2021 Best Practices Study

BEST PRACTICES STUDY UPDATE.

AIM HIGHER. ACHIEVE MORE.

2021

Independent Insurance Agents & Brokers of America.

Copyright ©2021 by the Independent Insurance Agents & Brokers of America and Reagan Consulting, Inc. All rights reserved. No portion of this document may be reproduced in any manner without the prior written consent of IIABA or Reagan Consulting. In addition, this document may not be posted as a link on any public or private website without the prior written consent of IIABA or Reagan Consulting.

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2021 Study Sponsors

We wish to thank the following companies for their sponsorship. The funding provided makes possible the development of the 2021 Best Practices Study and the Best Practices Gateway website.

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Table of Contents

Introduction & Overview .............................................................................................................................. 6

Adapting to a Rapidly Changing Environment ............................................................................................ 10

Executive Summary..................................................................................................................................... 22

Agencies under $1.25 Million in Revenue ..................................................................................... 22

Agencies between $1.25 Million and $2.5 Million in Revenue...................................................... 26

Agencies between $2.5 Million and $5.0 Million in Revenue........................................................ 30

Agencies between $5.0 Million and $10.0 Million in Revenue...................................................... 34

Agencies between $10.0 Million and $25.0 Million in Revenue.................................................... 38

Agencies over $25.0 Million in Revenue........................................................................................ 42

Cross Category Comparison ........................................................................................................................ 46

Glossary....................................................................................................................................................... 76

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The 2021 Best Practices Study

Introduction & Overview

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The 2021 Best Practices Study Introduction & Overview

About the Study : History & Process

Created in 1993, through a joint initiative between Reagan Consulting and the Independent Insurance Agents & Brokers of America (the Big “I”) , the Best Practices Study (BPS) is designed to deliver critical financial and operational industry benchmarks and strategies to member agencies. For nearly 30 years, this comprehensive annual publication has helped agencies optimize their performance and built its reputation as one of the industry’s most consistently effective, reliable, and valuable information resources.

Every three years, the Big “ I ” asks insurance companies, state association affiliates, and other industry organizations to nominate agencies they consider to be among the best in the industry for each of the BPS ’ s revenue categories. Nominated agencies are then invited to participate and must complete an in-depth survey detailing their financial and operational year-end results. Results are then scored and ranked objectively to determine which agencies earn the Best Practices agency designation. In 2019, the beginning of the current three-year (2019-2021) BPS cycle, over 1,000 independent agencies throughout the U.S. were nominated and 267 of the participating

The 1993 Best Practices Study

agencies became Best Practices agencies. Their results served as the foundation for the 2019 Best Practices Study . This year, the 2021 Best Practices Study continues to examine these same top performers who maintained their Best Practices status by submitting annual data. Participation in the Best Practices Study is a prestigious recognition of superior accomplishments. Agencies who believe they have the qualities of a Best Practices agency and wish to be nominated for the next cycle (2022-2024) can have their state association or an insurance carrier nominate them or can self-nominate.

The 2021 Best Practices Study

The 2021 Best Practices Study is composed of three primary sections:

1. Adapting to a Rapidly Changing Environment — As the world and the insurance industry continue to evolve, both internal perpetuation and InsurTech are areas that Best Practices agencies should address when thinking about the future. This whitepaper highlights how agencies are adapting to new realities and offers strategies for how they can continue to excel.

2. Executive Summaries — Key benchmarks and perspectives summarized for each of the six revenue categories

3. Cross Category Comparison — The complete array of Best Practices benchmarks for all six revenue categories, arranged in a side-by-side format that allows for quick metric comparisons

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The 2021 Best Practices Study Introduction & Overview

For More Information

Visit the Best Practices Gateway at www.reaganconsulting.com/research/best-practices for access to the annual Best Practices Study . Other resources and tools to help agencies improve their performance and enhance the value of their business are also available via the Big “I” website, www.independentagent.com. Two of the most frequently used tools

are the Interactive Agency Self-Diagnostic Tool and the Best Practices Joint Planning Tool which are valuable components of a complete line of Best Practices products and services. If you have questions about the information published in the 2021 Best Practices Study or if you would like to nominate your agency to participate in the 2022-2024 Study cycle, please contact Reagan Consulting at 404-233-5545. If you would like access to additional Best Practices tools or wish to purchase the Study , contact the Big “I” Education Department at www.independentagent.com/best-practices or 800-221-7917.

