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Now that the election is over, it is time to analyze how the results will likely impact the independent agency system, specifically insurance agency values.
Since 2016, agency values have steadily risen over the past 8 years, regardless of who occupied the White House or controlled Congress. This time period largely paralleled the hard market, which has naturally created increases in premiums and revenue, thereby giving agency values an automatic increase in growth, one of the key factors in a valuation. As a result, IA Valuations’ data shows agency values have appreciated by over 40% since 2016.
In this article, we will break down the three key questions post-election that could impact agency values. Similar to past elections, the agenda for the major parties is starkly different, particularly for how they could impact agency owners.
First, the primary area of difference is related to tax rates: individual, business, and capital gains rates. Both parties agreed on enhancing the childcare tax credit to help working families manage the costs of child care, but that is where the similarities in the major parties' tax plans ended.
Trump and the GOP campaigned vigorously on cutting taxes to stimulate economic growth, whereas Harris and Democrats campaigned on middle-class tax cuts and implementing a variety of tax increases on businesses and higher-income earners. This issue, more than any others, would’ve had the greatest impact on agency values, specifically what an agency owner would’ve taken home after a sale based on tax rates.
With Republicans winning the Presidency and US Senate, we will see an aggressive effort to extend the 2017 20% corporate and pass-through entity tax cuts. In addition, we will not likely see Trump and the GOP take any steps towards implementing an increase in capital gains taxes or other tax increases.
This will be a priority agenda item for the Republicans as they enter the new Congressional session.
Knowing that, the second issue we will look at is what impact the election outcome will have on M&A activity. Given the results, we will not see the same agent and broker M&A run-up that we experienced in Q4 2020 and 2021 when Biden won the presidency and Democrats controlled the House and Senate.
Looking back, the IA system experienced a record level of M&A activity (20%+ increase in any previously recorded or activity since) during those time periods due to the uncertainty of capital gains and individual tax rates. With the threat of a significant increase in capital gains taxes, many M&A advisors, CPAs, and financial planners urged their agency owner clients to rush to close their sales in 2020 and 2021 before Democrats were able to enact tax increases.
As we know now, the tax increases were never adopted because the Democrats could not get all of the members of their party on board with increasing taxes.
For agents considering when to sell, tax increases hinging on the election outcome are no longer a factor. Agency owners can control the timing of their decisions without fear of the federal government changing tax rates and having an impact on their value or take home from the sale. This should result in a decrease in M&A activity and therefore could create a larger supply of agencies.
The other issue related to this is what happens with interest rates. With inflation being tamed over the past year, interest rates will not likely go back up, and therefore it should free up cheaper capital for PE-backed brokers to continue their hunt for acquisition targets, thereby keeping the demand for agencies high. We do not expect the election outcome to have a significant impact on the Federal Reserve’s positioning on interest rates.
The third and final issue is the only uncertainty in the insurance industry resulting from this election. It is the future funding and extensions of federal government subsidized insurance programs, namely flood and crop insurance. The future funding of the flood and crop insurance programs will be under greater scrutiny as budget hawks will put pressure on GOP leaders to reduce spending. With the growing national debt, it will be difficult to fund every federal initiative and deliver tax cuts.
This will create a challenge in messaging for independent agents as we advocate for the preservation of tax cuts while asking for greater funding for the flood and crop insurance program. If your agency has a large federal flood or crop book of business, pay close attention to how these programs are treated during the first time federal funding runs out under GOP rule as it will provide some insight into how the majority policymakers plan to treat the funding of these programs.
In conclusion, like elections in the past, we do not anticipate the results to have much of an impact on agency values. We expect values to continue to trend up and the outcome of the election should buy agency owners more time to make their decision on when and how to transition ownership or sell due to the stability in tax rates expected over the next few years.
Jeff Smith is CEO of IA Valuations, and may be reached at jeff@iavaluations.com.
Views expressed are the author's own. The information provided here is general in nature and shall not be construed as personal legal, tax or financial advice for your situation.
This article was originally published on IA Valuations' blog and has been reprinted here with permission.
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