An Avalanche of M&A?

The prospect of higher taxes on capital gains and on corporate profits could drive consolidation, especially among agents and brokers.

A financial adviser friend likes to say that "taxes are on sale" at the moment. He's focusing on the possibility of higher income-tax rates for his well-to-do clients and for the corporations whose shares are in their portfolios, and trying to get clients to reduce or liquidate certain holdings before the increases hit. But this idea of taxes on sale should have effects that ripple far beyond my friend's client base, possibly including a spate of consolidation in the insurance industry.

That's the thesis that was advanced last week by Stephen Schwarzman, CEO of Blackstone Group, the private equity firm that as of March 31 had a staggering $650 billion of assets under management.

He says corporate leaders worry about a Biden administration proposal to tax capital gains as ordinary income for those earning more than $1 million a year, rather than let them apply the much lower rate that has long been used for profits on sales of stock, real estate and many other assets. The change would mean a tax rate of 39.6% on capital gains for those high earners, rather than 20%.

While any tax increases look to be at least months away, Schwarzman said high earners are starting to look now at selling assets and booking profits, to be safe.

Although he didn't single out insurance, I suspect his thinking applies, in particular, to many owners of insurance brokerages and agencies. We could see an acceleration of the consolidation that has been occurring in the distribution channel. Private equity has already been buying up brokerages and agencies, and having eager sellers should only increase the pace.

The continuing digitization of insurance sales, accelerated by the pandemic, may also encourage owners to continue selling. Digitizing takes capital that some don't have, so, knowing they face a steady loss of competitiveness, owners might explore selling now. Even if they have the capital, owners have to decide whether they want to manage a significant transition -- moving business online and incorporating digital technology into a host of internal processes while also figuring out how to reopen offices following the pandemic. Many may decide that they'd just as soon let some bigger entity handle the shift. For anyone contemplating an exit, now would seem to be a good time.

Beyond the effect on agencies and brokerages, the possibility of a higher tax rate on capital gains could encourage insurtechs and even some larger, established companies to consider putting themselves on the market now if they had already been considering an exit. The same for the possible increase in the corporate tax rate in the U.S. from 21% to 28% (or whatever the final proposal turns out to be): Potential sellers might hope to get a higher valuation based on the loftier net income that lower taxes allow.

It's not clear how great the effect of the possible tax changes would be for insurtechs and larger companies. Lots of other factors come into play, the larger a company is, and tax increases aren't anywhere near a done deal. But the prospect of higher taxes might tip the scales for some.

In theory, consolidation will address one of my bugaboos -- the wild inefficiency of so many insurance processes -- through economies of scale and greater investment in digitization.

I realize that the adage says: "In theory, there is no difference between theory and practice. In practice, there is."

And, in fact, a lot of the increase in scale among agents and brokers seems to have been used to press carriers for higher commissions, rather than to drive efficiency.

But I don't give up easily. I'm holding out for scale that drives digitization and that drives costs down while simplifying life for customers.



Paul Carroll

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Paul Carroll

Paul Carroll is the editor-in-chief of Insurance Thought Leadership.

He is also co-author of A Brief History of a Perfect Future: Inventing the Future We Can Proudly Leave Our Kids by 2050 and Billion Dollar Lessons: What You Can Learn From the Most Inexcusable Business Failures of the Last 25 Years and the author of a best-seller on IBM, published in 1993.

Carroll spent 17 years at the Wall Street Journal as an editor and reporter; he was nominated twice for the Pulitzer Prize. He later was a finalist for a National Magazine Award.