Life has changed for everyone since the lockdown of US citizens and businesses a few weeks ago by our local and federal governments. No one can really believe that in such a short time, beginning mid-March, that our lives could turn completely upside down.
This article focuses on the effect we see on the value of insurance agencies and brokers due to the literal shutdown of many of the businesses they insure. In addition, without jobs, homeowners could lose their homes, autos and other assets, despite a short-term inability to pay these bills.
No one can predict when and if things will really get back to normal in the coming weeks or possibly months. What we do know is that a situation like this has never happened to insurance agents and brokers, nor to the American public.
Things could look drastically different by the time this article is published. It will take time to heal and get back to where we were in January. However, the lessons from this experience should be kept in mind for the next disruption to the system.
Many individuals and some businesses operate with very little excess money in their budgets and savings accounts. A prolonged lockdown on businesses, especially small business will likely lead to their inability to restart easily, or hire back all their staff, so that people can begin to pay their bills again and live their lives. That could mean a much higher unemployment rate in the U.S.
Agency Values Before the Coronavirus
In early March, agency values were at an all-time high. Many agencies and brokerages across the country have been able to sell for the highest multiples ever seen, often in the 2.5 to 3.5 times revenue range and/or eight to 10 times EBITDA (earnings before interest, taxes and depreciation/profit).
It was simply a matter of putting a good profile and pro forma together for a firm and taking them to market, with no lack of buyers both regionally and nationally. Some were private equity based and others weren’t, but were still willing to pay these prices, with incredible terms. Usually terms of 50%-100% of their offers in down payments with some or little requirements for stock in the acquirers. Often additional payments in the form of earn-outs and bonuses for making certain benchmarks in revenue or EBITDA growth were offered.
Impact of Coronavirus on Agencies
Insurance agency consultants are just beginning to see the effect of the mandates that have been put into place by local and federal government shutting down businesses and people’s lives.
An agency’s commissions are directly a function of premiums charged by insurance companies and the rating bases used to develop those premiums. Most businesses’ insurance rates for their property and casualty coverages are related to sales. Rates for workers’ compensation are based on payrolls. Work comp rates have been dropping a good deal over the past year. Now, with numerous layoffs, employers are asking their agents to lower their payrolls and sales that create their premiums. In addition, any businesses that have commercial autos are trying to reduce their costs, by putting these vehicles out of use, during this work stoppage.
We have had insurance clients that insure certain fragile industries, where they cannot have workers work from home, tell us of complete layoffs of all of their staff and are already asking for premium credits to their policies.
What Are Employers Doing?
When they lay off their workforces employers are encouraging or assisting workers in filing for unemployment, since the government has told them to do so and they will cover these persons’ wages in the interim. However, there are so many applying for this benefit, the online system simply cannot take the number of claims. It locks up and shuts down before the individual can finish the application. We have heard numbers like one-in-three in a household, know a friend or family member that has lost their job. With about 340 million people in the U.S., the number of unemployed workers is staggering.
Make-Up of an Agency’s Book
Those agencies with a significant amount of workers’ compensation and employee benefits business will be most affected with a loss of revenue. Agencies that write clients in the hardest hit businesses, like restaurants, bars, hospitality and entertainment venues, will also have a large loss of revenue. This will occur for whatever length of the shutdown, but could also affect life afterwards, if those businesses cannot easily recover and start back up.
As valuation and merger and acquisition consultants, we are asking agency clients to predict their loss of revenue from their workers’ comp and benefits books of business, as well as to review clients that operate on a tight margin, or those that already have indicated they will be out of business, or likely unable to survive.
The numbers are shocking. Usually a 10% to even a 25% drop in commissions is anticipated, depending on the make-up of the agency’s insureds. Of course, the agencies will then cut expenses accordingly, usually in staff. No one feels optimistic.
Agency Value After the Coronavirus
What we do know is that values are declining, as revenues to agencies and brokerages are declining. We know that the effect of even a two-month shutdown will be disastrous. We know that the contingencies/bonuses the insurance companies give to agencies and brokers will be affected negatively as most require not only growth in the books of business placed with that carrier, but also profitability.
Buying Frenzy May Subside
We know that many acquirers are currently thinking about what to do about the sellers they currently have in their pipelines and if they can proceed with some caveats or changes to the terms of the deal. Some will pause their acquisitions until they see what is going to happen and how long the current shutdown lasts. Some may keep acquiring, but drastically change their pricing.
There is still a lot of private equity money available to these buyers but will not make foolish decisions in light of what is happening. It will be a wait and see environment through the next several weeks, if not the next few months. If things go beyond that, there may be no return for many insurance agencies’ clients.
We might see a switch from a seller’s market to a buyer’s market. Many more agency owners could think it is time to take the equity out of their business and put it in their bank account. If that happens, buyers could have more options and be selective on what to purchase. This would have a downward impact on agency value.
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