2018 Best Practices Study
PRACTICES Be the leader others want to follow. STUDY UPDATE 2018 BEST
Copyright ©2018 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 linked to from any public or private website without the prior written consent of IIABA or Reagan Consulting.
2018 Study Sponsors
For over two decades, Reagan Consulting and the Big “I” have relied upon the generous support of the Best Practices Sponsors to make the Study possible. In an environment of ever‐increasing competition, cost‐cutting and consolidation, we are especially grateful for the Best Practices sponsors who, by their support, tangibly demonstrate their commitment to the independent insurance distribution system. Without you, the Best Practices Study would not be possible, and we thank you for your partnership.
This year, the 25th anniversary of the Best Practices Study , we offer our special thanks and sincere gratitude to the handful of current sponsors whose history of generous support of the Study extends back to the very beginning: Central, Chubb, CNA, and Travelers.
Introduction & Overview .............................................................................................................................. 6
A Word from the President & CEO of the Big “I” – Bob Rusbuldt ................................................... 8
A Word from the CEO of Reagan Consulting – Bobby Reagan ...................................................... 10
About the Study : History & Process............................................................................................... 12
Why Best Practices Matter: Revisiting the Critical Importance of Benchmarks ......................................... 14
Executive Summary..................................................................................................................................... 28
Agencies with under $1.25M in revenue....................................................................................... 28
Agencies between $1.25M and $2.5M in revenue ........................................................................ 32
Agencies between $2.5M and $5.0M in revenue .......................................................................... 36
Agencies between $5.0M and $10.0M in revenue ........................................................................ 40
Agencies between $10.0M and $25.0M in revenue...................................................................... 44
Agencies with over $25.0M in revenue ......................................................................................... 48
Cross Category Comparison ........................................................................................................................ 52
For 25 years, the Best Practices Study has allowed agents to understand what areas they need to focus on in order to achieve maximum impact. Agency resources are limited, so it is critical for agents to understand how to influence situations and decisions they believe are beyond the agency’s control. Focusing resources on those issues which the agency can measure, monitor, and influence results in a greater opportunity to affect real change and foster success. The best agencies are constantly learning more about what their clients want and then figuring out ways to deliver it. By understanding and consistently exceeding client expectations, they build exceptional client loyalty and long-term relationships. The Best Practices Study gives them the
financial and benchmarking tools they need to make this happen. Countless agents across the country testify to the fact that the Best Practices Study allows them to take the time to work on their business and to validate their processes, procedures, and performance while planning for the future.
Over the last 25 years, the Best Practices Study has fine- tuned its methodology, questions, and processes to adjust to our ever-changing business environment by including technology, banks, mergers, service centers, perpetuation, productivity, and human resources. It is clearly not a static bank of data. The Best Practices Study not only helps agents understand the history of our industry’s evolution, but also has the pulse of what is going on in today’s marketplace.
“Countless agents across the country testify to the fact that the Best Practices Study allows them to take the time to work on their business and to validate their processes, procedures, and performance while planning for the future.”
Seeing the trends and the change in agency size and productivity over the past 25 years has been amazing. The Best Practices program is credible documentation of the industry evolution and it continues to provide ways for independent agencies to stay ahead. Reagan Consulting shares our passion for the independent agency system and our desire to see our members succeed. Our long-term partnership with Reagan Consulting has allowed us to share valuable resources, enhance the value of independent agencies, and even educate insurance consumers. The purpose of the partnership was clear from the beginning, and that is to help our members grow the value of their most valuable assets – their agencies – and we’ve never strayed from the course.
Reagan Consulting’s industry expertise and ability to collect, share, and interpret data is impeccable and unsurpassed. This partnership has allowed the Big “I” to share the right tools at the right time in a cost-effective manner to maximize agent opportunity and meet the Big “I” goals of delivering sustainable competitive advantages for independent agencies. Born from former Big “I” staffer and the “mother” of the Best Practices Study , Shirley Lukens, and nurtured and grown under the tutelage and talent of Bobby Reagan, the entire team has been a source of pride and valued partners for independent agents & brokers.
“Born from former Big “I” staffer and the “mother” of the Best Practices Study , Shirley Lukens, and nurtured and grown under the tutelage and talent of Bobby Reagan, the entire team has been a source of pride and valued partners for independent agents & brokers.”
