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Can Trump’s Math Work in Healthcare?

When it comes to healthcare reform, it’s all about the math.

The First Element: Trump and Winning

President Trump hates to lose. He’s about winning until we’re all sick of winning. (His words, not mine.) The American Health Care Act, Republicans’ attempt to replace the Affordable Care Act, also known as Obamacare, failed. Support was so scarce that Speaker of the House Paul Ryan and the president didn’t even bring it to a floor vote in March.

The press said Trump lost. Given his vocal support and strong lobbying for the bill, this assessment was accurate, but one the president cannot, and, apparently will not, accept. He sent his team to try to salvage the bill before the April recess. They failed. Which was a bit surprising given that Trump seems more focused on passing a bill – any bill – than on the substance of legislation.

This is the first number in our healthcare reform equation: Trump wants to win and doesn’t care how.

The Second Element: Divided Republicans

It takes a simple majority to pass a bill out of the House. With 434 current members (the elevation of Jim Price to Secretary of Health and Human Services leaves one seat vacant), 218 votes are required to pass legislation. There are currently 246 Republicans in Congress. Having already shut Democrats out of the process, Trump needs all but 28 members of the GOP caucus to pass a bill; a 29th Republican “no ” vote, and the bill fails.

There are about 40 members of the House Freedom Caucus, a group of the chamber’s most conservative lawmakers. The majority of the caucus united in opposition to the AHCA. In March, Trump blamed them for the bill’s defeat. In April, he sent his emissaries to get their votes.

The Freedom Caucus demanded elimination of some of the ACA’s most popular provisions as the price of their support. These provisions prevent carriers from excluding coverage for pre-existing conditions and require health plans to include certain essential benefits, like maternity coverage. The White House reportedly considered acquiescing to these demands.

The problem, however, was that accepting the Freedom Caucus’ demands resulted in (relatively) moderate GOP members abandoning the AHCA. Gaining conservatives votes doesn’t help if the cost is an equal number of moderate votes. There may be a path to pass the AHCA solely relying on solely on Republican votes, but, given the divide between conservative and mainstream Republicans, it’s hard to find it.

Which provides the second number for our equation: Republicans can’t pass healthcare reform on their own.

See also: The Math of Healthcare Reform  

The Third Element: Democrats Want Repair

Democrats believe the ACA has been good for America, especially for those who, but for the ACA, would have no healthcare coverage. Most liberal Democrats think the ACA doesn’t go far enough. They won’t be satisfied with anything less than a single-payer system.

Many Democrats, however, think the ACA is generally fine, but in need of critical tweaking to keep it working. Some liberals will hold out for their dream of “Medicare for All,” but even many in their ranks will take a repaired ACA over a broken system or what Republicans are offering.

Which is why Democrats united against the Republican plan. Not that it mattered. Republicans never sought Democratic votes for the ACA.

Democrats want to fix the ACA. That’s the third and final number in our healthcare reform equation.

The Math of Healthcare Reform Compromise

If Trump wants to win, he needs to move beyond a purely Republican formulation. Otherwise, as shown above, the math doesn’t work. Republicans need the larger numbers that Democrats provide to pass healthcare reform legislation.

How does this math work? Let’s say a healthcare reform package reaches the floor of the House that attracts 164 Republicans – just two-thirds of their caucus. However, it gains support from 54 Democrats – only one-third of their caucus. The bill moves on to the Senate. In short, it’s easier to find 218 votes among 434 members than from among 246.

This path makes the challenge before the president straightforward, if difficult: find a legislative package that attracts enough Democratic votes to offset the Republican votes it loses. In the old days (before Washington because hyperpartisan), pragmatists from both parties would meet and hammer out a compromise. That’s what’s needed now. Significantly, there’s plenty of common ground to be found.

There are ACA taxes that neither Republicans and Democrats like. Eliminate them. The Shared Responsibility Payments that penalize Americans for going without coverage are universally acknowledged to be ineffective. Fix it. Both Democrats and many Republican want to keep the ACA’s Medicaid expansion. Preserve it.

The path to a compromise won’t be easy, but the equation is simple addition: Trump wants to win and doesn’t care how PLUS Republicans can’t pass healthcare reform on their own PLUS Democrats’ want to fix the ACA. The result: compromise.

See also: Stigma’s Huge Role in Mental Health Care  

Political Cover

The biggest obstacle to achieving healthcare reform is not the math, it’s the politics. Incumbents in both parties dread being “primaried” – Republicans fear being challenged from the right, Democrats from the left.

