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Valuing Your MGA

Valuing Your MGA

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Valuing Your MGA

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  1. Valuing Your MGA Presented by Cameron Jacox and James Hilton June 1, 2011 Share the tools

  2. Valuing your MGA Cameron D. Jacox James E. C. Hilton Managing Partner Managing Partner

  3. Wine Comparison |Consistency assumed Wine: • Age, brand, vintage, region • Complementary consumption • Consistency drives value higher • More confident purchase

  4. Traditional Multiples |Only one piece of the puzzle 3-5xService fees 3xSegregated fund trailers • Completely cash-flow based • Ignores advisor-level growth opportunities • Client-centric business

  5. Key Questions |How do I… • …prepare it for an optimal valuation? • …develop operations for long-term growth? • …go shopping for MGAs and drive consolidation?

  6. The Original MGA |Boost valuation multiples • Western expansion • Localized broker support • Provided more resources • Drove growth 1900

  7. The Canadian MGA |An entrepreneurial endeavor • Few market penetration or capital issues • Global outsourcing trend • Focused on core competencies • MGAs will be more closer with advisors 1980s

  8. Transforming Industry |Boost valuation multiples • No “pledge of allegiance” “The marketplace has reached the end of the commoditization cycle” –Jim Burton • Regulatory uncertainty Industries that fail to fight against irrational regulation become grey It’s the wild west again!

  9. Valuation Calculation |What is it worth? Start: Multiple of Service Fees (3-5x) Less:(Lapse Rates) (Compliance Issues) (Buyer’s Supplier Power) Add:Broker Loyalty and Age Positives of the above ____________________________ = $_ _ _,_ _ _,_ _ _._ _

  10. MGA Valuation |Advisor based valuation model • MGA consists of advisors • Detailed advisor-level analysis is needed for serious MGA valuation • Growth comes from within Advisors Advisors are everything

  11. Book Valuation |Succession 2.5-3.5XRenewals 0-2XNew Business • High policyholder attrition • (5-10%) • 80:20 rule for advisors • Client and policy structure • Age of clients • internal growth opportunity Advisor = Brand

  12. Book Valuation |Succession • Normalize revenues • Excessive expenses • One-off large cases • Revenue capacity of book • Was broker hunter or sitting on book?

  13. MGAValuation |Components • Advisors age & succession • Lapse rates • Advisor loyalty • Compliance issues • Future regulation

  14. Advisor Age |Succession & Retention • Rare advisor-MGA allegiance • Advisor age as important as production • Books switch hands after a transfer • Plan for advisor succession • Transfer books to close colleagues

  15. Lapse Rates |Above or below average • Enormously reveals a book’s true quality • Improper sales by unscrupulous advisor? • Is the business stable?

  16. CCIR Issues Paper |Lack of clarity… • …“Compliance…screening representatives for suitability and monitoring their behavior” • …“Lack of clarity… [in] roles, responsibilities, accountabilities and… oversight of the agent, the MGA, and the insurer”

  17. CCIR Issues Paper |Effect on valuation • Conservative operations + • Ability to integrate hypothetical mandates +/- • Client-product suitability • Advisor oversight systems • Advisor screening

  18. Taking Action How to maximize your valuation and shop your MGA Dress it Up, Develop it, or Go Shopping? Dress it Up, Develop it, or Go Shopping? Dress it Up, Develop it, or Go Shopping? Dress it Up, Develop it, or Go Shopping?

  19. Broker Value-adds |Brokers improve the MGA • Pushing valuation improvement to broker level • Revenue improvement will always trump cost efforts • Broker success = MGA success Dress it Up, Develop it, or Go Shopping?

  20. Broker Development |Building from within • Hunters vs. gatherers • Sitting on opportunities within their book that could maximize value to policyholders, carriers, and themselves • Active policyholder marketing Dress it Up, Develop it, or Go Shopping?

  21. Policy Loans | Book consulting example • Reduce lapse rates 72% over age 50 • Increase premium Total actual premium • Service clients Dress it Up, Develop it, or Go Shopping?

  22. It’s Time… | …Time to Go Shopping Dress it Up, Develop it, or Go Shopping?

  23. Book Acquisition | Vertical Integration • Acquisitions • Multiples are low • Mitigates risks associated with the revenue model • Attrition highest among high-touch advisors Dress it Up, Develop it, or Go Shopping?

  24. Capital Structure | Risk Growth • Incentivize advisor book acquisition • Vertically integrate while gaining market share • Take an ownership % • Play offensively not defensively Dress it Up, Develop it, or Go Shopping?

  25. Boosting Profitability | For the long run Multiples are relatively low - room for improvement 5-7x is possible if: • High technology adoption • Strong differentiation • Succession strategy is being implemented • Advisor sales assistance • Regulatory certainty

  26. cam@jacoxhilton.com | james@jacoxhilton.com More information: (slides, articles, etc) http://summit.jacoxhilton.com Thank-you Share the tools