The COVID-19 pandemic has caused a lot of uncertainty for independent insurance agencies. Many agencies are focused on answering client inquiries regarding coverage while managing a partial or completely remote workforce. Although there’s a lot of optimism (in fact, a sizable portion of agents believe their revenue will increase slightly in 2020), there’s still concern for potential loss of revenue due to cancelled policies or claims by line of business, especially as legislation may mandate coverage for Business Income losses due to the pandemic.
For those looking to sell their insurance agency in the next year, this may call into question their decision. Will my agency face a reduction in revenue, and how will it impact my valuation? Are buyers still looking to acquire agencies?
In short, the answer is yes.
Before the pandemic hit, the insurance industry saw an unprecedented period for M&A, with new private equity partners such as KAI entering the market. Valuations of insurance agencies in the last decade have seen a staggering increase to an average of 9 times an agency’s base purchase price based on EBITDA. Publicly traded companies including insurance carriers have also entered the market. The year 2019 saw its strongest year for deals at over 600, and the first quarter of 2020 matched the strength of the prior year. But when the pandemic hit, there was a pause in acquisitions as buyers and sellers re-assessed their abilities to assume risk. Independent agency transactions were about half in April compared to the year before. There’s a lot of fluidity in the market that may impact profitability.
If you’re considering selling your agency, there’s a number of factors to contemplate during the next 12-18 months that may affect the valuation and sale dynamics of your agency.
Although there’s optimism the industry will rebound from the effects of the pandemic, insurance agencies should prepare for a slight loss in revenue. You should review your book of business and understand the impact COVID-19 has placed on certain industries and lines of business, using these metrics to weigh your current book against a potential percentage of loss, factoring in new business growth. This will help you determine the true amount of new sales needed to offset this loss, positioning your agency for continued growth and therefore a stronger valuation. This is especially important if your book is comprised of retail, travel, restaurant or benefits business. KAI, in partnership with Keystone, offers our members a financial impact tool that can help calculate these factors to position agencies for continued success.
Continued potential for market fluctuations:
The insurance industry is facing one of the hardest markets we’ve seen in a decade, with rates increasing and stringent underwriting impacting buying, and carriers writing less insurance policies overall. The economic downturn has impacted employer payroll, in turn reducing investment income on the carrier side. Agents should continue to monitor these fluctuations, industries impacted, and its potential reflection on your book of business.
Agencies located in geographic areas that have faced shutdown orders are beginning to open slowly, but many non-essential businesses are still shuttered. When they re-open, guidelines for capacity may hamper their revenue potential. Businesses may operate at a lower payroll than in previous years, and this may continue to impact your agency’s revenue potential if your book is largely focused on these types of businesses.
Ownership structure and risk sharing:
About half of today’s insurance agency owners are Baby Boomers. The recent economic downturn may impact the capacity for perpetuation. Selling your agency can release this financial burden from future owners. A buyer such as KAI can work with you on risk sharing options including dual-phased valuation. In this scenario, a buyers pays a portion of your agency’s value depending on EBITDA at the measurement period, then re-setting the valuation deal in a year’s time and paying the difference, if EBIDTA stays flat or continues to grow. KAI is strongly positioned to help agencies strategize for continued growth and a stronger second period of valuation.
Determining buyer position:
It is important to understand your buying partner’s strength in assuming risk. Private equity has completed most acquisition deals in the last decade. When the market paused, these backers needed to determine how long to stretch their capital. The stimulus has allowed the federal reserve to be a buyer in the debt market, so there’s a spike in high yield issuance debt. KAI is backed by a globally-renowned private equity partner with strong financial footing. We continue to provide a strong foundation for assuming risk.
Agents should be prepared to consider a reduction in revenue for the next 12-18 months and understand how that may impact valuation. You should be prepared to calculate your agency’s financial position by line of business, determining the impact by industry. Those considering selling may wish to consider risk sharing or talking to a buyer for options in valuation.
The consensus is that there’s still capacity, demand, and opportunity for selling.