Insurance agencies have owners. Those owners get divorced. The insurance agency is an asset whose value must be divided in an insurance agency owner’s divorce. This article explores how to value insurance agencies as part of the Illinois divorce process.
An Insurance Agency Appraisal Must Begin With Defining What Is Being Valued
The question of what an insurance agency is worth cannot be determined by simply multiplying the agency’s annual commissions by an industry multiple. Insurance agencies may represent several insurance carriers, employ multiple producers, generate recurring commissions from thousands of policies, and possess a valuable book of business. The economic value of those features depends on what the agency truly owns and what could continue or be transferred after a change in ownership.
Insurance agencies act as the “sales arm” of the insurance industry. Business Valuation Resources, What It’s Worth: Valuing Insurance Agencies 9 (2021). Captive agents are affiliated with a single carrier, independent agents can represent several carriers, and brokers typically represent customers while working with multiple carriers. Id.
These distinctions can have a major impact on value.
An independent agency may own valuable rights associated with its customer accounts and be able to transfer its book of business to a purchaser. However, another agency may depend almost completely upon a contract with one carrier that limits the owner’s ability to transfer the agency, keep customers, or receive renewal commissions after termination.
Under Illinois law, there is an additional requirement. The Illinois Marriage and Dissolution of Marriage Act states that “the court shall employ a fair market value standard.” 750 ILCS 5/503(k). The valuation date is the date of trial, unless the parties agree to another date or the court chooses another date within its discretion. Id.
Before selecting an income, market, or asset approach, an insurance-agency appraisal should identify the legal entity or entities being valued, the spouse’s percentage and class of ownership, whether the agency is independent, captive, or operates as a brokerage, the kinds of insurance sold, the agency’s carrier relationships, and the ownership and transferability of its book of business.
Additionally, the appraisal should identify the rights attached to the owner’s interest, the assets and liabilities included in the valuation, and the applicable valuation date. These distinctions particularly matter in an Illinois divorce because Section 503(k) requires the court to determine fair market value as of the date of trial or another date agreed upon by the parties or ordered by the court. 750 ILCS 5/503(k).
So, the first question should be: What property does the spouse actually own?
What Does The Insurance Agency Owner Actually Own?
An owner might own every share of a corporation or membership interest in an LLC. The agency might separately own customer records, trade names, cash, receivables, office equipment, technology, contractual rights, and related assets. The owner might also possess contractual termination benefits or other rights that become payable if a carrier relationship ends.
However, a lot of an insurance agency’s value can be intangible.
Insurance agencies are usually not balance-sheet-intensive businesses. What It’s Worth: Valuing Insurance Agencies at 55. Beyond equipment, furniture, working capital, cash, and similar tangible property, much of their value may consist of “customer and client relationships, an assembled workforce, technology, a trade name, and goodwill.” Id. The appraiser needs to determine which of those economic benefits belong to the agency.
For example, an agency may report substantial recurring commissions due to the fact that customers frequently renew their policies. However, historical renewal commissions do not necessarily establish that the agency owner has a transferable right to future renewals. The answer can depend on Illinois insurance law, the type of insurance involved, the agency agreement, and whether the carrier or agency controls the underlying customer information and renewal rights.
Likewise, an agency may have a few producers whose personal customer relationships generate much of its revenue; this does not automatically mean that all of those relationships belong to the enterprise.
Insurance agencies are often “built on relationships,” so it is important to determine whether the customer relationships belong to the individual producers or the agency itself. What It’s Worth: Valuing Insurance Agencies at 51-52.
In all, the appraisal should not start with the agency’s gross commissions. It should start with the carrier agreements, producer agreements, entity documents, customer information, and other records that reveal what the agency truly possesses.
A Captive Insurance Agency Is Not The Same As An Independent Agency
An important distinction in insurance-agency valuation is whether the agency is independent or captive.
An independent agency usually represents multiple insurance carriers. By contrast, a captive agent is affiliated with one specific carrier. What It’s Worth: Valuing Insurance Agencies at 9.
The difference does not, by itself, establish which type of agency is more valuable. Captive agencies sometimes possess valuable and transferable books of business. Other times, these agencies operate under agreements that sharply restrict what the agent truly owns.