The research conducted for the Best Practices Study would not be possible without the generous financial support of our sponsors. When the Best Practices Study was introduced in September 1993, many insurance companies and industry vendors quickly embraced the initiative, understanding it would make the independent distribution force more effective, efficient and profitable. Our carrier and vendor partners understand that by supporting the Best Practices Study , they are making an investment in independent agents and helping them to be successful. We salute all our Best Practices sponsors.
We are honored to celebrate this 25-year collaboration and look forward to the next chapter with the Best Practices Study.
The insurance agency/brokerage business and the world in which it operated were both very different in 1993, when we issued the first Best Practices Study . The World Wide Web was still in its infancy, with a total of just 600 websites. Laptop computers, email, texting, and even Google were foreign or non-existent concepts to most Americans. Bill Clinton took office in his first term as President, and the most popular movie was Jurassic Park (perhaps a picture of the political world we were heading into).
In the early 90s, times were tough for agents and brokers, as fierce competition, alternative markets, and harsh economic forces had taken their toll over the previous decade, as evidenced by decreasing
numbers of agents and declining market share. To address these challenges, the Big “I” appointed a blue-ribbon panel called the Presidential Commission to Enhance Agency Values . One of the Commission’s key initiatives was to help agents better understand the internal factors affecting their results and the critical success factors and best practices that were allowing some agencies to prosper. To create and execute what became the Best Practices Study , the Big “I” partnered with my consulting firm, which consults with agents and brokers on matters of value and operating excellence. The stated objectives of the Best Practices Study were to: 1) Allow agents to better understand their own performance 2) Make agents aware of the performance of the best agencies in the industry 3) Identify the factors most critical to the success and viability of agents 4) Provide the necessary training, tools, and resources to allow agents to elevate their performance and prosper As we celebrate the publication of the 25th version of the Study , it is fair to say that these objectives have not only been achieved but have far exceeded any of our expectations. We have also seen the quality and breadth of the Best Practices Study improve materially. The 1993 Best Practices Study included 150 agencies, organized in five size categories, from agencies with revenues under $500,000, to those with revenues of over $5,000,000. The 2018 Study has been expanded to include 237 agencies across six size categories with the top-end including agencies with revenues over $25,000,000. The 2018 Best Practices Study is also much more comprehensive, including information on producer hiring and performance, generational health, specialization, account stratification, acquisitions, technology, and financial health.
It is fascinating to see how the performance of Best Practices agencies has improved over the past 25 years. If we look at one size category of agencies (revenues between $2.5 - 5.0 million), we can see the remarkable lift in the performance of the average agencies from 1993 to 2018, as measured by two critical metrics – revenue-per-employee and agency profitability (pro forma pre-tax profit).
Revenue per Employee
Pro Forma Pre-Tax Profit
While a portion of the improvement in revenue-per-employee can be attributed to inflation, the improvement is still stunning, as is the improvement in profit margins (which are not impacted by inflation). Similar improvements have been achieved in both larger and smaller agencies. We would certainly not suggest that the Best Practices Study is entirely responsible for these performance improvements. Technology, increased specialization, better employee training and development, and improvements in the quality of management have all have helped improve performance. However, the Best Practices Study has undoubtedly helped countless agencies in particular, and the industry in general, to identify and assimilate these improvements and many others. The need for the Best Practices Study in 1993 was great, and it has more than served the purpose for which it was intended. It can also be argued that the need for Best Practices Study in 2018 is just as great for similar and many new reasons. We still face challenges and new competitors. We must continue to respond to the changing needs of our clients and the growing threats and opportunities created and offered by technology. We must find ways to adapt and improve and do so more quickly than ever before. We encourage every agency leader to leverage every tool available to them to help better lead their organization to their desired objectives and to reach their full performance potential. The Best Practices Study is and will continue to be one of the most valuable management tools available in the years to come. It has been our rare privilege to partner with the Big “I” and our Best Practices company sponsors in this worthy endeavor.
The annual Best Practices Study ( BPS ) originated in 1993 as a joint initiative between Reagan Consulting and the Independent Insurance Agents & Brokers of America (the Big “I”). For a quarter of a century, the goal of the BPS has been to provide member agents with meaningful performance benchmarks and business strategies that could be adopted or adapted for use in improving agency performance, thus enhancing agency value. The BPS provides important financial and operational benchmarks and is recognized as one of the most thoughtful, effective and valuable resources ever made available to the industry.
