2010 Best Practices Study
Analysis of Agencies with Revenues Between $5,000,000 and $10,000,000
Mgmt. Perspectives
Profile
“Rule of 20” Score
Revenues
Expenses
The Rule of 20 is a simple growth and profitability balancing equation that provides a quick way to determine whether or not an agency is creating value for its shareholders. It states that an agency will drive industry-standard shareholder returns if the sum of (a) its organic growth rate and (b) 1/2 of its EBITDA margin equals or exceeds 20.
Rule of 20 Outcome
Profitability
Organic Growth
EBITDA Margin
Rule of 20 Outcome
Public Brokers
Employee Overview
Willis Group
2.0% 26.5% 15.3
Producer Info
Brown & Brown
-5.1% 34.2% 12.0
Staff Service Info
Organic Growth Rate
1/2 of EBITDA Margin + =
Rule of 20 Score
Aon -1.0% 21.1% 9.6 Arthur J. Gallagher -2.5% 19.1% 7.1 Marsh & McLennan -1.0% 15.8% 6.9
Technology
Insurance Carriers
Generally speaking, an outcome of 20 or more, regardless of the different combinations of growth and profitability, indicates that the agency’s shareholders can expect to earn 15% -17% per year through stock price appreciation and/or shareholder distributions.
Appendix
2009 was a year of extremely soft pricing which prevented the public brokers from achieving an outcome of 20, as shown in the table above.
Because organic growth is such a key input into the Rule of 20, the persisting soft market and the current depressed economic environment have made it harder to achieve a score of 20. A good rule of thumb is that an agency, while always striving for as high a Rule of 20 score as possible, will combine solid organic growth with an EBITDA margin that is at least twice as high as its growth rate.
Average
+25% Profit Average +25% Growth Average
“Rule of 20” Score
11.8
17.8
23.0
Financial Stability
Average
Top 25%
Balance Sheet Current Ratio
1.35:1
2.03:1
Tangible Net Worth (% of Net Revenue)
10.7% 38.3%
30.8% -4.0%
Receivables/Payable Ratio
Aged Receivables
% Receivables Aged Past 60 Days % Receivables Aged Past 90 Days
-0.9% -4.9%
3.1% 2.3%
2010 Best Practices Study
Accounts Receivable
Agencies with Revenues Between $5,000,000 and $10,000,000
Average
+25% Profit
+25% Growth
Agency Billed vs. Direct Billed by Carrier % of P&C Revenues that are Agency Billed
35.3% 62.5%
31.5% 60.2%
27.0% 64.7%
% of P&C Revenues that are Direct Billed
107
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