Courts in Illinois have confronted this distinction. In In re Marriage of Cutler, the husband was the principal and sole shareholder of a captive GEICO insurance agency that could sell only GEICO insurance. 334 Ill. App. 3d 731, 736 (2002). Under the agreement, if the agency relationship ended, the husband “would not own his renewals,” could not obtain future commissions from those renewals, could not solicit former customers for up to one year, and could transfer the GEICO agency agreement only with GEICO’s written permission. Id. at 736.
The wife’s expert used the market approach and valued the agency at $270,000, but the husband’s expert used the asset approach and valued it at $32,000. Id. at 736. However, the trial court valued the agency at $243,000 using the capitalized-returns method, a form of the income approach. Id. at 736. The appellate court rejected the wife’s valuation where it relied on a rule of thumb applicable to multiline or independent agencies and failed to account for the GEICO restrictions, which had a “significant negative impact” on the agency’s fair market value. Id. at 737. Additionally, the court rejected the capitalized-returns valuation and held that the $32,000 asset-based figure was the “only properly proven value” of the business. Id. at 737-38.
Cutler illustrates why a captive agency cannot simply be valued like an independent or multiline agency. Rather, the appraisal must account for the actual contractual rights and restrictions attached to the agency.
The Carrier Agreement Can Control The Agency’s Value
An insurance agency earns money through relationships with insurance carriers, yet those relationships do not exist only because the agency has an insurance license.
In Illinois, an insurance-producer license is defined as authorization to act as an insurance producer for particular lines of authority. The Illinois Insurance Code provides that the license itself does not create authority for its holder to “represent or commit an insurance carrier.” 215 ILCS 5/500-10. That authority can instead depend on the producer’s contractual relationship with the carrier.
The agency agreement may therefore be one of the most essential documents in the appraisal.
The carrier agreement should be reviewed to determine what insurance products the agency may sell, who controls customer and policy information, whether the relationship is exclusive, who receives renewal commissions, and whether commission rates may change. Further, the appraiser should evaluate the carrier’s termination rights, what happens to existing policies after termination, whether the agreement can be assigned or transferred, whether the agent may solicit former customers, and whether the owner is entitled to any payment when the relationship ends.
Who Owns The Insurance Agency’s Book Of Business?
When discussing insurance agencies, the phrase “book of business” is used all the time. What does that really mean, though?
BVR describes growth in an agency’s “book of business” or “policies in force” as a central component of agency performance; high renewal rates allow an agency to expand its revenue base and make future cash flow more predictable. What It’s Worth: Valuing Insurance Agencies at 13.
A valuable book may represent renewal opportunities, recurring relationships with policyholders, customer information, carrier relationships, policy data, and the expectation of future commissions. Thus, its value depends greatly upon retention and transferability.
BVR states the underlying issue directly: “Who owns the relationship, the producers or the agency?” What It’s Worth: Valuing Insurance Agencies at 51.
Illinois law adds an extra layer.
Section 500-77 of the Illinois Insurance Code addresses “expirations,” which include information that concerns an insurance policy like the insured property, insured’s identity, policy value, inception and expiration dates, premiums, limits, and coverage information. 215 ILCS 5/500-77(a).
Subject to the statute’s exceptions, the insured and the insurance business entity mutually and exclusively own those expirations, and the business entity usually possesses the exclusive use of policy records and related information for renewal, sales, and marketing purposes. 215 ILCS 5/500-77(b)-(c).
This statutory protection can prove to be economically significant. The ability to solicit renewals and control over policy information can make an established customer base more transferable to a purchaser.
The rule has important exceptions, though. Section 500-77 does not apply when the insurance producer is “employed by or has agreed to act exclusively or primarily” for one insurance company or affiliated group. 215 ILCS 5/500-77(d)(3). The statute also provides that a producer acts primarily for one company or group if the producer receives 75% or more of insurance-related commissions from it or places 75% or more of the producer’s policies with it. Id. Importantly, the section does not apply “to policies providing life and accident and health insurance.” 215 ILCS 5/500-77(d)(4).
So, Illinois law clearly shows why “book of business” cannot be treated as one uniform asset. The appraiser should therefore determine precisely which customer information, renewal rights, expirations, and contractual rights are owned or controlled by the agency before assigning a value to the book.
Insurance Licensing And Ownership Are Different Questions
Illinois law regulates who may transact insurance.
Generally, an individual cannot sell, solicit, or negotiate insurance in Illinois unless that individual is properly licensed for the applicable line of authority. 215 ILCS 5/500-15(a).