This is not paranoia. The extremes of both parties will seek vengeance on their less pure teammates. Party leaders and the administration will need to give these members extensive cover in terms of messaging, campaign money and resources to beat back these attacks. Or they will need to convince the public that failing to achieve healthcare reform is a worse outcome than the compromise.

This is where Trump proves he deserves to win. He must demonstrate his self-proclaimed negotiating prowess and his proven marketing acumen to create a political environment where compromise on healthcare reform doesn’t doom incumbents.

In other words, for Trump to win he needs to make sure that members of Congress win, too.  Otherwise, he loses. That’s politics—and math.

For curated articles on healthcare reform, check out the Alan Katz Health Care Reform Magazine on Flipboard.

Outlook for Taxation in Insurance

During his campaign, President Trump identified tax reform as a central pillar of his agenda to create 25 million jobs over the next decade. Similarly, Congressional Republicans have said that tax reform is essential to increasing economic growth and hope to complete action on tax reform legislation before the end of this year. Many Congressional Democrats, including Senate Democratic leader Schumer and Senate Finance Committee ranking member Wyden, also have supported corporate rate reduction to boost U.S. international competitiveness, provided it is done on a revenue-neutral basis.

While there is little detail on specific tax reform proposals at this early stage in the process, insurance companies will be asking how various tax reform proposals may affect the U.S. tax treatment of their domestic and foreign operations as tax reform efforts advance in 2017. With the proviso that the tax-reform situation is very fluid, here is what the proposals currently put forward by the president, the House and the Senate could mean:

During his campaign, President Trump proposed reducing the U.S. corporate tax rate from 35% to 15%. He also would repeal the corporate alternative minimum tax (AMT). His plan would eliminate “most business tax expenditures,” except for the research credit. President Trump’s tax plan also would impose a one-time, 10% repatriation tax on overseas corporate profits. Earlier in his campaign, Trump’s tax plan specifically called for the repeal of tax deferral on the foreign earnings of U.S.-based companies, but his most recent plan does not address the taxation of future foreign earnings.

A House Republican task force on tax reform, led by Ways and Means Committee Chairman Brady, prepared the Blueprint. Chairman Brady and committee staff have been working since July of last year to draft statutory language that reflects the goals and principles outlined in the Blueprint. Under the Blueprint, the top U.S. corporate income tax rate would be reduced from 35% to 20%. The Blueprint generally proposes eliminating all business tax expenditures except for the research credit. In addition, the Blueprint would move the U.S. from a worldwide international tax system to a “territorial” 100% dividend-exemption system and impose a mandatory “deemed” repatriation tax
(8.75% for cash or cash equivalents and 3.5% for other accumulated foreign earnings).

The cash flow system proposed by the Blueprint includes immediate expensing of all depreciable and amortizable new business investment and denying a deduction for net interest expense. The Blueprint notes that special rules are needed for banking, insurance and leasing business activities under the proposed border adjustable destination-based cash-flow tax system. As of mid- February 2017, the details of such special rules remain under consideration by Chairman Brady and his staff.

The Blueprint proposes to establish a “destination-based” business tax system that would be “border adjustable” by exempting the gross receipts from export sales and imposing tax on imports, which could be achieved through the denial of a deduction for the cost of the imports.

In recent interviews, Chairman Brady has described border adjustability as a critical part of the Blueprint, stating, “It became clear we needed border adjustability to eliminate all the incentives for companies to move jobs, innovation and headquarters overseas.”

Chairman Brady and other House Republican leaders also have cited border adjustability as a key means of offsetting the cost of lowering the U.S. corporate tax rate to 20%. Although there are no official revenue estimates for the House Republican Blueprint, the Brookings Institution-Urban Institute Tax Policy Center has estimated that border adjustment raises $1.2 trillion over 10 years. The cost of lowering the U.S. corporate tax rate to 20 percent and the cost of repealing the corporate AMT was projected to be $1.8 trillion over the same period.

House Republican leaders have noted that they would need to identify alternative means offsetting a reduction in corporate tax rates if their border adjustment proposal is not adopted. In 2014, former House Ways and Means Committee Chairman Dave Camp (R-MI) introduced a tax reform bill (H.R. 1) that included provisions to lower the U.S. corporate tax rate to 25% and included a broad range of revenue offsets affecting various industries. Revenue offsets in H.R. 1 affecting insurance companies included proposals to change the way life insurance reserves and non-life insurance reserves are computed, and changes to the taxation of deferred acquisition costs (the “DAC” tax). Other offsets included changes to life and non-life insurance company proration for DRD and tax-exempt interest. H.R. 1 also proposed an increase in the discount rate used to compute life insurance reserves. Under H.R. 1, U.S. insurance companies also were not permitted to deduct reinsurance premiums paid to a related company that is not subject to U.S. taxation on the premiums, unless the related company elects to treat the premium income as effectively connected to a U.S. trade or business (and thus subject to U.S. tax).