The Best Practices Gateway: https://reaganconsulting.com/research/best-practices

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The 2021 Best Practices Study Introduction & Overview

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Adapting to a Rapidly Changing Environment

Introduction  Internal Perpetuation  InsurTech

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Adapting to a Rapidly Changing Environment

Introduction

A most remarkable 2020 … b ut there is more to the story than COVID-19

2020 proved to be one of the most consequential years for our world, country, and industry. COVID-19, which erupted onto the world stage in early 2020, has yet to be resolved as we go to press for this 2021 Best Practices Study (August 2021). The second wave of COVID misery, in the form of the Delta strain, ensures that COVID will continue to stay front and center on the world stage well into 2022. Despite the early fears regarding the impact of COVID on the overall economy and the insurance industry, we fared remarkably well. After a horrific drop in GDP early in 2020, the U.S. economy rebounded magnificently in the second half of the year. Agency growth rates in 2020 were strong. Agency profitability hit all-time highs. Agencies transitioned to remote work virtually overnight and customer care and retention levels remained remarkably steadfast. Agency valuations, both internally and externally, have reached the highest levels ever achieved in our industry. All this … in the midst of a global pandemic. If nothing else, 2020 demonstrated, yet again, the enormous value and resiliency of the independent insurance broker. Although the final COVID story is still unwritten, we have much to be grateful for and have every reason to be optimistic regarding the future of our industry. That said, many events outside of COVID-19 continue to shape our industry and must be addressed for Best Practices agencies to thrive in the future. Two of the most fundamental areas warranting close attention are internal agency perpetuation and InsurTech. Over the past decade, pressures on internal perpetuation have ratcheted up materially. Our industry has gone through massive M&A consolidation over the past decade, unlike anything ever before seen. Whereas 25 years ago, only five national firms were competing to buy insurance agencies, the number of buyers competing for deals today exceeds 40. Basic supply and demand pressures have pushed agency valuations, both internal and external, to all-time highs. This is great news, but does require adapting internal perpetuation strategies to account for current realities. In the next section of this year’s Best Practices whitepaper, we will address how Best Practices agencies are rethinking their internal perpetuation strategies. Another trend requiring close attention is InsurTech. Without question, technological innovations have driven many of the monumental improvements in agency operations and profitability over the past few decades. The impact of this convergence of technology and insurance brokerage operations acceleration is difficult to overstate. A flood of investment capital is driving change at a pace and scope unimaginable just a handful of years ago. Many believe that the insurance brokerage space is ripe for technological disruption (think 1990’s -era travel agencies and stock brokerages). Agencies who do not monitor and adapt to the rapid technological innovations bombarding our industry will, without question, struggle to meet their full potential in the future. The second section of this year’s whitepaper will address the key trends in Insurtech that Best Practices leaders need to know to continue to excel. Internal Perpetuation InsurTech

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Adapting to a Rapidly Changing Environment

Internal Perpetuation Best Practices

Perpetuation Then and Now: Maintaining Private Ownership in 2021

Despite the M&A frenzy that has dominated the independent insurance marketplace for the past decade, the reality is that most independent brokers plan to remain independent for the foreseeable future. Executing this plan, however, has become far more complex than it was in prior years. The insurance landscape has changed dramatically in recent years, and the gap between internal and external valuations seems to be continually widening, making it even more challenging for agencies to perpetuate internally. However, the fundamental challenge remains: how can an agency successfully navigate the shifting market dynamics and reach its desired perpetuation destination?While each agency has unique needs that dictate various options, there are time-tested, proven principles for maintaining private ownership that still apply to agencies of all shapes and sizes.

In 2010, Reagan Consulting conducted The Private Ownership Study to better understand the best practices of agencies dedicated to remaining independent. In creating this Study , Reagan surveyed 900 firms, examining in detail 145 firms committed to private ownership. To successfully perpetuate in 2010, Reagan discovered that there were four pillars, or keys, to perpetuation that allowed firms to remain independent: (1) healthy operations, (2) reasonable sellers, (3) able buyers, and (4) an effective transfer mechanism.

When the Study was conducted, the economy was struggling following the Great Recession of 2008. Profit margins were down, organic growth was anemic, and there was a historically soft property & casualty market. Appraised agency valuations, used to set the values for internal share sales, were roughly 6.0x trailing pro forma EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization, or pre-tax cash flow). Now, only ten years later, internal appraised valuations have rocketed to almost 9.0x pro forma EBITDA, a 50% increase.

Enterprise Value as a Multiple of Pro Forma EBITDA

~50% Increase in 9 years

8.9x

8.6x

8.2x

7.1x

7.0x

6.9x

6.8x

6.5x

6.3x

6.1x

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: Reagan Value Index

This massive increase in agency valuations had a significant impact on the affordability of equity to would-be buyers. To gauge equity affordability, Reagan Consulting uses a metric called the Buyer Coverage Ratio (“BCR”). Under the assumption of a financ ed equity purchase (generally the case), the BCR is the percent of a buyer’s first annual payment

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Adapting to a Rapidly Changing Environment

Internal Perpetuation Best Practices

(principal and interest) covered by shareholder distributions or bonuses that the buyer receives. For example, if a buyer’s first-year payment is $100,000 in principal and interest and they receive shareholder bonuses or distributions of $70,000, the BCR is 70% ($70,000/$100,000). An agency with a BCR of 100% provides buyers with bonuses and/or distributions sufficient to cover 100% of the buyer’s principal and interest payments, albeit on a pre-tax basis. The Study concluded that agencies with BCRs of 100% or better were ideally positioned to perpetuate internally. In other words, equity proved to be generally affordable in the event an agency had a 100% or b etter BCR. In cases where an agency’s BCR fell below 100%, the Study concluded that buyer affordability would likely become an issue. Let’s look at an example of what has happened over the past decade to Buyer Coverage Ratios. The typical financing terms available to buyers in 2010 were a 10% down payment, with the remaining balance financed over eight years at a 3% interest rate. Below is a comparison of BCR ratios assuming the same financing terms were available to buyers in both 2010 and 2021. The meteoric rise in valuations over the p ast decade dropped this agency’s BCR from 101% in 2010 to just 73% in 2021; equity affordability decreased by almost 28%!

