Change brings business opportunities in the US

19 September 2017

Donald Trump’s first months in office have not been without controversy but, for companies that can rise above the media hype and manage the risks, there are big opportunities to be had.

Donald Trump has had a bumpy ride since his inauguration on 20 January 2017. But one clear trend has emerged – the Republican President Trump is pursuing a much more business-friendly policy than his predecessor.

President Trump has promised to cut red tape, lower taxes and invest in America. As a result, confidence in financial markets and business is running high.

During the President’s first one hundred days in office, the Dow Jones Industrial Average climbed 6.1 per cent while the S&P 500 index rose 5.3 per cent – the fifth best stock market reaction to a presidency since 1923.

The 2017 International Business Report from Grant Thornton found that business confidence in the US was at a 14-year high.

“Business is bullish on the expectation of free market reforms and reduced government involvement, as well as greater opportunities for capitalism.

There is certainly a lot of anticipation in the business world of better things to come,” says David Payne, Chief Revenue Officer at JLT Specialty USA.

Reasons for optimism

Business optimism in America is being driven by expectations in three main areas: tax reform, deregulation and infrastructure investment. All three have implications for insurable risk.

For example, less federal intervention could see barriers to mergers and acquisitions (M&A) lowered, creating new opportunities to expand. According to EY, almost 80 per cent of US executives it surveyed say they expect their company to actively pursue M&A over the next year.

“The first quarter of 2017 had the strongest cross-border M&A deal flow since 2007. US CEOs are buoyed by their rising stock prices and the stronger dollar, which make foreign acquisitions more affordable,” says Payne.

“There has been significant growth in M&A insurance and we are seeing increasing interest from US companies in Bermuda and London capacity for warranty and indemnity cover,” he says.

Deregulation could also have a beneficial effect on US directors’ and officers’ exposures. 

Regulatory enforcement actions are a significant severity risk for US companies and, in recent years, there has been a rise in regulatory enforcement and massive fines levied against US and foreign businesses by US prosecutors and regulators.

“A Trump presidency could result in fewer directors’ and officers’ claims, with implications for limits and premiums,” says Payne.

A more relaxed regulatory environment might also have implications for cyber exposures. If the Trump administration were to ease federal fines and penalties for data breaches, the focus could instead shift to the courts to drive behaviour.

“Insurers would have to deal with any potential shift away from tough regulatory penalties in favour of civil actions. Policies will need to be able to respond,” says Payne.

Energy boost

The energy sector is another area where regulation is being relaxed and government interference reduced. 

President Trump has signed a number of executive orders relaxing environmental rules and restrictions for coal, oil and gas, including one order to extend offshore drilling in US waters.

“Combined with a more stable oil price, changes in energy and environmental regulation could lead to an increase in drilling and exploration, which in turn could boost demand for insurance,” says Payne.

Infrastructure

One of the policies that could have the most economic impact is the promised revitalisation of America’s ageing infrastructure

According to the American Society of Civil Engineers (ASCE), the US can no longer afford to defer investment in infrastructure and must address years of underfunding.

It estimates the US needs to spend an additional $2 trillion on infrastructure by 2025 if it is to make the grade. Failure to do so would cost the US economy an estimated $4 trillion and $7 trillion in lost business sales by 2025.

“The clearest opportunities for business are the promised investments in infrastructure.

The US has major infrastructure needs and many US cities badly need investment in transport and power generation,” says Nick Robson, CEO of Credit, Political and Security Risks at JLT Specialty.

A large investment in infrastructure – Trump suggested $1 trillion was needed during his presidential campaign – would represent a big opportunity for the construction industry, engineering and financial institutions, and the specialty insurers who support these sectors, as well as the specialist credit risk insurers who are increasingly underwriting the fundamental credit and performance risks necessary to support and secure the financing of such projects.

But the benefits of infrastructure investment would go far beyond the construction sector. A sizeable infrastructure investment would drive demand for raw materials and require new plant and machinery, services and logistics.

The wider and deeper economic impact of a large investment in infrastructure cannot be underestimated, says Robson.

