CH 9 Flashcards
Brokerage’s Prime Goal
Profit maximization, balancing short-term and long-term gains, and considering both soft and hard insurance markets.
Brokerage Valuation Methods
Multiple of commissions and multiple of earnings, along with other factors affecting value.
Multiple of Commissions
Valuation method (1-3x) using gross premium, regardless of profitability.
Multiple of Earnings
Valuation method using income-producing ability, considering factors like risk and client base.
Balance Sheet Assets
Cash, Investments, Accounts Receivable, Office Equipment, and Technology.
Balance Sheet Liabilities
Current and long-term obligations that reduce a brokerage’s value.
Shareholders’ Equity
Owners’ stake in the business, calculated using Assets = Liabilities + Equity.
Revenue (Income Statement)
Essential component in valuing a brokerage, including commissions, investment income, and fees.
Commission Revenue
Largest revenue source, varying with premiums written; includes profit sharing agreements.
Expenses (Income Statement)
Costs to consider in valuation, including controllable (managed) and uncontrollable (external) expenses.
Cash Flow
Essential for value; capacity to generate cash.
Billing Processes
Speed and accuracy in billing impact valuation and cash flow.
Operational Efficiency
Essential, ensuring the brokerage operates effectively and minimizes wasteful spending.
Client Retention
Critical for value; high retention indicates stability.
Loss Ratio
Claims paid vs. premiums collected, impacting value and relationships with insurers.
E&O Claims
Malpractice claims against brokers, reducing value and scaring away investors.
Trust Fund Regulations
Insurance premiums are separate from the brokerage’s other operating funds.
Commission Reserve Accounts
Accounts for unearned commissions, for handling refunds from policy cancellations.
Accounts Receivable
Money owed to the brokerage from clients, managing effectively minimizes risks.
Acid-test Ratio
Measures short-term liquidity by comparing liquid assets to current liabilities.
Equity-to-Debt Ratio
Indicates the proportion of equity and debt used to fund the business.
Working Capital Defense Interval
Measures how long working capital can cover daily expenses.