The licensing obligation can also apply to the agency itself. Under Section 500-30(c), “[a] business entity acting as an insurance producer must obtain an insurance producer license.” 215 ILCS 5/500-30(c). Before the Director can approve the application, the Director must also find that the business entity “has designated a licensed producer responsible for the business entity’s compliance with the insurance laws and rules of this State.” Id.
These requirements impact how an agency operates. However, they do not answer every question that concerns the economic ownership of the business in a divorce.
The appraiser should distinguish among the business entity’s license, the individual producer’s license, ownership of shares or membership interests, and contractual authority from insurance carriers. They are related but not interchangeable.
Imagine that a spouse owns shares in an insurance-agency corporation and also personally holds the producer licenses and carrier appointments necessary to generate the agency’s revenue. Whether another individual could replicate those relationships can impact the fair market value of the ownership interest.
Yet, the fact that only one spouse is licensed to sell insurance does not necessarily make an agency acquired during marriage that spouse’s nonmarital property. That is a different question governed by Illinois divorce law.
Is An Insurance Agency Marital Or Nonmarital Property In Illinois?
Before an Illinois court can divide the value of an insurance agency, the court must classify the ownership interest as either marital or nonmarital property.
Section 503(a) provides that “‘marital property’ means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage,” except for the categories identified as nonmarital property. 750 ILCS 5/503(a). Section 503(b)(1) provides that “all property acquired by either spouse after the marriage and before a judgment of dissolution of marriage” is presumed to be marital property. Id. § 503(b)(1). That presumption may be overcome by “clear and convincing evidence” that the property was acquired through one of the methods identified in Section 503(a), or under the other circumstances specified in subsection (b)(1). Id.
Thus, an ownership interest in an insurance agency acquired during the marriage generally will be presumed marital, even if the agency is titled in one spouse’s name, one spouse works at the agency, or one spouse holds an insurance-producer license.
In In re Marriage of Frazier, the husband operated a State Farm insurance agency that he acquired during the marriage; the appellate court held that “[t]he trial court did not err in considering the agency as marital property, inasmuch as it was acquired during marriage.” 125 Ill. App. 3d 473, 474 (1984).
By contrast, an agency interest acquired before the marriage will typically be nonmarital property. An agency interest may also be nonmarital if it was “acquired by gift, legacy or descent,” acquired in exchange for nonmarital property, or “excluded by valid agreement of the parties, including a premarital agreement or a postnuptial agreement.” 750 ILCS 5/503(a)(1), (2), (4).
Classification should occur interest by interest. The appraisal and classification analyses must identify when and how each property interest was acquired.
A Growing Insurance Agency Does Not Automatically Become Marital Property
A premarital insurance agency does not automatically become marital property just because its customer base, revenue, or value increases during the marriage.
Section 503(a)(7) classifies “the increase in value of non-marital property” as nonmarital, regardless of whether that increase comes from marital property, nonmarital property, a spouse’s personal effort, or another source, but the increase remains subject to the reimbursement provisions of Section 503(c). 750 ILCS 5/503(a)(7).
This distinction can be particularly important in terms of an insurance agency.
For example, imagine that a spouse owns an independent insurance agency before the marriage. During a 30-year marriage, the agency expands, adds other producers, gains new carrier appointments, improves customer retention, and grows from $400,000 to $4 million in annual commissions. The agency’s fair market value may have substantially increased, yet the increase itself does not automatically become marital property.
In In re Marriage of Werries, the husband’s 45% partnership interest had been acquired partly before the marriage and partly by gift, and despite substantial growth during the marriage, the court held that the interest remained nonmarital. 247 Ill. App. 3d 639, 643-46 (1993). The court explained that “[t]he issue is not the business’ form,” but whether the nonmarital estate had truly stayed segregated from the marital estate and whether adequate proof of that separation had been presented. Id. at 646.
This analysis can apply to an insurance agency. Ownership records, acquisition documents, agency-purchase agreements, bank records, capital accounts, tax returns, loan documents, and other financial records may be necessary to demonstrate whether the original nonmarital interest maintained its identity.
To be clear, keeping the agency nonmarital does not automatically end the inquiry because the marital estate may have contributed to its growth.
The Marital Estate May Have A Reimbursement Claim Against A Nonmarital Insurance Agency
Illinois handles contributions to nonmarital property primarily through reimbursement.