Every three years, the Big “I” asks insurance companies, state association affiliates, and other industry organizations to nominate for each of the Study’s revenue categories those agencies they consider to be among the better, more professional agencies in the industry. Nominated agencies are then invited to participate. They must be willing to complete an in-depth survey detailing their financial and operational year-end results. Those results are then scored and ranked objectively to determine whether each agency qualifies as a Best Practices agency when compared to other nominated agencies. At the beginning of the current three-year Study cycle in 2016, over 1,500 independent agencies throughout the U.S. were nominated to take part in the Best Practices Study . Although participation took extensive time and effort, 262 of the participating agencies qualified and were designated as Best Practices agencies. The 2018 Study continues to examine the 2016 agencies, and more specifically, the 237 agencies who maintained their designations as Best Practices agencies. To maintain Best Practices status, designated agencies must continue to participate by providing data annually until the next Study cycle begins in 2019. Participation in the Best Practices Study is a prestigious recognition of superior accomplishments. Agencies that believe they have the qualities of a Best Practices agency can have their state association or an insurance carrier nominate them, or they can self-nominate. The 1993 Best Practices Study
The 2018 Best Practices Study is made up of three main sections:
1) Why Best Practices Matter. On this 25 th anniversary of the Best Practices Study , we revisit the importance of benchmarking in general, and Best Practices benchmarking specifically, to becoming and remaining a best-in-class independent insurance agency / broker. 2) Executive Summaries. Key benchmarks and perspectives presented in summary form for each of the six revenue categories.
3) Cross-Category Comparisons. The entire spectrum of Best Practices benchmarks for all six revenue categories is presented in a side-by-side format that allows for a quick comparison of metrics across revenue categories.
Visit the Best Practices Gateway at www.reaganconsulting.com/research/best-practices for access to the annual Best Practices Study and other useful studies.
In addition to the annual Best Practices Study , resources and tools are also available to help agencies improve their performance and enhance the value of their businesses via the Big “I” website, www.independentagent.com. Two of the
most frequently-used tools are The Agency Self-Diagnostic Tool and the Joint Agency Company Planner . These Best Practices tools are part of a complete line of Best Practices products and services. If you have questions about the information published in this 2018 Best Practices Study Update, contact Reagan Consulting at 404-233-5545. If you would like access to Best Practices tools or to purchase the Study Update , contact the Big “I” Education Department at www.independentagent.com/bestpractices or 800-221-7917.
The Best Practices Gateway : www.reaganconsulting.com/research/best-practices
As we revisit the origins and history of the Best Practices Study , it is remarkable to think back to the world in which we lived in 1993. Personal computers (PCs), connected networks, spreadsheets, the Internet, imaging and email were new and emerging technologies. Insurance agencies operated with primitive agency management systems, dial-up modems, dedicated word processors, proprietary insurance company terminals and typewriters. In 1993, there were no meaningful collections of relevant or reliable benchmarks in our industry, as there were no affordable or readily-accessible means by which data could be collected, processed and analyzed. Large-scale data analysis was the domain of large companies, with multi-million-dollar mainframe computers and dedicated teams of programmers and analysts. As a result, the benchmarks we relied upon in the independent agent and broker universe were, at best, simple and often based on anecdotal observations rather than hard data. This all changed in the late 1980s and early 1990s with the widespread adoption of personal computers by U.S. businesses. Mainstreet insurance agencies with PCs and spreadsheet software, could, for the first time, collect and share information electronically regarding their agency operations (using 5.25” 360K floppy disks!). Inexpensive database management software made it possible for Reagan Consulting to collect and analyze agency information in a way never before experienced. We were finally able to compile accurate operating and financial data from a large number of insurance agencies across the U.S. In doing so, we were able to report back to the industry on the best practices of the best-of-the- best agencies in America with granular precision and accuracy. Meaningful benchmark data became available to the industry for the first time.
The emergence of the Best Practices Study literally transformed the industry and the way it was managed. For the first time, agency owners and managers could:
• Accurately understand what was possible, having seen what the best-of-the-best were achieving
Benchmark your Agency
• Measure themselves against best-in-class agencies and identify their own performance gaps
Elevate Performance and Agency Value
Compare to Best Practices
• Manage their businesses to address and close those performance gaps
Process Improvement Cycle with Best Practices
This Process Improvement Cycle using Best Practices benchmarks was nothing short of revolutionary 25 years ago when the first Study was published. Step forward to 2018 – are benchmarking data still relevant and important to achieving operational and financial excellence and maximizing agency value? The answer is a resounding yes, and perhaps more so now than ever.
