2016 BPS Study

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2016 BEST PRACTICES STUDY

Be the leader others want to follow.

Conducted by:

2016 Study Sponsors

We wish to thank the following companies for their sponsorship. The funding provided makes possible the development of the 2016 Best Practices Study and the Best Practices Gateway website.

Table of Contents

Introduction & Overview .............................................................................................................................. 7

Brokerage Industry Perspectives ................................................................................................................ 11

Executive Summary..................................................................................................................................... 27

Agencies with under $1.25M in revenue....................................................................................... 28

Agencies between $1.25M and $2.5M in revenue........................................................................ 31

Agencies between $2.5M and $5.0M in revenue .......................................................................... 34

Agencies between $5.0M and $10.0M in revenue........................................................................ 37

Agencies between $10.0M and $25.0M in revenue...................................................................... 40

Agencies with over $25.0M in revenue ......................................................................................... 43

Cross Category Comparison ........................................................................................................................ 47

Glossary....................................................................................................................................................... 75

The 2016 Best Practices Study

Introduction & Overview

The 2016 Best Practices Study Introduction & Overview

About the Study: the History & the Process

The annual Best Practices Study (“BPS”) originated in 1993 as an initiative by the Independent Insurance Agents & Brokers of America (or “Big I”) to help its members build and maintain the value of their most important assets, their agencies. By studying the leading agencies and brokers in the country, the association hoped 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 Big I retained the principals of Reagan Consulting to create and perform the first Best Practices Study . Annual updates conducted by Reagan Consulting continue to provide important financial and operational benchmarks and the Study is recognized as one of the most thoughtful, effective and valuable resources ever made available to the industry. Once 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

The 1993 Best Practices Study

agencies they consider to be among the better, more professional agencies in the industry. The nominated agencies are then invited to participate. They must be willing to share key business practices/philosophies and to complete an in‐ depth survey detailing their financial and operational year‐end results. Those results are then scored and ranked objectively for inclusion on the basis of operational excellence. In 2016, the beginning of the current three‐year study cycle, over 1,000 independent agencies throughout the U.S. were nominated to take part in the Best Practices Study . Although participation took extensive time and effort, 255 of the nominated agencies qualified and were designated as Best Practices agencies. These top‐performing agencies’ results serve as the foundation for the 2016 Best Practices Study. Benchmarks for these 2016 BPS agencies will be updated annually in 2017 and 2018. Participation in the Best Practices Study is a prestigious recognition of superior accomplishments. Firms that believe they have the qualities of a Best Practices agency and wish to be nominated in 2019 for the next study cycle should contact their state association or an insurance carrier and ask that their name be submitted. This year, the Best Practices Study was redesigned to better address areas of critical importance to the independent agent & broker industry and to present benchmarks in a more graphical and accessible format. The 2016 Best Practices Study is made up of three main sections: 1. Brokerage Industry Perspectives. An analysis of the four key challenges facing the insurance brokerage industry is provided along with perspectives on how BPS agencies are responding to each. 2. Executive Summaries. Key benchmarks and perspectives are presented in summary form for each of the six revenue categories. New in the 2016 Best Practices Study

The 2016 Best Practices Study Introduction & Overview

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. In addition, the 2016 Best Practices Study introduces several new metrics in areas of critical importance for insurance agents and brokers. These new metrics include:  Sales Velocity – to assess sales culture  Age Banded Sales Velocity – to assess generational contributions to Sales Velocity  Weighted Average Shareholder Age (WASA) – to assess perpetuation readiness  Weighted Average Producer Age (WAPA) – to assess perpetuation readiness  Effective NUPP (Net Unvalidated Producer Payroll) – to assess producer investment effectiveness The Best Practices Gateway

The electronic version of this study can be accessed via the websites of the Big I (www.independentagent.com) and Reagan Consulting (www.reaganconsulting.com). In addition to the annual Best Practices Study , many other useful studies, resources, and tools are available to help agencies improve their performance and enhance the value of their businesses. 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. The Study can be purchased online from the Big I at www.independentagent.com.

