Prudence dictates that you do your research first before you commit to buying an insurance business for sale. One area of due diligence is the valuation of each prospective investment. Let’s look at the metrics that investors study to measure the viability of every insurance company put up for sale.
Factors That Determine the Value of an Agency
There are many key metrics to consider, and these include:
Return on Equity (ROE)
The ROE is the quotient between the company’s net annual income and its shareholders’ equity. The ROE indicates the profits the insurer has made in exchange for each dollar from its investors’ equities. In other words, the figure shows how profitable the agency is for its stakeholders.
In insurance, the term “lapse” refers to policies that have not been renewed after a period, usually a year. Hence, the lapse ratio measures how many of the agency’s clients have opted not to renew their accounts and indicates its ability to satisfy and retain customers.
Both lapsed and canceled policies mean revenue losses for an insurance provider, giving the lapse ratio considerable weight when considering whether to buy an agency or not.
The solvency ratio is an important indicator of the company’s financial health. It calculates whether the company can maintain its shareholders’ equity while servicing its debts. The solvency ratio also indicates the agency’s risk of defaulting on its obligations or declaring bankruptcy in the future.
Enterprise Value Multiples
The enterprise value multiple is the ratio between the company’s assessed enterprise value and its earnings before interest, taxes, depreciation, and amortization (EBITDA). This metric weighs the company’s worth against its earnings before its non-cash expenditures.
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Accuracy is essential when considering a possible purchase of an insurance agency. Let us help you find out which of your options are worth your future investment. Contact us now to set an appointment.