How are insurance brokerages valued?

Is the book being valued, or the whole brokerage?

The answer changes the number. A client book is the set of client relationships and the right to service and renew their policies. A whole brokerage adds staff, systems, premises, and for a share sale the company's liabilities and history.

The licence structure matters too. ASIC says that if you want to run a financial services business you generally need to be authorised under an Australian financial services (AFS) licence, and that you may instead provide financial services as an authorised representative of a licensee. Where a broker works as an authorised representative, the authorised representative agreement usually decides who controls the client relationships, whether the licensee must consent to a sale, and whether it holds a right to buy the book at a formula price. A formula price is a contract term, not market value, and a report says how the two differ.

Which income is an insurance book valued on?

Brokerage income has several parts, and they are not equally durable. Insurer remuneration and broker fees on policies in force are the core, because most of them come round again at renewal. Premium funding income counts if the arrangement continues for a buyer. Profit share and volume-based payments from insurers depend on claims results or targets, so they are assessed separately. One-off fees, such as a single large project policy, are excluded. Mid-term cancellations that require remuneration to be refunded are netted off.

Illustration only, not a market multiple. The hypothetical, rounded figures below show how total income in the accounts becomes a recurring income base.

How is renewal retention measured?

From the brokerage's own renewal register, usually over two to three years, measured by client count and by income. A book can hold its client numbers while losing its larger accounts, so income matters more. The valuer separates clients who left from policies that simply were not renewed because a business closed or an asset was sold, and looks at whether losses cluster after a staff departure or a change of insurer.

New clients won during the year are part of the book, but their renewal record is short. A buyer pays for the renewal stream; the seller's ability to win new business belongs to the people and systems that do the winning.

What else moves the value of a brokerage?

Two books with the same recurring income can be worth quite different amounts. The usual reasons are:

• ·Client concentration: a few large commercial accounts carry more risk than many small ones
• ·Insurer concentration, and whether agency or binder arrangements need the insurer's consent to move
• ·Mix of personal lines and commercial lines, and the servicing load each carries
• ·Key account managers, their restraints, and whether clients deal with the brand or the person
• ·Claims handling and service standards that keep clients at renewal
• ·For a share sale, the company's complaints and breach history and professional indemnity position

Which methods are used for insurance brokerages?

For a whole brokerage, capitalisation of maintainable earnings usually leads, with the principal's pay restated to a market cost and one-off income removed. For a book on its own, the recurring income after servicing cost is capitalised or projected with a stated retention assumption, then tested against completed sales of comparable books where the evidence exists.

Prices paid by large consolidators often reflect savings that a particular buyer can make by folding a book into its own licence and back office. That is value to that buyer. Market value assumes a typical buyer, and the report says which buyer pool it assumes. The ATO recommends a secondary or cross-check method where possible, and a valuer reconciles the methods rather than averaging them.

What do we need from you?

Most of this comes from your broking system and your licensee.

• ·Twenty-four to thirty-six months of brokerage income statements, reconciled to the broking system
• ·A client-level renewal register: product class, renewal date, insurer, remuneration and fees
• ·Your AFS licence details, or your authorised representative agreement
• ·Insurer agency agreements and any binder arrangements
• ·Profit share, premium funding and other income, listed separately
• ·Top clients by income, and income by insurer
• ·Staff roles, pay and restraints

What does an insurance brokerage valuation cost?

Every valuation is a fixed fee, agreed in writing before work starts, and it does not change with the value concluded. The band is set by the annual revenue, excluding GST, of what is being valued: for an insurance book on its own, that book's annual recurring income; for a whole brokerage, or shares or units in it, the brokerage's total annual turnover. Exactly $3 million is Medium; exactly $10 million is Large.

Add-ons are $495 per retrospective (past) valuation date and $795 per additional entity. Delivery time starts once payment and all required information have been received.