If you have questions about the information published in the 2016 Best Practices Study please contact the Big I Education Department at 800‐221‐7917 or Reagan Consulting at 404‐233‐5545. The Best Practices Gateway : http://bp.reaganconsulting.com

Brokerage Industry Perspectives

How Best Practices agencies are leading the way

Brokerage Industry Perspectives How Best Practices agencies are leading the way

The U.S. insurance distribution landscape is changing more rapidly than perhaps ever before. This rapid change is widening the gap between the industry’s winners and losers. It is increasing the cost of inaction, bad strategy and poor execution. As a result, agency leaders are being forced to think more strategically and respond more aggressively than in the past. Our industry faces several challenges – some coming from within the industry, while others are being driven by external forces. Uncertainty abounds. Yet, in the midst of this uncertainty, a group of dynamic, industry‐leading firms is charting a course for future success.

The four key challenges facing the insurance brokerage industry are as follows:

1) Growth is slowing

2) Consolidation is occurring at a record pace

3) The workforce is aging

4) New technologies threaten the traditional broker model

This year’s crop of BPS agencies are not simply high‐performers, they are truly industry leaders, fighting through these challenges to create value and opportunity.

Key Challenge #1: Growth is Slowing

Agency growth has been slowing for three straight years. The average Best Practices firm grew organically by 6.9% in 2015, down from the recent high of 9.0% in 2012.

Organic Growth

12.5%

9.0%

8.2% 8.0%

8.0%

6.9%

4.5%

3.3%

1.1% 1.2% 1.1%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Best Practices Study, All Agencies

Brokerage Industry Perspectives How Best Practices agencies are leading the way

The current slowdown in growth is easily explained by the graph below. The U.S. economy is nearly stalled, commercial P&C premiums are softening and health insurance premiums are barely increasing.

Growth in Insurance Premiums and GDP

10% 15% 20% 25%

0% 5%

‐15% ‐10% ‐5%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q2 2016

Health Insurance Premiums

Commercial P&C Premiums

US GDP

Sources: Bureau of Economic Analysis, CIAB

In the not‐so‐distant past, agencies were frequently local generalists that pursued most any opportunity that came their way. Growth occurred without much effort and was largely taken for granted. Not today. With the economy struggling, meaningful premium growth a distant memory, and a crowded broker landscape, agencies must work very hard and very smart to grow. BPS agencies have risen to the challenge.

Defining Competitive Advantage

Winning in a mature and crowded marketplace requires strategic clarity. The competitive landscape is requiring brokers to address several key questions:

 Who is our target client?

 What internal and external challenges are driving that target client’s decision‐making?

 In what ways can our firm deliver unique and compelling value to the target client?

 Are there specific resources we must provide to serve the target client’s needs?

 Can we recruit and train specific employees to focus their efforts on the target clients?

 Are there technology investments we can make to better serve these target clients?

 How does our firm maximize our exposure to those target clients?

Brokerage Industry Perspectives How Best Practices agencies are leading the way

As more and more agencies address these questions, the need to specialize becomes increasingly obvious. Customers benefit from being “targeted,” since a broker that is truly knowledgeable about their risk management needs can do a far better job for them. Hence, the tremendous rise in specialization by agencies in recent years. Today, most BPS agencies are deriving a significant portion of their revenue from areas in which they are specializing, finding that focused expertise can differentiate the firm in a crowded marketplace. For the largest firms, nearly half of their revenue comes from industries in which they specialize.

BPS Firms' Specialty Revenue as a % of Revenue

42.7%

39.7%

39.2%

BPS Average: 34.7%

36.0%

27.5%

23.3%

< $1.25M $1.25M‐ $2.5M

$2.5M‐ $5.0M

$5.0M‐ $10.0M

$10.0M‐ $25.0M

> $25.0M

Developing a Growth Culture

BPS agencies recognize that growth is the key that unlocks the achievement of nearly all of their goals. Growth enables a firm to better serve its clients by driving innovation and investment in client resources. Growth makes it possible to hire top talent because it attracts those seeking continuous opportunity for advancement. Growth benefits the community by consistently providing an agency with more and better resources with which to serve the local community. The list goes on and on – and BPS agencies understand the value of growth instinctively. For most BPS agencies, consistent organic growth (non‐acquisition growth) is the most important goal. Yet achieving organic growth is unpredictable since it is impacted by several variables including new business, lost business, premium pricing and economy‐driven changes in exposures. Sales Velocity is the term Reagan Consulting has created to measure the single most important driver of organic growth – new business. Sales Velocity is defined as New Commissions Written as a percentage of a firm’s Baseline (prior year) Commissions and Fees. Thus, a firm that writes $1 million in new business on top of a baseline of $10 million in commissions and fees is generating a Sales Velocity of 10%. BPS firms know that a superior Sales Velocity can create organic growth, even in a struggling marketplace. BPS firms generate a Sales Velocity averaging about 15%. This is well above the industry norm of approximately 12% and helps explain why BPS firms tend to outgrow the rest of the industry.

