2020 Best Practices Study

BEST PRACTICES STUDY U PD ATE.

AIM HIGHER. ACHIEVE MORE.

2020

Independent Insurance Agents & Brokers of America.

Copyright ©2020 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 posted as a link on any public or private website without the prior written consent of IIABA or Reagan Consulting.

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We wish to thank the following companies for their sponsorship. The funding provided makes possible the development of the 2020 Best Practices Study and the Best Practices Gateway website.

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Introduction & Overview .............................................................................................................................. 6

Re:Think – Embracing the Challenges of a Post-COVID World ................................................................... 10

Executive Summary..................................................................................................................................... 24

Agencies under $1.25 Million in Revenue ..................................................................................... 24

Agencies between $1.25 Million and $2.5 Million in Revenue...................................................... 28

Agencies between $2.5 Million and $5.0 Million in Revenue........................................................ 32

Agencies between $5.0 Million and $10.0 Million in Revenue...................................................... 36

Agencies between $10.0 Million and $25.0 Million in Revenue.................................................... 40

Agencies with over $25.0 Million in Revenue................................................................................ 44

Cross Category Comparison ........................................................................................................................ 48

Glossary....................................................................................................................................................... 78

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Created in 1993, through a joint initiative between Reagan Consulting and the Independent Insurance Agents & Brokers of America (the Big “I”) , the Best Practices Study (BPS) is designed to deliver critical financial and operational industry benchmarks and strategies to member agencies. For nearly 30 years, this comprehensive annual publication has helped agencies optimize their performance and built its reputation as one of the industry’s most consistently effective, reliable , and valuable information resources. Every three years, the Big “ I ” asks insurance companies, state association affiliates, and other industry organizations to nominate agencies they consider to be among the best in the industry for each of the BPS ’ s revenue categories. Nominated agencies are then invited to participate and must complete an in-depth survey detailing their financial and operational year-end results. Results are then scored and ranked objectively to determine which agencies earn the Best Practices agency designation.

The 1993 Best Practices Study

In 2019, the beginning of the current three-year (2019-2021) BPS cycle, over 1,000 independent agencies throughout the U.S. were nominated and 267 of the participating agencies became Best Practices agencies. Their results served as the foundation for the 2019 Best Practices Study . This year, the 2020 Best Practices Study continues to examine these same top performers who maintained their Best Practices status by submitting annual data. Participation in the Best Practices Study is a prestigious recognition of superior accomplishments. Agencies who believe they have the qualities of a Best Practices agency and wish to be nominated for the next cycle (2022-2024) can have their state association or an insurance carrier nominate them or can self-nominate.

The 2020 Best Practices Study is composed of three primary sections:

1. ReThink: Embracing the Challenges of a Post-COVID World — Agencies must prepare now for the time when the yellow “Caution” flag comes down and they face the transformed economic landscape

2. Executive Summaries — Key benchmarks and perspectives summarized for each of the six revenue categories

3. Cross Category Comparison — The complete array of Best Practices benchmarks for all six revenue categories, arranged in a side-by-side format that allows for quick comparisons of metrics across categories

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Visit the Best Practices Gateway at www.reaganconsulting.com/research/best-practices for access to the annual Best Practices Study . Other resources and tools to help agencies improve their performance and enhance the value of their

business are also available 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 which are valuable components of a complete line of Best Practices products and services. If you have questions about the information published in the 2020 Best Practices Study or if you would like to nominate your agency to participate in the 2022-2024 Study cycle, please contact Reagan Consulting at 404-233-5545. If you would like access to additional Best Practices tools or wish to purchase the Study , contact the Big “I” Education Department at www.independentagent.com/best-practices or 800-221-7917.

The Best Practices Gateway: https://reaganconsulting.com/research/best-practices

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2020 is shaping up to be the most tumultuous year in the history of the Best Practices Study . A year that started out with great momentum and promise has turned into one of anxiety and uncertainty. On March 1st, agencies were growing at the fastest rate in over a decade and agency valuations were setting all-time records. Life for agents and brokers was not just good, it was really good. Yet, less than a month later, the global economy began shutting down in the fastest reversal of our lifetimes with the arrival of the COVID-19 pandemic. While most Americans were aware of the new novel Coronavirus, it had not yet upended their day-to-day lives. On March 11, that all changed:

Seemingly overnight, American businesses closed operations or transitioned to remote work arrangements, as stay-at- home mandates became the order of the day. Despite the identification of insurance workers as “essential workers,” and thus exempt from certain stay-at-home restrictions, most agencies sent their employees home to work remotely. By early April, a vast number of agents and brokers began applying for emergency Paycheck Protection Program loans to ensure they could continue to employ their staffs through the summer. And as of August 2020 (the Best Practices Study publication date), the majority of agencies are still working remotely.

