When the members of the Fed sit down for their March conclave, they will likely conclude that they remain ahead of the curve on inflation and can take a pass on raising rates. They will prefer to squeeze additional gains from the labor market before acting again to tighten policy. And they will take note that they have plenty of time to raise rates later in the year.
If the data turns sharply stronger than anticipated, they can raise rates just six weeks later at the May meeting. And there are some strategic benefits to a move in May. Yellen can prime the markets for a May hike during the March press conference and prove that the Fed can move at meetings without a regularly scheduled news conference, which is more likely to happen anyway if the Fed is changing rates more than once a year.
Most importantly, if data strengthens further and prompts the Fed to pull forward a hike to March or May, markets should reset policy expectations to a baseline of three hikes with an option on a fourth. A move earlier than June suggests a risk that the Fed would be in danger of overshooting its targets without a bit more aggressive action in 2017. And if I am wrong, and the Fed is indeed behind the curve? In that case, markets would be looking at four hikes with an option on a fifth.
General Insurance Brokerage believes that rate hikes have a negative impact on the valuation of insurance agencies and books of business! Let’s speak in generalities for a minute. Almost every agency or book of business purchase $5,500,000 and below, are financed through the SBA (85%) on a 10-year amortization or a traditional funding source on a 6-7-year amortization. In rare cases, adding a real estate purchase of 51% or greater of the entire purchase price gives the opportunity for a 25-year amortization.
The bank underwriting process looks at many factors, the biggest factor is free cash flow before and after debt service. Debt service is the amount that a buyer finances after down payment and adding closing cost and fees back in the loan. It would make sense that
Something must give in an environment of increasing interest rates. This something will typically be that seller multiples will shrink accordingly thus the sales price for the agency or book of business will decrease.
General Insurance Brokerage has a program where a buyer only puts up 10% of the purchase price and in many cases less if they have an existing book of business. This has helped in propping up valuations for sellers! It is never too late to ask questions or plan your exit strategy. Please call Marc Greene for a confidential conversation regarding your strategy and as always, we do not charge a fee to the seller.
Marc Greene is a contributing editor to Agency Equity, a consultant to the insurance agency and the managing member of General Insurance Brokerage, LLC.