Brokerage Industry Perspectives How Best Practices agencies are leading the way

Determining Agency Sales Velocity

$1,000,000 New Business $10,000,000 Prior Year Commissions & Fees

10% Sales Velocity

Sales Velocity of BPS Firms by Size Category

Industry Average Sales Velocity 12.0%

15.5%

15.4%

15.3%

15.0%

14.0%

13.2%

< $1.25M $1.25M‐$2.5M $2.5M‐$5.0M $5.0M‐$10.0M $10.0M‐$25.0M > $25.0M

How do BPS firms generate high Sales Velocity?

1) They build a culture of accountability where producers must consistently produce significant new business at levels consistent with other BPS agencies 2) They provide support structures and resources that allow producers to spend a high percentage of their time generating new client relationships

3) They consistently grow their production team by actively recruiting and developing additional producers

Reagan Consulting’s research indicates that 55%‐60% of firms across the industry have neglected to hire a sufficient number of new producers to achieve their stated growth and perpetuation goals. To address this, the 2016 Best Practices Study focuses more attention on producer hiring benchmarking than any of the previous studies.

Brokerage Industry Perspectives How Best Practices agencies are leading the way

Key Challenge #2: Record Consolidation and Loss of Independence

Agency mergers & acquisitions have dominated industry headlines in recent years. The pace of consolidation has increased steadily since 2009, when M&A activity temporarily cooled due to the Great Recession. 2015 was a record year for deal activity, with 469 announced transactions, according to SNL Financial.

North American Insurance Brokerage Transactions

469

Ten Year Average 289

342

300

293

262

238

237

221

188

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: SNL Financial

Why are so many agencies selling? There are numerous reasons for the escalation in deal activity, including:

 Record valuations have been driven by a record number of buyers, including publicly‐traded brokers, privately‐ held agencies, banks and most notably, private equity‐backed buyers.  Private equity’s entrance into the insurance distribution marketplace has been dramatic. As the following chart shows, private equity firms have grown their share of deals from 4% to nearly 50% over the past decade.  Increasingly, agency owners are concluding that size matters and they are feeling the pressure to get larger as quickly as possible. Some, believing they can’t get there fast enough, sell.  The natural impulse to remain independent has, for some agencies, been thwarted by an inability or unwillingness to invest in the next generation of leadership and production. These firms have been left with few alternatives but to sell.  As client demands have escalated, agents are increasingly turning to third‐party partners to provide access to the value‐added tools and resources necessary to remain relevant.

Brokerage Industry Perspectives How Best Practices agencies are leading the way

Private Equity's Rise to Dominance: Share of Deal Activity

46%

44% 43%

31%

28%

22%

12% 14% 15%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: SNL Financial

Most agency shareholders face a dilemma created by this frothy market. Their internal “going concern” value is solid, but it still represents only a fraction of what they believe they could get from a third‐party buyer. Older shareholders want to sell and capture a higher value. Younger shareholders want to remain independent, rather than working for someone else. Thus, both sides agree that the firm must do whatever it can to close the gap between the lower internal value and the higher “street value.” But how can this be accomplished? The higher values delivered by third‐party buyers are typically driven in large part by expense reductions (producer compensation, owner compensation, staffing reductions, etc.) that the seller must agree to implement after the deal is closed. Today’s agency owners are increasingly recognizing that they can narrow the difference between internal and external value by getting more serious about making these changes on their own, without selling the business. If a third‐party buyer can justify a higher value by tightening the agency’s belt, there is no reason why this cannot be accomplished internally, too. Another strategy that the active M&A marketplace has produced is an offensive one. If you don’t want to join them, beat them! After years of believing they were priced out of the acquisition market, today’s BPS firms are jumping into the acquisition fray. They are recognizing that in this hyper‐competitive market, although they will likely have to pay top dollar for an acquisition, acquisitions can still be worth doing. They typically focus on smaller, local agencies owned by friends or respected competitors. We noted earlier that acquisition activity in 2015 was dominated by private equity buyers. But it was also a record year for privately‐held buyers, that did a total of 115 deals nationally, besting the previous high of 90 set in 2012. The BPS Study indicates that larger BPS firms were active acquirers in 2015, while only roughly 1 in 10 BPS firms under $10 million made an acquisition. Generally, larger firms have easier access to cheaper capital, which makes deals easier. Further, it is often the larger firms that are best positioned to achieve the synergies required to ensure that deals are accretive to shareholders.