When one estate contributes property to another, the contributing estate usually “shall be reimbursed” by the estate that received the contribution, but no reimbursement is available for a contribution that cannot be traced by clear and convincing evidence or that was intended as a gift. 750 ILCS 5/503(c)(2)(A).
In an insurance-agency case, marital-property contributions might include marital funds used to repay acquisition debt, marital money used to make a down payment on another agency, money used to purchase another producer’s book, or marital property used to fund a substantial expansion. The contribution must be traced. Showing that the agency became more valuable during the marriage is not enough alone.
Personal effort is treated separately. A spouse’s personal effort devoted to nonmarital property constitutes a contribution from the marital estate. 750 ILCS 5/503(c)(2)(B). Reimbursement is available when those efforts are significant and result in substantial appreciation, unless the marital estate was reasonably compensated for them. Id.
This may cause an issue for a premarital insurance agency because an owner may spend years recruiting producers, developing new carrier relationships, acquiring accounts, managing staff, and increasing retention. Those efforts may play a major role in increasing the agency’s value.
However, substantial effort does not establish reimbursement if the marital estate already had been reasonably compensated through the owner’s salary, bonuses, draws, or other compensation.
As discussed in Werries, when determining whether a marital estate should receive reimbursement for personal effort devoted to a nonmarital business, reasonable compensation is vital because if the spouse was already reasonably compensated, additional reimbursement is unnecessary. 247 Ill. App. 3d at 648.
So, insurance-agency valuation in a divorce may need to answer two questions. First, how much did the nonmarital agency increase in value?Second, was the marital estate already reasonably compensated for the owner-spouse’s efforts that helped create that increase?
Those questions require the agency’s compensation structure, its historical financial performance, and the sources of its growth to be understood.
That is where the detailed valuation analysis begins.
How Does An Insurance Agency Make Money?
The appraiser must understand how the insurance agency generates revenue before valuing it.
The main source of revenue for many insurance agencies is commissions, which are generally calculated as a percentage of the premiums paid by customers; however, commission rates vary depending on the type of insurance and the underwriting carrier. What It’s Worth: Valuing Insurance Agencies at 31. Additionally, new policies commonly generate a higher commission percentage than renewals. Id. Agencies may receive additional performance-based commissions from carriers, whereas brokers may charge customers fees for insurance-procurement services. Id.
The timing of commission revenue can vary, as well. An agency may receive commissions over time as they are earned or receive advance commissions in a lump sum. Id. An advance commission may have to be repaid if the customer cancels the policy before the end of its term. Id.
Not every dollar of historical revenue has the same value. Recurring commissions generated by a stable group of renewing customers are likely more predictable than commissions generated by one-time transactions or unusually large policies.
What Factors Drive The Value Of An Insurance Agency?
Even if two insurance agencies generate the same amount of annual revenue, they may still have very different fair market values.
Customer retention is a significant factor. Retention rates above 90% can permit agencies to grow their revenue base and more accurately forecast future cash flow. What It’s Worth: Valuing Insurance Agencies at 13.
Diversification is also an important consideration. An agency dependent on one carrier, one major customer, one producer, one insurance product, or one industry is generally exposed to more risk than an agency with diversified sources of revenue. BVR describes insurance agencies as being “built on relationships” and emphasizes the importance of examining products and markets, producer dependence, acquisition history, and whether customer relationships belong to the producers or the agency. What It’s Worth: Valuing Insurance Agencies at 51-52.
Carrier relationships also matter. An agency may depend upon carriers for available products, commission rates, pricing, and continued appointments. So, an agency with strong relationships with multiple carriers may present a different risk profile than one mostly dependent on a single carrier.
The appraiser should consider the agency’s customer concentration, customer retention, carrier concentration, producer dependence, product mix, geographic diversification, historical growth, profitability, and ability to continue operating without the current owner.
An Insurance Agency’s Financial Statements May Need To Be Normalized
Tax returns and financial statements do not necessarily represent an insurance agency’s sustainable economic performance.
Pro forma EBITDA is an important consideration in insurance-agency valuation; buyers look at ongoing revenue, expenses, compensation policies, nonrecurring items, and reinvestment. What It’s Worth: Valuing Insurance Agencies at 52. Core commissions and fees usually comprise the “lion’s share” of direct revenue, but contingent or bonus commissions and multiyear policies paid entirely upfront may need adjustment. Id.
