Insurance claims administrators and risk managers make up a significant part of the independent insurance industry service provider sector.
Some industry statistics
Classified under the SIC code 6411 and NAICS 524282, there are some 215,300 establishments concerned with independent insurance services in the US alone. The industry as a whole employs around 1,125,000 staff generating a total of $188.8M in annual revenues.
The typical insurance services firm is quite small with a staff of just 5 and the annual sales of some $1,000,000. The vast majority of these companies are privately owned.
Insurance administrators provide a range of essential services which include, among others:
- Design and administration of insurance plans for individual and business clients.
- Insurance investigation and fraud prevention.
- Claims administration services.
- Insurance verification and recovery service.
Insurance claims administrators with successful track record of earnings and loyal client base are desirable acquisition targets. Recent business sales give you an excellent basis for determining the fair market value of such firms.
Insurance administrator valuation using multiples
You can create a highly defensible estimate of business value by using valuation multiples derived from such comparable business sales. There a number of multiples to consider:
- Selling price to net annual sales
- Price to gross profit
- Price to net income
- Price to EBIT and EBITDA
- Price to total practice assets
- Price to owners’ equity
Your business value estimate should be based on a number of valuation multiples. Depending on the company’s earnings prospects and risk, each multiple can shed additional light on how the business does compared to similar firms in the industry.
The result is usually expressed as a range of business values, from low to high, along with the median and average values. You can also calculate your company’s value as an average of the figures given by each valuation multiple.
Example: using valuation multiples for insurance administrator company valuation
To show how such market-based valuation works, let’s take a typical insurance administrator service company with these financial parameters:
- Annual net sales: $1,000,000
- Gross profit: $920,000
- Net income: $225,000
- EBIT: $273,000
- EBITDA: $295,500
- Discretionary earnings (SDE): $385,000
- Total business assets valued at: $288,200
We next pick several valuation multiples and apply them to the financials above. Here are our business valuation results:
|Multiple||Multiple value||Business value|
|Price to net sales||1.5||$1,500,000|
|Price to gross profit||2.0||$1,840,000|
|Price to net income||6.8||$1,530,000|
|Price to EBIT||7.1||$1,938,300|
|Price to EBITDA||6.9||$2,038,950|
|Price to discretionary earnings||4.0||$1,540,000|
|Price to total assets||5.5||$1,585,100|
|Average Business Value||$1,710,336|
Each result is different. Why? It depends on how the company in the example compares to its peers for each financial performance parameter, e.g. business net sales, profitability or asset base.
Additional business valuation methods to consider
As a rule, defensible appraisal of an insurance administrator firm should use a number of professionally recognized valuation methods. To supplement the market approach we have shown above, consider using income based valuation methods such as the Discounted Cash Flow. For owner-operator managed firms the Multiple of Discretionary Earnings method is a good choice.
Business goodwill valuation in divorce and partner buyout
Established firms in this industry often create considerable business goodwill. A common problem is how to handle this in cases of marital dissolution in the jurisdictions that treat business goodwill as part of the marital estate. Often the goodwill needs to be separated into its personal and institutional parts based on the statutory or case law in your jurisdiction regarding the distribution of goodwill assets.