Brokerage Industry Perspectives How Best Practices agencies are leading the way

% of BPS Firms that Acquired an Agency Last Year

43.9%

25.5%

13.5%

11.8%

11.1%

10.6%

< $1.25M $1.25M‐$2.5M $2.5M‐$5.0M $5.0M‐$10.0M $10.0M‐$25.0M > $25.0M

Finally, firms of all types and sizes are recognizing that in an environment dominated by consolidation, culture matters ! Over the long run, a firm’s independence hinges on its ability to attract and retain talented employees. Most agencies today have an environment that works well for Baby Boomers and Gen‐Xers. However, over the coming decade, environments will increasingly be shaped by the employment preferences of Millennials and the generation following them. BPS agencies today are giving a great deal of thought to how to make their work environments more attractive to this younger demographic.

Key Challenge #3: Aging of the Workforce

Many factors have converged in recent years that have combined to alter the age demographics of our industry. First, medical and technology advances have increased life expectancies dramatically. Over the past 20 years, the lifespan of the average U.S. resident has increased by three full years from 75.8 to 78.8 according to the Centers for Disease Control and Prevention. As life expectancies and the quality of life for older Americans increase, these mature workers are able to remain active and productive in their vocations for much longer. Second, the Great Recession, weak recovery and persistently low interest rates have caused many would‐be retirees to remain in the workforce. Finally, during the Great Recession many firms reduced their hiring for a period of time while they assessed whether or not the economy was recovering. The result? The average age of the employees of most agencies has increased significantly. Since 2008, Reagan Consulting has measured the weighted average age of our clients’ producers and shareholders. The trend is persistently upward:

WASA (Weighted Average Shareholder Age)

WAPA (Weighted Average Producer Age)

51.1 51.9 52.5 51.9 52.9 53.3 54.5 54.4

49.4

49.3

48.7

48.4

48.0

47.8

47.0

46.6

2008 2009 2010 2011 2012 2013 2014 2015

Brokerage Industry Perspectives How Best Practices agencies are leading the way

This picture is not confined to producers and agency owners. It is also an issue with leadership teams, client support staff and administrative employees. Is an aging workforce a bad thing? No – older workers are frequently just as effective as younger workers. But a workforce that is too heavily concentrated among any single age group will create a succession challenge if a large group retires within a small window of time. BPS firms recognize the dual necessity of investing in talent and managing age concentrations to ensure stability of leadership, production and client servicing. The Best Practices Study now monitors age concentrations to allow firms to more effectively benchmark and manage their succession planning. Following are actual examples of healthy and unhealthy age distributions within BPS Agencies.

Age Banding of Producer Controlled Books

10% 15% 20% 25% 30% 35% 40% 45%

% Total Book

0% 5%

20s

30s

40s

50s

60s

70s+

Producer Age Decades

Average Firm Unhealthy Firm Healthy Firm

Agencies best positioned to achieve long‐term independence employ generationally‐balanced production talent. As seen in the “Age Banding of Producer Controlled Books” comparison above, young producers handle a larger share of agency revenue in healthier firms. Healthy firms do not usually stumble across a millennial diamond in the rough. Rather, they make a continuous effort to hire and train individuals in the next generation. Today, young producers not only represent an agency’s future owners, leaders and producers, they drive organic growth. Sales Velocity is the key indicator of organic growth. The following “Age Banding of Sales Velocity” chart shows that healthier firms, generating superior Sales Velocity results, enjoy greater new business production from younger producers (defined as producers under age 46). Young talent, not seasoned veterans, often determines an agency’s current and future growth.

Brokerage Industry Perspectives How Best Practices agencies are leading the way

Age Banding of Sales Velocity Example

8.6%

17.9%

Healthy

2.0%

9.7%

Unhealthy

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0%

Up to age 35

36 ‐ 45

46 ‐ 55

Over 55

Notes: Sales Velocity = total written new business as % of prior year’s commissions and fees BPS Average Sales Velocity for all revenue groups is approximately 15%

Many BPS agencies invest heavily in their own business. They recognize that the investment with the highest return potential for most agencies is the recruitment and development of new producers. The Best Practices Study helps agencies benchmark these investments with three important metrics: NUPP, Producer Success Rate and Effective NUPP.