The Blueprint states that transition rules will be needed for tax reform in general and in particular for the move to a destination-based cash-flow business tax system; however, it does not describe those transition rules. Chairman Brady recently has reaffirmed that he does not support exemptions for individual business sectors, but he is prepared to consider transition relief.

See also: Implications for Insurance Taxation?  

Senate tax reform proposals

In a Feb. 1 speech, Senate Finance Committee Chairman Orrin Hatch (R-UT) said the Senate is working on its own tax reform plan, and the “hope is to have a tax reform proposal in one form or another to discuss publicly in the near future.”

Chairman Hatch has expressed hope that the Senate tax reform effort will be able to secure bipartisan support. Without Democratic support, Chairman Hatch has noted that “we’ll basically need universal Republican support to pass anything through [budget] reconciliation” procedures that allow for legislation to pass with a simple majority. Most Senate legislation requires approval by a 60-vote supermajority.

Chairman Hatch has not taken a position on the border tax adjustment. However, he has noted that several senators have expressed concerns or opposition to the House proposal. Senators who have announced opposition to the House border adjustment proposal include Senate Majority Whip John Cornyn (R-TX), who also serves on the Finance Committee, and Sen. David Perdue (R-GA).

“What it means is that the Senate will have to work through its own tax reform process if we’re going to have any chance of succeeding,” Chairman Hatch said in his Feb. 1 remarks. “No one should expect the Senate to simply take up and pass a House tax reform bill, and that’s not a bad thing.”

While now focused on pursuing comprehensive tax reform, Chairman Hatch and his staff had been working over the last two years on a corporate integration proposal that would subject business income to a single level of tax. The proposal, which has not been released to date, has been expected to adopt a dividends-paid deduction approach in which dividends are treated like interest (i.e., deductible payments) and a withholding tax is imposed on both to ensure one level of U.S. tax on interest and dividend income.


  • There is little detail on specific tax reform proposals that could affect the insurance industry at the time of this document’s publication. Accordingly, insurance companies will need to closely monitor how various tax reform proposals may affect the U.S. tax treatment of their domestic and foreign operations as tax reform efforts advance later in 2017. PwC will provide timely updates on developments as they arise.

Administrative Developments

A number of administrative developments occurred in 2016 concerning insurance companies.

These developments affected insurers in various lines of business:

  • Life insurers – The most significant development for life insurers remains the adoption of Life Principles Based Reserves (PBR), effective as early as Jan. 1, 2017, for some companies and some contracts issued on or after that date. Life PBR has a number of related tax issues, and the IRS and Treasury Department provided its first guidance in Notice 2016-66, setting forth rules for implementing the 2017 CSO mortality tables. Life PBR remains on the annual Priority Guidance Plan, was recently identified as one of 13 “campaigns” to which the IRS will devote significant resources in the coming months, and is the subject of an Industry Issue Resolution (IIR) project.

Two other 2016 administrative developments are particularly important for life insurers. First, Notice 2016-32 provides an alternative diversification rule under section 817(h) for a segregated asset account that invests in a government securities money market fund. The new, alternative diversification rule in Notice 2016-32 facilitates such investments. Second, Field Attorney Advice 20165101F concludes that a change in the computation of the statutory reserves cap that applies to life insurance reserves is a change in basis and therefore required to be spread over 10 years. Although Field Attorney Advice is not precedential, this conclusion was controversial, and companies are still considering the issue as potential changes in basis arise.

  • Non-life insurers – IRS Attorney Memorandum (“AM”) 2016-002 addresses the mechanics of a change in method of accounting for unearned premiums by a Blue Cross or Blue Shield organization that fails to meet the medical loss ratio (MLR) requirement of section 833(c)(5). The guidance is helpful to a broader class of nonlife insurers than Blue Cross organizations because it illustrates the operation of the unearned premium reserve and the application of section 481 to changes in accounting method more generally.

In addition, in early 2017, the Departments of Labor (DOL), Health and Human Services (HHS) and Treasury issued Frequently Asked Questions about ACA implementation, including guidance defining the term “health insurance coverage.” Under that guidance, the provision of Medicaid coverage to Medicaid recipients as a managed care organization, and the provision of coverage under a Medicare Advantage organization or plan or a Medicare prescription drug plan is not “health insurance coverage.” This interpretation could excuse some companies from the compensation deduction limitation of section 162(m)(6) and could clear up confusion created by two prior Chief Counsel Advice memoranda (201610021 and 201618010).

