Business valuation of insurance agencies and brokers

Insurance brokerage is a growing business. In the US, for example, there are nearly 220,000 insurance brokerage firms.

The industry employs some 1,232,000 people and generates total annual sales of over $355 billion. Most insurance agencies are small businesses with an average staff of 6 and annual revenues of around $1.8 million.

These businesses continue to provide excellent financial rewards to agency owners in return for investment in modern financial management systems, client management and new business development.

Insurance brokers tend to have highly recurring income stream. Attracting and retaining long-term growth clients is very important.

If you are valuing an insurance agency, consider these key business value drivers:

1. Product mix

Insurance agents can offer products in a wide range of markets. Among these are the property and casualty commercial lines, personal, health insurance, and life insurance products.

Group health and consumer insurance lines are frequently more profitable than commercial contracts. Agencies that specialize in health benefits often show good, steady cash flow which drives their business value.

2. Whether the policies are direct or agent-billed

Direct-billed policies tend to have higher client retention rates. As a result, your will find that insurance agencies with high direct-bill rates often command higher business valuations.

3. Contract renewal rates

Existing client policy renewals are critical to the insurance agency’s ability to generate stable cash flow. Renewal rates may be affected by the client base characteristics and client concentration. Agencies whose income stream depends on a few large clients are likely to have business value below the peers with diversified customer base.

4. Licensed employee percentage and tenure

Professional insurance agents are in great demand. If you are looking at an agency whose staff is largely composed of highly skilled, long-term insurance professionals, the valuation multiples tend higher.

This is due to both the expectation of better client retention and ability to develop new business.

5. Independent or captive insurance agencies

Independent agents frequently command higher valuation multiples. This is because some major carriers limit the product choices that their captive agents can offer.

Independent insurance brokers can capitalize on this reduced competition by offering profitable products that are highly customized to meet their clients’ needs. This leads to better client retention, steady profit growth and higher business valuations.

Business valuation techniques for insurance brokerages

You have a number of solid choices to determine the value of an insurance agency. Some guidelines:

Market approach to valuing insurance agencies

Multiples of gross sales commissions are the preferred way to determine business market value in this industry. Again, valuation multiples for agencies with high client retention rates tend to be at the top of the range.

Agency valuation under the Income approach

Because many smaller insurance agencies are acquisition targets for larger firms, business valuations should factor in the potential synergies. The Discounted Cash Flow business valuation method, which enables you to account for key business value drivers directly, is an excellent choice here.

Asset approach to business valuation

Insurance agencies tend to have a large intangible asset base and business goodwill in the form of established clients and carrier relationships. The method of choice here is the Capitalized Excess Earnings – it lets you calculate the business value as the sum of its tangible assets and business goodwill.

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