In the dynamic landscape of independent insurance agencies, understanding the many risk factors that influence agency valuation is crucial. These factors can significantly impact the value of an agency, whether it is being evaluated for internal perpetuation, external sale, or business planning purposes. In this article, we discuss six key factors that impact the valuation of an insurance agency so agency owners can improve the value of their operation and ensure a smooth transition.
We will start with big-picture external macro issues that agency owners have little control over but still have a meaningful impact on the value of an insurance agency. Then we will get into the factors that agency owners can control.
1. External Economic Factors
External economic factors play a significant role in determining the value of an insurance agency. The old saying, “You can’t time the market,” also applies to insurance agencies. The timing of external economic factors and an ownership transition can have a uniquely meaningful impact on an agency owner depending on the timing of when they are planning to sell their agency. These factors include:
- Supply and Demand: The number of buyers and sellers in the market directly affects agency values. A higher number of buyers compared to sellers can drive up the value. This also supports the interest of a seller in creating a competitive market for their agency. Seeking options when selling will drive greater value in the agency and ensure the owner finds the right suitor for their agency.
- Availability of Capital: The ease with which buyers can access capital and interest rates influence acquisition activity and, consequently, agency values.
- Market Conditions: General economic conditions, such as inflation rates, the unemployment rate, consumer confidence, GDP, and market growth, have a bearing on an agency’s clients’ insurance purchasing decisions and therefore the agency’s bottom line.
2. Insurance Industry-Specific Factors
The P&C insurance industry has been in the midst of a hard market going on for 7 years. This has been great for agency revenues, however your clients and employees are growing tired of YOY rate increases. Several insurance industry-specific factors are crucial in assessing an agency’s value, including the following:
- Profitability of the Insurance Industry: The overall profitability of the industry, particularly carriers in an agency’s lineup, will have an impact on its value.
- Carrier Relationships: The quality and diversity of relationships with insurance carriers are important. Agencies that are heavily reliant on a single carrier may be viewed as higher risk, particularly during a hard market stretch where carrier profitability is under stress. In addition, carriers that turned off new business and implemented restrictive underwriting practices create vulnerabilities for agencies that are overly reliant on one or two markets.
- Market Conditions: Factors such as the hard market, catastrophic losses, and rate increases impact the overall industry and, by extension, individual agency values.
3. Book of Business Factors
The composition and quality of an agency’s book of business are critical in determining an agency’s value. The following factors play a role in key factors related to an agency’s book of business:
- Carrier Concentration: Agencies with a diversified carrier portfolio (ideally 8-25% with any single carrier) are valued higher due to reduced risk.
- Client Concentration and Mix of Business: Agencies with a balanced client base, where no single client accounts for a large percentage of revenue (over 5%), are preferred. In addition, agencies with a balanced book of business between commercial lines (CL) and personal lines (PL) reduce risk. An ideal percentage mix is 55% CL and 45% PL.
- Age of Book: The age of the book influences valuation. Older books with long-standing clients may be seen as stable, but there is a risk if these clients are tied to retiring owners. Meaning, if the book of business has an average age of 67, similar to the selling principal, it will be a greater concern to a buyer. An aging book likely means less risk and accumulation of assets.
4. Agency Staffing and Generational Health
The structure and health of the agency’s staff are pivotal to determining value. In many acquisitions, a buyer is looking to acquire as much talent as they want to acquire the book of business. Therefore, agency owners should pay particularly close attention to the following factors:
- Generational Health: A diverse range among staff ensures continuity and reduces risk. Agencies with a mix of younger and older employees are better positioned for long-term success. Having an infrastructure that supports experience and mentorship will be beneficial to talent development and staff retention.
- Non-Owned Books of Business: Agencies with clear agreements and ownership of their books of business are valued higher. Handshake deals and informal arrangements can be problematic and are often deal breakers for agency owners.
- Employment Agreements: Having formal employment agreements, including non-piracy and non-solicitation clauses, helps secure the agency’s value by ensuring key staff remain with the agency post-sale. Almost every buyer will require staff to sign an employment agreement in order to complete a purchase.
5. Growth, Retention, and Profitability
Operational metrics and profitability are critically important to determining an agency’s value. The following factors are essential in the value equation:
- Annual Growth Rates: Consistent organic growth is a strong indicator of an agency’s health. Agencies that can demonstrate steady growth are valued higher.
- Retention Rates: High client retention rates (typically in the low 90s) are indicative of client satisfaction and stability. These types of agencies give confidence to a prospective buyer and will garner greater valuations than those with retention rates in the 80s and below.
- Profitability Metrics: Detailed financial metrics, such as EBITDA margins, provide a clear picture of the agency’s financial health and operational efficiency. An agency’s ability to generate consistent profits through strong revenue growth and expense management is a key determinant. The average EBITDA profitability for insurance agencies is 26%.
6. Agency Culture, Operations, and Technology Systems
The final factors are arguably the most important, particularly culture. Owners have the greatest control over these factors, but oftentimes they are the most difficult to quantify. These factors include:
- Culture: The agency’s culture, including its sales and service culture, impacts its attractiveness to buyers. A positive, growth-oriented culture is a significant asset.
- Transition Planning: Agencies with a clear transition plan for their owners are better positioned for valuation. Those with multiple owners also increase value and typically show a commitment to talent development and the next generation.
- Technology Systems: Agencies that are technologically advanced, utilizing modern CRM systems and going paperless, are more attractive to buyers. Efficient technology systems streamline operations and reduce costs.
Conclusion
Valuing an insurance agency involves a multifaceted analysis of various risk factors. External economic conditions, insurance industry-specific dynamics, the composition of the book of business, staffing and generational health, and operational metrics all play critical roles. Agencies that proactively manage these factors, maintain robust financial health, and plan strategically for the future are positioned to achieve higher valuations.
If you are interested in learning how these factors influence your insurance agency valuation, please reach out to Jodie Shaw at jodie@iavaluations.com.
This article was written using a transcription of IA Valuations’ webinar, Risk Factors in Your Agency Operations and Valuations, with assistance by Chat GPT. You can watch the conversation that this article was transcribed from at the link above.
About IA Valuations and Agency Link – Founded in 2017, the IA Valuations team has performed over 300 valuations to independent insurance agencies across the U.S. Our advisors have 25+ years of experience guiding agency owners on maximizing their agency value, planning, and legal needs for ownership transition. In addition, IA Valuations has provided perpetuation planning, financial modeling and business planning for independent insurance agencies. Finally, IA Valuations has advised dozens of agency owners on selling their agencies through our Agency Link process. Agency Link is a platform that connects buyers and sellers together to further the growth and strength of the IA system. To learn more about IA Valuations, please visit IAValuations.com or contact@iavaluations.com.
The information provided in these documents is general in nature and shall not be construed as personal legal, tax or financial advice for your situation. Please contact@iavaluations.com to discuss your personal situation.
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