Industry Description

According to the US Census Bureau, the insurance brokerage industry (NAICS 524210) comprises of establishments primarily engaged acting as brokers/agents in selling annuities and insurance policies underwritten by insurance carriers.  The insurance brokerage industry is a vital component of the larger insurance sector as they act as intermediaries between insurance carriers and consumers.

In the US, this is a $138 billion industry, made up of approximately 134,000 companies, most of which are small, single-location operations.  Revenue comes from commissions generated on policies sold, meaning that revenues increase as policy prices increase and as policy volume increases.  Industry revenue comes from commissions on the following:

  • 30% from commercial property and casualty insurance
  • 30% from personal property and casualty insurance
  • 15% from medical insurance
  • 10% from life and accident insurance
  • The remainder from other types of insurance, include annuities and title insurance

Industry Trends

The insurance industry is intertwined into the economy and society, given how pervasive insurance is in our life. Just about any noticeable change in either will have some impact for the insurance industry.  Notable in this regard is the Affordable Care Act, a.k.a. Obamacare.  For the time being, the Affordable Care Act continues to exist, but its fate remains uncertain.

Technology continues to reshape everything, not just the insurance industry.  Consumers are increasingly expecting to have all information at their fingertips.  And cost-effectively technology solutions have made that possible.  The insurance industry as a whole is also changing how it assesses risk.  Slipping away is the approach of managing risk as a large pool in favor of a much more granular approach.  As more advancements surface, the insurance industry will need to be stay on top of these changes because in a few years some won’t exist any more and newer technology will be at the front.

Key Performance Metrics

  • Net premiums written
  • Underwriting results
  • Combined ratio
  • Net investment income
  • Net income
  • Consolidated capital and surplus

Benchmark Statistics

The following benchmarking data is based on studies from various insurance agencies:[1]

2017
2016
2015
2014
2013
Operating Profit % 14.7 14.2 14.2 13.8 12.7
Net Income before Taxes % 13.2 12.8 12.8 12.0 10.5
Sales/Fixed Assets 43.9 45.5 47.4 38.3 39.7
Current Ratio 1.1 1.1 1.1 1.1 1.1

 

Summary of Valuation Approaches

There are four commonly accepted valuation methods that should be considered when valuing an insurance agency.  These methods are:

  1. Asset-based valuation: This method calculates a business’s equity value as the fair market value of a company’s assets less the fair market value of its liabilities.  This approach is also sometimes referred to as a “cost based approach”; that is, the business’s value is equal to the cost of acquiring its physical assets. This approach is seldom used for an insurance agency being valued as a going concern because the value of a retail business is more closely related to its earnings and cash flow.
  2. Income approach to value (capitalization of earnings): This method is most applicable to companies that face predictable and constant growth in earnings and have a long history of operations.  The business value under this method is equal to the cash flow projection for one year divided by a capitalization rate (i.e. the appropriate discount rate less the predicted growth rate).
  3. Income approach to value (discounted cash flow): The value of equity utilizing this method is equal to the present value of free cash flows available to equity holders over the life of the business. This method works well for both established companies with low growth rates as well as new companies with higher rates of growth, but requires predicting changes in future cash flows.
  4. Market approach to value: This method utilizes market indications of value based on metrics from guideline publicly traded insurance agencies companies and privately held businesses.  The financial metrics of public companies or those of private transactions can be used to create valuation multiples that are then used to calculate business value.

Availability of Publically Traded Comparable Companies

For insurance agencies that are publicly-traded, the availability of financial data makes it possible to compare a subject company to industry benchmarks and apply industry multiples.  When valuing insurance agencies, however, it is important to use benchmarks and multiples based on companies that are similar to the subject company.

The top publicly traded U.S. insurance agency companies, ranked by market capitalization, are:[2]

  1. Berkshire Hathaway, Inc.
  2. Chubb Limited
  3. The Progressive Corporation
  4. American International Group, Inc.
  5. The Travelers Companies, Inc.
  6. The Allstate Corporation
  7. The Hartford Financial Services Group, Inc.
  8. Loews Corporation
  9. Markel Corporation
  10. Cincinnati Financial Corporation
  11. CAN Financial Corporation
  12. R. Berkley Corporation
  13. Alleghany Corporation
  14. American Financial Group, Inc.
  15. Old Republic International Corporation

The trailing twelve-month price to earnings ratio of these companies range from negative (not meaningful) to 49.7. The trailing price to sales ratios range from 0.69 to 3.71.[3]

Availability of Private Purchase Transactions

In addition to publicly traded insurance agencies, data regarding privately held companies can provide a useful benchmark when valuing a