Likewise, one-time commissions can distort historical results. For instance, a large life-insurance policy sold to one customer can generate substantial revenue in one year without causing a comparable recurring stream of income in later years. Id.
Acquisitions can also make growth look different than it actually is. BVR warns that purchasing another producer’s book of business or merging with another agency can cause a spike in revenue and expenses, which can affect customer and carrier retention. Id. at 51.
Additionally, owner and producer compensation should be examined. A closely held agency owner may pay himself significantly more or less than the market rate for the work performed. Case studies within BVR show how both excessive owner compensation and nominal owner salaries can distort reported EBITDA and thus require normalization. Id. at 59-60.
Normalization works to identify the revenue and expenses that are reasonably representative of the agency’s continuing operations.
What Valuation Methods Are Used To Value An Insurance Agency?
Generally, an insurance agency can be valued under three traditional approaches: the asset approach, income approach, and market approach. Id. at 55.
The appropriate method should reflect the particular agency’s assets, earnings, contractual rights, risks, and transferability.
In an Illinois divorce, the overall objective is fair market value. Section 503(k) requires that, “[i]n determining the value of assets or property,” the court “shall employ a fair market value standard.” 750 ILCS 5/503(k). The valuation date is the date of trial unless the parties agree to another date or the court orders another date within its discretion. Id.
The Asset Approach To Valuing An Insurance Agency
Under the asset approach, the value of a business is typically determined by considering the value of its assets and liabilities.
However, this approach may provide an incomplete picture. The asset approach is the least likely of the three main approaches to apply because an insurance agency is often not a balance-sheet-intensive business. What It’s Worth: Valuing Insurance Agencies at 55. Much of an agency’s value may lie in intangible assets like trade name, workforce, customer relationships, technology, and goodwill. Id.
Regardless, the asset approach cannot just be ignored.
In Cutler, the husband’s captive GEICO agency did not own its book of business and was subject to contractual restrictions that prevented him from taking the book to another agency or receiving future renewal commissions if the GEICO relationship ended. 334 Ill. App. 3d at 736. After the appellate court rejected the market-based valuation and the trial court’s capitalized-returns valuation, it concluded that the $32,000 asset-based figure was the “only properly proven value” of the agency. Id. at 737-38.
An asset approach may therefore become especially important when an agency’s apparent earnings depend upon contractual rights or relationships that cannot be transferred to a hypothetical buyer.
The Income Approach To Valuing An Insurance Agency
Under the income approach, an agency is valued based on the economic benefits the business is expected to generate.
For a stable and slowly growing agency, an appraiser might use a single-period capitalization method. However, for most agencies, a discounted cash flow analysis may be the better approach. What It’s Worth: Valuing Insurance Agencies at 57. Even then, a DCF is “only as good as its inputs.” Id.
Those inputs need careful scrutiny.
An appraiser should think about whether projected growth is acquisition-driven or organic, whether major customers are likely to remain, whether existing retention rates are sustainable, and whether the agency has enough producers to support its projected growth. Id. BVR recommends stress-testing retention where the agency has limited producer capacity or significant customer concentrations. Id.
Expenses matter, too. The appraiser should evaluate whether fixed expenses are truly fixed, whether projected marketing expenditures are enough to support growth, the agency’s capital expenditures, its debt and working-capital needs, and whether owner compensation must be normalized. Id.
An income approach requires more than capitalizing the agency’s current earnings because the appraiser must determine what portion of those earnings can reasonably be expected to continue and what risks accompany them.
Future Earnings And An Insurance Agency In An Illinois Divorce
Another issue occurs when future earnings are used to value an insurance agency in an Illinois divorce.
In Frazier, the trial court valued the State Farm agency the husband operated at around $144,000 based on the discounted present value of his projected future earnings through retirement. 125 Ill. App. 3d at 474-76. The appellate court rejected that valuation because those earnings depended substantially on work the husband would perform after the divorce. Id. at 476-77.
The court explained that the husband could not merely “rest on his laurels” and continue receiving the projected commissions. Id. at 476. He would have to keep servicing and retaining his existing accounts by sending renewals, processing claims, answering policy questions, advertising, and performing other ongoing work. Id.
By failing to account for that future activity, the valuation classified the results of the husband’s post-dissolution efforts as marital property. Id. at 476-77. The court decided that these shortcomings produced a “grossly excessive valuation” of the agency. Id. at 477.