 NUPP (Net Unvalidated Producer Payroll)

Expressed as a percentage of net revenue, an agency’s NUPP is the difference between what an agency pays its unvalidated producers (producers in development) and what the unvalidated producers would earn under the agency’s normal commission schedule. In other words, NUPP measures what the agency’s unvalidated producers are paid versus what they earn. NUPP allows an agency to see if it is investing more, or less, than its peers in its unvalidated producers. Most Best Practices firms report a NUPP of between 1% and 2% of net revenue. Although NUPP is a very helpful metric in gauging an agency’s overall producer investment level, it does not speak to the effectiveness of the investment being made. To better understand the effectiveness of this investment, we must consider the success rate a firm is able to achieve in developing its producers. We define this Producer Success Rate as the percentage of producers hired during the past five years that have already validated or are on track to validate by achieving the goals set out for them. Most BPS firms achieve a success rate of between 50% and 75%.

 Producer Success Rate

 Effective NUPP

Finally, to measure overall effectiveness in producer recruiting and development, we multiply the NUPP by the Producer Success Rate to obtain a firm’s Effective NUPP. The Effective NUPP is the best indication of an agency’s investment in producer development.

Brokerage Industry Perspectives How Best Practices agencies are leading the way

Below is the NUPP, Success Rate and Effective NUPP average for all six BPS size categories.

NUPP

Effective NUPP

55.5% Producer Success Rate

0.7%

>$25.0M

1.3%

>$25.0M

0.9%

$10.0M‐$25.0M

1.4%

$10.0M‐$25.0M

60.8%

0.8%

$5.0M‐$10.0M

64.1%

1.2%

$5.0M‐$10.0M

0.6%

$2.5M‐$5.0M

64.5%

0.9%

$2.5M‐$5.0M

0.7%

$1.25M‐$2.5M

74.0%

1.0%

$1.25M‐$2.5M

1.3%

<$1.25M

80.7%

1.6%

<$1.25M

0.0%

0.5%

1.0%

1.5%

0.0% 0.5% 1.0% 1.5% 2.0%

While all firms need to make a meaningful investment in unvalidated producers, many BPS firms rely on their Age Banding of Sales Velocity to help guide their focus as they search for new producers to ensure they are not exacerbating an already‐existing age concentration.

Producer and Leadership Succession Planning

As Baby Boomer producers approach retirement, many agencies are awakening to a challenge far greater than expected. Insurance brokerage is a relationship business, and many producers’ clients are heavily concentrated among their peer group. Thus, as a producer approaches retirement, the decision‐maker at many of his/her clients may be approaching retirement also. And regardless of whether or not the decision maker is facing retirement, it is not unusual for a producer’s book of business to undergo a higher level of account attrition as he/she retires. Recognizing this, many BPS agency leaders have been developing plans and protocols for transitioning producer books of business when they do retire. Numerous approaches have been used, and typically a firm’s “standard plan” must be customized to the needs and wishes of the retiring producer and those that will assume production responsibility for each account once they retire. These plans vary widely across the industry, but typically include: 2) A process for determining which producer(s) will assume production responsibility for each transitioning client going forward 3) A transitional compensation program that rewards both the incumbent producer and the new producer for the time and effort that will be required of each during the transition. Some plans, for example, split the normal producer commission between the two individuals, with the majority going to the retiring producer in the first year, an even split in the second year, and then the majority going to the replacement producer in the third year. After the third year, all commissions go to the replacement producer. 1) A notification period the producer is required to give prior to the transition

Brokerage Industry Perspectives How Best Practices agencies are leading the way

Leadership succession is also an issue being tackled by many BPS agencies. The industry’s leading firms recognize that future independence hinges on their ability to develop the next generation of leaders, and that the most common mistake firms make is not starting early enough. As a result, savvy firms today are placing an emphasis on early succession planning for all key leadership positions. They are also focusing on leadership training in new and different ways, including the deployment of outside resources and programs.

