Q1 2021 Business Valuation Insights
Legal Highlights
Derek Scott Williams PLLC v. Cincinnati Ins. Co.
In this business interruption case resulting from mandatory shutdowns to control COVID-19, the court allowed a dental practice's proposed class action seeking COVID-19-related coverage to proceed, rejecting Cincinnati Insurance Co.'s stance that an insured has to show a "physical alteration" of property to allege physical loss, a precondition for coverage but does dismiss the claim of coverage under the civil authority provision of the policy. The court found the wording of the policy sufficiently vague, especially as to the meaning and definition of the word “loss.” Ambiguities in insurance contracts are generally construed against the insurer. Referring to the ambiguity of the definition of loss and the terms “loss of” and “loss to,” “the Court concludes that Williams’s claims regarding the business income coverage state viable claims upon which relief may be granted.”
Industry Spotlight
Property, Casualty and Direct Insurance in Florida
Over the five years to 2020, industry revenue in Florida is expected to increase an annualized 3.2% to $64.4 billion, including the growth of 1.4% in 2020 alone. Industry revenue growth can be attributed to a hardening premium price cycle as industry operators looked to bolster their excess reserves and improve profit margins. For industry establishments, the high-risk nature of Florida's insurance market has historically caused operators to exit the state prior to the current period.
As a means of expanding access to affordable insurance services, the Florida Office of Insurance Regulation (FLOIR) recruits national companies to operate in the state and stimulate internal competition. As a result, the number of industry enterprises substantially increased at an annualized rate of 12.2% to 776 operators during the five years between 2015 and 2020. This influx of industry operators has resulted in a similar increase in industry employment, where the total number of employees grew an annualized 2.7% to 42,935 workers in 2020. Moving forward, industry demand is expected to continue growing, albeit at a decelerated rate. Thus, industry revenue is expected to increase at an annualized rate of 1.2% to $68.4 billion during the five-year period between 2020 and 2025.
Economic Review
The Bureau of Economic Analysis (BEA) reported that the nation’s economy—as indicated by GDP—grew by 4.0% in the fourth quarter, a rate that is more consistent with historical figures than the 33.4% rate of growth from the third-quarter 2020 figure or the decline of 31.4% from the second quarter when the economy had just reopened after the forced shutdown due to the start of the coronavirus pandemic. For all of 2020, GDP contracted by 3.5% after expanding by 2.2% in 2020.
How Has the COVID-19 affected the EBITDA Market Multiples in 2020?
Taking into consideration the uncertainty the onset of the spread of the virus caused early in the second quarter of 2020, sellers appeared to have initially forecasted a worst-case scenario, with EBITDA multiples falling to 3.7x. However, by the second half of 2020, EBITDA multiples returned to levels near historical norms, at 4.7x in the third quarter and 4.4x in the fourth quarter of 2020.