2001 Best Practices Study

Agencies with revenues under $250,000 Agencies with revenues between $250,000 and $500,000 Agencies with revenues between $500,000 and $1,250,000 Agencies with revenues between $1,250,000 and $2,500,000 Agencies with revenues between $2,500,000 and $5,000,000 Agencies with revenues over $5,000,000 I NCLUDE S A COMPR EHENS I VE ANALYS I S OF :

C O N D U C T E D B Y : I N D E P E N D E N T I N S U R A N C E AG E N T S O F A M E R I C A , I N C . A N D R E AG A N C O N S U LT I N G

A SPECIAL ACKNOWLEDGEMENT We wish to thank the following companies for their sponsorship which has funded the development of the annual Best Practices Study and the update of the web-based Best Practices Gateway and Best Practices Performance Quick Check:

Central Insurance Companies

Chubb Group of Insurance Companies

OneBeacon Insurance

CNA

Fireman’s Fund

Royal & SunAlliance

Travelers

Zurich North America

T ABLE OF C ONTENTS

Introduction

1

Special Analysis of Agencies with Revenues Less than $1,250,000 Personal Lines Analysis

3 5 7

Regional Analysis

Population Density Analysis

Special Analysis of Agencies with Revenues Greater than $1,250,000 Personal Lines Analysis

8

Regional Analysis

10 12

Population Density Analysis

Analysis of Agencies with Revenues Less than $500,000 Best Business Practices

14

Benchmarks

Agency Characteristics Revenue Analysis Acquisition Activity Expense Analysis

20 20 22 24 25 26 32 33 33 42 42 43 45 46 4 7 52 53 53 64 64 66 68 69 70 76 77 77 36 56

Profitability Productivity

Financial Stability Carrier Representation

Technology

Analysis of Agencies with Revenues Between $500,000 and $1,250,000 Best Business Practices

Benchmarks

Agency Characteristics Revenue Analysis Acquisition Activity Expense Analysis

Profitability Productivity

Financial Stability Carrier Representation

Technology

Analysis of Agencies with Revenues Between $1,250,000 and $2,500,000 Best Business Practices

Benchmarks

Agency Characteristics Revenue Analysis Acquisition Activity Expense Analysis

Profitability Productivity

Financial Stability Carrier Representation

Technology

Analysis of Agencies with Revenues Between $2,500,000 and $5,000,000 Best Business Practices

80

Benchmarks

Agency Characteristics Revenue Analysis Acquisition Activity Expense Analysis

86 86 88 90 91 92 98 99 99

Profitability Productivity

Financial Stability Carrier Representation

Technology

Analysis of Agencies with Revenues Between $5,000,000 and $10,000,000 Best Business Practices

102

Benchmarks

Agency Characteristics Revenue Analysis Acquisition Activity Expense Analysis

108 108 110 112 113 114 120 121 121 132 132 134 136 137 138 144 145 145 124

Profitability Productivity

Financial Stability Carrier Representation

Technology

Analysis of Agencies with Revenues Greater Than $10,000,000 Best Business Practices

Benchmarks

Agency Characteristics Revenue Analysis Acquisition Activity Expense Analysis

Profitability Productivity

Financial Stability Carrier Representation

Technology

Glossary

147

T HE 2001 B EST P RACTICES S TUDY E XECUTIVE U PDATE

Background In 1993, the IIAA’s Commission to Enhance Agency Value retained the principals of Reagan Consulting to create and perform the study of The Best Practices of the Leading Independent Insurance Agencies in the United States . Updated annually, the study provides important financial and operational benchmarks and is recognized as one of the most thoughtful, effective and valuable resources ever made available to the industry. The leading agencies included in the study are nominated once every three years by the insurance companies participating on the Commission and the Executive Directors of IIAA’s state associations. Those nominated are then asked to complete an in-depth survey. From those agencies submitting data, the top 30 in each revenue category are then included in the study for the next three years and earn the status of a “Best Practices Agency.” They are scored and ranked objectively for inclusion on the basis of Account Retention Rates, Revenue Growth, Productivity, Profitability, and Financial Stability. Participation in The Best Practices Study has become a prestigious recognition of the superior accomplishments of the top insurance agencies in each of the six size categories studied. About this study Of the 800 agencies nominated, more than 250 submitted data for the 2001 Best Practices Study . This year the study provides a more comprehensive look at agency results and operations. Supplementary information was gathered in the following areas: • Agency technology • Benefits provided to agency employees • Revenues derived by line of business and services provided • Details on acquisition transactions In addition telephone interviews were conducted with the top agencies in each of the six revenue categories to glean the business practices used by these organizations to achieve their outstanding results.

1

The 2001 Best Practices Study is available in two formats – hard copy and electronically. The hard copy, which can be purchased via the IIAA distribution center (800-261-4422), contains all the numerical results as well as an analysis at the beginning of each revenue section of the business practices used by those top agencies in that study group. The electronic Executive Update contains only the numerical results and can be accessed via the websites of IIAA and Reagan Consulting (www.independentagent.com & www.reaganconsulting.com). From the sites, users can enter the Best Practices Gateway page to view an html version of the Executive Update, download a Best Practices Excel spreadsheet to compare their year-end results with the study’s results, and access the complete family of Best Practices resources. As in previous years, the update provides an analysis of agencies by revenue size, by region and by population density of the city in which they primarily operate. In addition, the study contains an analysis of agencies that indicated that Personal Lines is an important source of revenue. Other Best Practices Studies and Tools In addition to providing benchmarks and documenting the business practices of leading agencies, the IIAA and Reagan Consulting periodically address specific business practices or focus on issues of critical importance to independent agencies. Such studies include The Best Practices of Leading Sales Organizations and The Best Practices for Perpetuation and Management Succession. Tools designed to help agencies measure and improve their performance include the Agency Self-Diagnostic Tool and the Joint Agency Company Planner . These Best Practices studies and tools, which are part of a complete line of Best Practices products and services, can be ordered through the IIAA Distribution Center at 800-261-4422.