Key Challenge #4: Technology Disruption

Since the original Best Practices Study was introduced in 1993, technology has had a profound impact on nearly every aspect of life. It is hard to believe that it has been only 21 years since the internet was commercialized for public use in 1995. Since then there has been a steady drumbeat of predictions of the demise of the industry and claims that insurance agents are modern day buggy‐whip makers. But like Mark Twain once quipped, reports of agents’ demise have been greatly exaggerated. Over the past couple of decades, we’ve learned a great deal about why agents are valuable and continue to prosper, even as technology advances. The complexity of many insurance products, especially commercial and group health products, necessitates a “navigator” that can truly understand the insured’s needs and then efficiently tailor solutions to optimize limited risk management dollars. Agents also play a vital independent role in answering questions and advocating for their clients when claims occur. At the same time, unprecedented amounts of capital are flooding into start‐up companies in the insurance industry. According to CB Insights, a firm that tracks technology investments in the insurance industry (which they dub “Insurtech”) there were 82 investments in insurance start‐ups during the first half of 2016 totaling over $1 billion. This pace would eclipse the record set in 2015. These start‐ups are attacking every segment of the insurance industry.

Insurance Tech Financing Trend

$1,852

$2,000

$1,800

$1,600

$1,400

$1,200

$1,000

$657

$800

$600

$415

$389

$369

$277

$400

$180

$171

$133

$110

$93

$78

$43

$37

$200

‐

Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 Q1 '16 Q2 '16

Investment ($M)

Deals

Source: www.cbinsights.com

Brokerage Industry Perspectives How Best Practices agencies are leading the way

When agents think of Insurtech, they typically think of a few segments of the industry that have been visibly targeted. Employee benefits is probably the most notable example, where Zenefits has become famous (or infamous) over the past couple of years. Other segments of known technology intrusion are auto insurance comparison tools (Insurify, CoverHound), small commercial insurance (Insureon, Next) and social media distribution of personal lines (Lemonade). But these often discussed segments and companies represent only a fraction of the overall investment. According to CBInsights.com, there are over 130 startups across the insurance sector that have raised over $3.5 billion in aggregate funding. Best Practices agency leaders wonder – how disruptive will Insurtech become over the next few years? How big of a bite will it take out of our business? While no one can say for sure, there are some leading indications to consider. Technology disruption has thus far targeted the smallest, least complex products in the insurance distribution spectrum, where advisory‐oriented agents have the least to offer. This “low hanging fruit” broadly includes lines such as monoline auto insurance, renters insurance and small commercial insurance. Technology upstarts are betting that consumers will increasingly have a strong preference for internet purchasing of nearly everything, including insurance.

BPS firms have taken a three‐pronged approach to potentially disruptive technology.

Monitor Insurtech

Best Practices agency leaders pride themselves on being aware of what is going on around them. Monitoring Insurtech developments is a great place to start. Two quality sources of information on Insurtech investing are:

 CB Insights www.cbinsights.com/blog/category/insurance‐tech/

 Venture Scanner www.venturescanner.com/insurance‐technology

There are myriad other sources of information as well. Regardless of the source, it is vital that agency owners be apprised of developments in Insurtech so that they can effectively respond to emerging changes in the industry.

Swim Upstream Quickly

Agency leaders would benefit from taking an inventory of which aspects of their business are most vulnerable to Insurtech disruption. Two areas that seem to have a higher than average level of vulnerability are small commercial P&C and small group medical. These are segments of the marketplace that are being aggressively targeted by technology upstarts due to the vast number of potential customers with relatively simple risk management needs. If these two segments are in fact more vulnerable, it is important for an agency owner to know the percentage of his/her business that is generated within these particularly vulnerable business segments. The current Best Practices data offers some clues. Below is a look, across all size categories, at the amount of revenue coming from commercial P&C accounts generating below $5,000 in commissions and also group benefits accounts with under 50 lives.

Brokerage Industry Perspectives How Best Practices agencies are leading the way

% of Total P&C Book of Business made up of accounts under $5,000

% of Total EB Book of Business made up of accounts with less than 50 lives

84.4%

73.2%

68.0%

59.2%

48.1% 44.4%

42.8%

37.2%

29.9%

23.7%

21.2%

14.4%

< $1.25M $1.25M‐ $2.5M

$2.5M‐ $5.0M

$5.0M‐ $10.0M

$10.0M‐ $25.0M

> $25.0M

< $1.25M $1.25M‐ $2.5M

$2.5M‐ $5.0M

$5.0M‐ $10.0M

$10.0M‐ $25.0M

> $25.0M

As the charts indicate, the smallest agencies have the highest concentrations of small accounts and are therefore generally more vulnerable to technology disruption than larger agencies. A strategy that many firms are embracing is to focus on writing larger accounts with greater complexity. These types of accounts tend to benefit more from a broker’s involvement. But suddenly increasing an agency’s target client size is no small task – especially for agencies outside of large metro areas.