2010

2021

Value as Multiple of EBITDA

6.5x

Value as Multiple of EBITDA

9.0x

Down Payment

10.0%

Down Payment

10.0%

Years Financed

8.0

Years Financed

8.0

Interest Rate

3.0%

Interest Rate

3.0%

Profits Distributed

80%

Profits Distributed

80%

Pre-tax, First Year Buyer Coverage Ratio

Pre-tax, First Year Buyer Coverage Ratio

101%

73%

This huge leap in agency valuations and the accompanying compression of BCRs have put real pressure on internal perpetuation. Equity is materially less affordable to buyers. Without buyers, any internal perpetuation plan will collapse.

What happened between 2010 and 2021 that caused these seismic shifts in agency valuations? The typical agency or broker is not much different from a decade ago – profit margins and growth rates are about the same. As it turns out, external factors have accounted for much of the increase in agency valuations: •

• Tax laws changed in favor of agency owners • Public broker equity markets surged • The U.S. stock market strengthened significantly following the Great Recession • Interest rates remained at historically low levels

Investment capital flooded the industry from a variety of sources, most notably, private equity firms • Capital costs declined materially • Competition intensified from high-performing acquirers

For privately-owned agencies perpetuating with internal valuations at 8-10x EBITDA multiples (now the norm), several strategies may seem to be appropriate to address the buyer affordability conundrum. Increasing agency profit margins, hiring producers, and increasing down payments on buyer notes are often touted as mechanisms to increase affordability

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Adapting to a Rapidly-Changing Environment

Internal Perpetuation Best Practices

but most likely won’t achieve the intended results. Let’s see how each of these strategies is likely to affect an agency’s BCR:

1) While increasing profit margins may be a great strategy overall, it is unlikely to improve the BCR, as a higher agency valuation will offset enhanced cash flows.

2) Hiring more producers will eventually widen the pool of available buyers, lessening the load for individual buyers. This will likely decrease the BCR because investments required to hire and develop producers will generally reduce distributions/bonuses available to buyers. 3) While increasing down payments on buyer notes technically improves an agency’s BCR by reducing payments on perpetuation notes, equity payments are simply accelerated and the underlying equity affordability remains unchanged.

The All-Important Fourth Pillar of Agency Perpetuation

Fortunately, other strategies will improve the BCR, enhancing equity affordability to buyers. These strategies focus primarily on the fourth pillar of internal perpetuation, an Effective Transfer Mechanism:

4) 5)

Secure or provide financing over longer time periods. Rather than eight years, consider 10+ years. Many industry banks (InsurBanc and others) now provide much longer-term financing than was previously available. Internal financing can also be extended to enhance affordability.

Reduce interest rates to IRS- approved minimums on agency or seller-financed notes. Take advantage of historically low interest rates when drafting buyer notes.

Increase profit distribution percentages to shareholders, helping ease buyers’ cash flow worries. Tread carefully when increasing distributions levels, as an agency still needs to make necessary growth investments (book purchases, producer hiring, tech improvements).

The adjusted example below highlights how implementing a mix of these three strategies can produce a higher BCR, ultimately increasing buyer affordability and enabling an agency to achieve its internal perpetuation goals.

2021 Carried Forward

2021 Adjusted

Value as Multiple of EBITDA

9.0x

Value as Multiple of EBITDA

9.0x

Down Payment

10.0%

Down Payment

10.0%

Years Financed

8.0

Years Financed

12.0

Interest Rate

3.0%

Interest Rate

3.0%

Profits Distributed

80%

Profits Distributed

85%

Pre-tax, First Year Buyer Coverage Ratio

Pre-tax, First Year Buyer Coverage Ratio

73%

110%

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Adapting to a Rapidly-Changing Environment

Internal Perpetuation Best Practices

What if an equity purchase model with buyer financing does not work for your agency due to your corporate structure or operating model? You can employ other transfer mechanism boosters to place equity and/or equity alternatives in the hands of next-generation talent. Although dilutive to existing shareholders and not without tax complications, the following strategies for transfer mechanisms aid recruiting, improve affordability, and drive retention.

Patch Bonuses

First-time agency equity buyers receive a patch bonus to help to weather the initial negative cash flow typically associated with share purchases. For example, if a buyer experiences a $100,000 note payment shortfall in the first 2-3 years of their share purchase, the agency can provide a $50,000 patch bonus to offset the negative cash flow. This eliminates the need to boost distributions to all shareholders and augments the cash available to buyers. Employees (typically producers) are granted stock in the company when they reach and/or exceed certain thresholds. For example, if a producer reaches a book size of over $300,000, they are granted a $ amount or % of stock in the company that vests over a previously determined period (avg. 3-4 years).