  • Health insurers – No payments will be required in 2017 under the Affordable Care Act (ACA) Health Insurance Provider fee, as a result of that fee’s suspension under the Consolidated Appropriations Act of 2016. Health insurance providers are still required to file Form 8963 for the 2016 year pending legislative developments on the ACA.

In addition, some insurers (particularly health insurers) anticipate significant guaranty fund assessments as a result of the liquidation of Penn Treaty America Insurance. Many such companies (other than Blue Cross organizations) account for those payments on a reserve basis as premium- based assessments under Rev. Proc. 2002-46.

  • Captive insurance companies – Section 831(b) allows certain small, non-life insurance companies to elect to be taxed only on investment income and not on underwriting income. The IRS and Treasury Department have not provided guidance on changes that the Protecting Americans from Tax Hikes (PATH) Act of 2015 made to the requirements to qualify for that provision.

See also: Be on the Lookout for These 3 Tax Scams  

Captive insurance companies – particularly small (“micro”) captive insurance companies — remain a significant administrative priority, however. For example, Notice 2016-66 identifies a significant number of such companies as “transactions of interest” for which reporting is required. Those reporting requirements are drafted broadly, and a large number of companies are in the process of reporting. The IRS also has identified “micro captive” insurance companies as a “campaign” issue that is a priority for the IRS in targeting its examination resources. Furthermore, practitioners and taxpayer alike are still waiting for the Tax Court’s decision in Avrahami v. Commissioner, which could provide even more judicial guidance on insurance qualification in the context of captive insurance.

  • Regulations under Section 385 (characterization as debt or equity) – In spring 2016, the IRS and Treasury Department proposed regulations that would establish a contemporaneous documentation requirement that must be satisfied for certain related- party debt to be respected as debt and recharacterize as equity certain instruments that were intended to be treated as debt for Federal income tax purposes if they are issued in connection with certain distributions and/or acquisitions, even if they met the documentation requirements. The proposed regulations generated significant Congressional and taxpayer concern, including nearly 200 unique comment letters. In fall 2016, the IRS and Treasury Department released final and temporary regulations. The government made significant changes in the final regulations in response to taxpayer comments. The overall scope of the proposed regulation has been reduced through a number of exemptions in the final and temporary regulations. The final and temporary regulations do not apply to debt instruments issued by foreign corporations. They also do not apply to interests issued by regulated insurance companies other than captive insurance companies. The final regulations also treat surplus notes of an insurance company as meeting the documentation requirements of the regulations, even though approval or consent of a regulator may be required for payments under the notes. However, the final regulations make no special provision for life insurance companies that are prevented from joining a consolidated return by the life-nonlife consolidated return limitations, nor do they provide specific guidance on the treatment of a company’s obligations under funds withheld reinsurance.
  • Regulations Under Section 987 – The IRS has issued final and temporary Section 987 regulations in December 2016. The final regulations implement an accounting regime based largely on proposed regulations issued in September 2006, to account for income earned through a qualified business unit (QBU) that operates with a functional currency different than that of its owner (e.g. foreign branches). Similar to the 2006 proposed regulations, the final regulations generally do not apply directly to insurance companies but may be relevant to non-insurance affiliates.

2016-17 Priority Guidance Plan

As in prior years, the IRS and Treasury jointly issued a Priority Guidance Plan outlining guidance it intends to work on during the 2016-2017 year. The plan continues to focus more on life than property and casualty insurance companies.

The following insurance-specific projects, many of which carried over from last year’s plan, were listed as priority items:

  • Final regulations under §72 on the exchange of property for an annuity contract. Proposed regulations were published on October 18, 2006;
  • Regulations under §§72 and 7702 defining cash surrender value;
  • Guidance on annuity contracts with a long-term care insurance rider under §§72 and 7702B;
  • Guidance under §§807 and 816 regarding the determination of life insurance reserves for life insurance and annuity contracts using principles-based methodologies, including stochastic reserves based on conditional tail expectations;
  • Guidance on exchanges under §1035 of annuities for long-term care insurance contracts; and
  • Guidance relating to captive insurance companies.

Less clear is what projects the 2017-2018 Priority Guidance might include. For example, the Trump administration may have different guidance priorities than its predecessor. In addition, a recent Executive Order requiring agencies to relieve existing regulatory burdens in exchange for imposing new ones could complicate the number of guidance items that may be published or the form those items may take.


