Investment management professionals are like physicians—we take care of our clients, not only of their wealth but also of their well-being, through the science of investing. Dedicated investment-management professionals ask, listen, empathize, educate, prescribe and treat.

DR.CHENJIAZI ZHONG


Valuation of Insurance Brokerages

Insurance brokers act as intermediaries between insurance companies and insurance buyers. Although insurance brokers perform many of the same functions as insurance agents, they differ in that they act in the interest of insurance buyers, who are looking for a suitable policy at a price they can afford. Unlike insurance agents, insurance brokers have no authority to bind insurance coverage or issue policies. To initiate coverage on a client’s behalf, an insurance broker can ask an underwriter at the insurer to issue an insurance binder. Alternatively, the insurance broker can issue the binder and then request a signature from an underwriter. 

Among the many insurance services and programs, insurance brokers provide the services:

• Risk management 

• Loss control

• Claims management

• Personal coverage for wealthy individuals

• Data and analytics, such as loss forecasting and benchmarking

• Employee benefits

• International insurance, such as foreign workers’ compensation coverage

• Captives and other forms of alternative risk transfer

• Affinity programs

• Mergers and acquisitions (M&A) by helping to facilitate transactions and manage risks

Valuation Drivers 

The value of most insurance brokerages is driven substantially by growth, profitability and customer relationships.  

  1. Growth can be either organic growth or acquisition-related growth. Given that acquisitions can be a key source of growth for many insurance brokerages, distinguishing between organic growth and acquisition-related growth is often important in valuation. Insurance brokers generate revenue primarily through commissions paid by insurers, which are typically established as a percentage of the premium associated with the type of insurance placed. Insurance premiums, however, can be volatile depending on macroeconomic factors; therefore, revenues for insurance brokers vary widely. Besides, new customer relationships can be costly and difficult to obtain, so high levels of organic growth are normally unsustainable. That said, a significant portion of revenue growth for insurance brokers is often achieved through acquisitions
  2. Profitability. One factor that can greatly influence the profitability of an insurance brokerage is the quality of the company’s workforce. The workforce of an insurance brokerage has the responsibility of generating revenue from the insurance brokerage’s customer relationships, and as such, it holds significant value for the company. The efficiency with which an insurance brokerage’s workforce can turn those customer relationships into revenue drives profitability
  3. Strong customer relationships enhance the value of an insurance brokerage. If customers have developed a relationship with the company rather than a particular salesperson, the insurance brokerage will generally have higher customer retention, which is especially important to consider under acquisition scenarios, because key personnel may leave the company once it has been purchased 

Valuation Measures

Similar to most companies in financial services, typical valuation measures for valuating an insurance brokerage include its market cap, enterprise value (EV), trailing price-to-earnings (P/E), forward P/E, PEG, price/sales, price/book, EV/revenue and EV/EBITDA. Profitability is usually measured by the profit margin and operating margin of the insurance brokerage. Return on assets and return on equity are common indicators for measuring the management effectiveness of insurance brokerages. Moreover, as an industry rule of thumb, insurance agencies are worth 2x–3x the revenue or 6x–9x EBITDA in valuation. 

Industry Considerations and Issues

Beyond the valuation basics, certain characteristics of the insurance brokerage industry need to be considered:

  • Hard market or soft market. Revenues and corporate earnings are influenced by the current position in the insurance cycle, although not all products or services follow the same trends. As the insurance market hardens, profitability is often enhanced in the short term. On the other hand, softening markets tend to cause revenues to slow or contract, and when combined with weak macroeconomic conditions, such as rising unemployment, the negative effects are exacerbated
  • M&A environment. Too much focus on the top-line revenue growth of an insurance brokerage can lead to neglect of its existing customer base and forgoing valuable organic growth opportunities. Insurance brokerages that rely too heavily on acquisition-based growth will find themselves slowing when the pipeline dries up or is hampered by debt obligations from previous acquisitions
  • As related to public insurance brokerages, differences in size, growth, diversification and risk can lead to valuation differences. The average multiple of EBITDA for public insurance brokerages has moved higher since 2015, driven by favorable macroeconomic trends (improving organic growth rates, stable/growing margins and lower corporate tax rates). Public company multiples dipped slightly in 2020 as a result of the uncertainty associated with the COVID-19 pandemic, while valuations have rebounded in 2021
  • In valuing large private companies, market sentiment toward insurance brokerages should be considered
  • At the individual company level, culture, leadership and modernization also matter. Taking the Oakeshott Insurance Group as an example in a qualitative study, Lvina et al. (2019) recommended global insurance brokerages mitigate the legislative and language barriers and further develop the intercultural competence of the workforce by focusing on the cultural and societal context. In addition, insurance brokerages that have invested in training the next generation of insurance brokers and leaders tend to stand out among their peers. Moreover, agencies that have invested in new technology, e.g., modern agency management systems, social media and web and mobile-friendly marketing, can further differentiate themselves from the competition. From a commercial approach, Brophy (2020) listed the applications of blockchain within the insurance industry and illustrated the state of play of blockchain in insurance from a commercial and regulatory point of view

Insurance Brokerage Landscape and Acquisitions

M&A activity has accelerated between 2017 and 2021, driven by favorable industry dynamics and aging owner demographics. The participation of private equity in the insurance brokerage industry had also driven demand and valuation multiples, with private-equity-affiliated deals accounting for approximately 60% of overall industry M&A activity. In 2022, broad M&A activity slowed down a bit on high interest rates.

Several notable acquisitions that occurred in the insurance brokerage industry in recent years: 

  • In December 2017, USI Insurance Services acquired various insurance operations from Wells Fargo Insurance Services USA (WFIS), formerly part of Wells Fargo & Co. USI purchased WFIS’ commercial insurance brokerage and consulting, employee benefits and property/casualty national practices
  • In April 2019, Marsh & McLennan Companies, Inc. completed its acquisition of Jardine Lloyd Thompson Group plc, a multinational insurance brokerage headquartered in the UK. The new combined company had operations in over 130 countries

References

Brophy, R. (2020). Blockchain and insurance: A review for operations and regulation. Journal of Financial Regulation and Compliance, 28(2), 215-234. doi:10.1108/JFRC-09-2018-0127

Lvina, E., Matveev, A., & Grishin, G. (2019). Transforming cultural barriers into assets: Lessons learned from a global insurance broker. Revista de Management Comparat Internațional, 3, 226-240. https://www.ceeol.com/

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