Performance Stock Grants

Note Forgiveness Purchase debt can be forgiven for equity purchases on achievement of certain performance thresholds by the buyers. If the debt is held outside the agency, making note forgiveness impossible, performance-driven bonuses can be paid to cover debt payments.

Phantom Stock (aka synthetic equity)

Phantom stock provides selected employees (typically producers or senior management) a deferred compensation benefit based on the performance of the compan y’s equity, affording them many of the benefits of stock ownership without actually giving them any company stock or units. It has no inherent requirements or restrictions regarding its use, allowing the organization to use it however it chooses. There are, however, difficult tax consequences, which you must carefully research. A book equity plan rewards all producers based on pre-established levels of production. It can take the form of a stock grant or deferred compensation plan in which producers receive equity in their books of business rather than in the agency itself. For example, if a producer reaches a book size of over $500,000, they are granted a 50% ownership interest in their book of business at a predetermined valuation multiple (1.0 – 1.5x commission + fees), vested over time.

Book Equity

Although the prospect of perpetuating in 2021 is certainly more daunting than it was a decade ago, the right mix of perpetuation strategies will enable agencies to maintain independence and continue to thrive in the years to come. Additionally, by drawing on the extensive metrics detailed in this Best Practices Study , agencies are better prepared to face the challenges ahead. The future of internal agency perpetuation is bright, but only to agencies who adapt to current realities and strive towards continual improvement.

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Adapting to a Rapidly-Changing Environment

InsurTech Best Practices

InsurT ech: What’s next and how can agents and brokers respond?

Over the past few years, the insurance industry has been abuzz with the catchphrase: “ InsurT ech.” What exactly is InsurTech? And what does it mean for insurance brokers and professionals? InsurTech is the convergence of technology and traditional insurance brokerage. A tangible example of this accelerating trend is the August 2021 merger of ABD Insurance & Financial Services ( “ABD”), an award -winning and Best Practices Agency, and Newfront Insurance, Inc. (“Newfront”), a Top 50 Fintech company. In combining their forces, s kills, and capabilities, ABD and Newfront aim to redefine the insurance experience by blending talented insurance professionals with cutting-edge technology innovators. Not all InsurTech firms seek to partner with or empower agents and brokers – some intend to disrupt the industry.

Best Practices leaders need to answer two fundamental questions: how widespread is InsurTech and what is the probability of significant disruption?

In June 2021, Reagan Consulting conducted a survey to understand the current InsurTech landscape and learn how insurance leaders are thinking about this new phenomenon. Reagan interviewed and surveyed CEOs, CTOs, and technologists who shared their insights on how insurance and technology are colliding, what they see as the next wave of innovation, how to best remain informed regarding new products and services, and what agents and brokers can do to actively engage with different InsurTech players.

Enablement, not disruption

At first glance, InsurTech may appear as a looming specter of the unknown, threatening to upend agencies’ traditional operations. In Reagan’s survey, however, industry thought leaders were largely in agreement that InsurTech will enable, rather than disrupt the industry. When asked directly if they were concerned about InsurTech disruption materially impacting their business in the next 3 - 5 years, only 17% said they were concerned. As the years progress, more disruption is likely. Thirty-three percent of survey participants predicted a material disruption in the next ten years.

Source: 2021 Reagan InsurTech Survey

Survey participants viewed InsurTechs as potential partners who can help agencies succeed. Fortunately, the availability of beneficial technologies has never been higher. Marketing materials routinely flood agencies’ inboxes, wooing brokers with the lure of increased sales, improved customer experiences and lighter workloads from enhanced efficiencies. Yet, it’s important for agencies to discern whether or not the proposed technology actually applies to their businesses. The key question becomes, “Does this product enrich my value proposition to historical customers, as well as prospects?” Brokers are who are able to adopt and effectively leverage applicable new technology services will indeed be able to better perform and ultimately reduce the threat of disruption.

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Adapting to a Rapidly-Changing Environment

InsurTech Best Practices

Recent funding/investment

In the face of all of these newly available technologies, how has the market responded? The chart below shows the global InsurTech funding and volume of transactions.

Source: WillisTowersWatson

In 2020, InsurTech funding reached an all-time high of $7.1 billion (up 12% v. 2019) through 377 deals (up 20% v. 2019) . The jump in funding and transaction volume came after the lowest quarter of global funding (Q1 2020) since 2018. For the remainder of the year, the COVID-19 environment saw even mature industries completely change the way operations were conducted, pushing investors into technology and technology-enabled businesses that fueled and facilitated these operational changes. Q3 2020 set a quarterly record for both InsurTech funding and transaction volume.