Embrace Technology

A new generation of insurance buyers is going to expect that business will be done differently than in the past. They will expect more and better access to information and will demand an ease of doing business comparable to what they’ve come to expect in other realms of their lives. An otherwise outstanding insurance broker that relies on out‐of‐date technology or methods will suffer significant brand damage. Thus, tomorrow’s successful brokerage will need to be advanced in its embrace of technology. There is no single answer to the threat posed to agents by Insurtech. BPS agencies must remain vigilant in assessing the magnitude of the threats faced by technology upstarts. Wherever possible, agents need to find ways to match or exceed the value proposition offered by the technology players, while retaining the all‐important client relationship and risk management expertise that form the heart of the existing insurance brokerage industry.

Brokerage Industry Perspectives How Best Practices agencies are leading the way

Conclusion

Since 1993, the Best Practices Study has provided a benchmarking analysis of the industry’s top performers. The Study’s purpose has never been simply the identification of benchmarks, however. The real value of the Study has been the identification of the business practices and methods that propel the top firms to the performance levels they achieve. These are challenging times for our industry. The slow growth environment, record consolidation, aging workforce and threats from technology upstarts will all make insurance brokerage a tougher industry in which to thrive over the next decade. At the same time, there are plenty of reasons to be optimistic about the future of the insurance broker. If BPS firms have shown us anything over the past 23 years, they have shown they can adapt and lead the way to a brighter future, regardless of the challenges they face. Our bet is that the Best Practices firms will continue to thrive, and will lead the way for others to prosper in the coming decade.

Executive Summary

Key Metrics by Agency Revenue Category

Executive Summary Agencies under $1.25 million in revenue

Profile

Regional Distribution

Corporate Structure

Average Revenues $822,626 Weighted Average Shareholder Age (WASA) 53.0

Sole Prop. 2.9%

LLC 23.5%

C Corp 32.4%

 Northeast  Midwest

17.6% 35.3%

 West

2.9%

S Corp 41.2%

 Southeast  Southwest

41.2%

2.9%

Revenue and Growth

Revenue Distribution (as a % of Gross Revenue)

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

22.5%

20.9%

Contingent / Bonus/ Overrides 8.9%

Other 0.4%

13.1%

12.9%

Group L/H/F 4.1%

Commercial P&C 36.4%

7.1%

4.2%

4.0%

2.9%

Personal P&C 50.2%

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

 The under $1.25M revenue group is the only revenue size category in the BPS for which Personal P&C is the largest revenue source.  With median organic growth of 2.9%, Group L/H/F was the slowest growing business segment for agencies in this revenue group.  This smallest revenue group has the highest concentration of C corps in the BPS (32.4%).

Group L&H

Commercial P&C

 < $5K

68.0%

 Under 50 lives

84.4%

 $5K to $10K

13.2%

 From 50 to 100 lives

8.3%

 $10K to $25K

8.4%

 Over 100 lives

7.3%

 $25K to $50K

4.6%

 > $50K

5.9%

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 Sales Velocity can help a firm assess where new business and growth are coming from and prepare for perpetuation.

3.3%

Top Quartile

Over age 55

20.3%

3.1%

Age 46‐55

Age 36‐45

3.0%

Average

13.2%

Up to age 35

3.8%

Comparison Group Average

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.  Agencies under $1.25M in revenue had an incredibly even distribution of Sales Velocity among the producer age bands. No age group accounted for more than 29% of Sales Velocity and no age group contributed less than 23% of Sales Velocity.  Multi‐line producers in agencies under $1.25M posted the highest

Book of Business per Producer (commissions and fees)

Book of Business by Age

New Business

Average Book

Up to age 35 20.1%

Over age 55 27.7%

Commercial P&C

$22,358

$143,178

Personal P&C

$23,109

$172,821

Life/Health/ Financial

$31,720

$75,965

Age 36‐ 45 27.7%

Multi‐ Line

$42,417

$348,506

Age 46‐ 55 24.5%

Effective NUPP

Comparison Group Average:

Producer Success Rate 80.7%

NUPP 1.6%

Effective NUPP 1.3%

new business totals and had the largest average book sizes – their book sizes were at least twice the size of all mono‐line producers.

