk of writing policies related to a far less predictable body in Washington—Congress, and how it might overhaul the tax code.

Companies’ awareness of tax insurance has grown as more insurers have entered the market and are collectively able to underwrite a $1 billion policy. New carriers, lower prices and quicker turnaround in issuing the policies have helped contribute to its popularity for lessening the risk in transactions.

But now, some companies are seeking policies to insure how the outcome of tax reform will affect their bottom line. That’s just not a financially feasible proposition, insurance brokers and underwriters told Bloomberg BNA.

“That’s not a bet carriers are going to take,” Craig Schioppo, a managing director at Marsh USA Inc., an arm of Marsh & McLennan Cos., said. “You don’t know what a legislature is going to do. You’re almost betting on political votes, which is not something my markets would do.”

To date, tax insurance has provided a way to relieve investor uncertainty as the Internal Revenue Service has restricted the issues on which it will issue private letter rulings. Policies may be written to ensure, for instance, that an S corporation or real estate investment trust qualifies for its special tax status or that a tax equity investor will be eligible for renewable energy credits.

More recently, companies have sought policies to protect themselves if a change in tax rates altered the value of an investment. Buyers, for example, may look for insurance on an acquisition eligible for a credit or deduction that is worth more if tax rates are higher. If rates fall, the insurance policy could pay out the difference. Gary Blitz, a senior managing director at insurance broker Aon Plc, said he has had 10 to 20 requests for such policies.

“We’re not at the stage where insurance has been able to step up and offer a solution,” Blitz said. “Things are too amorphous right now.”

The possibility of large-scale tax changes and corporate tax cuts seemed almost inevitable at the start of the year. But skepticism about the chances for a big tax bill this year has started to rise as Republicans in the government that they dominate have yet to release a detailed plan. As optimism about tax reform has waned, so have the requests for insurance policies to protect against those changes.

‘Theoretically’ Possible

David De Berry, chief executive officer of Concord Specialty Risk, which underwrites tax insurance, said he has received inquiries from companies looking to insure the acceleration of deductions in anticipation of tax reform that lowers rates, but so far the company hasn’t taken on those risks.

“It’s extremely difficult to insure legislative changes,” De Berry said. “Concord has a few principals that have insured political risk, but only at the state level.”

Pragmatically, it’s not possible to insure those kinds of risk, he said. But if there were a draft bill backed by Congress, supported by the president and scored by the Joint Committee on Taxation, that “theoretically” might make it possible for insurers to take “a small jump to insure that Federal legislation gets passed,” he said.

It has happened before. Blitz worked on a policy involving law changes more than 30 years ago, the last time comprehensive tax reform legislation moved through Congress in 1986.

That deal involved the purchase of an old property that the buyers were planning to renovate and qualify for the historic tax credit. At that point, Congress had proposed changes to the tax credit and the buyers wanted to make sure they would qualify for the credit under the law current at the time they were negotiating the deal. But at the time that policy was written, there was much more specificity about the potential tax changes in Congress than there is now, Blitz said.

Here to Stay

With or without tax reform, the underwriters and brokers are expecting the appetite for tax insurance to grow in the coming years.

The number of submissions for tax insurance policies has increased about 20 percent this year, Tim Kennedy, chief underwriting officer at Ambridge Partners LLC, told Bloomberg BNA. It’s still a “seller’s market,” despite some economic uncertainty, which means that tax insurance can help get some deals across the finish line if buyers want to ease some risk in the deal, he said.

De Berry’s Concord is looking to expand its business of insuring federal income tax returns. The product isn’t yet available for the largest public companies, but it could underwrite a Fortune 250-1000 company’s return. It’s a “safety blanket” for companies that don’t perceive too much tax uncertainty but want the added review, he said.

However, these kinds of risks steer clear of the action—or inaction—that will happen in Congress over the coming months.

“They’re not gamblers. They’re not just flipping a coin and saying I hope this works out,” Blitz said. “They will write insurance where they can get comfortable.”

To contact the reporter on this story: Laura Davison in Washington at lDavison@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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