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Adapting to a Rapidly-Changing Environment

InsurTech Best Practices

A few notable InsurTech investments included:

Sources to find information

With this surge of investments taking place, it becomes imperative for industry leaders to stay informed on new developments. Unfortunately, the availability of published information is still very much in the early stages. The relative novelty of authenticated InsurTech sources makes it difficult to cut through the noise and find out what is actually occurring. Survey participants concluded that the best strategy for staying informed is to collaborate with other thought leaders. This collaboration can take many forms.

Industry Associations • Whether focused on InsurTech (e.g., BrokerTech Ventures) or more generally on insurance brokerage (e.g., the Big “I” or The Council of Independent Insurance Agents and Brokers), industry associations provide a multitude of resources for agencies to engage with and learn about InsurTech.

Authenticated Publications • Numerous outlets offer specialized reports and articles, featuring the latest InsurTech news and trends. For example, Willis Towers Watson produces a quarterly report with valuable financial statistics surrounding InsurTech growth.

Open Forums/Conferences • Throughout the year, membership organizations and associated industry firms host events that enable leaders to interact in face-to-face environments and directly share insights and ideas on what’s happening in the space. Reagan Consulting’s own bi -annual Agency Ownership Summit is just one example of how leading insurance professionals gather together to discuss the latest developments.

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Adapting to a Rapidly-Changing Environment

InsurTech Best Practices

Separating news from the noise

Once an agency has begun collecting information, how can it accurately determine if an InsurTech investment is right? Bill P i eroni, CEO of A CORD , offers a thoughtful 7-step process to determine if a particular InsurTech will create value.

1 Customer Value Proposition

• How much value did you think you would get versus how much value did you actually get?

2 Testability

• Could you as an agent test the product?

3 Quantifiable

• Do I, as an agent, believe that the tool enhanced my success? Is the value proposition quantifiable?

4 Universal Compatibility

• Is the product compatible across all office types?

5 Consistency

• Is the service/tool used in a similar fashion for all adopters, or is every instance varied?

6 Co-optability

• Will this tool reach a critical mass of users?

7 Leader Support

• Are there authoritative adopters?

In utilizing this methodology, agencies can more likely adopt an InsurTech that does indeed bring value and favorably changes competitive dynamics.

Spotlight on Best Practices Agencies

A majority of Best Practices agencies have in fact already adopted and integrated new technologies to improve both their internal and external operations. During this year’s Best Practices Study data collection process, Reagan asked Best Practices agencies to assess their adoption of new technology compared to their peer agencies (i.e., those with similar revenue size categories). While agencies with revenues of $2.5M and above felt they were in line with their peers, agencies under $2.5M in revenue actually felt they were ahead of their peers when it came to accepting and implementing new technologies.

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Adapting to a Rapidly-Changing Environment

InsurTech Best Practices

InsurTech Adoption Assessment Compared to Peers

80%

74%

69%

70%

55%

60%

53%

50%

49%

47%

50%

43%

42%

40%

28%

27%

30%

23%

18%

20%

7%

5%

10%

4%

3%

3%

0%

Under $1.25M $1.25-2.5M $2.5-5M $5-10M $10-25M Over $25M

Behind Peers

In Line with Peers

Ahead of Peers

Source: 2021 Best Practices Study

Agencies were also asked if they made InsurTech investments that focused on their internal and external operations in past two years. Responses to this question are presented in the chart below. And it looks as though results are split fairly evenly, with all revenue categories enacting improvements that affected both their internal operations as well their external customer experience. The $5.0M - $10.0M revenue category was the largest adopter of InsurTechs with 71% focused on internal operations.

Internal v. External InsurTech Adoption Over the Past 2 Years

80%

71%

70%

64%

62%

60%

59%

58%

57%

57%

56%

55%

60%

53%

47%

50%

40%

30%

20%

10%

0%

Under $1.25M $1.25-2.5M $2.5-5M $5-10M $10-25M Over $25M

Internal Operations

External Customer Experience

Source: 2021 Best Practices Study

Some of the internal technology solutions included investments that made remote work easier. Video platforms like Zoom and Teams offered agencies an opportunity to interact in virtual environments and Slack, GroupMe, Adobe, and Microsoft 365 made it easier to communicate and share files. Other investments focused on automating particular sales processes and employed tools such as Agency Zoom, Salesforce, Better Agency, Vertafore, and Applied. Many external solutions

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Adapting to a Rapidly-Changing Environment

InsurTech Best Practices

focused on streamlining the application process and some of the listed providers include Indio and Rocket Referrals. Additional externally focused technologies were centered around client communication and many agencies have found success with tools like Zywave and Agency Revolution.

Action Items

Reagan encourages Best Practices Agencies to stay abreast of InsurTech news and take proactive steps to respond to InsurTech . Below are four action items for your agency’s consideration:

Hire Leadership : Awareness of the ever-changing technological landscape starts at the top for an agency. Bring in knowledgeable personnel focused on connecting your operations to technology solutions.

Start with Areas to Improve : Understand that a majority of the InsurTechs in the news will not apply to your operations. Identify your biggest challenge areas and needs as an organization to develop a filter for your research.