Early returns on the industry’s navigation of the pandemic and transition to remote-work realities have been generally positive. Agencies remained “open,” employees have been retained, and clients continue to be serv iced.

Nonetheless, many in our industry seem to be operating under a yellow caution flag, as when an accident interrupts a NASCAR race. As the yellow flag waves and race wreckage is cleared, racers slow down, line up behind a pace car, and seek to hold their positions until a green flag signals the restart of the race. In 2020, many agencies find themselves under a yellow flag, ceasing to make forward progress – just trying to hold their own and avoid giving up their pre- COVID-19 positions.

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Best Practices Agencies, as we have seen time and time again in previous crises, take a different view in such situations. They adapt, innovate, and find ways to thrive, despite the chaos and uncertainty that surrounds them.

Need convincing? Think back to the massive challenges independent insurance agencies faced in just the past three decades: Despite all these (and many more) highly-disruptive milestones, our industry has never been more valuable or more relevant. How is this even possible? How did Best Practices Agencies not go the way of high- commission stockbrokers, travel agencies, and video rental stores? How have Best Practices Agencies been able to adapt, innovate and prosper, regardless of the crisis du jour? In short, Best Practices Agencies use periods of turmoil and disruption as opportunities to rethink their businesses. Proactive strategic thinking by Best Practices Agencies is the catalyst for our industry’s massive gains. The COVID-19 pandemic will be no different. While under the COVID-19 yellow flag, Best Practices Agencies must go beyond the day-to-day challenges and rethink their fundamental business operations in critical ways.

The threat of Hillarycare (nationalized healthcare) looms large

The Internet disrupts consumer habits

Banks enter the insurance landscape

Eliot Spitzer attacks contingent income

The Affordable Care Act passes

InsureTech and industry consolidation threaten agencies

This discipline of rethinking is the focus of the 2020 Best Practices Study and we have identified four primary areas where this rethinking can be applied. If Best Practices Agencies engage in the practice of rethinking, we believe they will emerge from the COVID-19 pandemic stronger, better, and more competitive than ever, ready to restart the race when the yellow flag is lifted.

Managing your agency’s finances is always important, but the importance is magnified in times of stress and uncertainty

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like the COVID-19 pandemic. By rethinking your financial foundations, you can play both offense and defense while you wait for the yellow flag to raise. You can defensively address issues brewing on your balance sheet, while at the same time go on the offense to ensure a rapid response to changing economic circumstances. Admittedly, agency finances can be complicated, but below are three important areas to rethink.

1) Protect your balance sheet. Your balance sheet is your agency’s war chest and safety net. Protect it at all costs. The following are a few especially relevent balance sheet items to rethink:

• Keep an eye on accounts receivables. While there has been an industry push to move from agency bill to direct bill, a significant amount of agency bill still exists. Poor management of accounts receivable can be deadly. If an agency fails to collect a $10,000 premium account, it would have to write almost $70,000 in additional premium to make up for that loss. Losing sight of accounts receivable can have dire consequences.

• Consider debt more carefully. Traditionally, banks hesitated to loan money to insurance agencies given the lack of hard assets and collateral. In recent years, that has changed, as banks gained a better understanding of the opportunities within the insurance industry. In fact, most agencies can now obtain up to three times their annual EBITDA in debt funding. Ready access to debt can provide necessary capital to fuel growth investment and provide reserves in uncertain times.

Debt and Leverage

1.4x

100%

1.5x

1.5x

72.2%

1.0x

1.0x

75%

60.5%

1.0x

0.7x

50.0%

41.5% 38.6%

40.7%

50%

1.0x

0.5x

25%

0%

0.0x

< $1.25M $1.25M- $2.5M

$2.5M- $5.0M

$5.0M- $10.0M

$10.0M- $25.0M

> $25.0M

% of Firms with Debt

Average Leverage

• Rethink your cash position. Cash is king and insurance agencies generate a lot of cash. Unfortunately, many agency owners view the healthy distributions they take as compensation, rather than as discretionary distributions of profit that might better be retained in these uncertain times. Many agencies routinely distribute 80-90% of pretax profits. Retained profits are an excellent source of capital to fund growth investments and perpetuation and to provide rainy-day funds to weather the COVID-19 storm.

