17 / 191
2010 Best
Practices Study
Agencies
with Revenues
Under $1,250,000
17
Analysis of Agencies with Revenues Under $1,250,000
Mgmt. Perspectives
Profile
Revenues
Expenses
Profitability
Employee Overview
Producer Info
Staff Service Info
Technology
Insurance Carriers
Appendix
Average
Top 25%
Balance Sheet
Current Ratio
1.03:1
1.84:1
Tangible Net Worth (% of Net Revenue)
7.9%
31.9%
Receivables/Payable Ratio
88.7%
10.1%
Aged Receivables
% Receivables Aged Past 60 Days
36.1%
6.2%
% Receivables Aged Past 90 Days
20.7%
2.7%
Average
+25% Profit
+25% Growth
Agency Billed vs. Direct Billed by Carrier
% of P&C Revenues that are Agency Billed
14.3%
15.1%
9.8%
% of P&C Revenues that are Direct Billed
83.2%
84.9%
80.2%
“Rule of 20” Score
Financial Stability
Accounts Receivable
The Rule of 20 is a simple growth and profitability
balancing equation that provides a quick way to
determine whether or not an agency is creating value
for its shareholders. It states that an agency will drive
industry-standard shareholder returns if the sum of (a)
its organic growth rate and (b) 1/2 of its EBITDA margin
equals or exceeds 20.
Generally speaking, an outcome of 20 or more,
regardless of the different combinations of growth and
profitability, indicates that the agency’s shareholders
can expect to earn 15% -17% per year through stock
price appreciation and/or shareholder distributions.
Because organic growth is such a key input into the Rule of 20, the persisting soft market and the current depressed
economic environment have made it harder to achieve a score of 20. A good rule of thumb is that an agency, while
always striving for as high a Rule of 20 score as possible, will combine solid organic growth with an EBITDA margin
that is at least twice as high as its growth rate.
Public Brokers
Organic
Growth
EBITDA
Margin
Rule of 20
Outcome
Willis Group
2.0% 26.5% 15.3
Brown & Brown
-5.1% 34.2% 12.0
Aon
-1.0% 21.1% 9.6
Arthur J. Gallagher -2.5% 19.1% 7.1
Marsh & McLennan -1.0% 15.8% 6.9
Rule of 20 Outcome
2009 was a year of extremely soft pricing which prevented the public
brokers from achieving an outcome of 20, as shown in the table above.
Average
+25% Profit Average +25% Growth Average
“Rule of 20” Score
16.3
21.7
30.6
Organic
Growth
Rate
1/2 of
EBITDA
Margin
Rule of 20 Score
+ =