2010 Best Practices Study

Analysis of Agencies with Revenues Under $1,250,000

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

16.3

21.7

30.6

Financial Stability

Average

Top 25%

Balance Sheet Current Ratio

1.03:1

1.84:1

Tangible Net Worth (% of Net Revenue)

7.9%

31.9% 10.1%

Receivables/Payable Ratio

88.7%

Aged Receivables

% Receivables Aged Past 60 Days % Receivables Aged Past 90 Days

36.1% 20.7%

6.2% 2.7%

2010 Best Practices Study

Accounts Receivable

Agencies with Revenues Under $1,250,000

Average

+25% Profit

+25% Growth

Agency Billed vs. Direct Billed by Carrier % of P&C Revenues that are Agency Billed

14.3% 83.2%

15.1% 84.9%

9.8%

% of P&C Revenues that are Direct Billed

80.2%

17