2) Develop multiple financial forecasts. Best Practices agencies typically rely heavily on budgets to help manage towards desired growth and profitability outcomes. In normal times, this is enough. These are not normal times.

To protect your agency in a COVID-19 world, develop multiple forecasts and corresponding action plans – best case, worst case, and expected. Each forecast should be built with as much available information to inform revenue, including ground-level feedback and projections from producer-client interactions, knowledge of industry concentrations and potential impacts, and updates from peers, government officials, medical personnel, clients, and insurance company partners.

Once created, these dynamic forecasts and related action plans will allow you to adapt and pivot in real-time without making decisions under fire when the pre-pandemic budget goes out the window. Decisions that might normally take

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weeks or months will require only days to implement, as contingency action plans (expense reductions, specific personnel adjustments, growth investments, etc.) will already be in place.

3) Rethink profitability. Experiences like COVID-19, while painful, often reveal areas of excess in terms of agency profitability. COVID-19 has exposed four potential excess expense areas for insurance agencies. These potential excess areas can be recaptured as profit and used if needed to sustain the business during uncertain times or to make the necessary growth investments that will enable you to hit the ground running when the yellow flag is raised.

Pro Forma EBITDA* *Earnings before interest, taxes, depreciation, and amortization

31.9%

35%

26.4% 27.2% 25.8%

30%

22.7%

25%

19.3%

20%

15%

10%

5%

0%

< $1.25M $1.25M- $2.5M

$2.5M- $5.0M

$5.0M- $10.0M

$10.0M- $25.0M

> $25.0M

Potential expense items to rethink include:

Occupancy

Do you need as much space as you have? Occupancy expenses typically consume 4% of net revenue and represent the second largest expense category (after compensation). The pandemic has demonstrated that agency employees can, and often prefer to, work remotely, so there may be an opportunity for agencies to rethink occupancy requirements accordingly. Does an all-hands-on-deck, brick and mortar approach still make sense for your agency? Does the pandemic create an opportunity to reinvest rent savings in hiring new talent? Travel and entertainment has ground to a halt during COVID-19. Interestingly, new business has not evaporated as many predicted. Much to the chagrin of many producers, historical levels of T&E expenses may not be necessary or appropriate in the future.

Average Occupancy as % of Net Revenues (across all revenue categories):

Average Travel & Entertainment

T&E

as % of Net Revenues (across all revenue categories):

Average Automobile as % of Net Revenues (across all revenue categories):

Automobile

Like T&E, automobile usage has diminished and is certainly not mission- critical in many cases, revealing yet another area of potential savings.

Average Advertising/Promotion as % of Net Revenues (across all revenue categories):

Advertising/ Promotion

Similarly, many agencies have made material reductions in advertising/promotions without significantly impacting new business results. Could this be an ongoing trend? If so, advertising budgets may be yet another source of profits to recapture.

Rethink your finances; not only to weather these uncertain times, but to prosper as things return to normal.

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Established patterns in the workplace don’t change quickly or easily. Remote work has been discussed, debated, and experimented with for decades. Despite evidence that remote employees are often happier and more productive than their peers in the office, 2020 began with only a small portion of the U.S. workforce working remotely – 3.2%, according to flexjobs.com (Beth Braccio Hering, February 13, 2020). COVID- 19 created a “tipping point.” Virtually overnight, the question changed for most businesses from “should we embrace remote work?” to “how do we do remote work successfully?” The remote work adoption timeline was radically compressed. In June of 2020, the WSJ reported that nearly 50% of the U.S. workforce had transitioned to remote work due to COVID-19 (Laura Forman, June 6, 2020).

Forced to figure out how to successfully work remotely, many businesses found they could and are also discovering remote work offers benefits for both employers and employees. Current technologies, though not perfect, are generally sufficient to effectively support remote work, suggesting the slow pre-COVID adoption of remote work was due more to inertia and reluctance to change than to structural or technical limitations. Is remote work here to stay? Almost certainly, we have entered a new world of expanded remote work that will remain even when the pandemic has subsided. If so, how can agents and brokers embrace it? 1) Protect your culture. Acknowledge that cultural development will be more difficult as employees become more dispersed and personal interactions become less organic. Random encounters between people that occur naturally in a physical workplace help to develop relationships, spark new ideas, and promote culture. Technology is a poor substitute. You will need to be intentional about protecting your culture. How? Communicate, communicate, communicate.