Overall, the value of the existing enterprise must be distinguished from the value of labor the owner will perform in the future.
The Market Approach To Valuing An Insurance Agency
The market approach estimates value by comparing the subject agency with transactions that involve comparable insurance agencies.
Insurance agencies are often bought and sold, but that does not automatically make similar transaction data easy to use. Many agency transactions involve private-equity buyers whose deal terms are not publicly reported, and meanwhile, publicly traded insurance brokerages may be billions of dollars larger than the privately held agency being valued. What It’s Worth: Valuing Insurance Agencies at 55-56.
Thus, an appraiser should ask whether a purported comparable is actually comparable. Cutler illustrates the problem. The wife’s expert used a rule of thumb based on multiline agencies to value a captive GEICO agency but did not take into consideration the contractual restrictions that would greatly impact a hypothetical sale. 334 Ill. App. 3d at 734, 737. The appellate court held that those restrictions had a “significant negative impact” on the agency’s fair market value and that the resulting valuation was “not supported by proper evidence.” Id. at 737.
A transaction involving another insurance agency is helpful evidence only to the extent that the transaction reflects an agency with enough comparable economic characteristics.
A Revenue Multiple Is Not A Complete Valuation
Insurance agencies are usually talked about in terms of multiples of revenue, annual commissions, or EBITDA.
Those multiples can provide helpful market evidence; however, applying a multiple does not eliminate the need to analyze the underlying agency.
BVR reports a large range of observed commission and EBITDA multiples and warns that agency size, carrier quality, compensation practices, growth, product mix, profitability, customer relationships, and numerous other factors may materially affect price. What It’s Worth: Valuing Insurance Agencies at 126-27. BVR also warns that rules of thumb should be considered in the context of the underlying valuation analysis.
So, a revenue multiple may provide a reasonableness check or one piece of market evidence, yet it cannot answer the most vital valuation questions: What does this particular agency own? How stable are its earnings? How transferable is its book of business? How concentrated are its customers and carriers? How dependent is the agency on the owner or other key producers?
Those factors determine whether the multiple truly fits the agency being valued.
Personal And Enterprise Goodwill Can Affect The Value Of An Insurance Agency
An insurance agency’s value may surpass the value of its identifiable tangible assets, and some of that additional value may be goodwill.
In Illinois, there is a difference between goodwill associated with the individual owner and goodwill that belongs to the business itself. In In re Marriage of Schneider, the Illinois Supreme Court stated that personal goodwill reflects future income-generating ability and should not be separately included as a divisible marital asset when the same personal attributes are already considered under Section 503(d). 214 Ill. 2d 152, 166-67 (2005). The court also recognized that a corporation may possess both personal and enterprise goodwill and that the ban on double counting “is limited to personal goodwill and does not extend to enterprise goodwill.” Id. at 168.
Although Schneider involved a dental practice rather than an insurance agency, the distinction is relevant to an insurance business because customer relationships can depend greatly on individual producers.
Insurance agencies are “built on relationships.” What It’s Worth: Valuing Insurance Agencies at 51. Accordingly, it is wise to ask: “Who owns the relationship, the producers or the agency?” Id.
For an insurance agency, personal goodwill may be tied to the owner’s reputation, continued involvement, sales ability, and customer relationships, but enterprise goodwill may stem from the agency’s trade name, systems, workforce, transferable customer accounts, and carrier relationships.
The distinction is fact-specific. An agency that operates through several producers, account managers, institutional customer relationships, and standardized systems may maintain value even if the owner leaves.
By contrast, if one owner generates most of the revenue and personally controls the key customer and carrier relationships, more of the agency’s value may depend on that individual. BVR notes that smaller closely held agencies can face greater “key-man risks” when they depend heavily on leading producers. What It’s Worth: Valuing Insurance Agencies at 51. The appraiser should therefore consider who controls the important relationships, how much revenue depends on particular producers, and what would likely happen to the book of business if a key individual departed.
What Records Are Required To Value An Insurance Agency In A Divorce?
A reliable insurance-agency valuation requires more than an income statement and some tax returns.
The appraiser should acquire records that establish the agency’s financial performance and the contractual rights underlying that performance. These records may include ownership and organizational documents, multiple years of business tax returns and financial statements, bank records, debt documents, producer and employment agreements, commission statements, carrier agreements, agency-purchase agreements, compensation records, and documents relating to prior acquisitions.
