by Shirley Lukens, November 2006

National Underwriter

Chances are that your agency is the most valuable asset you own.  Whether you plan to perpetuate it internally or sell it to a third party, maintaining and enhancing its value is critical to your future. 

It is not surprising then that so many agencies use the annual Best Practices Study and Best Practices Tool Kit in the pursuit of this goal.  What is surprising, however, is the number of agencies that are still not sure how Best Practices can help them.  If you are among that group, here is a quick primer.

Four major factors impact agency value: growth, profitability, stability, and financial management.  If you can influence and control these factors in a positive way, then you can enhance your agency's value. Best Practices information can help you evaluate and control these factors.

Let's start with growth, specifically growth in revenues.  In a hard market it is easy to achieve double digit growth, but in a soft market even single digit growth becomes difficult. As a result, a focus on both retention and aggressive new business production is essential.  So, what kind of goals should you set for yourself or your producers?  How do you know what is realistic?

The newly released 2006 Best Practices Study can guide you.  It provides these benchmarks in seven different revenue categories.

 For example, if your agency is in the $2.5 -$5 million category, you will find that new commissions produced annually per validated CL producer is $61,945.  That is just the average producer in the average Best Practices agency.  For the Top 25% of the agencies, the average new commissions produced annually per validated CL producer is $109K. 

For the validated Personal Lines producer the average new commission produced annually is $40K.  In the Top 25%, the new commissions produced annually is nearly $80K.

 I imagine that many of you are rolling your eyes as you read this, saying to yourself - "Sure, if you live in NYC."  Don't be so sure!  One of the Best Practices agencies in the study has a Personal Lines producer who consistently produces in excess of $80K each year in a smaller metropolitan area in Wisconsin, a state that has among the lowest personal lines rates in the country. 

If we don't look outside to see what is possible, we can set our sites too low.  Best Practices benchmarks show us what the best are doing and hopefully motivate us to raise the bar.

The second factor impacting agency value is profitability.  Agency buyers establish an agency's value based on its expected future profits.  Generally speaking the higher the expected future profits, the higher the value (i.e. the more they are willing to pay for it.)

Best Practices agencies have seen a steady increase in profitability over the last decade.  In 1993 the Pro Forma Profitability as a percentage of net revenues hovered between 10% -12% for all the revenue categories.  In 2006, the average Pro Forma Profitability for all the revenue groups was 25%. 

This increase has been fueled by increases in employee productivity.  A $3.5 million revenue sized agency had 50 employees back than.  Today that agency has 26 employees.  That has resulted in expense reductions across the board from payroll expense to occupancy expense to equipment cost. 

Is your profitability significantly better today than it was a decade ago?  What do your head counts look like?  How do your expenses compare?  The Best Practices Study can give you a guide to make sure your numbers are in line.  If they're not, you can take actions to bring them in line.

The third factor impacting agency value is stability.  This refers to the risk associated with your operations and how successfully your agency would be able to sustain the loss of a key employee, a large account, or a lead carrier.  The Best Practices numbers can help you see how your risks compare to other agencies in your revenue category.  For example, what percentage of your revenue is derived from your single largest account?  The average agency in the $2.5 - $5 million revenue category derives only 3.7% of its total net revenue from its largest commission account and 15.4% from its ten largest accounts. 

What about the revenues from your top carriers?  Approximately 17.6% of the average agency's net revenues are derived from its top P&C carrier and 32% from the top three carriers.  Using the Best Practices numbers you can assess how well you are managing your stability/risks compared to a Best Practices agency peer group. 

The final factor in agency value is the financial management of an agency. This refers to the financial condition of the agency or the value of its balance sheet, its tangible assets and liabilities.  A key practice of the better agencies is that they retain earnings to reinvest in their agencies' growth.  They are willing and able to hire a new producer, upgrade their agency management system, and/or to provide additional training for employees.  Are you in a position to do the same?  How does your balance sheet compare to your Best Practices peers?

Another key financial practice is good receivables management.  Many of the Best Practices agencies have a receivables / payables ratio of 0%. That means their Accounts Receivables balance equals $0, but they have company payables due in the future.  In other words, they are collecting premiums on or before the policy effective date.  This helps to improve their bottom line by eliminating bad debt expense and allows them to earn interest income on the premium float.  How timely are your collections?  How big is the performance gap between your agency and the Best Practices agencies?    

Admittedly, the four factors that impact agency value can be affected by outside forces.  There isn't a lot your firm can do to turn around a soft P&C market.  Overall, however, the four factors are within your control.  You can focus on new sales, increase productivity by streamlining processes, and improve profitability by managing expenses. If you can positively influence the critical factors, you can increase your firm's value. 

That is why the Best Practices initiative was developed - to give agencies the tools, services, and information they need to improve their growth, their profitability, their stability and their management skills.

The annual Best Practices Study is a starting point because it gives you the benchmarks by which you can measure your performance and identify performance gaps.  Once you know where the gaps are, you can develop an action plan to address one or more of the gaps. 

Beyond the study there is an entire set of tools and information to help you execute your action plan to improve your performance.  If you aren't familiar with the tools, go to the Best Practices Gateway website (http://bp.reaganconsulting.com) and check out the Best Practices Tool Kit.  You can download free checklists, worksheets, and order forms.  

On the website you will also see the dozen sponsors whose financial support help to fund the site and the development of the annual Best Practices Study.  Many of them have taken a proactive role in helping their agencies obtain and use Best Practices tools.  When you talk to them be sure to thank them for their support!! 

A special thanks to the following carriers for their sponsorship of the 2006 Best Practices Study:  Applied Systems, Central Insurance Companies, Chubb, Hanover Insurance Group, Imperial AI Credit, InsurBanc, Main Street America Group, MetLife, Ohio Casualty, Safeco, Travelers, Zurich NA.

Shirley Lukens is a senior vice president and principal of Reagan Consulting, Inc., an Atlanta-based consulting firm that developed and produces the Independent Insurance Agents & Brokers of America Best Practices Study.   She can be reached at shirley@reaganconsulting.com.