2003 Best Practices Study

Over 90% of this year’s participants submitted data for the fiscal year ending 12/31/2002. The balance of the agencies reported on fiscal years ending within the first half of 2003.

As expected the hard market contributed to hefty, double-digit revenue growth rates in all but the two smaller revenue category groups – “ Under $500,000 ” and “ Between $500,000 and $1.25 Million ”. Both of these groups had single-digit growth rates below their previous year’s rates. While these lower growth rates reflect the fact that the agencies in these groups are less likely to write the larger commercial accounts most impacted by the hard market, the lower growth percentages point to the increasing competition with which these agencies are faced. For the smaller agencies, revenue growth remains difficult, even in the hard market. The average growth rate for the four study groups with revenues over $1.25 Million ranged from percentages in the mid-teens to a whooping 20.1%. Since growth rates for the prior year hovered in the low teens, it appears that these agencies benefited from the significant rate increases brought on by the hard market. Did the increased revenues mean bigger profits? Yes, but….The strong revenue growth rates did translated into stronger profitability ratios than in the prior year, although not proportionately higher. The pre-tax profits averaged 12.1% of net revenues for the three study groups with revenues over $2.5 Million. This was just slightly better than last year’s average profits for this combined group. The “ Under $500,000 ” group’s pre-tax profits also improved, but by only half of a percentage point. The two groups with revenues between $500,000 and $2.5 Million had a combined average pre-tax profit of 13.4%, a strong figure, but a full 2.3 percentage points below the prior year results. A major factor influencing this year’s profitability ratios was compensation expense. Since the 2001 Study results were published, compensation per employee increased an average of $9,990 in each of the six study groups. Employees, who had worked in soft market conditions for years with minimal or no salary increases, were finally rewarded. Agencies used their increased revenues to provide incentives and to retain and recognize employees who labored under heavier, market-induced workloads. At the same time many agencies made investments to support future growth, particularly the larger agencies that used the additional revenues to add new producers and support staff.

Acquisition activity was another factor in the revenue growth rate for the two larger revenue categories, although such activity was not limited to those groups as shown in the chart below.