Main Types of Insurance Business Valuations

July 16, 2020, Posted by: Aaron DiCaprio

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Business Valuations

Insurance companies share similarities with other types of businesses, but they also have some portfolio items and operating processes unique to the industry. While that can make it difficult to determine the value of an insurance company, studying specific metrics in a financial business' portfolio can shed some light on its profitability. If you're considering purchasing an insurance business, it pays to seek out an insurance consulting company with experience in business valuations.

Metrics That Determine the Value of an Insurance Company

The metrics you use can depend on several factors. One of those is whether a business is privately or publicly held. An insurance consulting services professional can help you determine which elements apply to the company in question and which ones deserve your attention during the valuation process.

Value of Assets

Anything owned by a business that can show value on a balance sheet is an asset. These include equipment, vehicles, buildings, land, cash, accounts receivable and supplies. Intellectual property and other intangibles, like goodwill and customer perception, also have value and should be counted among a business' assets.

Combined Ratio

The combined ratio is used to compare the incurred losses and expenses of an insurance business. It is expressed as a percentage of earned premiums. A combined ratio under 100% indicates the business is operating at a profit. 

Multiples of Earnings

Multiples of earnings per share of stock can help you value an insurance business that has shareholders. It represents the earnings of each shareholder outside of any dividends. EPS is directly correlated to business value.  Shareholder earnings are determined by taking interest and taxes out of net income and then multiplying that figure by the number of shares. 

Seller's Discretionary Earnings

Seller's discretionary income can be used to value smaller private businesses where the multiples of earnings method cannot be applied. It takes the gross profit and makes several adjustments. One-time and operating expenses and the costs of wages, depreciation, amortization, and interest are added to that amount. Non-recurring and non-operating expenses are then subtracted from the total. The value is then expressed as a multiple of SDE, generally between one and four depending on the type of business.

Cash Flow

Cash flow statements are common accounting documents that show the amount of money coming in and going out of a business over a set period. They can be useful in determining the profitability of a business; however, they must be discounted to reflect the impact of interest, taxes, depreciation, and amortization. However, cash flow is somewhat subjective because it requires projections of future values.  

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3XY Insurance Solutions provides innovative solutions and consulting services to insurance executives looking for a competitive edge. We develop exclusive programs and products; leverage markets, partnerships, and talent; and capitalize on digital capabilities to accelerate growth and increase profitability. Contact us today at 215-322-5497 and see if we can grow your insurance business and improve its profitability.

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