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

44.1%

Average

30.2

29.8%

29.0%

7.22

20.0

14.7%

Revenue per Employee Compensation per Employee Spread per Employee

$120,324

$159,501

Pro Forma Operating Profit

Pro Forma EBITDA

$61,658

$35,908

Average

Top Quartile

$58,666

$85,238

Comparison Group Average

Top Quartile

Notes & Definitions

Organic Growth & Profitability Scatter Plot

 Pro Forma Operating Profit is reported pre‐tax profit normalized to account for non‐recurring or non‐ operating income and to exclude contingent / bonus / override income.  Pro forma EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization, adjusted to add back discretionary owner expenses and to normalize non‐recurring or non‐ operating income and expenses.  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.

50.0%

45.0%

40.0%

35.0%

30.0%

25.0%

20.0% Profitability (EBITDAMargin)

15.0%

10.0%

5.0%

0.0%

‐10.0%

0.0%

10.0%

20.0%

30.0%

Organic Growth

This graph 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.

Executive Summary Agencies between $1.25 million and $2.5 million in revenue

Profile

Regional Distribution

Corporate Structure

Average Revenues $1,827,251 Weighted Average Shareholder Age (WASA) 53.2

LLC 10.8%

C Corp 27.0%

 Northeast  Midwest

13.5% 29.7% 16.2% 32.4%

 West

S Corp 62.2%

 Southeast  Southwest

8.1%

Revenue and Growth

Revenue Distribution (as % of Gross Revenues)

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

23.4%

Contingent / Bonus / Overrides 7.5%

18.4%

17.4%

Other 0.6%

12.7%

10.1%

Group L/H/F 11.4%

7.4%

6.5%

Commercial P&C 48.3%

3.0%

Total Agency

Commercial P&C

Personal P&C

Group L/H/F

Personal P&C 32.2%

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



Although the smallest business segment for agencies in this group, Group L/H/F commissions & fees grew at a faster rate than all other lines of business, with a median growth rate of 10.1%.  Best Practices agencies with revenues of $1.25 ‐ $2.5M posted the highest median growth rate (7.4%) for Commercial P&C of all the revenue categories in the BPS.

Group L&H

Commercial P&C

 < $5K

48.1%

 Under 50 lives

73.2%

 $5K to $10K

18.5%

 From 50 to 100 lives

17.9%

 $10K to $25K

15.6%

 Over 100 lives

8.9%

 $25K to $50K

9.4%

 > $50K

8.4%

Executive Summary Agencies between $1.25 million and $2.5 million in revenue

Production

Definitions

Sales Velocity

Age Banding of Sales Velocity

Top Quartile

Over age 55

25.9%

3.4%

Age 46‐55

6.9%

Age 36‐45

Average

15.4%

Up to age 35

1.7% 3.3%

Comparison Group Average

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 $1.25 ‐ $2.5 million revenue group has the most unbalanced distribution of Sales Velocity by producer age bands, with 67% of Sales Velocity generated by Producers over age 45.  Agencies in this group boasted the second‐highest Producer Success Rates of any size category in the BPS.

Book of Business per Producer (commissions and fees)

Book of Business by Age

Up to age 35 10.8%

New Business

Average Book

Over age 55 31.1%

Commercial P&C

$41,105

$339,112

Age 36‐ 45 23.4%

Personal P&C

$32,362

$209,564

Life/Health/ Financial

$39,565

$208,393

Multi‐ Line

$41,799

$285,418

Age 46‐ 55 34.7%

Effective NUPP

Comparison Group Average:

Producer Success Rate 74.0%

NUPP 1.0%

Effective NUPP 0.7%

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

Average

39.6%

28.8

28.0%

26.2%

13.92

19.6

15.3%

Revenue per Employee Compensation per Employee Spread per Employee

$141,028

$201,858

Pro Forma Operating Profit

Pro Forma EBITDA

$75,579

$51,862

Average

Top Quartile

$65,449

$109,313

Comparison Group Average

Top Quartile

Notes & Definitions

Organic Growth & Profitability Scatter Plot

50.0%

45.0%

40.0%

35.0%

30.0%

25.0%

20.0% Profitability (EBITDAMargin)

15.0%

10.0%

5.0%

0.0%

‐10.0%

0.0%

10.0%

20.0%

30.0%

Organic Growth

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