Using Valuation to Maximize the Sale

Valuation is an integral part of determining the value of a book of insurance business. Cameron Jacox and James Hilton, managing partners at Jacox-Hilton, a software and consulting services firm for life insurance advisors, will tell you that they conduct a book valuation based on five points of criteria:


“This has to do with looking at component revenue streams,” says Hilton.

“Primarily, that means recurring revenue streams, first-year commissions, and the trending over the course of your last five years. For example, if your business has seen declines recently then your book will be discounted for the perceived risk of a negative outlook.”

Book Stability

“This has to do with what kind of lapse rates the book has experienced historically and any other issues that could make the revenue streams unsustainable over time,” says Jacox. “Lapse rates vary across products, such as Term and Universal Life, but also on time in-force and the size of the policy. Wealthier policyholders lapse their policies at a much lower rate than middle-income policyholders because they are more aware of what they are purchasing and why at the time of purchase.”

Book Composition

This includes policy details like the premiums, upcoming term renewals, and more. “Are they higher-end clients or are there more of the lower premium policies that dominate the mix there?” asks Hilton.

Distribution of Revenue Over Number of Clients

“This is an interesting metric,” says Hilton. “This will tell you if their are a lot of clients that the premiums are spread out over or are there a few big clients. In the latter case, the book is less stable.”

In-force Analysis

“Substantively, the value in a book for the buyer is in the relationships and the policies in-force. Our valuation considers the future revenue potential,” says Jacox “We actually look at where there are opportunities to improve client value. There may be a lot of ten-year terms coming up for renewal and we are able to improve the cost or convert them. There also could be some loans outstanding on policies or abnormally large cash values. There’s a whole bunch of opportunities coming from within the book that we would actually quantify, look at the historical validity of the opportunity and the chance of capturing value from it, as well as the first year commission potential.”

Combined, these five points make for a powerfully accurate basis for valuation and ensures both the seller and the buyer receive the value that they are truly entitled to. Jacox-Hilton neither narrowly applies a simplistic multiple of revenue that provides the seller with less than he has earned through his long career nor an unrealistic view of the sustainability of trailers for the buyer.

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