Implement Strategies to Close Gaps
Identify Performance Gaps
The magic of benchmarking is that it provides a current context for performance assessment. As one Best Practices (“ BP ”) agent noted, “Just knowing we grew at 9% isn’t that useful, but when it is compared to a group growing at 7% or 11%, it tells us a lot more about what 9% really means.” Without context – without benchmarks – agency leaders are still, as they were in 1993, managing in a vacuum, unable to truly discern whether they are front-runners in the industry or whether they are missing the mark.
“Just knowing we grew at 9% isn’t that useful, but when it is compared to a group growing at 7% or 11%, it tells us a lot more about what 9% really means.”
A BP agent on the importance of context
Peter Drucker said it best: “What gets measured gets managed.” If agents and brokers can measure their performance versus best-in-class standards, they can then manage their agencies to improve execution and ultimately increase shareholder value. This facilitation of continuous improvement continues to be the primary value proposition of the Best Practices Study today. “When I talk to small business owners in other industries,” notes one agent, “and tell them about the importance of knowing your numbers, metrics and having guidelines to benchmark against, they are often shocked about what we have access to with the Best Practices Study .”
Traditional benchmarking often delivers a single shot of information that ages quickly and has limited lasting value. But the Best Practices Study takes a different approach - it is designed to provide continuous and immediate access to current information. As one BP agent stated, “I find the benchmarking very useful as a tool. It equips me to look at our past results and then adjust my strategy or direction for the agency. I can compare my results with others in the industry and know where we are performing well and areas we need to improve.”
“When I talk to small business owners in other industries,” notes one agent, “and tell them about the importance of knowing your numbers, metrics and having guidelines to benchmark against, they are often shocked about what we have access to with Best Practices Study .”
A BP agent on benchmarking
A review of historical Study results shows performance can change significantly over time. Chasing old benchmarks is futile. The annual updates to the Best Practices Study deliver fresh data that capture performance changes in real time. Additionally, consistently reported metrics enable repeatable analysis. New Best Practices metrics are added when warranted, but traditional metrics are maintained, enabling agencies to use a consistent performance baseline. In addition, Best Practices Study data and metrics cover the entire agency organization to address both macro-level issues, such as organic growth and profitability, and the more granular analyses critical to agency operations.
“I find the benchmarking very useful as a tool. It equips me to look at our past results and then adjust my strategy or direction for the agency. I can compare my results with others in the industry and know where we are performing well and areas we need to improve.”
A BP agent on the benefits of benchmarking
In addition to using benchmarking to focus on building a culture of continuous improvement, we see agencies using Best Practices benchmarking data to support their strategic planning efforts and to manage employee compensation.
Strategic planning is one of the most important leadership exercises for high-performing insurance agents and brokers. These planning exercises are often fundamental turning points in the lifecycle of an agency and the comparison benchmarking provided by the Best Practices Study can provide key strategic insights and tactical steps in the planning process. Effective strategic planning involves understanding the strengths of the business that give it an advantage, the weaknesses that put the business at a disadvantage, the opportunities that can be exploited and the threats that pose potential future problems. Once these items are understood, plans can be put in place to fortify, pursue or address key areas. “When our management team sits down to map out the future of the Company,” explains one BP agent, “benchmarks play a big role in providing the guardrails for many of our decisions. It forces us to remain focused on all aspects of the business to assure that our chosen metrics remain in line with our financial goals.”
One of the benefits of participating in the Best Practices Study is that each agency receives a detailed Agency Performance Analysis, which provides a comparison of the agency’s results versus that of its peer group. This Agency Performance Analysis serves as a critical tool during strategic planning. As one agent said, “We begin each strategic planning exercise with a deep dive into our Agency Performance Analysis. Before we start talking about where we want to go, we need to clearly understand where we are.” One of the more recent applications of the Best Practices Study is as an objective measure for determining compensation, particularly executive bonuses. Not only do the metrics provide objective measures for performance, but they also provide a comparison reflective of current market dynamics. For executives whose primary responsibility is driving shareholder value, Best Practices metrics can be a very useful way to gauge success. The Rule of 20 metric (addressed later in this paper), serves as a proxy for shareholder returns and is used by many agencies to evaluate executive performance and determine bonus levels. In its 25-year history, the Best Practices Study has established itself as a key resource in many of the industry’s leading firms. The core benchmarking data within the BPS has many applications for today’s agency leaders and is positioned to be a foundation of performance improvement for years to come. We are excited to see where the next 25 years take us.
