Stability is a key factor in establishing the value of a client portfolio in group insurance and benefits.
In group insurance, the stability of the client portfolio demonstrates the seller’s credibility, says Louis Carrière, president of the firm DCI-Assurance Inc. “A seller who hasn’t had a group client for more than two years indicates weak client relationships. Turnover rate is a key factor,” says Carrière.
Dave Patriarche, president and founder of the firm Mainstay Insurance agrees. He says in terms of the value of a group business clientele, the highest he has seen is about three times revenues (commissions). “But if the clients are not really sticky, it can be worth much less, because the client can change their broker quickly. They don’t have to wait until renewal. My advice on this is to keep a healthy relationship with all your clients, to keep a high level of persistency and get the best value for your business if/when you sell.”
The evaluation of a group insurance firm is very similar to that of a property and casualty insurance firm, says Pierre Piché, president of ASQ Consultants en avantages sociaux. “Our evaluation scale emphasizes a group’s renewal perspectives,” says Piché. A longer client relationship is more valuable. For example, a client dating back 20 years is worth 3 to 3.5 in renewal commissions, as opposed to 1 for a group that has been a client for just a year.
Another factor that comes into play is whether the firm is a one-person firm or larger. Flying solo is a disadvantage when it comes to business value. “A sole representative…would have given more personal service to his clients. Renewals would depend on this relationship, as would the value of the firm. To evaluate a firm, we have to consider whether the client’s loyalty would persist once the seller is no longer there. That is why the value goes up when an individual stays on for a period after the transaction,” says Piché.
According to confidential information he received from a consolidator, Patriarche confirms that the market will attribute greater value to a company than to a single operator firm. The buyer of a one-person firm with minimum overhead would be attributed a valuation multiple of about two to three times the revenues. On the other hand, the buyer will attribute a higher value to a company which has, for instance, multiple consultants and higher overhead. A firm such as this would generally be in the range of four to five times Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). These multiples can vary according to the market and many other conditions, he adds.
Martin Shaw, Managing Director of NFP Canada, owner of Groupe Force, underlines the impact of account size (insured groups). “The average size of an account is among the main factors that may impact the value of a cabinet…A large practice with many larger accounts might be worth more because there’s usually less volatility with larger groups than with SME groups (small and medium size businesses), but if you have, e.g., a $4 million account in a cabinet managing $18M of premiums, that means more volatility if ever there’s a merger or acquisition.”
Shaw points out the difference between cabinets and business blocks. “Cabinet and blocks are two different things. The value will be different if we’re talking about a cabinet with the producer fully dedicated to group insurance and working with a staff. A block of business from an advisor who occasionally writes group business won’t be worth as much,” he says.
He also underlines the significance of the market or business sector in which a clientele’s groups operate. “Economic downturns might also play a role, as some accounts may scale back their benefits,” he explains.
Clément St-Laurent, vice president, business development and group benefits advisor with Alliance Solution Collective, says he evaluates a clientele based on the presence of large groups at the time of the purchase. “Often, we isolate one large account and base the transaction on the others. The large account must stay on the books a certain number of years, until the duration is equal to the multiple of renewals that the seller received. If we pay twice the renewal commissions, the large account must stay for two years,” says St-Laurent.