Proactively find ways to: •

Reinforce your shared values and goals.

• Keep employees informed on corporate level goals, initiatives, etc. • Celebrate wins.

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• Use technology-based tools such as Slack and Teams, with their real-time chat functionalities, to replace lost “water cooler” time.

2) Encourage interaction & feedback. • Have 10- minute “c heck- in” calls for teams 2 -3 times per week. •

Create quarterly surveys to solicit candid feedback from remote employees on what is working well and what needs to be changed. Use these surveys to also gauge how employees are doing personally. Remote work is not for everyone. Some employees will struggle to adjust. Feelings of isolation are common. Other employees will struggle with burnout as the less structured nature of remote work can lead to overwork. Surveys can help you monitor morale and be more responsive to potential problems. • Make sure all employees know they have channels for one-on-one discussions and face-to-face meetings, if needed.

3) Rethink your geographic footprint. In liberating agencies from the central office model, COVID-19 also creates access to a broader, deeper talent pool. If location is truly less relevant, access to qualified candidates is greater than ever before. As you prepare to compete for talent in this expanded pool, remember that excellence in managing remote work can help you win. Firms that offer remote employees more of what they want, including tools, technology, and support, as well as greater flexibility in how, where, and when they work, will have an increasing competitive advantage in the battle for talent.

4) Embrace diversity initiatives. In addition to being sound business strategy, embracing diversity will also drive long-term growth and profitability. A diverse team that more accurately reflects the reality of our economy will bring a variety of perspectives on how to respond to a rapidly changing business and social environment. Best Practices Agencies have an opportunity to be a beacon of light in what feels like a deeply divided world. Diversity is good business. 5) Maintain employee accountability. Agencies must develop a way to monitor employee results while also avoiding micro-management. Accountability is especially important for young producers. Fostering good prospecting habits and tracking production activity / pipelines is critical in a remote-work environment. In some ways, COVID- 19 has done agencies a favor by illuminating producer effectiveness. If effort and activity is not demonstrated, don’t be afraid to quickly terminate and reinvest those dollars elsewhere. Equip your producers with a digital playbook and resources to successfully compete in the marketplace. And then hold them accountable for doing so.

Before COVID, the labor markets were tight and good talent was in short supply. Many agencies only looked to hire in their own backyard and frowned upon remote work. Training and development largely occurred in in-person settings.

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COVID changed these realities and some agents and brokers are finding ways to prosper amongst the pandemic turmoil. The bottom line is that insurance agencies are a people-driven business. Rethink your personnel and how you work. Continue to make generous investments in your team - they are the lifeblood of your agency and the key to future success.

On a similar note to rethinking your agency’s foundations , it’s critical to pause and assess your client base and growth drivers, understanding how you can best maximize your current strengths and avoid any potential pitfalls. Is your agency too concentrated in certain industries? What parts of your book are thriving and struggling during the pandemic? Are there any significant concentrations in your book of business that simply don’t make sense?

In other words, how well do you know your customers?

Below are a few practical ways to better understand and proactively manage your business and client base:

1) Conduct an industry analysis. Do you have exposures in industries that are significantly affected by COVID-19 (hospitality, retail, restaurants, etc.)? Perform a full audit of your customer base over a specified account threshold that will cover at least 80% of your total book. Take proactive measures to reconsider growth investments in industries in which you are overweighted or that may no longer make sense.

Within your agency management system, enter clients’ Standard Industrial Classification (SIC) or North American Industrial Classification System (NAICS) code to identify client industries. Make this a required field when submitting new business. You are likely to find business concentrations and exposures that you were never aware of. 2) Conduct a Line-of-Business analysis. Similarly, is your book of business ideally balanced in terms of lines of business? Will an extended COVID-19 recovery impact your agency’s largest lines of business? Consider carefully how potential large- scale market forces might affect your agency’s performance and start thinking seriously about

Industries Worst Affected by the COVID-19 Job Crisis (Number of unemployed persons aged 16 and over in the U.S. in April 2020, by industry)

4.86M

Leisure and hospitality

3.22M

Wholesale and retail trade

2.55M

Education and health services

2.02M

Government workers

1.99M

Manufacturing

1.70M

Professional and business services

1.53M

Construction

1.42M

Other services

3.21M

Other industries*

*includes persons with no previous work experience and persons whose last job was in the U.S. Armed Forces Source: Bureau of Labor Statistics; chart by Statista

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how you can create plans today to mitigate the potential negative effects.

