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Meeting Summary

Mulling Post-Tax Reform Realities, Cyber Insurance and the New Tech Landscape

July 27, 2018
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Large-cap treasurers grapple with tax-reform implications and cyberthreats, talk training, and consider how technology will change the role of treasury. 

T30LC 2018 

Treasurers of large-cap companies covered a range of timely topics at the T30 LC 2018 spring meeting sponsored by US Bank at Starbucks’ headquarters in Seattle. Subjects discussed included planning for the effects of US tax reform—on capital structure and allocation, for starters—and how they may impact treasury’s global cash and tax structures; the damage caused by cyberattacks and the insurance available to address it; rising rates and interest rate risk management; issuing debt in a foreign currency; and the impact of new technologies on treasury. Here are three areas that stood out:

1) Tackling Tax Reform: Many Questions, Some Answers. Treasurers heard expert commentary on the key elements of US tax law changes they need to consider, including whether treasury structures for, say, overseas cash pooling are still relevant under the new rules. Also reviewed: possible responses by tax authorities in other key jurisdictions, as well as regs, rules and clarifications to look out for.

2) Relieving Cybercrime Pain: Assessing Insurance. Cyberattacks expose corporates to significant losses of cash and reputation. Given the changing dynamics of the cyber insurance industry, what should treasurers be thinking about and doing? This discussion focused on actions triggered by recent incidents of cyber intrusion, what cyber risk looks like today and how to protect your company.

3) Deploying New Technologies in Treasury. The advent of robotic process automation (RPA), artificial intelligence (AI) and machine learning informed a session on the various ways treasury teams are implementing new technologies. Of equal importance: What do technological advances mean for treasury roles and responsibilities, and what new skills are needed?

NeuGroup Peer Research Cash Use the Expected The Encouraging

Tackling Tax Reform: Many Questions, Some Answers

US Bank’s presentation covered the timing of paying tax on deemed repatriation and the potential effects on global liquidity structures, as well as the foreign tax implications of the BEAT, GILTI and FDII provisions that expand the base of cross-border income. This was followed by a discussion on the effects of tax reform on areas including capital structure and debt paydown.

An Uncharted Interest Rate Environment

KEY TAKEAWAYS 

1) When to pay the tax? The tax on foreign earnings may be spread over eight years, but doesn’t stay at the same rate. For years one through five, the tax is 8%; it jumps to 15% in year six, 20% in year seven and in year eight reaches 25%! So it clearly may behoove companies to pay the tax earlier to reduce the total tax hit. The downside of early payment is paying the IRS more money earlier because the tax is applied to a bigger base amount. This is just one example of the numerous decisions tax reform is forcing treasury to play a role in making.

2) Time to deleverage? A key effect of tax reform will likely be deleveraging fueled by increased free cash flow, limitations on net interest expense deductions, and the reduced value of the deduction at a lower tax rate. The natural result will be to let debt mature or to buy it back early. US Bank cited companies that “indicated they will use the extra tax reform cash flow to deleverage at a faster pace.” Treasury needs to weigh the effects of deleveraging from its perspective.

3) Need to get everyone on the same page. A common theme among the treasurers discussing tax reform issues was the difficulty of getting finance, tax and senior management to sing from the same sheet music. That’s probably because each group has its own idea of how “best” to deploy the cash. Singing in unison will take time and effort, but is a must as the decision clock continues to tick.

OUTLOOK 

The presentation and comments by members indicated that, no surprise, the tax overhaul passed at the end of 2017 will significantly benefit US multinational corporations and may provide longer-lasting advantages than markets are factoring in today. That said, clarity is needed as the IRS fleshes out the details of a bill that was passed in haste. The lack of clarity around various elements of the complex rules means it will take companies substantial time and effort to settle on actions and strategy that satisfy all stakeholders, including activist investors. Indications from other NeuGroups suggest that many companies are still making decisions on how much cash to repatriate and when, how exactly to transfer securities and how to spend the money.

Relieving Cybercrime Pain: Assessing Insurance

The head of the cyber practice at Marsh laid out the big picture on cyber risk, underscoring that most companies will constantly face cyberattacks and that cybersecurity can only do so much. He then delved into the cyber insurance market. That followed a description by the treasurer of a large shipping and transportation company of a malware attack on the company’s European subsidiary that shut down all the sub’s systems. The attack cost the company a significant amount of revenue; unfortunately, the business had no cyber insurance.

Training, Anyone?

