There are no simple formulas for valuing life insurance and investment product clienteles. If someone insists on a fixed multiple, start shopping around for a better deal. Your clientele may be worth much more than you think because of its future business potential.A renowned Quebec specialist in the transfer of blocks of business in life insurance and financial services, Alain Vézina says he is tired of seeing fire sales in the market. The president of the private business bank Nessa Capital thinks that a clientele should never be sold until the seller knows its real economic value.
"The value of life insurance in-force that generates $50,000 in annual renewal commissions can be worth three times these renewals. But those that say that a valuation index higher than three times is unrealistic are often those that cannot or won't pay more," Mr. Vézina explains.
Supply and demand
He believes in basic economics. "If someone is aware of the potential of a clientele and there are four or five advisors ready to buy it, they can set the multiple accordingly. It's a question of supply and demand, not of a fixed multiple."
Mr. Vézina is currently valuing the file of one advisor who, after a 30-year career, has 2,000 clients, representing about 1,000 term policies. The book also contains a lot of disability insurance but few investment products. The advisor is in an enviable position, and his two employees have known the clientele for years. "Before asking if this clientele is worth three to four times renewals, you have to assess the economic value," Mr. Vézina explains.
It would be unthinkable to sell this kind of book to a single advisor because he could never develop its full potential, Mr. Vézina continues. The ideal buyer would be a firm with several advisors who would have enough energy to go see all the clients whose term policies are expiring in the next two to three years. A firm like that would be willing to pay much more than three to four times renewals because it could tap into the potential.
Another transfer case that Mr. Vézina is currently managing involves an advisor with assets under management of $30 million, insurance premiums in force of $1.3 million with renewals and another in force without renewals of $400,000 in premiums. "Her managing general agent offered only $1,000 for the last portion of the clientele because there are no renewal commissions."
Mr. Vézina underlines that value does not lie in renewals alone. Year in, year out this advisor produces $20,000 in new premiums from this segment of her clientele. "In life insurance, the needs of your clients must be reviewed on average every seven years. Each time is a business opportunity," he explains.
Mr. Vézina estimates that a clientele of $1,000,000 of premiums in force represents on average 1000 clients and $50,000 in annual renewal commissions. "Advisors are not just buying renewals, unless they plan to rest on their laurels. They are actually buying the capacity to meet 100 clients per year that have not been advised in seven years, and whose needs have changed. Under these conditions, $1 million can easily generate $100,000 in new business premiums per year," he says.
Another example: 2,000 clients represent on average between $15,000 and $20,000 in assets in investment products per person. "If I do my work and I can sell more investments to these clients, it's worth it for me. I'll willingly pay the price," Mr. Vézina adds.
The problem is that few life insurance and financial services advisors have the entrepreneurial spirit, he contends. Property and casualty brokerage firms all have employees and brokers. Meanwhile, he says most insurance advisors are reluctant to rent their own premises, develop a brand and put up a shingle like a dentist, lawyer or notary. They tend to work for managing general agents or captive networks, who dictate the rules and values, Mr. Vézina says.