2

SPECIAL PERSONAL LINES ANALYSIS Agencies with Revenues Less Than $1,250,000

AGENCY CHARACTERISTICS

This analysis represents the results for agencies with revenues of under $1,250,000 that feel that personal lines is an important part of their growth and profitability. These operating results provide the Best Practices standards against which to measure your Personal Lines

results.

A. Percentage of Group Who Said Personal Lines is Important Agencies with Net Revenues of: Less Than $500,000

80.0% 68.6%

$500,000 - $1,250,000

B. Metro Population Where Agency is Located Less than 50,000

63.6% 20.5%

50,000 - 250,000 250,000 - 1,000,000 More than 1,000,000

6.8% 9.1%

REVENUE ANALYSIS

Average PL Commission Income: $280,320

Average

+25% Profit

+25% Growth

% of Net Total Revenues

47.1% 91.9% 13.5%

47.6% 91.8% 13.4%

40.2% 91.6% 16.2%

% Renewals (1) % New Business (2)

% Acquired (3)

0.7% 5.5% 6.2%

1.2% 5.1% 6.4%

0.0% 7.8% 7.8%

Growth Rate: Internal (4)

Total (5)

(1) Renewal Revenues as a percent of prior year's Personal Lines Total Revenues. This figure is impacted by attrition (loss or retention of accounts) and by changes in premium and commission levels. The higher the percentage, the more favorable the results. (2) New Revenues as a percent of prior year's Personal Lines Total Revenues. The higher the percentage, the more favorable the results. (3) Acquired Revenues as a percent of prior year's Personal Lines total Revenues.

The percentage indicates the significance of acquired business. (4) Growth in Revenues from prior year excluding acquired revenues. (5) Growth in Revenues from prior year including acquired revenues.

3

SPECIAL PERSONAL LINES ANALYSIS Agencies with Revenues Less Than $1,250,000

EMPLOYEE PRODUCTIVITY

CSR Information

Average # of CSRs

2.1 4.0 1.0

High Low

Average $131,897 $27,347

+25% Profit

Average Commissions Serviced

$199,242

Average Pay

How Time Was Spent:

Selling New Business Marketing (Placement)

15.8% 15.7%

Claims Processing Customer Service

7.9%

56.1%

Administration

4.1%

How Time Was Spent 4.1%

15.8%

56.1%

15.7%

7.9%

Selling New Business Marketing (Placement) Claims Processing Customer Service Administration

Producer Information

Average

+25% Profit

Average No. of Validated Producers Average PL Commissions in Book

1.3

*

$81,200 $35,813

Average Pay/PL Producer

*-Insufficient Data

CARRIER REPRESENTATION

Number of Carriers Represented

Average

+25% Profit

+25% Growth

No. of PL National No. of PL Regional

2.7 3.7

2.3 3.7

2.6 3.4

Service Center Use

Total Pers'l Lines Commissions placed in Carrier Service Center

33.8%

*

*

*-Insufficient Data

4

SPECIAL REGIONAL ANALYSIS Agencies with Revenues Less Than $1,250,000

AGENCY CHARACTERISTICS

in conjunction with results by revenue group to gain the most complete understanding of the The regional analysis provides another perspective for understanding the Best Practices data in their proper context. However, characteristics regarded as unique to agencies in a certain part of the country or any regional factors influencing agency operations are best considered

operating characteristics of the Best Practice agencies.

NE

SE

MW SW

W

Growth Net Revenue Growth

9.8% 7.8% 10.6% 7.8% 8.1%

Profitability as % of Net Revenues Pre-tax

16.4% 15.1% 16.6% 19.2% 24.7% 17.3% 19.3% 19.4% 24.5% 20.5% 3.3% 6.6% 4.6% 5.1% 7.6%

Pro Forma Pre-tax Operating Pre-tax

Productivity Revenue per Employee

$93,639 $98,207 $90,671 $94,144 $106,676 $51,006 $55,053 $49,179 $51,745 $48,422 $42,634 $43,155 $41,492 $42,399 $58,254

Compensation per Employee Spread per Employee (1)

Pay Levels for Producers Commercial P&C Producers Personal P&C Producers

$70,880 $59,674 $77,000

* * * *

$38,000

* *

$27,167 $41,503

* *

*

$39,286

Life & Health Producers

$61,168 $107,700 $60,659

$45,400

Multiline Producers

Pay Levels for CSRs Commercial P&C CSRs

$32,653 $35,000 $25,866 $25,513 $33,529 $28,275 $29,829 $27,943 $19,842 $24,814

Personal P&C CSRs Life & Health CSRs

$13,313

*

*

$14,129

* *

$37,017 $28,856 $25,832

*

Multiline CSRs

Number of Carriers PL - National

2.4 4.3 2.8 4.9

3.1 3.2 3.8 4.5

1.9 4.2 2.2 4.1

3.0 2.5 3.2 4.0

3.3 1.8 4.0 2.7

PL - Regional CL - National CL - Regional

Service Center Use Total Pers'l Lines Commission placed in Carrier Service Center Total Comm'l Lines Commission placed in Carrier Service Center

*

13.7%

*

*

27.2%

*

5.8%

*

*

15.3%

% of Agencies Making Acquisition in Last 12 Months

0.0% 7.7% 0.0% 16.7% 0.0%

* - Insufficient Data

(1) Total revenue per employee minus compensation per employee. While revenue per employee has been a standard productivity measure, the "spread" measures the dollars per employee available to pay all other agency expenses and generate a profit for the agency.