Every three years, the Big “I” asks insurance companies, state association affiliates, and other industry organizations to nominate for each of the Study’s revenue categories those agencies they consider to be among the better, more professional agencies in the industry. Nominated agencies are then invited to participate. They must be willing to complete an in-depth survey detailing their financial and operational year-end results, which are then scored and ranked objectively to determine whether each agency qualifies as a Best Practices Agency when compared to other nominated agencies. Top performers are awarded the Best Practices Agency designation, which they retain for three years if they continue to provide their operating and financial data to Reagan Consulting annually. Whether in improving performance, strategic planning or determining compensation, the Best Practices Study , and the benchmarking capacity it provides, is an invaluable tool for agents and brokers. The value of the Best Practices Study extends well beyond the data itself – obtaining the Best Practices designation carries myriad benefits as well.
Branding & Marketing
Promotes a strong reputation in the marketplace to help attract new recruits
Promotes a healthy discipline for capturing relevant data on your agency
Differentiates Best Practices Agencies vs. peers
Provides Best Practices Agencies access to the best agencies across the U.S.
When effectively used, the Best Practices distinction can help generate new business opportunities and build trust with investors, carriers, clients, vendors, and other stakeholders. As one BP agent puts it, “The Best Practices designation is used on our website like a medal of honor, showing others that we are a top-notch independent insurance agency that they can trust.”
Many Best Practices agencies co-brand their agency logos with the IIABA Best Practices logo and include the distinction under email signatures. A perennial Best Practices agency reports, “We use the Best Practices designation in our email signatures and marketing materials. We feel like this helps us to establish, for clients, carriers and investors, our expectations for our own performance - to be the best of the best, in all areas of our organization.”
“The Best Practices designation is used on our website like a medal of honor, showing others that we are a top-notch independent insurance agency that they can trust.”
A BP agent on the marketing power of the BP designation
Effectively attracting and hiring new talent is one of the toughest challenges for most agencies to execute. Best Practices agencies are able to differentiate themselves in the competition for talent by promoting their standing as one of the best operators in the industry. One BP agent summed it up well: “It is more competitive than ever for our agency from a recruiting standpoint… for both producers and our support staff. Our Best Practices designation is critically important to us in getting the best talent available. People want to work for the best. The Best Practices award ensures that we are known as one of the best.”
“It is more competitive than ever for our agency from a recruiting standpoint… for both producers and our support staff. Our Best Practices designation is critically important to us in getting the best talent available. People want to work for the best. The Best Practices award ensures that we are known as one of the best.”
A BP agent on the recruiting power of the BP designation
In a time where agents face ever-increasing competition for talented employees, investment capital and clients, it is important to understand how your agency stacks up versus others and to maintain forward momentum. One agency reported that its producer benchmarks are “routinely used as information in our producer recruiting conversations.”
Best Practices agencies are required to provide operational and financial data to Reagan Consulting on an annual basis. Navigating through agency management systems can be a daunting task, but it promotes a healthy discipline that enhances an agency’s internal controls and delivers insight and knowledge of the business outside of day-to-day management. One BPS CFO noted, “Gathering the data annually for the Best Practices Study is challenging and time- consuming, but it is an incredibly useful exercise for my team. It requires us to know our numbers and our agency management system in much greater detail than we would otherwise.”
Every three years, a new Best Practices class is nominated and selected for each revenue size category. Upon the selection of a new class of Best Practices agencies, the Big “I”, in partnership with Reagan Consulting, conducts the Best Practices Symposium in a major U.S. city, in which leading-edge presentations are delivered by industry experts and Best Practices agents are afforded the opportunity to share their own best practices in a roundtable setting with their peers. The Symposium, along with other meetings and webinars facilitated by the Big “I” and Reagan Consulting, allow Best Practices agencies the opportunity to continue to learn and to reach their full organizational potential.
The beauty of the Best Practices Study is that it provides virtually every conceivable metric or benchmark necessary to evaluate and improve an insurance agency’s operations. This can also be a major challenge with the Best Practices Study – it provides so much information that, at times, it can be difficult to identify the most important metrics. To that end, with an eye for maximizing agency value enhancement, what are the very most important metrics for agency leaders?
