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2007 Best Practices Study | Agencies with Revenues Over $25,000,000 | Executive Perspectives
Appendix
Insurance
Carriers
Technology
Service
Staff Info
Producer
Info
Employee
Overview
Financial
Stability
Revenues/
Expenses
Executive
Perspectives
Profile
Agencies with Revenues Over $25,000,000
Overview
Established for the first time in the 2004 Best Practices
Study, the largest Study Group has 25 firms with
revenues averaging $52.8 million. Twenty are
privately-held and four are bank-owned agencies.
Despite the difficulty of another year of soft property
and casualty pricing in 2006, this group was able to
achieve an impressive 10.6% organic growth rate,
which exceeded that of every single publicly traded
insurance broker.
The group also achieved another strong level of
profitability in 2006, with Pro Forma EBITDA (earnings
before interest, taxes, depreciation and amortization)
of 25.1% of net revenues. This was driven chiefly by
the group’s high level of employee productivity which
at $170,865 per employee was the highest level ever
achieved by a Best Practices Study Group.
“Rule of 20” Score -
Introduction of a New Statistic
In recent years, Reagan Consulting has developed a
metric called the “Rule of 20” to provide a quick
means of calculating whether or not an agency is
creating significant value for its shareholders. It is the
sum of an agency’s EBITDA margin times 50% plus
the organic revenue growth rate.
So, for example, an agency that generates an EBITDA
margin (as a percent of revenue) of 20% and grows
organically by 10% achieves a “Rule of 20” score of
exactly 20%. (20% times 50% plus 10% = 20%.)
The higher the score, the better. The secret to the rule
of 20 is the weighting of the relative importance of
organic growth versus EBITDA when it comes to
creating shareholder value (the weighting is 2 to 1.)
Generally speaking, an outcome of 20 means an
agency is generating a shareholder return of
approximately 15%-16%, which is commonly viewed
as the “expected” rate of return for a well-run
insurance agency. A score of less than 20 indicates
room for improvement, while a score above 20 is
outstanding.
For the >$25 million Study Group, the median Rule
of 20 Score was 16.7%. Of the 25 firms, 10 actually
achieved a score higher than 20. These results are
impressive, particularly in a soft market. In 2006,
only one public broker, Brown & Brown, achieved a
Rule of 20 outcome of 20 or more, as is shown in the
table below.
Keys to Their Success
Rank Public Brokers
Organic
Growth
EBITDA
Margin
Rule of 20
Outcome
1 Brown & Brown
4.5% 38.8% 23.9%
2 Willis Group
8.0% 21.3% 18.7%
3 Hub Group
5.0% 26.7% 18.4%
4 Hilb, Rogal & Hobbs
4.4% 27.0% 17.9%
5 Arthur J. Gallagher
6.0% 21.2% 16.6%
6 USI
1.8% 20.7% 12.2%
7 Marsh & McLennan 2.0% 14.2% 9.1%
8 Aon
2.0% 13.9% 9.0%
Rule of 20 Outcome
Pro forma EBITDA Margin times 50%
PLUS
Organic Revenue Growth Rate
EQUALS
Rule of 20 Outcome