The Impact of COVID-19 on Insurance Agency Valuations

July 9, 2020

Mike Strakhov, Head of Insurance Lending, Live Oak Bank

Covid-19 impact on insurance agency valuationsThese are interesting times when determining the value of an insurance agency. The insurance industry has the potential to fare better than others during an economic downturn because insurance is not a discretionary spend in most cases. For example, banks require coverage on collateral, including homes, vehicles, commercial buildings, equipment, and may require general liability to protect borrowers in the event of other losses. Government entities require insurance to operate an automobile, and workers’ compensation insurance is mandatory coverage for businesses with limited exceptions. The compulsory nature of many lines of insurance is a significant factor that positively impacts the retention of customers and premium, regardless of the economic condition.

How Insurance Agencies are Evaluated

Most insurance agencies have diverse books of business spread between many customers and different lines of business. When we analyze a book of business and the potential impact of the pandemic to decision a loan, we look at several factors. These include the effect on earnings year-to-date and the risk factors to revenue down the road. All revenue is not created equal, and books of business will perform differently based on the revenue composition. Therefore, the “quality” of the revenue and the current and future profitability of an agency are essential considerations, particularly when the future is uncertain. Basing a purchase price strictly on a multiple of revenue is a popular approach to value an agency, especially smaller transactions. However, this method fails to recognize many factors and can lead to costly decisions.

After reviewing the recent history of acquisitions that Live Oak Bank has funded over the last 18 months, we see buyers paying within a range of 5.25 times to 7.5 times EBITDA with an average multiple of 6.25 times EBITDA(1). This equates to an average multiple of 2.25 times revenue. To put this in perspective, we are not financing the large private equity-type deals. These larger transactions garner higher multiples for a myriad of reasons. Our loans are often made to privately-held insurance agencies with less than $5 million in revenue selling to another privately-held insurance agency. For strong agencies with a history of profitability, diverse books of business with a positive outlook of stable revenue, we do not see that valuations have changed all that much. However, we are seeing the structure of some deals changed with sellers holding some or more debt tied to post-transaction performance to reduce the buyer’s downside risk.

Applying the numbers shared above to your agency may or may not be appropriate. The devil is in the details. Most agency owners feel they run a great agency, and the business is worth the top of the range. That may be true. Or, on the other end of the spectrum, the agency could have several factors that raise concerns for buyers as well as the financial institution being asked to provide financing for the transaction that could negatively impact your ability to maximize agency value. As a bank, we analyze the agency’s cash flow to make sure the deal supports the debt necessary for the transaction. While we are deeply involved in agency acquisitions, we aren’t in the valuation business. The information above on transaction multiples is what we see in our loan portfolio. To bring clarity to what an agency is worth, consider having a professional valuation firm that specializes in insurance agencies provide a valuation.

To learn more about Live Oak Bank or to discuss this topic further, please reach out to Mike Strakhov, CPCU, head of insurance lending. You can reach Mike at (614) 361-9482 or michael.strakhov@liveoak.bank.

(1)This data is sourced internally.

Cover of 2020 Issue 4 Smart Choice Magazine titled "Agent Education: Adapting to Changing Needs in a Changing World"Agent Education: Adapting to Changing Needs in a Changing World

Being in the insurance industry, we've grown accustomed to navigating circumstances completely out of our control (such as weather and other natural disasters) — but the pandemic has really tested our resilience. For more on how agents can adapt to changing needs in a changing world while still providing exceptional service and products, check out the 2020 Issue 4 of Smart Choice Magazine.

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