2017 Best Practices Study

• Net Investment in Unvalidated Producer Payroll (NUPP) . NUPP is a measure of an agency’s investment in unvalidated producers. See page 72 for more on how to calculate NUPP.

• Hiring Velocity. Hiring Velocity is a gauge of an agency’s hiring rate in replenishing its existing producer population. Hiring Velocity is calculated by taking the number of unvalidated producers hired in the most recent year and dividing it into the agency’s total number of producers. A healthy Hiring Velocity is typically in the 15-20% range. • A Producer Hiring Needs Worksheet. Use of a spreadsheet tool, such as that referenced on page 10 of Reagan Consulting’s 2014 Producer Recruiting & Development Study (available for free at www.reaganconsulting.com). This focused approach allows for a detailed analysis of producer hiring needs in light of an agency’s specific growth objectives, age demographics, attrition rates, and success rates in developing producers.

Using these tools and monitoring the results can provide privately-held firms with a critical edge in overcoming the demographic challenges of internal perpetuation.

Never before have there been more financing resources available to help privately-held firms perpetuate internally. Access to capital is no longer a significant perpetuation hindrance for many independent agents. Historically, agency perpetuation transactions often relied on internal financing. In Reagan Consulting’s 2012 Private Ownership Study , we reported that a majority of shareholder purchases were financed by either the selling partner or the agency itself. Buyers would then pay off the note to selling shareholders or the agency with future profit distributions. This typical financing approach requires repayment periods of seven to ten years at market interest rates, which today range from three to seven percent. While these approaches have worked well historically, they bring certain challenges that are sometimes problematic. Sellers often want their money when they sell, rather than having to provide financing for a long period of time. And agencies often have more pressing and strategic uses for their capital resources than acting as a bank. In recent years, historically low interest rates and a competitive lending environment have led to an increase in agencies financing share transfers externally through a local bank or industry lender. In many cases, outside financing can mirror the favorable note terms and interest rates historically provided in internal financing. Additionally, outside financing allows retiring shareholders to receive their money up front upon retirement, rather than waiting to receive their money in the future. Not all agencies are able to leverage their relationships with their local community banks to secure financing. Typically, community banks prefer making loans to companies that have a significant amount of tangible/securable assets (e.g., machinery and equipment) to rely on as collateral, of which an insurance agency has few. An insurance agency’s assets are intangible (expirations and future earnings). Relying on these intangible assets as collateral can give local bankers heartburn.

Thankfully, if local financing is unavailable, there are many industry specific lenders that can provide financing. Industry lenders understand the insurance industry and can be creative in how they structure financing. Industry lenders can often:

• Offer sizeable, one-time term loans in a variety of structures (e.g., interest only, balloon payments, amortizing over long-period of time, etc.) to facilitate share redemptions.