KEY TAKEAWAYS 

1) Data and intangibles are the 21st century asset class. A Marsh slide showed that in 1975, 83% of the S&P 500’s market value was tied to tangible assets and the rest to intangibles; by 2015 it flipped completely, with 84% in intangible assets. This is a dramatic representation of the importance and value of data and the stakes involved because it’s so vulnerable to cybercrime. Marsh advocates a multi-pronged approach to managing risk around this new reality that, of course, includes insurance.

2) Cyber insurance is expensive. The high cost of cyber policies relative to other types of insurance is a key reason many firms have not embraced cyber coverage. Marsh said transferring this risk is viewed by some as a “defeat.” But transferring, say, half a billion dollars of risk to an insurer may be part of a smart risk management strategy that also includes mitigation and acceptance of the risks. Marsh argues that insurance comes at a fraction of the cost of mitigation efforts.

3) Cyber premiums may be poised to fall. Some analysts say cyber insurance is now a buyer’s market, citing a recent report by Fitch Ratings that says “various market pricing surveys” show cyber premium renewal rates are flat or down, “indicating that market underwriting capacity is meeting or exceeding demand.” Marsh reported that US cyber insurance prices in Q1 decreased for the fourth time in the past five quarters, and said “capacity and competition continue to increase as existing insurers expand their offerings and new carriers enter the market.”

4) How much coverage should you get? In today’s cyber insurance market, it is possible to get up to $1 billion of coverage, with the average policies being written in the $300-$500 million range. Marsh makes the point that “as cyber events become more complex, the potential for conflict increases between P&C, aviation, crime, and other towers and the cyber tower. Sometimes overlap is inevitable, and may even be desirable (e.g., free coverage extensions, legacy coverage enhancements).” Treasurers in some NeuGroups are exploring buying cyber insurance as part of aggregate coverage that bundles various risks under one policy. The idea is to get more bang for the insurance premium buck, apply coverage where it is most needed and avoid paying premiums for coverage that results in few claims.

OUTLOOK 

What many are calling the fourth industrial revolution is giving rise to technology that will enable far-reaching business opportunities and connectivity to customers (the internet of things, for example). But it also poses enormous risks that can’t be completely avoided through cybersecurity and mitigation efforts. These include damages to reputation and underlying data integrity that won’t be fixed overnight. That explains why Fitch says cyber insurance coverage continues to be one of the fastest growing segments and represents a significant growth opportunity for US property/casualty insurers. The stakes are even higher for companies doing business in Europe because of the EU’s General Protection Data Regulation (GDPR). But while cyber insurance is surely a product for treasury to better understand, it might be more prudent to take heed of what Warren Buffett said in May at Berkshire Hathaway’s annual meeting: “I don’t think we or anybody else really knows what they’re doing when writing cyber [insurance policies]. We don’t want to be a pioneer on this.”

Deploying New Technologies in Treasury

Most treasurers remain focused on technologies that can improve processes and boost efficiencies, namely updated treasury management and/or ERP systems and systems that expedite the purchase-to-pay cycle. But there’s a lot out there with the potential to turn the mountains of data companies produce into actionable information. Can we analyze all communications between the sales team and customers in Salesforce, using AI to feed forecasts and do scenario analysis? That could replace FP&A. A treasurer who has been working on a project for more than a year looking at every process and function in treasury led this session. New technologies will play a part in changing how these processes are done, and will ultimately determine what that means for the roles and responsibilities of treasury team members, including the treasurer, and what new skills they’ll need.

Treasurers’ Top-of-Mind

KEY TAKEAWAYS 

1) Time to pay attention to emerging technologies. This isn’t something that may or not happen; technological innovation is part of the transformation every business and every business unit needs to embrace in this fourth industrial revolution. As one treasurer said, he needs to pay attention and understand what’s out there. The new world order will include humans, of course, but we need to learn to adapt, find where we add value and hand off the rest to programs, bots and systems.

2) These new technologies are already being deployed. Some technology companies have already developed RPA and AI for the cash forecasting process. And Microsoft has developed a streamlined letter of credit process using blockchain.

3) Banks are investing in fintech. US Bank conducts API hackathons with 150-160 people to see what they can create, and integrates some of the results into the bank’s core offerings. US Bank also proposes problems to fintechs (API shops) that they can solve and integrate.

OUTLOOK 

Even though advanced technologies such as AI and RPA may not be fully embraced for five years or so, now is the time to look at treasury processes and understand how new technologies will impact your organization and the roles and responsibilities of the treasury team.

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