  • Life insurers should consider the effect of Life PBR tax issues on product development, financial modeling, and compliance as some companies consider a January 1, 2017, effective date.
  • Nonlife insurers who move in and out of insurance company status (or whose products move in and out of insurance contract status) should consider whether the recent Attorney Memorandum sheds light on the application of section 481 to insurance- specific items such as unearned premium reserve.
  • Health insurers can expect significant changes in tax rules and, in particular, one-time transition rules as a result
    of the 2017 suspension of the Health Insurance Provider Fee and the likely repeal (and possible replacement) of the ACA.
  • Captive insurers should be prepared for additional IRS scrutiny as a result of the Priority Guidance Plan item promising guidance, identification of the micro captive issue as a “campaign,” and the possibility that a decision in the Avrahami case could shed more light on insurance qualification for Federal income tax purposes.

What Trump Wants to Do on ACA

President Trump’s speech to a joint session of Congress on Feb. 28 covered his commitment to repeal and replace the Affordable Care Act. What did he say, what did he mean and what will be the impact on the ACA?

What He Said

The president said, “I am also calling on this Congress to repeal and replace Obamacare with reforms that expand choice, increase access, lower costs and, at the same time, provide better healthcare.”

Then, he proclaimed, “We must act decisively to protect all Americans. Action is not a choice — it is a necessity. So I am calling on all Democrats and Republicans in the Congress to work with us to save Americans from this imploding Obamacare disaster.”

He cited five principles that “should guide the Congress as we move to create a better healthcare system for all Americans.

“First, we should ensure that Americans with pre-existing conditions have access to coverage and that we have a stable transition for Americans currently enrolled in the healthcare exchanges.

“Secondly, we should help Americans purchase their own coverage through the use of tax credits and expanded Health Savings Accounts — but it must be the plan they want, not the plan forced on them by the government.

“Thirdly, we should give our great state governors the resources and flexibility they need with Medicaid to make sure no one is left out.

See also: What Trump Means for Health System  

“Fourthly, we should implement legal reforms that protect patients and doctors from unnecessary costs that drive up the price of insurance — and work to bring down the artificially high price of drugs and bring them down immediately.

“Finally, the time has come to give Americans the freedom to purchase health insurance across state lines — creating a truly competitive national marketplace that will bring cost way down and provide far better care.”

What He Meant

I hesitate to try interpret what the president means when he, well, uses words. We’re talking a moving target here. However, given the gravity of the speech, I assume what he said was thoroughly vetted and intentional. So, I’ll go try to interpret the president’s message. Full disclosure, however: Republicans are already fighting over the meaning of his five healthcare reform principles, so there’s clearly room for differing interpretations.

Pre-existing Conditions:

In the past, Trump has expressed the desire to keep the ACA’s guarantee-issue provisions that prevent insurers from declining coverage because of a consumer’s health status. Last night, however, he used different wording, stating that pre-existing conditions should not bar Americans from having “access” to coverage. These are two different things. The ACA requires that carriers accept consumers, even those with expensive medical conditions, into any plan for which the consumer is eligible. Calling for access means that, as an alternative, these Americans could be shunted into high-risk pools or plans designed specifically for high-cost insureds.

Offering access to high-risk pools means Americans with existing medical conditions would have fewer choices and limited benefits and would pay higher premiums than their healthier neighbors. In testimony before a California legislative committee, I once referred to high-risk pools as “a ghetto of second-hand coverage.” The author of the legislation establishing the state’s pool sat on the committee. Oops! But I stand by my description.

The president’s indicating a willingness to accept high-risk pools was good news for House Speaker Paul Ryan, who supports them. However, there are millions of Americans with pre-existing health conditions. How will they react to being removed from the “normal” market? And how will they, and their family and friends, express those feelings at the polls?

Tax Credits and HSAs:

Health Savings Accounts have long been a staple of Republican healthcare reform proposals. In a draft of Speaker Ryan’s Obamacare replacement bill, tax credits are the primary means of making health insurance premiums affordable. Conservatives have pushed back against tax credits, calling them a new, non-means-tested entitlement program. The president’s backing of this approach will give the speaker some leverage in negotiations with these members of the GOP caucus in the House.


President Trump’s call for giving governors more say in how their states implement Medicaid seems to support efforts to move federal payments for the program into block grants, which aligns the White House with Republicans in the House. Currently, states receive funds based on Medicaid enrollment (subject to a host of adjustments for a variety of factors, but let’s keep it simple for now). Block grants would give states a fixed amount to spend within very broad federal guidelines. This approach enables the federal government to cap their spending on the program and leaves it to states to manage the program.