Agency-management-system data can be useful, as it may show information that does not appear on the financial statements.
BVR recommends evaluating agency-management reports that concern “clients, policies, carriers, and internal producers.” Id. at 130. It further recommends investigating retention rates, the number of clients and policies, carrier relationships, the mix of commercial and personal policies, revenue and earnings trends, key producers, geographic markets, and whether employees have signed noncompetition agreements. Id. at 129-30.
Commission statements can also help verify whether the revenue reported on the agency’s profit-and-loss statements was truly received and identify which carriers and policies generated that revenue. BVR suggests determining whether reported revenue can be supported by bank statements and commission statements. Id. at 129.
Additionally, the discovery should identify how the agency has grown.
If the agency purchased another book of business or agency, the appraiser needs to review the purchase agreement, financing documents, earnout provisions, and historical retention associated with the acquisition. Bringing in another book of business or producer can create sudden changes in expenses, revenue, and customer and carrier retention. Id. at 51.
These documents may help distinguish internally generated growth from growth that was purchased with additional capital or debt.
The Valuation Expert Should Reconcile The Different Methods
Applying multiple valuation methods can cause differing results. The appraiser should not simply average them. Rather, the expert should explain which approaches deserve greater weight based on the agency’s characteristics. For instance, the asset approach may receive greater weight when contractual restrictions limit transferability. See Cutler, 334 Ill. App. 3d at 736-38.
Income-based conclusions should also be tested against assumptions concerning customer and carrier concentration, growth, retention, producer dependence, and other agency-specific risks. BVR recommends comparing a DCF result against relevant market evidence and using sensitivity analysis to test key variables. What It’s Worth: Valuing Insurance Agencies at 58.
The point of reconciliation is not to make every method provide the same number. Instead, the goal is to determine which evidence most reliably reflects the agency’s fair market value. As Cutler demonstrates, even an accepted methodology may be improper if it does not reflect the business’s true economic and contractual characteristics. 334 Ill. App. 3d at 737-38.
How Is The Value Of An Insurance Agency Used In An Illinois Divorce?
Once the agency has been classified and valued, the agency’s value becomes part of the larger property-division analysis.
In Illinois, the court must assign each spouse that spouse’s nonmarital property and divide marital property “without regard to marital misconduct in just proportions” after considering the relevant statutory factors. 750 ILCS 5/503(d).
Those factors include “each party’s contribution to the acquisition, preservation, or increase or decrease in value” of marital or nonmarital property, “the value of the property assigned to each spouse,” “the duration of the marriage,” and “the relevant economic circumstances of each spouse.” 750 ILCS 5/503(d)(1), (3)-(5). The court also considers the parties’ “age, health, station, occupation, amount and sources of income, vocational skills, employability, estate, liabilities, and needs,” whether the property division is “in lieu of or in addition to maintenance,” and “the reasonable opportunity of each spouse for future acquisition of capital assets and income.” Id. § 503(d)(8), (10)-(11).
So, valuing an insurance agency does not automatically mean that the nonowner spouse will receive an ownership interest in the business.
Cutler demonstrates how an agency’s valuation can impact the allocation of marital property; the trial court awarded the agency to the husband at an assigned value of $243,000 and included that value in its overall distribution of the marital assets and debts. 334 Ill. App. 3d at 735-36.
The appellate court decided that $32,000 was the “only properly proven value” of the agency. Id. at 738. Since the $243,000 agency value represented more than half of the parties’ net marital estate, the court held that the erroneous valuation “substantially and materially affected” the equitable distribution and remanded for redistribution using the $32,000 value. Id. at 738.
Even when only one spouse will keep operating the insurance agency after the divorce, the valuation can significantly impact how the leftover assets and debts are allocated between the spouses.
The Bottom Line On Valuing An Insurance Agency In An Illinois Divorce
What is an insurance agency worth in an Illinois divorce? The answer cannot be determined just by multiplying annual commissions or revenue by an industry multiple. The analysis starts with finding the spouse’s ownership interest, determining whether the agency is captive or independent, reviewing the carrier agreements, establishing who owns the book of business and renewal rights, classifying the interest as marital or nonmarital property, and choosing the proper valuation date. In Illinois, courts apply a fair-market-value standard, yet the proper valuation method depends on the economic and contractual characteristics of the specific agency.