The value of an insurance agency is ultimately driven by two factors – growth and profitability. The faster the growth and the higher the profitability, the better. For 25 years, growth and profitability have remained as the cornerstone metrics of the Best Practices Study . Agencies that focus on these two metrics, and the fundamentals that drive them, set their agencies apart from the industry, enjoy the highest possible valuations, and earn the Best Practices designation year after year. Growth and profitability metrics remain the most important benchmarks in the Best Practices Study .
Organic growth is defined as commission and fee growth (excluding contingent income), excluding the effect of acquisitions. In the 2018 Study , BPS agencies in the six revenue categories posted median organic growth rates ranging from 3.3% - 5.6%. Top quartile organic growth was consistently in the double digits.
There are four primary components that drive organic growth: exposure changes, rate changes, client retention, and new business. Exposure and rate changes are largely market-driven and outside the control of an agency. On the other hand, new business and client retention rates can be enhanced through improving operations and a continued commitment to implementing best practices. Of these two, client retention doesn’t tend to vary greatly across agencies. Best Practices agencies routinely retain 95% or more of their clients, while relatively weak agencies still retain a surprisingly high 88% - 90% of their clients. Thus, retention tends not to be the key driver for organic growth. Rather, the key driver of variation in organic growth across agencies is new business generation. It is the key differentiator between Best Practices agencies and their industry peers and is the single most important metric in consistently qualifying as a Best Practices agency. Given the importance of new business generation to organic growth, Reagan Consulting developed a more granular metric to measure it – Sales Velocity. Sales Velocity is defined as the most recent year’s new commission & fee income written expressed as a percentage of prior year baseline commission
Net Commissions & Fees Organic Growth
Median Top Quartile
and fees income. An agency that writes $100,000 in new business on a prior year baseline of $1 million in commissions and fees is generating a Sales Velocity of 10% ($100,000 / $1,000,000 = 10.0%). Sales Velocity is the best measure of an agency’s new business generation. In 2018, Best Practices agencies achieved Sales Velocities ranging from 11.7% to 16.6%. Top quartile Best Practices agencies generated Sales Velocities ranging from 17.5% to 32.7%. Superior Sales Velocity nearly always leads to above-industry organic growth.
Components of Organic Growth
Sales Velocity Calculation:
This year’s written new business
New Business (Agency Driven)
Key Differentiator Metric
Last year’s commissions and fees
Retention Rate (Agency Driven)
Exposure Changes (Market Driven)
Pricing Changes (Market Driven)
<$1.25M $1.25-$2.5M $2.5-$5M $5-$10M $10-$25M >$25M
Average Top Quartile
The ages of the producers generating an agency’s Sales Velocity can provide critical insight into an agency’s future long- term growth potential and perpetuation readiness. Age banding Sales Velocity helps clarify which producer age groups represent relative strengths or weakness for an agency. Sales Velocity results that have very little contribution by young producers or very heavy contributions by mature producers may experience material growth difficulties in the future as older producers retire.
Age Banding of Sales Velocity
Reagan Consulting’s research indicates that it is common for agencies with historically high Sales Velocities to have significant new business contributions from multiple generations of agency producers. To highlight this, the Best Practices Study breaks down Sales Velocity results in four different producer age bands: Freshmen (up to age 35); Sophomores (36-45); Juniors (46- 55); and Seniors (over 55). A balanced Sales Velocity is a leading indicator of a healthy sales engine that is poised to deliver strong growth into the future and support organization, future organic growth and perpetuation readiness.
2.8% 2.9% 2.2%
<$1.25M $1.25- $2.5M
Up to age 35 Age 36-45 Age 46-55 Over age 55
The most common profitability metric used throughout the Best Practices Study is pro forma EBITDA. An agency’s pro forma EBITDA is an agency’s reported Earnings Before Interest, Taxes, Depreciation and Amortization after normalizing (or pro forma) revenue and expense adjustments are made and discretionary expenditures made for the benefit of the owners are added back. Think of it as normalized pre-tax cash flow after accounting for operating anomalies and owner perk add-backs. An agency’s pro forma EBITDA expressed as a percentage of pro forma revenue is its pro forma EBITDA margin. Thus, an agency with $5M in pro forma net revenue (total revenue net of outside broker commissions and fees) and $1.2M in pro forma EBITDA is generating a 24.0% pro forma EBITDA margin ($1.2M / $5.0M).