Collaborate : Remember the network effect and work to create dialogue among your peers. Striving to be the only agency leveraging a specific technology ultimately results in limited value of that technology.

Evaluate Carriers Through a Lens : Changes in customer expectations and preferences accelerate along with technological evolution. When evaluating carrier relationships, ask, “How are you improving the insured’s experience?”

The strategies outlined above will prepare you to welcome new changes and propel your agency to the forefront of the industry, maintaining your status as a Best Practices Agency.

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Executive Summary

Key Metrics by Agency Revenue Category

Agencies under $1.25 Million in Revenue

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Executive Summary

Agencies under $1.25 Million in Revenue

Profile

Regional Distribution

Corporate Structure

Average Revenues $908,048

C Corp 15.8%

LLC 21.1%

Weighted Average Shareholder Age (WASA) 52.0

◼ Northeast ◼ Midwest

11.1% 29.6%

S Corp 63.2%

◼ West

7.4%

◼ Southeast ◼ Southwest

40.7% 11.1%

Revenue and Growth

Revenue Distribution (as a % of Gross Revenue)

Organic Growth in Net Commissions & Fees (excluding contingents, bonuses & overrides)

Contingent/ Bonus/ Overrides 5.6%

29.3%

Other 1.2%

Group L/H/F 4.3%

21.2%

18.8%

18.1%

Commercial P&C 39.4%

9.7%

6.0%

4.4%

3.6%

Personal P&C 49.5%

Total Agency

Commercial P&C

Personal P&C

Group L/H/F

Median

Top Quartile

Note : Commercial P&C includes Bonds/Surety. Group L/H/F includes Group Medical, All Other Group, and Individual L/H/F .

Account Stratification

Notes

At only 4.3% of gross revenue, Group L/H/F business continues to be a relatively untapped revenue source for this Best Practices revenue category. • Agencies under $1.25M in revenue posted the highest organic growth rate of all Best Practices revenue groups in this year’s Study (6.0%).

Commercial P&C

Group L/H/F

◼ < $5K

◼ Under 50 lives

58.7%

90.5%

◼ $5K to $10K

◼ From 50 to 100 lives

14.3%

9.5%

◼ $10K to $25K

◼ Over 100 lives

15.9%

0.0%

◼ $25K to $50K

7.7%

◼ > $50K

3.4%

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Executive Summary

Agencies under $1.25 Million in Revenue

Production

Definitions

Sales Velocity

Age Banding of Sales Velocity

Sales Velocity is a critical metric in determining organic growth. It is defined as this year’s written new business divided by last year’s commissions and fees. Age Banding of Sales Velocity can help a firm assess where new business and growth are coming from and prepare for perpetuation.

Top Quartile

27.5%

Over age 55

3.2%

Age 46-55

3.2%

Age 36-45

2.4%

Average

14.2%

Up to age 35

5.5%

Comparison Group Average

Book of Business per Producer (commissions and fees)

Book of Business by Age

Notes & Definitions

Effective NUPP, which is the product of an agency’s investment in unvalidated producers (NUPP) and success rate in hiring producers (Producer Success Rate), is expressed as a percentage of net revenue. It is the best overall measure of an agency’s effectiveness in recruiting and developing sales talent. This revenue category tied with the $2.5-$5.0M revenue category for the highest Sales Velocity in thi s year’s Best Practices Study (14.2%). This group scored lowest in NUPP and Effective NUPP in this year’s Study , an indication that producer recruitment, hiring and development may be lagging in these smaller agencies.

Over age 55 21.1%

New Business

Average Book

Up to age 35 16.4%

Commercial P&C

$57,102

$262,470

Personal P&C

Age 36- 45 11.6%

$45,416

$182,384

Life/Health/ Financial

*

*

Multi- Line

$33,668

$530,688

Age 46- 55 40.9%

Effective NUPP

Group Average:

Producer Success Rate 58.2%

NUPP

Effective NUPP

0.4%

0.2%

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Executive Summary

Agencies under $1.25 Million in Revenue

Profitability/Productivity

Profitability

Employee Productivity

Rule of 20 Score

Pro Forma Metrics: # of Employees

Top Quartile

37.9

53.9%

Average

7.9

28.1%

27.0%

21.8

13.0%

Revenue per Employee Compensation per Employee Spread per Employee

$132,939

$198,072

Pro Forma Operating Profit

Pro Forma EBITDA

$64,148

$32,233

Average

Top Quartile

$68,792

$128,955

Comparison Group Average

Top Quartile

Notes

Organic Growth & Profitability Scatter Plot

The Rule of 20 measures an agency's shareholder returns. It is calculated by adding 50% of an agency's Pro Forma EBITDA margin to its organic commission & fee growth rate. An outcome of 20 or higher means an agency is likely generating, through profit distributions and/or share price appreciation, a shareholder return of approximately 15% - 17%, a typical agency/brokerage return under normal market conditions. The graph to the right provides a look at the Rule of 20 results for agencies in this revenue category. The solid black line represents all combinations of organic growth and EBITDA margin that result in a Rule of 20 score of 20.