Then, the appraiser must normalize the agency’s financial results, examine recurring and nonrecurring commissions, distinguish organic growth from acquisitions, evaluate customer and carrier concentration, and decide how much of the agency’s revenue depends on particular producers. The appraiser must also consider transferability, key-person risk, retention rates, reasonable owner compensation, and the difference between personal and enterprise goodwill. An asset, income, or market approach may be appropriate, but the methodology has to reflect what the agency owns and what a hypothetical purchaser could realistically acquire.
Valuation is only one aspect of the divorce analysis. The court must translate the marital value of the insurance agency into an equitable division of property while considering the agency’s liquidity, debt, licensing requirements, contractual restrictions, and the related marital assets and liabilities. The owner-spouse may keep operating the agency while the nonowner spouse receives other marital property, cash, installment payments, or another award reflecting the marital value of the business.
If you own an insurance agency or your spouse owns an insurance agency, see my Illinois business divorce owner page and contact my Illinois divorce firm.
Russell D. Knight is a Chicago divorce and family law attorney who has practiced family law since 2006. He represents clients in complex Illinois divorce matters involving closely held businesses, insurance agencies, professional practices, business valuations, and other difficult-to-value marital assets. His Chicago practice focuses on Illinois divorce and family law.
CASES, STATUTES, AND OTHER SOURCES REFERENCED IN THE INSURANCE-AGENCY VALUATION AND DIVORCE IN ILLINOIS ARTICLE
215 ILCS 5/500-10 — Insurance-Producer Definitions, Licensing, And Authority To Represent An Insurance Carrier
215 ILCS 5/500-15(a) — Insurance-Producer Licensing Requirement
215 ILCS 5/500-30(c) — Business-Entity Producer Licensing And Designation Of A Responsible Licensed Producer
215 ILCS 5/500-77(a)–(d) — Ownership And Use Of Insurance Expirations, Policy Information, And Statutory Exceptions
750 ILCS 5/503(a), (b)(1) — Definition And Presumption Of Marital Property
750 ILCS 5/503(a)(1), (2), (4), (7) — Nonmarital Property, Premarital Property, Gifts, Agreements, And Appreciation Of Nonmarital Property
750 ILCS 5/503(c)(2)(A)–(B) — Reimbursement For Contributions And Personal Effort Between Marital And Nonmarital Estates
750 ILCS 5/503(d) — Factors Governing The Division Of Marital Property
750 ILCS 5/503(k) — Fair-Market-Value Standard And Valuation Date
In re Marriage of Cutler, 334 Ill. App. 3d 731 (5th Dist. 2002)
In re Marriage of Frazier, 125 Ill. App. 3d 473 (5th Dist. 1984)
In re Marriage of Werries, 247 Ill. App. 3d 639 (4th Dist. 1993)
In re Marriage of Schneider, 214 Ill. 2d 152 (2005)
Business Valuation Resources, What It’s Worth: Valuing Insurance Agencies (2021)
FREQUENTLY ASKED QUESTIONS ABOUT INSURANCE-AGENCY VALUATION AND DIVORCE IN ILLINOIS
Is An Interest In An Insurance Agency Marital Property In An Illinois Divorce? An interest acquired during the marriage is typically presumed marital. An interest acquired before marriage, by gift or inheritance, or through another qualifying nonmarital property may stay nonmarital, although reimbursement claims can still arise.
How Is An Insurance Agency Valued In An Illinois Divorce? Illinois courts apply a fair-market-value standard. Depending on the agency, an appraiser may use the asset, income, or market approach after considering the agency’s earnings, book of business, carrier agreements, risks, and transferability.
Does It Matter Whether The Insurance Agency Is Captive Or Independent? Yes, captive agencies may be subject to carrier restrictions affecting renewals, customers, and transferability.
Who Owns An Insurance Agency’s Book Of Business? It depends on the agency’s contracts and the applicable insurance law. Illinois law gives business entities particular rights in policy “expirations,” but exceptions apply, such as accident-and-health policies.
Can Future Renewal Commissions Be Included In The Agency’s Value? Renewal expectations may affect value, yet future earnings attributable to the owner’s post-divorce labor cannot just be treated as a present marital asset.
Is Goodwill Included In The Value Of An Insurance Agency? Enterprise goodwill may be included if it belongs to the continuing business. Personal goodwill tied to the owner’s reputation, relationships, and future earning ability is treated differently.