“From mines in Africa to turbine manufacturers in Europe, infrastructure investment on this scale would impact the whole supply chain, stimulating sectors around the world. And, longer term, improved infrastructure would mean greater efficiency for business and lower costs for consumers,” he says.

Much has been made of Trump’s ‘America First’ rhetoric and the potential for increased protectionism. But Trump’s tough approach may hold some unexpected positives for international business, according to Robson.

For example, a more direct approach towards China does present risk but may deliver better trade results for multinational companies. Many foreign businesses that have invested in China have not yet seen the returns they had hoped for, despite China’s miraculous economic growth, he notes.

The effort to reset relations with Russia are challenging but should also be welcomed, says Robson.

“It’s clear that a more positive engagement with Russia should be constructive for everyone and could potentially restore some sanity to the situation in Syria, as well as bring about some positive economic consequences in the future.”

Political risk

However, Trump’s foreign policy could potentially expose US businesses to increased political risk in overseas markets.

“There is always the risk that unpopular policies could make US companies vulnerable to popular discontent, strikes or riots. For example, during riots in Mexico in January, US companies were deliberately targeted by protestors and looters,” explains Robson.

Aggrieved governments may also be more inclined to look for reasons to withhold payments, disrupt civil disputes or frustrate contracts, he adds. However, the opportunities for US companies investing and trading overseas are substantial and these risks can all be managed, and the consequences mitigated with effective insurance solutions, if they are properly understood.

US friendly

America First could also create problems for foreign companies operating in the US, although all businesses should theoretically benefit from Trump’s main reforms.

The US is obliged under international trade agreements to treat foreign investors fairly and ensure parity with US companies. But the political reality could see President Trump push the barriers of such agreements.

For example, the administration may want to see US engineers, banks and contractors get the lion’s share of infrastructure projects, while foreign companies could face increased scrutiny when tendering for US contracts.

“There will be great opportunities for foreign companies, but more so for those deemed American friendly,” says Robson. “Non-US firms will need to demonstrate that they are committed to investing in America, using US services and suppliers, and creating jobs in America,” he says.

Despite Trump’s emphasis on America First, the US will need foreign investment and expertise, as well as finance and insurance. This is especially true given the scale of the President’s ambitions in infrastructure.

“Clients will need the right expertise and advice from their broker at a time of business opportunity,” says Payne.

London and Bermuda are important sources of capacity for large and complex risks for US companies, especially in sectors such as construction, energy and financial institutions.

London is also a centre for speciality risks, including political risk, credit risk, cyber, M&A insurance and more complex liability risks.

Companies, investors and lenders will want to de-risk the construction and infrastructure projects that should follow Trump’s promised investment in infrastructure. This is likely to see them look to their brokers for additional capacity and for innovation on insurance structures.

Risk transfer

“As companies look at expansion and the need to transfer more complex risks, there will be continued demand for specialist insurance markets.

Some risks can only be placed in London or Bermuda, while some large programmes cannot be filled without global markets,” he says.

A large increase in infrastructure spending could put pressure on domestic insurance capacity for construction risks, requiring brokers to source capacity from international markets, says Payne.

US companies might also seek out international markets to reduce any overreliance on US capacity. Similar to developments in banking, US risk managers want to tap into more diversified sources of capital for their insurance programmes.

“Looking to London and Bermuda as markets to create more global diversity appears to be a wise move for many US companies, especially in the age of increasing carrier consolidation,” he says.

So far, the Trump presidency has been good for the US economy, which is also a positive for the global insurance industry. The US insurance market is the world’s largest, and insurers stand to benefit from a more prosperous US economy.

“We should see strong growth in infrastructure investment and M&A volumes, as well as increased complexity in an interconnected world, which will drive demand for new insurances like cyber,” says Payne.

“And despite the plentiful supply of insurance capital, there will be opportunities for those carriers that bring innovation to the market and focus on the most interesting industries.”

For further information please contact Nick Robson, CEO of Credit, Political & Security Risks on +44 20 7558 3643 or email nick_robson@jltgroup.com