VALUATION METRICS USED IN
PRICING LIFE INSURANCE
MANAGING GENERAL AGENCIES
Daryn S. Hobal, CBV, CFP
MGA Transactions Announced in 2011-12
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An MGA with 2,500 brokers and 11 regional offices in Ontario, Quebec and
Atlantic Canada acquired by a subsidiary of a U.S. Private Equity Firm.
Subsequent to the transaction above the MGA acquired a Quebec-based
MGA with approximately 1,800 new advisors. Post transaction the MGA will
have in excess of $220 million in in-force life insurance premiums and $2.5
billion in segregated fund assets under management to become one of the
largest MGAs in Canada.
A privately held MGA announced the acquisition of an Ontario-based MGA.
The acquisition strengthens the acquirer’s position in Ontario and allows for
expansion into Atlantic Canada.
A Canadian public company announces the acquisition of a 67% interest in
an entity created from the amalgamation of an MGA with an Eastern
Canadian operation and a Western Canadian based MGA.
More to Follow…
“Yes our plan is to continue to grow and there are others that
we’re in deep discussions with and…did say that he has $$
to make these kind of purchases”
“The deal, expected to close…this new entity will also be
looking to acquire other MGAs.”
Changing Ownership of MGAs
Owner/Manager
Institutional
Private Equity
Public Company
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With the profile of MGA ownership changing so will the
metrics used to price transactions.
In valuing a business it is important to consider who the likely
buyer will be.
Vendors should be mindful of the goals of consolidators and
their requirements.
Public Companies
 Goal is to make acquisitions that are accretive to their earnings per share.
Private Equity Investors
 In the business of investing in private companies to generate a return.
 Looking to be passive investors and partner with management.
 Looking to create value by growing operation and eventually divesting
their interests through an IPO or divestiture.
 Will often finance a significant portion of the purchase price and will want
to use future cash flows to amortize the debt.
Past Pricing Metrics
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Owner/Manager knowledgeable of the value of their inforce book of business to them.
Transactions negotiated around industry rules of thumb or
established metrics.
Typically, rules of thumb would be based on a multiple of
service fee revenue and/or assets under management.
EBITDA vs. Maintainable EBITDA
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Acquirers not concerned with reported EBITDA but will want
to get to a normalized EBITDA.
Typically Normalized for:
 Owner/Manager compensation
 Non-recurring revenue and expenses (transfer fees)
 Non-arms length transactions (rent levels in owner
occupied office, staff related to owner)
Normalized EBITDA is analyzed over multiple periods
(averages, weighted averages, forecast) and a judgement is
made as to what can be expected going forward.
EBITDA vs. Maintainable EBITDA
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Maintainable EBITDA is an indicator of how much cash will
be available to:
 Amortize debt
 Reinvest in itself
 Pay a return to the investor
Transactions values are often expressed as multiples of
EBITDA.
A multiple of EBITDA provides an indication of enterprise
value (value of working capital, capital assets, goodwill and
other identifiable intangible assets on a pre-debt basis).
Private Company Transaction Terms/Prices
Cannot really be known unless:
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You are party to a transaction.
A public company acquires a private company and
metrics are implied from information disclosed to public
in financial statements or press releases.
What information is available with respect to transactions
involving interests in MGAs?
Notes: Goodwill Impairment Test
What are the buyers acquiring?
What are the buyers acquiring?
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Intangible Assets – Rights to future revenue.
Goodwill – Represents the excess cost of the acquisition
over the entity’s tangible and intangible assets.
“represents the expectation that XYZ Co. will be able to
maximize the value of the contracts with major insurance
carriers, and that synergies will be able to be achieved,
to maximize the profitability of the combined entity.”
Tangible
Assets
Identifiable
Intangible
Assets
Standalone
Goodwill
Synergies
?????
Total Goodwill Paid
Business Standalone Value
Price
The degree to which an acquirer will pay for synergies
depends on the number of special interest purchasers in the
market for the business and the quantum of anticipated cost
savings or increased revenue post transaction.
Example – Company A
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Expected Normalized Income - $100,000
Investors Required Rate of Return – 20%
Value of Tangible/Intangible Assets - $300,000
$100,000 Capitalized at 20% (Inverse 5x):
$500,000 – Value of Business
($300,000) – Tangible/Intangible Assets
$200,000 – Residual to Goodwill
Value of Business = Goodwill + Tangibles/Intangibles
Example – Company B
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Expected Normalized Income - $50,000
Investors Required Rate of Return – 20%
Value of Tangible/Intangible Assets - $300,000
$50,000 Capitalized at 20% (Inverse 5x):
$250,000 – Value of Business
($300,000) – Tangible/Intangible
($50,000) – Residual to Goodwill
Value of Business lies in the value of its identifiable
tangible/intangible assets = $300,000 (No Goodwill)
Recent Transactions Involving MGAs
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Company A purchases an MGA for a price estimated
at $1,873,000.
$1,250,000 of the purchase price was paid on
closing. 75% of the balance was payable 3 years
after close with the remainder payable 2 years later.
$882,000 of the purchase price was allocated to
identifiable intangible assets and $1,022,000
allocated to goodwill.
The Company indicated in its MD&A that the MGA
had provided an additional $1.2 million in net
revenue post close (extrapolated for full year - $1.31
million).
Implied Purchase Price as a multiple of net revenue:
$1,873,000/$1,310,000 = 1.43X
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Two MGAs amalgamated through an exchange of shares.
The shares of one of the MGAs were used as consideration.
The fair value of the share consideration was estimated at
$3.308 million.
Management estimated that had the acquisition been made
at the beginning of its fiscal year the acquired company
would have earned $6.366 million in net revenue and
$0.446 million net earnings.
The implied multiples of the transaction:
 Price
to post acquisition net revenue = $3.308/$6.366
= 0.52X
 Price to post acquisition net earnings = $3.308/$0.446
= 7.4X
Valuation Principles To Consider
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Value is greater of going concern value or liquidation
value.
Rules of thumb should be used with caution.
Revenue may not necessarily equate to cash flow or
earnings to an acquirer.
The amount of goodwill that is paid is partially a function
of the strategic value to the purchaser and the quantum of
the cost savings or revenue increases that are expected
post transaction.
Negotiating other terms of transaction (vendor financing,
retention agreements) can help a vendor realize a higher
price and bridge differences in pricing expectations.