Are you wondering how to value an “insurance book of business?” An insurance book of business includes all the information for past and current clients and their insurance policy history. Putting a value on an insurance book of business is important for insurance agencies who are looking to expand, merge or strategically plan for the future. Let’s take a look at why insurance books of business are important and how to put a value on the book.
Understanding Insurance Books of Business
Insurance books of business are primarily a management tool for insurance agencies. These books help insurance agencies keep track of their past and current clients and their policies. A book of insurance can be used to identify profitable and unprofitable policy types, and it can help the insurance agent determine the locations where their company is growing and where more marketing may need to be done. By examining a book of insurance and running certain reports, insurance agencies can make important business decisions, improve their customer service and optimize their marketing and sales strategies.
How Can Insurance Agencies Put a Value on Their Insurance Books of Business?
An insurance book of business has a value, and it can be sold separate from the overall agency. For example, an agency may have several books of business.
- Insurance Book 1 – Life and health insurance policies
- Insurance Book 2 – Car, RV, boat and motorcycle insurance policies
- Insurance Book 3 – Homeowners and renters insurance policies
Each of these “books” could be sold to another insurance carrier or individual investor. However, a value must be placed on each book of insurance, and that can be difficult to accurately assess.
Using Revenue to Determine the Value of the Insurance Book of Business
The simplest way to determine an insurance book of business’s value is to use the book’s revenue and multiply it by 1.5.
For example, let’s say that a specific insurance book of business is worth $60,000 a year in commissions. In order to determine the value of the book, you might multiply $60,000 by 1.5 to get $90,000. If you then had another agency or investor that wanted to purchase the book, you’d tell them that the price is $90,000.
It’s important to note that this is considered a rough estimate of a book’s value because it doesn’t take into consideration certain factors, like the size of the agency, its growth rate and commission rates. For that reason, most agencies are switching to EBITDA to calculate the value of their insurance books of business.
Using the EBITDA Multiplier to Determine Agency Value
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. This method of calculating the value of an insurance book of business has grown in popularity in recent years because it’s better at calculating the book’s overall performance. However, it’s important to note that the EBITDA is not recognized under GAAP (Generally Accepted Accounting Principles) because the formulas used may overstate the company’s profitability.
The EBITDA Formulas
There are several formulas that will need to be calculated in order to create an accurate valuation of an insurance book of business. You’ll need your business’s financial statements in order to complete these formulas.
- The EBITDA Formula – The EBITDA formula can be written two ways. EBITDA = (Net Income) + Interest + Taxes + Depreciation + Amortization or EBIDTA = Operating Profit + Depreciation + Amortization
- EBIDTA Margin Formula – EBIDTA margin = EBIDTA/Total Revenue
- Enterprise Value Formula – Enterprise Value = (market capitalization + debt) – (cash and cash equivalents)
- EBIDTA Multiple formula – Enterprise multiple = enterprise value / EBITDA
Calculating the Value of Your Insurance Book of Business
Once you have calculated the values of all of the relevant formulas, you can calculate the book of business’s valuation. That formula is:
Valuation = Revenue * EBITDA Margin * EBITDA * EBITDA Multiplier
Once you have completed this formula, you should have a fairly accurate value for your insurance book of business.
Why You Might Want to Value Your Insurance Book of Business
Wanting to sell an insurance book of business isn’t the only reason an insurance agency may want to calculate its value.
- Assess Insurance Market Health – The agency may want to assess the health of its insurance markets. Putting a value on a book of insurance can help identify areas where you might be able to expand your business.
- Determine Revenue of the Client Base– By putting a value on your insurance book of business, you’ll know the value of the client base.
- You’re Considering a Merger – If you’re considering merging with another agency, you’ll need to evaluate their insurance books of business, and they’ll want to evaluate yours in order to determine if the merger is a good idea.
Boyd Insurance Brokerage Inc. in Washington
At Boyd Insurance Brokerage Inc., we offer insurance policies from a variety of carriers so that you can get the insurance you need at a price you can afford. If you need home, auto, RV, boat, snowmobile or business insurance, we can help you.
We also purchase agencies and Books of Business.
To get a quote for personal or commercial insurance, call us at 509-340-2693.