5

SPECIAL REGIONAL ANALYSIS Agencies with Revenues Less Than $1,250,000

State Groupings:

TECHNOLOGY

Agency Management System Utilized:

NE

SE

MW SW

W

AMS

53.3% 15.4% 29.4% 33.3% 33.3% 20.0% 53.8% 35.3% 66.7% 33.3% 20.0% 15.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 6.7% 0.0% 5.9% 0.0% 0.0% 0.0% 7.7% 5.9% 0.0% 22.2% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 6.7% 7.7% 23.5% 0.0% 11.1%

Applied Systems

Ebix

CAIR Doris InStar

Strategic Insurance Software

irs-aims

VRC Other

NE

SE

MW SW

W

Agency has a website

86.7% 83.3% 76.5% 33.3% 60.0%

Internet Access:

All employees have access from desktops Selected employees have access from desktop Access available but not through employee desktops No Internet access available in agency

86.7% 92.3% 100.0% 66.7% 100.0%

13.3% 7.7% 0.0% 16.7% 0.0%

0.0% 0.0% 0.0% 16.7% 0.0%

0.0% 0.0% 0.0% 0.0% 0.0%

6

SPECIAL POPULATION DENSITY ANALYSIS Agencies with Revenues Less Than $1,250,000

AGENCY CHARACTERISTICS

agency in a smaller community. As always, consider these data in light of the results achieved by agencies of a similar revenue size to gain the best understanding of Best Practices agencies. The population density analysis provides another valuable picture of the operating characteristics of the agencies included in the Best Practices Study Executive Update. In general, a comparison among agencies of a similar size is the best comparison basis, but an evaluation based on community size can prove helpful when an agency is atypical in nature, such as a larger revenue

Less than

50,000- 250,000

250,000- 1,000,000

Over

1,000,000

50,000

% of Agencies Located in Each Population Size

67.2%

14.8%

8.2%

9.8%

Net Revenue Growth

8.1%

8.1%

13.8%

14.3%

Profitability as % of Net Revenues Pre-tax

17.0% 19.5%

21.3% 17.5%

18.0% 19.6% 10.1%

17.8% 22.1%

Pro Forma Pre-tax Operating Pre-tax

5.4%

2.4%

3.8%

Productivity

Revenue per Employee

$91,375 $48,238 $43,137

$86,785 $47,247 $39,537

$117,214 $59,371 $57,843

$123,471 $68,613 $54,859

Compensation per Employee

Spread per Employee

Pay Levels for Producers Commercial P&C Producers

$63,386 $38,127 $51,585 $54,568

$77,465

* * * *

$60,833

Personal P&C Producers Life & Health Producers

* *

* *

Multiline Producers

$66,833

$123,293

Pay Levels for CSRs

Commercial P&C CSRs Personal P&C CSRs

$27,946 $24,336 $17,095 $27,640

$34,893

* * * *

$39,063

* * *

* * *

Life & Health CSRs

Multiline CSRs

Number of Carriers PL - National

2.7 3.4 3.1 3.8

2.4 3.9 2.6 5.0

2.2 4.2 2.4 3.0

2.7 2.7 4.5 6.3

PL - Regional CL - National CL - Regional

Service Center Use Total Pers'l Lines Commission placed in Carrier Service Center Total Comm'l Lines Commission placed in Carrier Service Center

20.7%

*

*

*

9.3%

*

*

6.4%

* - Insufficient Data

7

SPECIAL PERSONAL LINES ANALYSIS Agencies with Revenues Greater Than $1,250,000

AGENCY CHARACTERISTICS

This analysis represents the results for agencies with revenues of over $1,250,000 that feel that personal lines is an important part of their growth and profitability. These operating results provide the Best Practices standards against which to measure your Personal Lines

results.

A. Percentage of Group Who Said Personal Lines is Important Agencies with Net Revenues of: $1,250,000 - $2,500,000

43.3% 45.2% 46.7% 16.7%

$2,500,000 - $5,000,000 $5,000,000 - $10,000,000

Over $10,000,000

B. Metro Population Where Agency is Located Less than 50,000

8.7%

50,000 - 250,000 250,000 - 1,000,000 More than 1,000,000

28.3% 32.6% 30.4%

REVENUE ANALYSIS

Average PL Commission Income: $1,188,452

Average

+25% Profit

+25% Growth

% of Net Total Revenues

26.4% 92.2% 12.8%

26.8% 90.6% 11.1%

22.0% 92.4% 16.5%

% Renewals (1) % New Business (2)

% Acquired (3)

2.6% 5.0% 7.6%

2.8% 1.7% 4.5%

2.3% 8.9%

Growth Rate: Internal (4)

Total (5)

11.1%

(1) Renewal Revenues as a percent of prior year's Personal Lines Total Revenues. This figure is impacted by attrition (loss or retention of accounts) and by changes in premium and commission levels. The higher the percentage, the more favorable the results. (2) New Revenues as a percent of prior year's Personal Lines Total Revenues. The higher the percentage, the more favorable the results. (3) Acquired Revenues as a percent of prior year's Personal Lines total Revenues.