3) Consider account profitability. Do you know how much money you make on certain accounts, factoring in producer splits, support payroll, and other selling and operating expenses? Review your accounts to determine which are the most profitable based on size, business lines, etc. The results may surprise you. In a recent study conducted by Reagan Consulting of 50 independent agents, we found that commercial lines margins were actually higher for firms with smaller accounts, while there was an indistinguishable difference for employee benefits. Information like this is invaluable in developing business strategies going forward. 4) Implement a CRM system. Are you tracking producer activity? Do you actively communicate with clients and understand industry concentrations? Implement a new CRM system or effectively use your existing CRM system to monitor your communication efforts and track progress. Over time, these efforts will pay huge dividends; you will have real-time data on both producer and client needs and performance that you can use to manage future growth more intelligently. 5) Create frequent client touchpoints. How often do you connect with your customers? How has client contact suffered during COVID-19? Schedule periodic conversations/check-ins with your clients to touch base. Now, more than ever, is the time to check in on your most valuable clients. Focusing on your current account performance prepares you to weather the shifting economy. Armed with the in-depth knowledge of where your agency is working, how it’s succeeding, and where potential risks or gaps exist, you will be able to best navigate any continued changes with data-driven decisions that support your business. Knowing and actively communicating with your clients builds and strengthens relationships, enabling future growth. As the pandemic continues, this is a unique opportunity to reconnect with your business fundamentals – use the time wisely.

Without risk of hyperbole, the dynamic environment of mid-2020 is undoubtedly unprecedented. Between the COVID-19 pandemic and the associated derailing of the U.S. economy, the ongoing racial unrest triggered by the killing of George Floyd by police in May 2020 and the upcoming Presidential election, it would be difficult to point to a more uncertain moment in our lifetimes in which to conduct insurance agency business. To be up to the challenge, Best Practices Agencies must rethink the future, in both the near-term and the long-term. In the near-term, the pandemic and social unrest are shining a white-hot spotlight on the November 3 rd national elections, as both political parties and presidential candidates (Donald Trump and Joe Biden) stand at different ends of the policy spectrum. The winner will affect outcomes for people across all income levels, net worth, and economic segments. What

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will change as a result of the upcoming elections, and what strategies should Best Practices Agencies pursue today to best prepare?

In our view, if Donald Trump is reelected, the current political environment will largely stay the same. If Joe Biden wins and delivers Democrat majorities in the House and Senate, massive change is likely.

Based on current polling in battleground states, a Democrat sweep is a very real possibility. Given this, it is prudent to think through the changes that would likely accompany a Biden victory for the industry and plan accordingly.

The Biden / Democrat platform calls for material changes to the tax landscape, including:

Elimination of the “Step - Up” Basis in Estate Taxes

Increase in Personal Income Tax Rates

Increase in Capital Gains & Dividends Tax Rates

Rise in Corporate Taxes

• High wage-earners would be taxed at 39.6%, rather than the current 37%, with capped and potentially eliminated deductions.

• Rates will increase from the current 20% base to as much as 39.6% for high wage- earners.

• At the death and transfer of the estate, there will likely be a shift from zero taxes on the transfer to a charge of 39.6% capital gains rates on the assets in the estate regardless of whether assets are sold.

• In 2017, C-corp taxes dropped from 35% to 21%. Biden is discussing raising them to 28%, but some suggest the tax rate will be raised 1% per year to moderate the impact on earnings. The 2017 tax benefits given to pass-through entities will likely be reduced or eliminated as well.

Consider, too, other changes that would likely accompany a Democrat sweep in November and how this might affect your customers, specialty areas of focus and lines-of-business:

• More regulation on business . A less business-friendly environment • Oil and Gas. A de-emphasis on oil and gas and more focus on renewable energy sources • Health Insurance . Biden has not stated support for Medicare for All or a single-payer solution, but rather supports making changes to Obamacare • Trade. With Biden, we will likely see more certainty and less volatility as respects trade wars, tariffs, etc. (a less confrontational approach than Trump) • Climate Change . Federal lands may be closed, carbon taxes are likely, no new pipelines • Market Stability. Some pundits suggest that a Biden presidency will bring some level of calm and predictability to the stock market, even in light of the above

So, how might all this affect insurance agents and brokers? The impact would likely be felt in several specific areas, including:

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1) A reduction in after-tax earnings and valuation multiples. The rise in corporate tax rates will reduce the net after- tax earnings of all C-corporations. Similarly, the after-tax earnings of pass-through entities are also likely to decline. Reduced after-tax earnings will translate into lower valuations, both internally (appraised valuations) and externally (third-party valuations). 2) Changes in the M&A market. For sellers, valuations and after-tax proceeds are likely to suffer. The capital gains rate changes alone would effectively double the tax burden for sellers. Given this massive change, mergers and tax-free transfers of stock will likely become more popular and many potential sellers may race to close deals prior to 2021 to avoid the materially punitive effects of a Biden presidency.