Lowering the Cost of Care:

Too often, the debate over health insurance affordability ignores a harsh reality: The major driver of health insurance premiums is the cost of medical care. Most of the president’s principles concerning healthcare reform focus on healthcare coverage. But he’s also seeking to lower costs through malpractice reform and through taking steps to drive down the cost of prescriptions. That the president is addressing medical expenses at all is a good thing. Let’s hope that, as a replacement to the Affordable Care Act moves through Congress, there will be an even greater emphasis placed on reducing the cost of medical treatments and services.

Interstate Sales:

Trump and many Republicans invoke letting consumers buy out-of-state coverage with the same passion as Hogwarts students learning their first spells. Republicans proclaim out-of-state coverage will increase competition and lower premiums across the country. Like that school of witchcraft and wizardry, however, this proposal is, unfortunately, a fantasy. I’ll write a post on why soon, but for now consider just one factor: Virtually all health insurance policies sold today rely on discounts offered by “in-network” doctors, hospitals and other providers of care. Plans sold in State A may look good to a consumer in State B, but if that carrier doesn’t have a strong network in State B, what good is that policy?

The Impact

Let’s assume I’ve interpreted what the president said correctly. What will be the impact of his position on whatever Obamacare repeal-and-replace bill emerges from Congress and lands on his desk to sign?

See also: Is the ACA Repeal Taking Shape?  

First, it is very significant that the president’s healthcare reform principles align as closely as they do with those of Speaker Ryan. This gives the speaker a powerful card to play when herding his splintered caucus behind his preferred legislation.

Second, it seems to signal that the White House is ceding the responsibility to develop an ACA replacement to Congress. The president carved out no bold vision for what he wants, nor are his principles in conflict with longstanding Republican positions. The only exception is his call for federal action to lower prescription drug costs. But would Trump veto a bill that meets all of his principles except for this one? Doubtful.

Third, we’re only at the beginning of a long, arduous march to reforming or replacing the Affordable Care Act. Many more parties will be heard from, including Senate Republicans, insurers, pharmaceutical companies, doctors, hospitals and other special interest groups. The public will have a lot to say on this subject, too. Plus, any reform package will likely require support from Democrats, and negotiations for those votes have not yet begun.

As I’ve written previously, what Republicans are putting forward now may bear only a passing resemblance to the healthcare reform we will get at the end of what will be a very long, messy slog.

This article was originally posted on Alan Katz’s blog.

M&A: the Outlook for Insurers

Mergers and acquisitions in the insurance sector continued to be very active in 2016 on the heels of record activity in 2015. There were 482 announced transactions in the sector for a total disclosed deal value of $25.5 billion. Deal activity was driven by Asian buyers eager to diversify and enter the U.S. market, by divestitures and by insurance companies looking to expand into technology, asset management and ancillary businesses.

We expect the strong M&A interest to continue, driven primarily by inbound investment.

With the election of a new president and the transition of power in January 2017 comes tax and regulatory uncertainty, which may temporarily decelerate the pace of deal activity. President Trump is expected to prioritize the repeal and replacement of Obamacare, tax reform and changes to U.S. trade policy, all of which have unique and potentially significant impact on the insurance sector. Further, the latest Chinese inbound deals have drawn regulatory scrutiny, with skepticism from the stock market regarding their ability to obtain regulatory approval.

Bond yields have spiked over the last few months and are widely expected to continue to increase. The increase in yields should improve insurance company earnings, which is likely to encourage sales of legacy and closed blocks.

Highlights of 2016 deal activity

Insurance activity remains high

Insurance deal activity has steadily increased since the financial crisis, reaching records in 2015 both in terms of deal volume and announced deal value. While M&A declined in 2016, activity remained high, with announced deals and deal values exceeding the levels seen in 2014. In 2015, deal value was driven by the Ace-Chubb merger, valued at $29.4 billion, which accounted for 41% of deal value.

