2007 Best Practices Study

Agencies with Revenues Over $25,000,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

of 20 is the weighting of the relative importance of organic growth versus EBITDA when it comes to creating shareholder value (the weighting is 2 to 1.) Generally speaking, an outcome of 20 means an agency is generating a shareholder return of approximately 15%-16%, which is commonly viewed as the “expected” rate of return for a well-run insurance agency. A score of less than 20 indicates room for improvement, while a score above 20 is outstanding. For the >$25 million Study Group, the median Rule of 20 Score was 16.7%. Of the 25 firms, 10 actually achieved a score higher than 20. These results are impressive, particularly in a soft market. In 2006, only one public broker, Brown & Brown, achieved a Rule of 20 outcome of 20 or more, as is shown in the table below.

Overview

Established for the first time in the 2004 Best Practices Study, the largest Study Group has 25 firms with revenues averaging $52.8 million. Twenty are privately-held and four are bank-owned agencies. Despite the difficulty of another year of soft property and casualty pricing in 2006, this group was able to achieve an impressive 10.6% organic growth rate, which exceeded that of every single publicly traded insurance broker. The group also achieved another strong level of profitability in 2006, with Pro Forma EBITDA (earnings before interest, taxes, depreciation and amortization) of 25.1% of net revenues. This was driven chiefly by the group’s high level of employee productivity which at $170,865 per employee was the highest level ever achieved by a Best Practices Study Group.

Rule of 20 Outcome

“Rule of 20” Score - Introduction of a New Statistic

Organic Growth

EBITDA Margin

Rule of 20 Outcome

Rank Public Brokers

1 Brown & Brown

4.5% 38.8% 23.9%

In recent years, Reagan Consulting has developed a metric called the “Rule of 20” to provide a quick means of calculating whether or not an agency is creating significant value for its shareholders. It is the sum of an agency’s EBITDA margin times 50% plus the organic revenue growth rate.

2 Willis Group

8.0% 21.3% 18.7%

3 Hub Group

5.0% 26.7% 18.4%

4 Hilb, Rogal & Hobbs

4.4% 27.0% 17.9%

5 Arthur J. Gallagher

6.0% 21.2% 16.6%

6 USI

1.8% 20.7% 12.2%

Pro forma EBITDA Margin times 50% PLUS Organic Revenue Growth Rate EQUALS Rule of 20 Outcome

7 Marsh & McLennan 2.0% 14.2% 9.1%

8 Aon

2.0% 13.9% 9.0%

So, for example, an agency that generates an EBITDA margin (as a percent of revenue) of 20% and grows organically by 10% achieves a “Rule of 20” score of exactly 20%. (20% times 50% plus 10% = 20%.)

Keys to Their Success

The higher the score, the better. The secret to the rule

145 2007 Best Practices Study | Agencies with Revenues Over $25,000,000 | Executive Perspectives