by Shirley Lukens, September 2003

National Underwriter

The annual Best Practices Study originated in 1993 as an initiative to help independent agents build the value of their most important asset, their agencies.  By studying the leading agencies and brokers in the country, the Independent Insurance Agents & Brokers of America (IIABA) 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 IIABA retained the principals of Reagan Consulting to create and perform the first study.  A decade later the annual updates continue to provide the industry's most widely-used financial and operational benchmarks. 

About This Year's Results

This year's study continues to follow the performance of the 180 agencies selected for inclusion in the 2001 study.  For the second year their year-end results have been compiled to update a subset of the benchmarks found in the comprehensive Best Practices Study that is published every third year.  Next year a new group of agencies will be selected as "Best Practices Agencies" and their performance tracked for two additional years in the annual Best Practices Study Executive Updates.

Over 90% of this year's participants submitted data for the fiscal year ending 12/31/2002.  The balance of the agencies reported on fiscal years ending within the first half of 2003. 

As expected the hard market contributed to hefty, double-digit revenue growth rates in all but the two smaller revenue category groups - "Under $500,000" and "Between $500,000 and $1.25 Million".  Both of these groups had single-digit growth rates below their previous year's rates.  While these lower growth rates reflect the fact that the agencies in these groups are less likely to write the larger commercial accounts most impacted by the hard market, the lower growth percentages point to the increasing competition these agencies face.  For the smaller agencies, revenue growth remains difficult, even in the hard market.

The average growth rate for the four study groups with revenues over $1.25 Million ranged from percentages in the mid-teens to a whopping 20.1%.  Since growth rates for the prior year hovered in the low teens, it is obvious that these agencies benefited even more from hard market rate increases in 2002 than they did 2001.   

Did the increased revenues translate into stronger profit ratios?  Yes. The Pro Forma Pre-Tax Profit figures present a meaningful picture of how well the agencies fared.   The Pro Forma Pre-Tax Profit is management's estimate of the agency's profit if all "discretionary" expenditures made for the benefit of the owners, based solely on ownership, were removed and the goal of management was to maximize profits. The over $2.5 Million study groups reported an average pro forma profit of 18.9% versus 17.0% for the prior year.  For the study groups with revenues under $2.5 Million, the figure was 23.5% versus 20.1% for the prior year.  

Clearly, owners enjoyed strong "shareholder returns" in 2002.  The challenge facing many will be to resist taking these profits for granted and to not become too relaxed.  Those agencies that stay focused, investing in new talent or other growth strategies, will be better positioned five years down the road to experience a continued increase in returns. 

A major factor influencing this year's profitability ratios was compensation expense. Since the 2001 Study results were published, compensation per employee increased an average of $9,990 in each of the six study groups.  Employees, who had worked in soft market conditions for years with minimal or no salary increases, were finally rewarded.   Agencies used their increased revenues to provide incentives and to retain and recognize employees who labored under heavier, market-induced workloads. 

At the same, time headcounts continued to drop slightly in all but the two largest revenue categories where the number of employees jumped significantly.  However, many of these agencies made investments to support future growth, using their additional revenues to add new producers and support staff. 

Acquisition activity was another factor in the revenue growth rate for the two larger revenue categories, although such activity was not limited to those groups as shown in the chart below.  The average multiple paid was 1.32x the acquired revenues.  This was up slightly from 1.29x in the previous year.

Although the immediate effect of the hard market was evident on this year's results, the outcome is yet to be seen.  It will be interesting to see how the Best Practices agencies perform as the market turns and margins shrink, a phenomenon that appears to be rapidly approaching, based on the recent performance of the stocks of the public brokers.    Will they be able to maintain steady revenue growth and good profitability?  We think so.  These agencies have shown that they consistently are able to achieve good results by wisely controlling expenses, investing for future growth, and expecting the best from their employees and carrier partners. 

Complete study results are available online.  Just log on to the web sites of either Reagan Consulting (www.reaganconsulting.com) or the IIABA (www.iiaba.com) and click on the Best Practices Gateway.  Hard copies of the study may also be purchased through the IIABA's Education Department. 

Shirley Lukens (shirley@reaganconsulting.com)  is a principal at Reagan Consulting, an Atlanta-based management consulting firm that serves the insurance distribution system.