See also: A Closer Look at the Future of Insurance  

Significant transactions

Key themes in 2016 include:

  • Continued consolidation of Bermuda insurers, with the acquisitions of Allied World, Endurance and Ironshore. Drivers of consolidation include the difficult growth and premium environment.
  • Interest by Asian insurers in continuing to expand their U.S. footprint — accounting for two of the top-10 transactions.
  • Expansion in specialty lines of business as core businesses have become more competitive. This is evidenced by (i) Arch’s acquisition of mortgage insurer United Guaranty as a third major business after P&C reinsurance and P&C insurance; (ii) Allstate’s acquisition of consumer electronics and appliance protection plan provider SquareTrade to build out its consumer-focused strategy; and (iii) the agreement by National Indemnity (subsidiary of Berkshire Hathaway) to acquire the largest New York medical professional liability provider, Medical Liability Mutual Insurance, a deal expected to close in 2017.
  • More activity in insurance brokerage, which accounts for two of the top-10 deals.
  • Focus on scaling up to generate synergies, as evidenced by the acquisitions done by Assured Guaranty and National General Holdings.
  • Continued growth in asset management capabilities, as exemplified by New York Life Investment Management’s expanding its alternative offerings by announcing a majority stake in Credit Value Partners LP in January 2017 and MassMutual’s acquiring ACRE Capital Holdings, a specialty finance company engaged in mortgage banking.

Key trends and insights

Sub-sectors highlights

Life & Annuity – The sector has been affected by factors such as Asian buyers diversifying their revenue base, regulations such as the fiduciary rule by the Department of Labor and the SIFI designation, divestitures and disposing of underperforming legacy blocks, specifically variable annuity and long term care businesses.

P&C – The sector has been experiencing a challenging pricing cycle, which has driven insurers to 1) focus on specialty lines and specialized niche areas for growth and 2) consolidate. We have seen large insurance carriers enter the specialty space. Furthermore, with an abundance of capacity and capital, the dynamics of the reinsurance market have changed. Reinsurers are trying to adjust to the new reality by turning to M&A and innovation in products and markets.

Insurance Brokers – The insurance brokerage space has seen a wave of consolidation given the current low-interest-rate environment, which translates into cheap debt. The next consolidation wave is likely in managing general agents, as they are built on flexible and innovative foundations that set them apart from traditional underwriting businesses.

See also: Key Findings on the Insurance Industry  

Insurtech has grown exponentially since 2011. According to PwC’s 2016 Global FinTech Survey, 21% of insurance business is at risk of being lost to standalone fintech companies within five years. As such, insurers have set up their own venture capital arms, typically investing at the seed stage, in efforts to keep up with the pace of technology and innovation and find ways to enhance their core business. Investments by insurers and their corporate venture arms are on pace to rise nearly 20x from 2013 to 2016 at the current run rate.

Conclusion and outlook

The insurance industry will be affected by the proposed policies of the Trump administration, especially on tax and regulatory issues. Increasing bond yields and the Fed’s latest signal about a quick pace of rate increases in 2017 are expected to improve portfolio income for insurers.

  • Macroeconomic environment: U.S. equity markets have been rallying since the election, with optimism supported by President Trump’s policies to boost growth and relieve regulatory pressures. However, the rally may be short-lived if policies fail to meet investor expectations. While the Fed is widely expected to raise rates in 2017, other central banks around the world are easing, and uncertainty in Europe has spread, with the possibility that countries will leave the euro zone or the currency union will break apart.
  • Regulatory environment: The direction of regulatory and tax policy is likely to change materially, as the president has campaigned for deregulation and reducing taxes. Uncertainty around the DOL fiduciary rule has been mounting even though President Trump has not spoken out on the rule; some of his advisers have said they intend to roll it back. His proposed changes to Obamacare will affect life insurers, but at this juncture it is hard to estimate the extent of the impact given the lack of specifics shared by the new administration.
  • Sale of legacy blocks: Continued focus on exiting legacy risks such as A&E, long-term care and VA by way of sale or reinsurance. In 2017, already, there have been two significant announced transactions, AIG paying $10 billion to Berkshire for long-tail liability exposure and Hartford paying National Indemnity $650 million for adverse development cover for A&E losses.
  • Expansion of products: Insurers will focus on expanding into niche areas such as cyber insurance (expected to be the fastest-growing insurance product fueled by a slate of recent corporate and government hacking). Further, life insurers are focusing on direct-issue term products.
  • Technology: Emerging technologies including automation, robo-advisers, data analysis and blockchain are expected to transform the insurance industry. Incumbents have been responding by direct investment in startups or forming joint ventures to stay competitive and will continue to do so.
  • Foreign entrants: Chinese and Japanese insurers have keen interest in expanding due to weak domestic economies, intent to diversify products and risk and hope to expand capabilities.
  • Private equity/hedge funds/family offices: Non-traditional firms have a strong interest in expanding beyond the brokers and annuities business to include other sectors within insurance, such as MGAs.

