As one of the nation’s leading agency valuation firms, we’re fielding many calls these days from agency principals, buyers and lenders about what impact the pandemic will have on agency values. Since agency value has two primary variables, income (whether gross or net) and market multiple, we have to assess how the pandemic may affect both. Through the 2008 recession, agencies took a double hit to equity: reduced revenues and lower market multiples. This is a unique event in our history though and dissimilar to the financial meltdown for a number of reasons.
For the first variable, the reality is that the economic slowdown will affect different agencies differently. The question to ask yourself is “Will my agency’s financials look better over the last 12 months or the next 12 months?”. If the answer is that you expect revenue to decline going forward, then your equity is going to decline in 2020. Given that it’s your business, you probably have the best idea of how significant the decline could be and how long it may take you to replace the lost revenue, if possible.
For the second variable (multiples), we can report that the multiples have not changed as of today. The reason that we’re not seeing a change yet is because (1) the financial effects of the pandemic have not hit agency P&Ls yet (i.e. the impact is still unknown) and (2) private equity buyers plan capital allocation 6 to 12 months in advance (i.e. adjustments may come later in the year). Fortunately, interest rates continue to hold low and there is a surplus of capital, which is unlike the environment of the 2008 recession. That will help keep multiples high since the cost of debt is inversely proportional to market multiples. So, how can we predict the future impact on multiples, since the current market shows no change and history provides no comparable event?
Public company stocks are valued on expected future performance; therefore, we should be able to look at the value trend of public insurance brokers as a guideline. Below is a 10 year (plus 4 months of 2020) chart of the average public broker enterprise value as a multiple of both revenue and EBITDA.
First, the slope of the value trend lines for public brokers closely matches that of the value increases for private agencies over the last decade. Although the average multiples for public brokers greatly exceed those for private agencies, the growth rate was very similar over the last 10 years (yes, its been a good run!).
Second, you may notice that the public broker values spiked at the end of 2019, jumping above the fairly tight trend line, and then fell as of mid-April 2020 back to the trend line. Contrastingly, we didn’t see the same jump in multiples for private brokers in late 2019. Furthermore, the public broker values have risen slightly over the last two weeks following the shock to the stock market. In spite of the hype in the news, the market has a favorable outlook on insurance broker values going forward.
Third, note that the decade started at much lower multiples (~ 50% lower) and recall that 2010 was the tail end of the last recession. While the current trend of the public broker values makes me believe that the pandemic may not have a negative impact on market multiples as of today, we can’t forget that a prolonged recession can and has had disastrous affects on business value multiples in the past. The quicker we get through the pandemic, the better. Unlike the 2008 recession, we’re not dealing with a meltdown of the financial market though and hopefully will not be in the foreseeable future.
While I don’t have a crystal ball in my pocket, I’m optimistic that private agency multiples will not decline in the near future. The original question then goes back to whether your agency financials will look better over the last 12 months or the next 12 months. Only you can answer that question. Many parts of the country and segments of the economy are going to be significantly impacted. If you expect a material decline in your revenue, then you may want to gauge whether holding on to the business makes sense as opposed to selling it now while the value is still at its peak because, regardless of market multiples, a decline in revenue will yield a decline in equity.
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