The percentage indicates the significance of acquired business. (4) Growth in Revenues from prior year excluding acquired revenues. (5) Growth in Revenues from prior year including acquired revenues.

8

SPECIAL PERSONAL LINES ANALYSIS Agencies with Revenues Greater Than $1,250,000

EMPLOYEE PRODUCTIVITY

CSR Information

Average # of CSRs

5.7

High Low

23.0

1.0

Average $168,305 $31,085

+25% Profit

Average Commissions Serviced

$237,632

Average Pay

How Time Was Spent:

Selling New Business Marketing (Placement)

12.0% 13.1%

Claims Processing Customer Service

8.0%

63.0%

Administration

4.0%

How Time Was Spent

4.0%

12.0%

13.1%

62.9%

8.0%

Selling New Business Marketing (Placement) Claims Processing Customer Service Administration

Producer Information

Average

+25% Profit

Average No. of Validated Producers Average PL Commissions in Book

2.3

*

$213,263 $63,417

Average Pay/PL Producer

*-Insufficient Data

CARRIER REPRESENTATION

Number of Carriers Represented

Average

+25% Profit

+25% Growth

No. of PL National No. of PL Regional

7.0 3.7

5.6 3.8

5.6 2.6

Service Center Use

Total Pers'l Lines Commissions placed in Carrier Service Center

19.6%

12.2%

19.4%

9

SPECIAL REGIONAL ANALYSIS Agencies with Revenues Greater Than $1,250,000

AGENCY CHARACTERISTICS

in conjunction with results by revenue group to gain the most complete understanding of the The regional analysis provides another perspective for understanding the Best Practices data in their proper context. However, characteristics regarded as unique to agencies in a certain part of the country or any regional factors influencing agency operations are best considered

operating characteristics of the Best Practice agencies.

NE

SE

MW SW

W

Growth Net Revenue Growth

12.3% 15.8% 14.5% 8.6% 17.7%

Profitability as % of Net Revenues Pre-tax

12.4% 9.0% 12.8% 13.4% 11.4% 20.1% 16.4% 17.8% 18.5% 17.9% -0.5% -0.2% 3.7% 2.7% 2.7%

Pro Forma Pre-tax Operating Pre-tax

Productivity Revenue per Employee

$121,409 $120,392 $113,547 $113,121 $128,213 $73,956 $80,072 $73,977 $70,717 $83,935 $47,453 $40,320 $39,570 $42,404 $44,278

Compensation per Employee Spread per Employee (1)

Pay Levels for Producers Commercial P&C Producers Personal P&C Producers

$102,429 $153,206 $131,414 $99,499 $145,306 $66,214 $60,063 $65,059 $41,724 $79,188 $104,484 $161,878 $112,393 $131,926 $152,850 $72,894 $105,130 $128,742 $102,056 $108,887

Life & Health Producers

Multiline Producers

Pay Levels for CSRs Commercial P&C CSRs

$51,719 $36,803 $34,862 $36,530 $43,946 $31,994 $30,071 $28,160 $29,719 $36,891 $34,269 $32,996 $32,515 $44,477 $40,737

Personal P&C CSRs Life & Health CSRs

*

*

*

*

*

Multiline CSRs

Number of Carriers PL - National

7.7 5.2

5.1 3.5

4.8 3.4

7.8 2.7

7.4 2.2

PL - Regional CL - National CL - Regional

18.6 12.3

18.8 12.8

14.0 14.6

21.9

13.9 23.3

4.1

Service Center Use Total Pers'l Lines Commission placed in Carrier Service Center Total Comm'l Lines Commission placed in Carrier Service Center

27.2% 5.1% 2.9% 10.2% 18.1%

7.6% 1.2% 0.6% 2.6% 2.5%

% of Agencies Making Acquisition in Last 12 Months

32.0% 19.4% 24.0% 16.7% 16.7%

* - Insufficient Data

(1) Total revenue per employee minus compensation per employee. While revenue per employee has been a standard productivity measure, the "spread" measures the dollars per employee available to pay all other agency expenses and generate a profit for the agency.

10

SPECIAL REGIONAL ANALYSIS Agencies with Revenues Greater Than $1,250,000

State Groupings:

TECHNOLOGY

Agency Management System Utilized:

NE

SE

MW SW

W

AMS

40.0% 44.4% 40.0% 44.4% 33.3% 48.0% 44.4% 52.0% 38.9% 27.8% 12.0% 8.3% 4.0% 11.1% 22.2% 0.0% 0.0% 0.0% 0.0% 11.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 5.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 5.6% 4.0% 0.0% 11.1%

Applied Systems

Ebix

CAIR Doris InStar

Strategic Insurance Software

irs-aims

VRC Other

NE

SE

MW SW

W

Agency has a website

88.0% 91.7% 91.7% 100.0% 100.0%

Internet Access:

All employees have access from desktops Selected employees have access from desktop Access available but not through employee desktops No Internet access available in agency

96.0% 94.4% 100.0% 100.0% 100.0%

4.0% 5.6% 0.0% 0.0% 0.0%

0.0% 0.0% 0.0% 0.0% 0.0%

0.0% 0.0% 0.0% 0.0% 0.0%

11

SPECIAL POPULATION DENSITY ANALYSIS Agencies with Revenues Greater Than $1,250,000

AGENCY CHARACTERISTICS

agency in a smaller community. As always, consider these data in light of the results achieved by agencies of a similar revenue size to gain the best understanding of Best Practices agencies. The population density analysis provides another valuable picture of the operating characteristics of the agencies included in the Best Practices Study Executive Update. In general, a comparison among agencies of a similar size is the best comparison basis, but an evaluation based on community size can prove helpful when an agency is atypical in nature, such as a larger revenue