In this year’s Best Practices Study , pro forma EBITDA margins averaged approximately 24.0% across all revenue categories. These strong profit margins enable Best Practices agencies to deliver superior shareholder investment returns, fund strategic investments, hire producers, fund perpetuation obligations, pay dividends, acquire agencies & producers with books of business and raise outside capital. The Best Practices Study provides a granular perspective from which to examine each of the four expense categories that drive an agency’s profitability: Compensation (payroll & employee benefits), Selling, Operating and Administrative expenses. High profit Best Practices agencies monitor each of the four primary expense categories. Doing so allows them to understand profitability issues at an actionable level – providing the basis for changes in compensation, staff usage, resource usage, etc.
Pro Forma EBITDA Margin
Of particular note in this year’s and recent Best Practices Studies is the impact of creeping compensation costs and
Average Top Quartile
value-added resource investments on agency profitability. In order to remain relevant in a marketplace defined by chronic shortages of available young talent (people) and ever-increasing customer expectations, increasing profit margin pressures are the rule rather than the exception and will likely remain so for the foreseeable future. Recognizing the well-reported aging of our industry, Best Practices agencies have responded by aggressively investing to attract young employees, particularly producers, to the industry. This is a very expensive proposition. Left unchecked and unexamined, these investments in human capital can significantly impair an agency’s profitability and long-term viability. In addition, client demands for value-added resources continue to accelerate in the middle-market, where most Best Practices agencies operate. Best Practices agencies face increasing competition from large and well-resourced national and super-regional competitors seeking to fuel their own growth by picking off under-resourced and under-served middle- market accounts currently controlled by smaller agents and brokers. As a result, Best Practices agencies are required to make ever-increasing investments in the resources demanded in the marketplace (think claims management, loss control services, account executives, ACA compliance, wellness, etc.). These investments must also be kept in check.
These people and resource investments are likely to show up in several expense categories, but are most likely to impact an agency’s overall compensation expense load. Since compensation expenses typically make up a significant majority of an agency’s overall expense structure, it is the most important driver of overall agency profitability and one to be managed very carefully. Some of this profit margin pressure is simply the cost of doing business in the hyper-competitive middle- market in which most Best Practices agencies operate. The Best Practices Study is an invaluable resource to measure whether an agency’s compensation expense load is in line with its peers, who are facing the exact same competitive pressures.
Primary Agency Expense Categories
Total Compensation as % of Net Revenue
Key Differentiator Metric
<$1.25M $1.25-$2.5M $2.5-$5M $5-$10M $10-$25M >$25M
Total Pro Forma Compensation as a % of Pro Forma Net Revenue
Agencies must continually manage the trade-off between growth investments, which reduce profits in the short run, and maintaining high profit margins. Therein lies a dilemma - which metric is more important to generating shareholder returns: growth or profitability? Without growth investments, an agency will find it much easier to achieve high profit margins. On the other hand, if organic growth is the name of the game with no regard for profitability, it will be relatively easy to buy the growth desired, in the form of new producer hires, severely impacting profitability. How then to best to balance growth and profitability? To address this question, the Best Practices Study relies on the Rule of 20 metric, which provides a quick means of assessing an agency’s unique combination of growth and profitability and whether or not that combination is leading to strong shareholder returns. As it turns out, from a value creation standpoint, organic growth is roughly twice as important as agency profitability in generating high shareholder returns. This is reflected
in the math behind the Rule of 20, which is calculated by adding half of an agency's pro forma EBITDA margin to its organic revenue growth rate.
An outcome of 20 or higher means an agency is generating a very high shareholder return (15% - 17%). A Rule of 20 outcome of 15 – 20, typical for Best Practices agencies in the current marketplace, is an indication of a very healthy balance of growth and profitability and shareholder returns in the low-to-mid teens.
While a careful eye must be kept on both organic growth and profitability individually, the Rule of 20 metric can be an invaluable aid in ensuring that an effective balance of these two critical value creation metrics is maintained.
