2020 Best Practices Study

1) A reduction in after-tax earnings and valuation multiples. The rise in corporate tax rates will reduce the net after- tax earnings of all C-corporations. Similarly, the after-tax earnings of pass-through entities are also likely to decline. Reduced after-tax earnings will translate into lower valuations, both internally (appraised valuations) and externally (third-party valuations). 2) Changes in the M&A market. For sellers, valuations and after-tax proceeds are likely to suffer. The capital gains rate changes alone would effectively double the tax burden for sellers. Given this massive change, mergers and tax-free transfers of stock will likely become more popular and many potential sellers may race to close deals prior to 2021 to avoid the materially punitive effects of a Biden presidency.

3) Transfer of net worth. Changes in estate taxation may likewise cause some agency owners to rush to transfer generational wealth in advance of a potential Biden win.

4) Agency growth. Reduced earnings will place necessary agency growth investments under pressure. To the extent that these changes negatively impact growth, we will likely see agents and brokers ’ valuations moderate.

5) Increased value of insurance agencies navigating healthcare. A single payer health insurance system (i.e., Medicare for all) seems increasingly unlikely in the near-to-mid-term. A survival of Obamacare could offer short- term or even long-term benefits to agents writing this business, as insureds will continue to need help navigating the incredibly complicated health insurance landscape, making agents and brokers even more valuable. Keep these changes in perspective. If, in fact, Biden wins and policy shifts occur, all businesses will be affected and insurance agents and brokers are particularly well-positioned to deal with these changes. As was evidenced in the economic crash of 2008-2010 and demonstrated by the current COVID-19 pandemic, insurance agencies are resilient businesses and will continue to be incredibly important players in the U.S. economy for the foreseeable future.

In the long-term, Best Practices Agencies must be able to adapt to the post-2020 world in which they will find themselves. What will change? What will stay the same?

While nobody knows whether the dangers of the virus will be short-lived (if a vaccine is developed) or whether they will linger for years, below are some observations about what the future holds for the insurance industry.

Changes triggered or accelerated by COVID-19 include:

• Scale matters more than ever. Economists observed that COVID- 19’s impact has been much tougher on small businesses than large ones. This is in part because many small businesses lack the resources and access to capital enjoyed by their larger competitors. In the insurance brokerage business, scale brings several advantages including more lucrative carrier contracts and the ability to effectively specialize in particular industries or insurance

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