Less than

50,000- 250,000

250,000- 1,000,000

Over

50,000

1,000,000

% of Agencies Located in Each Population Size

12.5%

24.2%

32.5%

30.8%

Net Revenue Growth

15.3%

11.9%

16.5%

12.4%

Profitability as % of Net Revenues Pre-tax

12.9% 18.6%

13.5% 19.6%

9.8%

11.6% 17.7%

Pro Forma Pre-tax Operating Pre-tax

16.7% -0.4%

2.5%

2.2%

2.7%

Productivity

Revenue per Employee

$115,661 $70,351 $45,309

$113,459 $69,795 $43,664

$120,286 $79,880 $40,405

$123,074 $80,499 $42,575

Compensation per Employee

Spread per Employee

Pay Levels for Producers Commercial P&C Producers

$112,376 $38,934 $93,022 $105,667

$123,835 $49,048 $111,392 $112,564

$121,705 $57,445 $156,472 $106,898

$148,121 $90,828 $145,533 $84,851

Personal P&C Producers Life & Health Producers

Multiline Producers

Pay Levels for CSRs

Commercial P&C CSRs Personal P&C CSRs

$38,383 $30,781 $33,263

$33,787 $27,277 $35,418

$37,025 $30,433 $34,303

$51,410 $34,314 $37,448

Life & Health CSRs

Multiline CSRs

*

*

*

*

Number of Carriers PL - National

6.8 4.7

4.4 4.4

5.6 2.7

8.2 3.0

PL - Regional CL - National CL - Regional

15.4

12.9 16.1

15.5

24.6 15.0

6.5

8.2

Service Center Use Total Pers'l Lines Commission placed in Carrier Service Center Total Comm'l Lines Commission placed in Carrier Service Center

*

7.2%

10.9%

17.2%

1.7%

1.6%

5.7%

1.5%

* - Insufficient Data

12

13

A NALYSIS OF A GENCIES WITH R EVENUES L ESS T HAN $500,000

B EST B USINESS P RACTICES A NALYSIS

C USTOMER S ERVICE AND S ATISFACTION Over three quarters of the agencies in this revenue category are from smaller communities. Because their clients are typically neighbors and friends, they strive to show a sense of urgency and to be available to clients, be it longer hours of operations than their competitors, weekend appointments, or providing 24/7 availability through emergency numbers, pagers, or making their home phone number available. They use draft authority extensively to settle small claims quickly, and for larger claims are proactive in keeping the client apprised of the claims process and status. They are prompt at returning phone calls and responding to requests, have processes in place to continuously improve client coverages, and are quick to investigate and resolve problems that cause clients to be unhappy. Although carrier service centers are used somewhat for personal lines, the agencies in this revenue category tend to prefer to service their clients in house. This is a very difficult issue for the agencies in this revenue category. Most feel they cannot compete with larger agencies in attracting, training, and compensating new producers. If they are able to bring on a producer, it is usually through the acquisition of that producer’s book of business. Support staff is somewhat easier to identify and hire as a result of these agencies’ involvement in community and industry activities. Once on board, employees tend to become “one of the family” and turnover is generally low. Job satisfaction tends to be high because these employees are expected to do – and feel they have control to do – a job from start to finish. As one agent stated, “Whoever answers the phone owns that call.” Although small, these agencies offer employees many rewards including close relationships, a more casual atmosphere, recognition of their contribution, and monetary rewards when the agency succeeds. H IRING , D EVELOPING , AND R EWARDING E MPLOYEES

“Our risk management attitude separates us from the order takers. Nothing makes me more excited than improving a client’s coverage and eliminating fatal gaps in coverage. ” “A client will probably only have a couple of claims in their lifetime, whereas we see them regularly and could get callused if we didn’t try to view everyone’s claim as the most important claim we have ever had.”

“I give the people in our office credit for having common sense and experience to do a job without me having to look over their shoulder all the time. I back their decisions, make sure they have the tools and information they need and just let them do their job.”

14

Analysis of Agencies with Revenues Less Than $500,000

C OMMUNICATIONS – E MPLOYEE , C LIENT , AND C ARRIER

Because of their small size, these agencies find employee communications to be fairly easy. Everyone can gather quickly, either regularly or spontaneously as needed, to share information, get and provide feedback, and make decisions. Financial information may or may not be shared with non- family employees, but everyone has a good understanding of the agency’s goals and what it takes to accomplish them simply because they are discussed so openly and often. Generally these agencies communicate to the employees the need for honesty and integrity in all client and carrier dealings. One agency developed a statement signed by everyone in the agency regarding the “trust factor” and the confidentiality of client information. These agencies communicate the importance of the personal client relationships through such actions as sending birthday cards, attending client functions and personal events, and using gift certificates to say “thanks for the referral” or “sorry we caused you an inconvenience.” A surprising variety of vehicles are used to communicate information to clients and companies including comprehensive advertising (radio, cable, local newspaper) and the internet (websites, email). Frequent business communication is maintained through periodic phone calls, educational bulletins, industry news, annual renewal surveys, and correspondence as needed to keep the client informed of the status of transactions. Successful financial management for a small insurance agency is defined differently than it would be for a larger agent or broker. For the small, privately held firm the existing tax laws actually encourage owners to take money out of their businesses as opposed to building up their agency’s balance sheets. On the surface, this would affect liquidity and cash flow, but most of these owners are willing to put their personal resources in the business to meet payroll, invest in the purchase of physical assets, or make an investment to grow the business. For this reason, financial management cannot and should not be measured by the strength of the balance sheet. F INANCIAL M ANAGEMENT

“We work at being sensitive to the emotions and respectful of the person on the other end of the line.” “A letter goes out to every client with a claim telling them what to do, i.e. write down the name of the adjuster and phone number, etc. The letter spells out exactly what they need to do, what is going to happen, and what the expected time frame is and that they should call us immediately if anything is different from what we told them to expect or if they have any problems.”