Rule of 20
Rule of 20 Score = Organic Growth + ½ (EBITDA Margin)
Score > 20 generates shareholder returns of 15-17%
As evidenced by the remarkable improvement achieved by our industry over the past 25 years and the incredible valuations enjoyed by high-quality insurance agencies today, the independent insurance agent and broker system has never been healthier. Despite the numerous challenges faced today, the future of our industry has never been brighter. Perhaps it is simply human nature, but it seems we tend to focus far more on our challenges rather than our strengths. This is true in our industry as well. In times defined by increased competition, massive consolidation, technological disruption, and the need for a material infusion of young talent, it is instructive to remind ourselves of the challenges we have faced as an industry since the first Best Practices Study was published in 1993. • In 1993, during the first Clinton administration, the industry faced the specter of a move to a universal health care system in the form of “Hillarycare,” a health care reform package closely associated with the chair of the task force devising the plan, First Lady Hillary Clinton.
• In the mid-1990s, the Internet emerged as a sizeable threat to the independent insurance agent and broker, who feared being “amazoned” out to its role as a trusted advisor to insurance consumers.
• In the late 1990s, regulatory changes opened the gates to allow banks to compete head-to-head with insurance agents to deliver products and services to insurance consumers.
• In the early 2000s, Eliot Spitzer, the Attorney General of New York, launched a full-scale attack on contingent compensation, which serves as the single largest contributor to insurance agency profitability.
• In 2010, President Barack Obama successfully passed the Patient Protection and Affordable Care Act, also known as Obamacare, representing yet another direct threat to the independent insurance agent and broker’s role as a trusted advisor intermediary between insurance providers and consumers. • More recently, the independent insurance agent has faced a new potential adversary in the form of “insurtech,” technology-based insurance delivery providers, some of whom hope to unseat the independent agent from its advisory role with consumers. • Today, industry consolidation continues at a pace never before experienced. Insurance agency sales to well- capitalized private equity investors and publicly-traded insurance brokers have increased to all-time highs and some are questioning the long-term viability of small to mid-sized independent insurance agencies. Despite these challenges, and many more, Best Practices agencies have not only survived, but thrived over the past 25 years. The industry is, if nothing else, incredibly resilient and adaptive to the environment in which it operates. This speaks in large part to the entrepreneurial and creative natures of the men and women who dominate the independent insurance agency and brokerage ownership ranks in the United States.
In our estimation, independent insurance industry leaders will continue to adapt and thrive. To do so, they will require many resources, including the Best Practices Study .
Who knows what the next 25 years will bring? Twenty-five short years ago, who would have even imagined the reach of the Internet, our dependence on our iPhones and self-driving, autonomous vehicles? The next 25 years will likely bring a similar number of innovations and challenges to our industry. From decreasing the time and complexity of data submissions to participate in the Best Practices Study to increasing the speed and efficiency of the delivery of Study results, Reagan Consulting and the Big “I” look forward to finding new and improved ways to ensure that the Best Practices Study continues to adapt to our ever-changing world to better serve the future needs of independent insurance agents and brokers.
Sole Prop. 3.4%
C Corp 24.1%
Weighted Average Shareholder Age (WASA)
◼ Northeast ◼ Midwest
S Corp 44.8%
◼ Southeast ◼ Southwest
Revenue Distribution (as a % of Gross Revenue)
Organic Growth in Net Commissions & Fees (excluding contingents, bonuses & overrides)
Contingent / Bonus/ Overrides 7.2%
Group L/H/F 3.3%
Commercial P&C 38.6%
Personal P&C 50.2%
Note : Commercial P&C includes Bonds / Surety. Group L/H/F includes Group Medical, All Other Group, and Individual L/H/F .
• Agencies under $1.25 million have the largest concentration of personal lines business (50.2% of revenue) among all size categories as well as the highest organic growth rate in personal lines (4.1%). This smallest revenue category has the second highest concentration of C corporations (24.1% of firms), trailing only the largest revenue category at 33.3%. •
◼ < $5K
◼ Under 50 lives
◼ $5K to $10K
◼ From 50 to 100 lives
◼ $10K to $25K
◼ Over 100 lives
◼ $25K to $50K
◼ > $50K
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.
Over age 55
Up to age 35
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. The Effective NUPP for this size category of 1.4% is the highest of all revenue categories. BPS agencies under $1.25 million have gotten younger from a production standpoint in the last year – book of business for producers over age 55 has dropped from 33.7% of revenue to 23.3% of revenue, while Sales Velocity for producers 45 and under has grown from 5.3% to 6.6%. Multi-line producers maintain the largest books of business in this size category, but personal P&C producers wrote the most new business.
Over age 55 23.3%
Up to age 35 18.2%
Age 36- 45 24.8%
Age 46- 55 33.7%
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