Note: Firms identified as outliers have been set to have a maximum growth of 30% or a maximum profitability of 50%. They appear on the graph line bordering the chart instead of plotting their actual results.

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Executive Summary

Key Metrics by Agency Revenue Category

Agencies between $1.25 Million and $2.5 Million in Revenue

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Executive Summary

Agencies between $1.25 Million and $2.5 Million in Revenue

Profile

Regional Distribution

Corporate Structure

Average Revenues $1,815,885

C Corp 8.7%

Other 4.3%

LLC 30.4%

Weighted Average Shareholder Age (WASA) 52.5

S Corp 56.5%

◼ Northeast ◼ Midwest

17.4% 30.4%

◼ West

8.7%

◼ Southeast ◼ Southwest

34.8%

8.7%

Revenue and Growth

Revenue Distribution (as a % of Gross Revenue)

Organic Growth in Net Commissions & Fees (excluding contingents, bonuses & overrides)

25.7%

Contingent / Bonus/ Overrides 9.3%

Other 1.3%

17.2%

17.1%

Group L/H/F 4.7%

13.0%

7.1%

3.7%

Commercial P&C 48.5%

2.5%

-4.7%

Personal P&C 36.2%

Total Agency

Commercial P&C

Personal P&C

Group L/H/F

Median

Top Quartile

Note : Commercial P&C includes Bonds/Surety. Group L/H/F includes Group Medical, All Other Group, and Individual L/H/F .

Account Stratification

Notes

• Smaller agencies continue to struggle with Group L/H/F growth. Organic growth totaled negative 4.7% for agencies in this revenue category. • The vast majority of Group L/H/F business resides in the Under 50 Lives category (83.6%). • At 7.1%, agencies in this category posted the

Commercial P&C

Group L/H/F

◼ < $5K

◼ Under 50 lives

43.7%

83.6%

◼ $5K to $10K

◼ From 50 to 100 lives

17.2%

8.2%

◼ $10K to $25K

◼ Over 100 lives

15.0%

8.2%

second highest organic growth rates for Commercial P&C in this year’s Study .

◼ $25K to $50K

11.0%

◼ > $50K

13.1%

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Executive Summary

Agencies between $1.25 Million and $2.5 Million in Revenue

Production

Definitions

Sales Velocity

Age Banding of Sales Velocity

Sales Velocity is a critical metric in determining organic growth. It is defined as this year’s written new business divided by last year’s commissions and fees. Age Banding of Sales Velocity can help a firm assess where new business and growth are coming from and prepare for perpetuation.

Top Quartile

4.3%

21.9%

Over age 55

2.8%

Age 46-55

Age 36-45

3.1%

Average

13.9%

Up to age 35

3.8%

Comparison Group Average

Book of Business per Producer (commissions and fees)

Book of Business by Age

Notes & Definitions

• Weighted average producer age (WAPA) is 46. •

Effective NUPP, which is the product of an agency’s investment in unvalidated producers (NUPP) and success rate in hiring producers (Producer Success Rate), is expressed as a percentage of net revenue. It is the best overall measure of an agency’s effectiveness in recruiting and developing sales talent. This group’s Effective NUPP totaled 0.5%, the second lowest NUPP of all the Study groups. This group’s investments in young producers (under age 36) continues to pay dividends. They delivered 27% of the Sales Velocity achieved. The most senior group (over age 55), however, delivered the largest Sales Velocity contribution, an indication more young producer investment may be prudent.

Up to age 35 23.0%

New Business

Average Book

Commercial P&C

Over age 55 38.6%

$47,036

$313,173

Personal P&C

$21,706

$145,970

Life/Health/ Financial

$52,039

$252,886

Age 36- 45 20.6%

Multi- Line

$25,222

$251,041

Age 46- 55 17.8%

Effective NUPP

Group Average:

Producer Success Rate 49.1%

NUPP

Effective NUPP

1.1%

0.5%

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Executive Summary

Agencies between $1.25 Million and $2.5 Million in Revenue

Profitability/Productivity

Profitability

Employee Productivity

Rule of 20 Score

Pro Forma Metrics: # of Employees

Top Quartile

48.7%

Average

43.6

34.6%

13.0

30.7%

19.8%

Revenue per Employee Compensation per Employee Spread per Employee

20.2

$169,889

$294,330

Pro Forma Operating Profit

Pro Forma EBITDA

$79,309

$48,574

Average

Top Quartile

$90,580

$190,575

Comparison Group Average

Top Quartile

Notes

Organic Growth & Profitability Scatter Plot

The Rule of 20 measures an agency's shareholder returns. It is calculated by adding 50% of an agency's Pro Forma EBITDA margin to its organic commission & fee growth rate. An outcome of 20 or higher means an agency is likely generating, through profit distributions and/or share price appreciation, a shareholder return of approximately 15% - 17%, a typical agency/brokerage return under normal market conditions. The graph to the right provides a look at the Rule of 20 results for agencies in this revenue category. The solid black line represents all combinations of organic growth and EBITDA margin that result in a Rule of 20 score of 20.