“Our best practice for financial management is just staying on top of it. We watch our P&L very closely comparing it to the previous year, and we keep receivables in check. We do not let anyone get out of hand. We present the bill and tolerate 30 days. Period.”

“We watch bottom line profits. They are the reason we are in business... plain and simple.”

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Analysis of Agencies with Revenues Less Than $500,000

“Over the years we have written some large accounts when the market was hard, so when we made the money we put it aside. We didn’t spend that money but invested it wisely. We have been able to weather several rocky periods without borrowing money ... and, we finance everything in house. Not having any interest expense helps considerably.” “We do not live or die on selling just P&C. We also sell L&H, pension plans, mutual funds. With 92% of our accounts we have at least two lines of business or more. When we sell the client life insurance we know that, if for some reason we lose the P&C, we will retain the account because they are not likely to change their life insurance. We almost always get the P&C back.” “We stress account selling pretty heavily and continuously. If we are out at a farm in June selling hail insurance, we can usually get them to look at their risks and usually end up selling something else.” “Gaining the endorsement of the restaurant association has allowed me to market statewide where the calls roll in daily. What a great way to do business!”

At the same time, most successful smaller agencies do not use their size as an excuse for not successfully managing their finances. The typical agency in this study group is good at managing its receivables, keeping sufficient trust balances and investing properly the cash they have. More often than not, the principals of these insurance agencies prepare budgets in order to respond to the cyclical nature of the flow of their business, to prepare for capital expenditures and to measure their performance. R EVENUE G ROWTH Strategies for growing revenues in this study group run the gamut. Several have specialized in targeted niches and gained endorsements from associations or other trade groups while others have gravitated to offering their clients complete solutions – property & casualty, life & health and financial services. The top agencies in this study group appear to have fairly strong sales cultures with a focus on either developing strategic alliances or on account development and cross selling (although many see this focus as providing better service to the client.) Production goals and commission income are monitored very closely. Referrals are actively solicited and local advertising and community involvement are used to build a good stream of business.

16

Analysis of Agencies with Revenues Less Than $500,000

T ECHNOLOGY U TILIZATION

“Our employees are motivated by being a part of a new breed of agencies that focus on automation, which ultimately benefits the client and creates great pride from the support staff’s feeling about their job.” “We use our agency management system to do everything -- our billings, claims, Certificates of Insurance. You know, all of those things that take so much time. Without automation, we couldn’t do them as quickly and accurately. It saves us a lot of time and time is money.”

In many ways, the smaller agencies make better use of technology than many larger agencies. This is driven by their need to compete effectively by achieving significantly more with their limited staffs and resources. Most use upload and download with as many of their carriers as possible. To access internet-based products and services many of the agencies in this group have high-speed T1 or DSL connections to the internet, which is also used for communicating with carriers and with a growing number of clients. They try to continuously upgrade their agency management systems, although budgeting for hardware and software upgrades remains a challenge. These agencies usually point to their ability to grow and do more without the need to hire additional people as the biggest return on their technology investment and consider the salary savings when planning technology purchases. Like other agencies of any size, most struggle to stay current with technology trends and developments and rely on their vendor user groups and industry trade magazines as major information sources on the topic. E FFECTIVE P ROCEDURES /P ROCESSES The agencies in this study group typically have developed efficient, effective procedures for conducting business, again driven by the need to do more with less. The top agencies in this study group are fairly rigid in that they have standardized their workflows and the use of their automation to make sure nothing is lost in the process. They continuously look for ways to improve those workflows; and they make use of form letters, checklists, and other time-saving devices that also help in reducing errors. Other strategies mentioned to improve efficiencies and effectiveness include seminar selling, staying within the agency’s own underwriting guidelines, and sending applications only to those companies that have an appetite for that particular business.

“I find that if we improve a workflow that saves even a few minutes each time we do it, that can translate into something significant over a year’s time.”

17

Analysis of Agencies with Revenues Less Than $500,000

C ARRIER R ELATIONSHIPS

“We pride ourselves on the thorough job we do with our submissions. We make sure all of our apps are complete and correct and have all the information the carrier is going to need. Our carriers keep telling us how unusual we are.” eyes or slip anything past them. In our small community we sometimes have to quote on something that we know is not that great for the company even though it looks good on paper. We just make sure the insurance company knows all the facts so they can respond appropriately. They have learned to trust us, so when we tell the company ‘this is a good piece of business’, they take our word for it.” “Our best relationships are with carriers that support us in trying to be the best we can be whether it is providing us with dollars for co-op advertising or to develop a website or just giving us advice when we ask for it.” “Our companies trust us because we don’t try to pull any wool over their