3) Transfer of net worth. Changes in estate taxation may likewise cause some agency owners to rush to transfer generational wealth in advance of a potential Biden win.

4) Agency growth. Reduced earnings will place necessary agency growth investments under pressure. To the extent that these changes negatively impact growth, we will likely see agents and brokers ’ valuations moderate.

5) Increased value of insurance agencies navigating healthcare. A single payer health insurance system (i.e., Medicare for all) seems increasingly unlikely in the near-to-mid-term. A survival of Obamacare could offer short- term or even long-term benefits to agents writing this business, as insureds will continue to need help navigating the incredibly complicated health insurance landscape, making agents and brokers even more valuable. Keep these changes in perspective. If, in fact, Biden wins and policy shifts occur, all businesses will be affected and insurance agents and brokers are particularly well-positioned to deal with these changes. As was evidenced in the economic crash of 2008-2010 and demonstrated by the current COVID-19 pandemic, insurance agencies are resilient businesses and will continue to be incredibly important players in the U.S. economy for the foreseeable future.

In the long-term, Best Practices Agencies must be able to adapt to the post-2020 world in which they will find themselves. What will change? What will stay the same?

While nobody knows whether the dangers of the virus will be short-lived (if a vaccine is developed) or whether they will linger for years, below are some observations about what the future holds for the insurance industry.

Changes triggered or accelerated by COVID-19 include:

• Scale matters more than ever. Economists observed that COVID- 19’s impact has been much tougher on small businesses than large ones. This is in part because many small businesses lack the resources and access to capital enjoyed by their larger competitors. In the insurance brokerage business, scale brings several advantages including more lucrative carrier contracts and the ability to effectively specialize in particular industries or insurance

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coverages, such as D&O or cyber. As the brokerage landscape evolves and the number of brokers with a billion or more in annual revenue increases, local agencies will continue to feel the squeeze.

• Use of data, technology, and artificial intelligence will accelerate. As COVID-19 intensifies economic pressures in our economy, agents and brokers will more aggressively seek to deploy technology as a way to improve client offerings, while also enhancing efficiency and driving down costs. • The need for visionary leadership will intensify. The insurance brokerage industry has historically been a steady, slow-growth business without significant change year-to-year. Thus, the leadership demands for many agencies have been modest and not demanding a great deal of time or vision. This is clearly changing. In the COVID-19 era, agency leaders are facing a plethora of urgent decisions across all fronts. Issues such as remote-work, technology disruption, clients’ evolving needs, and diversity in the workplace are all clamoring for a greater share of agency leaders’ attention. While some love the challenge, others are wond ering if this is what they signed up for! Trying to predict a five or ten-year future is harder than ever given the extraordinarily rapid pace of change. We are confident, however, that certain elements of the insurance brokerage business won’t change over the coming decade. When planning for the future, it is important to consider these unchanging factors as well. • Relationships will drive business. Insurance brokerage will still require finding the right balance between relationships and resources. When the Best Practices Study was launched in 1993, the top agencies were those that developed strong personal relationships with clients, while delivering the resources necessary to help clients succeed. Twenty-seven years later, these same elements are true, but have evolved. Agencies had to work extremely hard to maintain their competitiveness during an arms-race of client resources. The balance between relationships and resources has clearly shifted in favor of resources. One needs to look no further than employee benefits business to see how fundamentally the broker’s role has transformed. Yet relationships still matter, and they will continue to do so. Although the back-slapping producer has been replaced by a knowledgeable, resourced “consultant , ” clients still want a real human they trust and relate to. That is unlikely to change. In the post mortems of their failed business plans, several insurtech leaders have lamented that they didn’t properly grasp how important a human relationship is to the insurance client.

