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For The Manager: Assessing the impact of clusters on agency value

HISTORICALLY, independent insurance agencies have owned two intangible assets: their customer lists and their company contracts. Few valuations separate the values of the two, since they are integrated. Some company contracts increase an agency's

By Chris Burand | Updated on March 31, 2005
HISTORICALLY, independent insurance agencies have owned two intangible assets: their customer lists and their company contracts. Few valuations separate the values of the two, since they are integrated. Some company contracts increase an agency’s value (though not by 100%, as is sometimes claimed), while others do little for it or even decrease it if the contract is not easily transferable. This may happen, for example, when an agency writes a material amount of business through a company that advises it will pull its contract if the agency is sold. Such issues are usually considered in a valuation, but separate values are not generally calculated.

What happens to an agency’s value if it does not own any company contracts? I’m not talking about an agency using a broker model, in which the agency represents just a few companies and works through MGAs for most of its markets. In such a situation, the relatively lower agency commissions and minimal contingencies are easily identified and factored into valuations. But how is an agency’s value affected when it does not own any company contracts because it is part of a cluster?

Like all good valuation answers, the answer is, “It depends.” To learn the effect of not owning any contracts, we have to look at how the cluster affects profit, growth and risk, which are the three keys to all valuations (along with the buyer’s or appraiser’s perception of these factors), and the quality of the agency’s balance sheet.

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