Like most small agencies, retaining their markets and satisfying volume requirement is seen as a challenge, one that requires constant attention. Nevertheless, the most successful agencies in this revenue category have a very simple game plan for establishing and maintaining carrier relationships: (1) put forth a sincere, consistent effort to represent the carriers fairly and honestly; (2) do your very best to produce the kind of business the carrier wants; and (3) make it easy for the carrier to do business with you. To execute this plan they do a lot of front-end underwriting, placing only business that the carrier wants or making sure the carrier is aware of all the facts and has the opportunity to respond appropriately to the risk. Effort is put into submitting only complete, correct, well-organized applications that include diagrams, pictures, claims histories, or other information that is needed for the carrier to quickly and properly underwrite and process the policy. When the carrier offers new services or products, they try to accommodate and utilize them if possible. In addition to playing by these rules, these agencies try to establish personal relationships with carrier contacts. They work at scheduling periodic face-to-face time either in the agency or at the carrier to discuss what they can do together and how, and to address issues that need to be addressed. They also seek to serve on the carriers’ advisory boards. On the other hand, these agencies are not afraid to walk away from a carrier relationship if it is hurting the agency/client relationship. P ERPETUATION /L EADERSHIP D EVELOPMENT Many of the agencies interviewed for this study named perpetuation and leadership development as one of their three greatest weaknesses. Of those that had addressed the issue, various approaches emerged. Although many of the younger principals, especially those located in more urban areas, felt there was still time to address the issue in the future, they had instinctively begun to think in terms of growing their business and its value for a future merger or acquisition. Many of the more rural agencies felt an affiliation with another agency or one of the agency networks such as

“I am helping my son gain confidence to make the tough decisions by throwing things back to him and asking him how he thinks it should be handled. When he sees that the decision he would make is the same decision I would make or is better, it gives him confidence.”

18

Analysis of Agencies with Revenues Less Than $500,000

SIIA was a viable perpetuation option. Most have taken steps to put in place the necessary legal documents to address death or disability. Many of the older principals had one of their children or key employees poised eventually to take over the business. They had a perpetuation plan in place to transfer both ownership and leadership over time and had made it known to other family members, carriers, and other affected parties what the basic details of that plan were. The biggest issue they felt they had to overcome was how to cash out and yet leave the business viable enough for the next generation to survive. B USINESS P LANNING When asked, most of the agencies in this study group would indicate that their business planning is a weakness. However, the top agencies in this group of agencies do engage in annual business planning, albeit using a process far less complicated and strategic than that used by larger agencies. Typically they set and monitor agency production goals and, even if not completely documented, have an idea of how they are going to achieve the goals. Their business planning often includes marketing strategies such as advertising via local communications media such as the radio, newspapers, cable, and sponsorships of community activities. They prepare budgets and use year-to-date and prior year comparison to stay on target. When looking at any material investment they plan ahead and put money aside or ask carrier partners for assistance in order to level out the cash flow.

“When we wanted to bring on a new producer we knew it was going to impact on our financial position significantly. We knew we had to plan that investment very carefully, but because we did, we were able to ask for and get help from our insurance companies.” “I came from the life & health side of the business and started this agency from scratch. A business plan was critical. We update it annually. And yes, it includes both production projections and a marketing plan.”

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Analysis of Agencies with Revenues Less Than $500,000

AGENCY CHARACTERISTICS

A. Average Total Revenues

$351,221

B. Corporate Structure

+25% Profit

Average

+25% Growth

C S

44.0% 44.0%

37.5% 50.0%

35.9% 48.7%

Partnership

4.0% 0.0% 8.0%

3.1% 0.0% 9.4%

5.1% 0.0%

LLC

Sole Proprietorship

10.3%

Average

+25% Profit

+25% Growth

C. Shareholders

Number of Shareholders

2.3 9.0 1.0

2.3

1.7

High Low

74.6% 100.0% 20.0% Average

+25% Profit

D. Ownership %

+25% Growth

% Owned by Largest Shareholder

69.5%

73.7%

High Low

E. Shareholder Age

Average

+25% Profit

+25% Growth

Current Age of Largest Shareholder

51.8

52.6

52.0

F. Population Density of Metropolitan Area Where Home Office Is Located

Average

+25% Profit

+25% Growth

Less than 50,000 50,000 - 250,000 250,000 - 1,000,000 More than 1,000,000

76.0% 12.0% 12.0%

75.0% 15.6%

74.4% 15.4% 10.3%

9.4% 0.0%

0.0%

0.0%

REVENUE ANALYSIS

A. % of Revenue by Source

Average

+25% Profit

+25% Growth

Commercial P&C

35.9% 46.5%

40.5% 46.0%

34.4% 41.4%

Personal P&C

P&C Service Fees

2.4% 4.9% 4.5% 2.9% 1.2% 1.7%

0.0% 5.1% 3.7% 2.1% 2.5% 0.1%

4.3% 4.5% 5.6% 2.1% 2.7% 4.8%

Contingent Group L&H

Individual L&H Investments Miscellaneous

Total Revenues

100.0%

100.0%

100.0%

Brokerage Commission Expense

2.8%

3.4%

5.5%

Net Revenues

97.2%

96.6%

94.5%

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Analysis of Agencies with Revenues Less Than $500,000