• Clients, employees, carriers, and communities will remain the four key pillars of any great insurance broker. Effectively balancing the interests and needs of these four constituencies is the best way for agents and brokers to plan for a prosperous future. When facing a major decision, the best agencies ask, “How will this decision affect our ability to serve our clients, employees, carriers and communities?” In a complex and rapidly changing landscape, this question can serve as a beacon in guiding a firm toward effective outcomes.

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• Growth will determine value. The old saying, “If you’re not growing, you’re dying,” has nev er been truer – and will only become even more so. As the competitive dynamics of our industry intensify, growth will be more challenging, requiring thoughtful vision and strategy, consistent investment, and business discipline. While this may be bad news to some, the good news is that the rewards for growth will increase as well with a greater value differentiation between slow-growth and high-growth firms. While these are harrowing times with unprecedented challenges, there are also unprecedented opportunities for agency leaders to make a strong and lasting contribution to clients, employees, carriers, and communities. The insurance industry has shown remarkable resiliency in the past and we are confident that our industry – led by the Best Practices Agencies – will thrive in the years to come.

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Regional Distribution

Corporate Structure

Average Revenues

C Corp 4.2%

Other 4.2%

LLC 20.8%

Weighted Average Shareholder Age (WASA)

◼ Northeast ◼ Midwest

11.1% 29.6%

S Corp 70.8%

◼ West

7.4%

◼ Southeast ◼ Southwest

40.7% 11.1%

Revenue Distribution (as a % of Gross Revenue)

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

34.9%

Contingent / Bonus/ Overrides 6.2%

Other 0.8%

23.6%

Group L/H/F 4.5%

20.2%

Commercial P&C 38.5%

10.3%

10.3%

7.4%

7.1%

4.7%

Personal P&C 50.0%

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 smallest agency revenue category continues to struggle to make significant headway with large Group L/H/F accounts. 88% of the Group L/H/F book for agencies under $1.25 million was represented by accounts under 50 lives. On a positive note, agencies under $1.25 million achieved the fastest growth rate (10.3%) in its Group L/H/F book across all Best Practices revenue categories.

Commercial P&C

Group L/H/F

◼ < $5K

◼ Under 50 lives

57.0%

88.0%

◼ $5K to $10K

◼ From 50 to 100 lives

14.7%

6.0%

◼ $10K to $25K

◼ Over 100 lives

14.2%

6.0%

◼ $25K to $50K

6.8%

◼ > $50K

7.2%

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

2.8%

Top Quartile

22.0%

Over age 55

3.9%

Age 46-55

Age 36-45

2.4%

Average

13.2%

Up to age 35

4.1%

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. Investment in young talent pays dividends. Over 30% of Sales Velocity for Best Practices Agencies under $1.25 million was generated by producers under age 35, the largest freshman class contribution to Sales Velocity across all revenue categories. New business contributions for validated producers were consistent across all lines of business – no one line of business significantly outpaced the others.

Up to age 35 14.8%

Over age 55 23.4%

New Business

Average Book

Commercial P&C

$39,568

$232,708

Personal P&C

$29,930

$143,019

Age 36- 45 22.1%

Life/Health/ Financial

$35,641

$162,618

Multi- Line

$49,619

$469,579

Age 46- 55 39.7%

Effective NUPP

Group Average:

 26

Profitability

Employee Productivity

Rule of 20 Score

Pro Forma Metrics: # of Employees

Top Quartile

51.3%

Average

38.9

33.8%

31.9%

7.7

19.7%

23.9

Revenue per Employee Compensation per Employee Spread per Employee

$128,003

$183,707

Pro Forma Operating Profit

Pro Forma EBITDA

$58,307

$29,579

Average

Top Quartile

$69,696

$119,789

Comparison Group Average

Top Quartile

Notes

Organic Growth & Profitability Scatter Plot

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. The graph to the right 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.

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Regional Distribution

Corporate Structure

Average Revenues

C Corp 27.6%

LLC 24.1%

Weighted Average Shareholder Age (WASA)

◼ Northeast ◼ Midwest

10.0% 30.0% 10.0% 43.3%

S Corp 48.3%

◼ West

◼ Southeast ◼ Southwest

6.7%

Revenue Distribution (as a % of Gross Revenue)

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

29.4%

Contingent / Bonus/ Overrides 7.9%

24.9%

Other 0.6%

21.0%

21.0%

Group L/H/F 7.6%

Commercial P&C 48.9%

8.1%

7.0%

5.8%

5.4%

Personal P&C 35.0%

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 $1.25 - $2.5 million Best Practices group had the second lowest WASA of any size category (52.5 years). At 8.1%, total agency organic growth for the $1.25 - $2.5 million group is the highest growth achieved by any revenue category in this year’s Study . The Top Quartile growth of 24.9% was the highest of any revenue category. • •