Note: Firms identified as outliers have been set to have a maximum growth of 30% or a maximum profitability of 50%. They appear on the graph line bordering the chart instead of plotting their actual results.

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Executive Summary

Key Metrics by Agency Revenue Category

Agencies between $2.5 Million and $5.0 Million in Revenue

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Executive Summary

Agencies between $2.5 Million and $5.0 Million in Revenue

Profile

Regional Distribution

Corporate Structure

Average Revenues $3,687,292

C Corp 21.4%

LLC 21.4%

Weighted Average Shareholder Age (WASA) 54.8

S Corp 57.1%

◼ Northeast ◼ Midwest

15.2% 19.6% 34.8% 19.6% 10.9%

◼ West

◼ Southeast ◼ Southwest

Revenue and Growth

Revenue Distribution (as a % of Gross Revenue)

Organic Growth in Net Commissions & Fees (excluding contingents, bonuses & overrides)

16.4%

16.3%

15.8%

15.0%

Contingent / Bonus/ Overrides 9.6%

Other 2.4%

Group L/H/F 5.5%

2.9%

2.5%

Commercial P&C 57.0%

-0.7%

-1.1%

Personal P&C 25.5%

Total Agency

Commercial P&C

Personal P&C

Group L/H/F

Median

Top Quartile

Note : Commercial P&C includes Bonds/Surety. Group L/H/F includes Group Medical, All Other Group, and Individual L/H/F .

Account Stratification

Notes

The $2.5M-$5.0M revenue category has the second highest WASA in this year’s Study (54.8). • Organic growth was tough in 2020 for this group (2.9%). Its overall, CL and PL growth results lagged all other revenue categories in this year’s Study .

Commercial P&C

Group L/H/F

◼ < $5K

◼ Under 50 lives

37.7%

75.2%

◼ $5K to $10K

◼ From 50 to 100 lives

15.4%

8.7%

◼ $10K to $25K

◼ Over 100 lives

17.2%

16.1%

◼ $25K to $50K

13.9%

◼ > $50K

15.8%

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Executive Summary

Agencies between $2.5 Million and $5.0 Million in Revenue

Production

Definitions

Sales Velocity

Age Banding of Sales Velocity

Sales Velocity is a critical metric in determining organic growth. It is defined as this year’s written new business divided by last year’s commissions and fees. Age Banding of Sales Velocity can help a firm assess where new business and growth are coming from and prepare for perpetuation.

2.5%

Top Quartile

23.8%

2.8%

Over age 55

Age 46-55

4.7%

Age 36-45

Average

14.2%

Up to age 35

4.2%

Comparison Group Average

Book of Business per Producer (commissions and fees)

Book of Business by Age

Notes & Definitions

• Weighted average producer age (WAPA) is 46. •

Effective NUPP, which is the product of an agency’s investment in unvalidated producers (NUPP) and success rate in hiring producers (Producer Success Rate), is expressed as a percentage of net revenue. It is the best overall measure of an agency’s effectiveness in recruiting and developing sales talent. This group tied for the highest Sales Velocity results in this year’s Study (14.2%). At 1.0%, this group scored the second lowest in terms of producer investments (NUPP), an

Up to age 35 13.1%

New Business

Average Book

Over age 55 34.6%

Commercial P&C

$75,167

$614,413

Personal P&C

$47,999

$237,430

Age 36- 45 26.8%

Life/Health/ Financial

$16,387

$168,974

Multi- Line

$44,163

$526,367

Age 46- 55 25.5%

Effective NUPP

Group Average:

indication that more young producer investment is likely warranted.

Producer Success Rate 68.3%

NUPP

Effective NUPP

1.0%

0.7%

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Executive Summary

Agencies between $2.5 Million and $5.0 Million in Revenue

Profitability/Productivity

Profitability

Employee Productivity

Rule of 20 Score

Pro Forma Metrics: # of Employees

Top Quartile

41.9%

31.4

Average

31.6%

27.5%

20.4

17.2%

17.7

Revenue per Employee Compensation per Employee Spread per Employee

$188,826

$267,349

Pro Forma Operating Profit

Pro Forma EBITDA

$106,512

$69,264

Average

Top Quartile

$82,314

$133,571

Comparison Group Average

Top Quartile

Notes

Organic Growth & Profitability Scatter Plot

The Rule of 20 measures an agency's shareholder returns. It is calculated by adding 50% of an agency's Pro Forma EBITDA margin to its organic commission & fee growth rate. An outcome of 20 or higher means an agency is likely generating, through profit distributions and/or share price appreciation, a shareholder return of approximately 15% - 17%, a typical agency/brokerage return under normal market conditions. The graph to the right provides a look at the Rule of 20 results for agencies in this revenue category. The solid black line represents all combinations of organic growth and EBITDA margin that result in a Rule of 20 score of 20.

Note: Firms identified as outliers have been set to have a maximum growth of 30% or a maximum profitability of 50%. They appear on the graph line bordering the chart instead of plotting their actual results.

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