Infrastructure: Risks and Opportunities

One of President Trump’s stated goals is to initiate significant investment in U.S. infrastructure — bridges, roads, airports, seaports, pipelines, fiber optic cables and water projects. As with any major spending measure — and the most common number being tossed around for this one is $1 trillion — there will be political hurdles. However, the U.S. House of Representatives Transportation and Infrastructure Committee just launched its #building21 campaign effort to promote its vision for 21st Century American infrastructure, calling for significant investment.

Infrastructure spending of such magnitude will bring many opportunities for construction and infrastructure companies. Organizations need to be strategically positioned to capitalize on the opportunity, well-prepared to engage in the heightened competition facing the industry and flexible enough to absorb an increasing level of risk.

Infrastructure Plans

In December 2015, Congress passed and President Obama signed the Fixing America’s Surface Transportation Act (the FAST Act), which increased the collection of gasoline taxes to pay for transportation infrastructure projects. The FAST Act authorized $305 billion for highway and motor vehicle safety, public transportation, motor carrier safety, hazardous materials safety, rail and research, technology and statistics programs. Although FAST Act funds are to be allocated to rehabilitate the country’s transportation network, there remains a significant infrastructure deficit in the country.

During his campaign, Trump called for $1 trillion in infrastructure investment in transportation, telecommunications, water, power and energy. Before his inauguration, Trump’s transition team circulated a list of 50 priority emergency and national security projects. Since then, Trump has given every indication that he plans to continue pushing to enhance infrastructure. For example, on Jan. 25, he signed an executive action related to one of the more controversial project proposals, a wall along the U.S.-Mexican border that many experts suggest would cost $15 billion to $25 billion.

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Against the same funding challenges the Obama administration faced, Trump’s plan calls for much of the infrastructure investment to be driven by the private sector through a series of tax credits and private funding as a means to encourage infrastructure investment in a revenue-neutral fashion. Trump’s plan also calls for the relaxation of various regulations to accelerate project delivery times and reduce cost.

Challenges and Headwinds

Most Democrats and Republicans agree on the need to improve this country’s infrastructure. A key difference, however, is how to pay for the upgrades.

On Jan. 24, Senate Minority Leader Charles Schumer introduced a $1 trillion infrastructure plan that relies heavily on direct government funding rather than on tax credits and private investment. Democrats generally argue that, although tax breaks may encourage investment, they will not necessarily bring about those infrastructure projects that are most needed, because the underlying economics may not make such projects profitable.

Despite these political differences, it is likely that some form of Trump’s plan will secure support as infrastructure renewal is a common interest. If an infrastructure spending bill is passed by Congress, organizations in the construction and infrastructure industries will be affected in a number of ways, including:

  • Increased competition: With an economic slowdown in some areas of the world and with increasing volatility, a large inflow of foreign capital will likely occur as international contractors seek opportunities to invest in and build U.S. infrastructure projects. Consolidation of market share in the sector is also likely.
  • Talent and labor shortage: Already facing a shortage of skilled professionals, the construction industry will need to compete with other industries to attract and retain talent.
  • Private investment: Regardless of which infrastructure plan takes hold, public-private partnerships will be a pivotal model to deliver infrastructure in the immediate future. Consider that more than 30 states have enabling legislation in place and are poised to act immediately on already-identified projects.
  • Increased risk: We are witnessing an ever-increasing trend of infrastructure projects being delivered through complex delivery methods, including design-build; design, build, operate and maintain; and integrated delivery. All such contracts result in increased risk being assumed by contractors. With competition expected to heat up, contractors will be expected to have greater risk-bearing capacity. Another consideration is that infrastructure and construction companies are increasingly tied to the “Internet of Things” through operational technology, electronics, software and network connections; this brings significant cyber exposures. And infrastructure itself is increasingly a target of cyber criminals.
  • Risk financing: Insurers and others continue to develop new risk consulting and risk transfer products and services. Not only do insurers absorb performance and hazard risks associated with infrastructure development, they are increasingly becoming infrastructure investors, as well. It remains to be seen how this level of infrastructure exposure will lead to new products and services or new alternative risk structures.

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The American Society of Civil Engineers (ASCE) estimates that the U.S. will face a $1.6 trillion infrastructure deficit in 2020. Although it is too early to know exactly how the new Congress and the Trump administration will proceed, we believe it’s safe to expect that infrastructure and development will be a hot topic this year and for many to come. If you’re not doing so already, now is the time to discuss with your advisers the risk and insurance considerations at the advent of a likely major U.S. infrastructure investment initiative.