Commercial P&C

Group L/H/F

◼ < $5K

◼ Under 50 lives

45.0%

83.1%

◼ $5K to $10K

◼ From 50 to 100 lives

18.0%

12.5%

◼ $10K to $25K

◼ Over 100 lives

19.2%

4.4%

◼ $25K to $50K

10.1%

◼ > $50K

7.6%

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

Top Quartile

32.0%

6.0%

Over age 55

2.5%

Age 46-55

Age 36-45

5.1%

Average

17.9%

Up to age 35

4.4%

Comparison Group Average

Book of Business per Producer (commissions and fees)

Book of Business by Age

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 group’s Effective NUPP totaled 0.7, the lowest NUPP of all the Study groups. BPS agencies in the $1.25 - $2.5 million revenue category posted the highest Sales Velocity (17.9%) of all the 2020 Best Practices Study revenue categories. This revenue category’s senior class (the “Over age 55” producer group) had the largest contribution to Sales Velocity in this year’s Study , an indication that additional investments in new producers may be needed.

Up to age 35 19.5%

New Business

Average Book

Commercial P&C

Over age 55 38.5%

$75,805

$363,563

Personal P&C

$28,647

$118,854

Life/Health/ Financial

$28,072

$152,101

Age 36- 45 27.5%

Multi- Line

$53,881

$551,106

Age 46- 55 14.6%

Effective NUPP

Group Average:

 30

Profitability

Employee Productivity

Rule of 20 Score

Pro Forma Metrics: # of Employees

Top Quartile

45.1%

44.0%

Average

38.6

26.4%

25.9%

14.9

22.6

Revenue per Employee Compensation per Employee Spread per Employee

$161,634

$273,627

Pro Forma Operating Profit

Pro Forma EBITDA

$80,353

$53,638

Average

Top Quartile

$81,281

$169,311

Comparison Group Average

Top Quartile

Notes

Organic Growth & Profitability Scatter Plot

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. The graph to the right 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.

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Regional Distribution

Corporate Structure

Average Revenues

C Corp 18.4%

LLC 21.1%

Weighted Average Shareholder Age (WASA)

◼ Northeast ◼ Midwest

19.5% 14.6% 14.6% 31.8% 19.5%

S Corp 60.5%

◼ West

◼ Southeast ◼ Southwest

Revenue Distribution (as a % of Gross Revenue)

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

25.3%

Contingent / Bonus/ Overrides 9.4%

18.3%

17.9%

Other 1.0%

17.0%

Group L/H/F 5.2%

7.5%

7.4%

5.3%

Personal P&C 23.6%

Commercial P&C 60.8%

-1.2%

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

• Agencies in the $2.5 – 5.0 million revenue category had the second highest WASA in the Study (55). • This was only revenue category in this year’s Study that exhibited negative growth (-1.2%) in Group L/H/F. • Agencies in this revenue category generated the second-highest commercial lines organic growth rate (7.5%) across all revenue categories in the 2020 Best Practices Study .

Commercial P&C

Group L/H/F

◼ < $5K

◼ Under 50 lives

35.6%

62.3%

◼ $5K to $10K

◼ From 50 to 100 lives

15.2%

17.2%

◼ $10K to $25K

◼ Over 100 lives

19.3%

20.5%

◼ $25K to $50K

13.2%

◼ > $50K

16.8%

 33

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

2.7%

Top Quartile

20.2%

Over age 55

4.1%

Age 46-55

Age 36-45

3.1%

Average

13.8%

Up to age 35

3.8%

Comparison Group Average

Book of Business per Producer (commissions and fees)

Book of Business by Age

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 in the $2.5 – 5.0 million revenue category had the highest producer success rate among all revenue categories in the Study at 73%. Life/Health/Financial producers generated the most significant

Up to age 35 14.0%

New Business

Average Book

Over age 55 34.5%

Commercial P&C

$84,811

$646,620

Age 36- 45 17.0%

Personal P&C

$60,024

$270,105

Life/Health/ Financial

$116,330

$297,837

Multi- Line

$57,113

$575,894

Age 46- 55 34.5%

Effective NUPP

Group Average:

new business (an average of $116,330) among all lines of business.

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