Revenue by Source

10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% % Total Revenue

0.0% 5.0%

Commercial P&C

Personal P&C P&C Service Fees

Contingent

Group L&H Individual L&H

Investments

Average +25% Profit

+25% Growth

Average

+25% Profit

25%Growth

B. % of Revenue by Line of Business

5.4% 7.7% 9.2% 5.6% 4.6% 2.2% 12.4% 27.9% 14.7%

4.5%

3.0% 9.9%

Workers Compensation Commercial Liability Commercial Package

14.5% 14.8% 11.3%

11.7% 10.9%

Commercial Auto

7.7% 3.2% 2.7%

8.3% 2.9% 2.4%

Commercial Property Surety/Contract Bonds

Commercial Umbrella/Excess

25.8% 12.2% 13.5%

21.6% 10.4% 13.3%

Personal Auto Homeowners

8.8% 1.4% 2.2%

Personal Package

0.0% 0.0%

4.6% 2.4%

Third Party Administration

Other

C. Other Products/Services Provided

% Providing

Average

+25% Profit

+25% Growth

Claims Adjusting/Administration Self Insurance Programs Risk Management Consulting Pension/Profit Sharing/401(k) Human Resource Consulting Bonding/Surety

15.8% 10.5% 15.8% 78.9% 47.4% 0.0% 5.3% 15.8%

20.0% 0.0% 0.0% 100.0% 60.0% 0.0% 20.0% 20.0%

33.3% 16.7% 16.7% 83.3% 33.3% 0.0% 0.0% 16.7%

Employee Leasing Products & Services (PEOs) Investment Products (Securities, Stocks, etc.)

D. % of Revenues Derived from Largest Accounts

Average

+25% Profit

+25% Growth

Largest Commission Account

3.6% 7.3% 1.1%

3.4%

3.8%

High Low

10 Largest Commission Accounts

10.7% 34.3%

10.8%

11.4%

High Low

1.3%

E. Revenues Derived from Acquisitions Made in Last 12 Months % of Agencies Acquiring

Avg. Commissions Acquired

7.6% % of Net Revenues

8.0%

$30,909

21

Analysis of Agencies with Revenues Less Than $500,000

What the Typical Transaction Looked Like:

Revenues Acquired Per Transaction

Multiple of Revenues Paid

$0 $10,000 $20,000 $30,000 $40,000

1.5x

1.0x

0.5x

0.0x

average

high

low

average

high

low

Pricing Structure Used

0% 20% 40% 60% 80%

variable

fixed

Primary Currency Used

What was Acquired

Stock Cash

Book of Business

Agency

F. Renewal Revenue as % of Prior Year's Total Revenues for Each Line of Business

This figure is impacted by attrition (loss or retention of accounts) and by changes in premium and commission levels. The higher the percentage, the more favorable the results. Average +25% Profit +25% Growth

Commercial P&C

89.6% 95.1% 95.4% 72.7% 52.7% 84.1%

83.7% 97.7%

90.7% 100.0%

Personal P&C

P&C Service Fees

*

*

Group L&H

74.5% 57.9% 78.1%

64.8% 41.3% 93.5%

Individual L&H

Total Commissions & Fees

*-Insufficient Data

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Analysis of Agencies with Revenues Less Than $500,000

G. New Business Revenue as % of Prior Year's Total Revenues for Each Line of Business

The higher the percentage, the more favorable the results.

Average

+25% Profit

+25% Growth

Commercial P&C

18.4% 12.7% 15.3% 30.4% 46.0% 16.1%

32.4% 15.3%

30.6% 13.9%

Personal P&C

P&C Service Fees

*

*

Group L&H

22.9% 58.8% 22.7%

49.2% 89.0% 22.8%

Individual L&H

Total Commissions & Fees

*-Insufficient Data

H. Acquired Revenue as % of Prior Year's Total Revenues for Each Line of Business

The percentage indicates the significance of the acquired business.

Average

+25% Profit

+25% Growth

Commercial P&C

0.2% 1.3% 0.0% 0.0% 0.0% 0.6%

0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

0.0% 0.0%

Personal P&C

P&C Service Fees

*

Group L&H

0.0% 0.0% 0.0%

Individual L&H

Total Commissions & Fees

*-Insufficient Data

I. Growth in Revenues from Prior Year by Source

Average

+25% Profit

+25% Growth

Commercial P&C

8.1% 9.1%

16.1% 13.0%

21.2% 13.9%

Personal P&C

P&C Service Fees

10.7% 3.1% -1.3% 6.3% 0.1% -0.4% 6.9% -7.5% 5.6% 6.3%

*

*

Group L&H

-2.6% 16.7% 12.9% -27.1% 28.1% 11.4% 17.0% 10.9% 10.9%

14.0% 30.4% 16.4% -27.2% 11.0% 19.5%

Individual L&H

Total Commission & Fees

Contingent Income Investment Income

Total Revenues

Brokerage Commission Expense

*

Net Revenues (Internal)

17.5% 17.5%

Net Revenues (Total including Acquistion)

*-Insufficient Data

23

Analysis of Agencies with Revenues Less Than $500,000

EXPENSE ANALYSIS (as % of Net Revenues)

Average

+25% Profit

+25% Growth

Compensation Expense Total Payroll

43.1%

31.5%

29.6%

Benefits

6.9%

6.4%

3.3%

Total Compensation

50.1%

37.9%

32.9%

Selling Expenses

T & E/Conventions

1.3% 2.9% 2.6% 6.8% 5.6% 2.2% 1.1% 2.1% 1.1% 1.0% 2.1% 0.8% 0.8% 0.2% 0.4% 2.2% 0.5% 0.7%

0.9% 2.5% 2.1% 5.4% 3.6% 1.9% 1.0% 2.2% 0.8% 0.9% 2.3% 0.9% 0.8% 0.0% 0.2% 2.0% 0.5% 0.2%

1.8% 2.5% 2.3% 6.5% 5.0% 2.1% 1.0% 2.0% 1.2% 0.3% 2.5% 0.8% 0.8% 0.0% 0.1% 3.5% 0.5% 0.3% 0.8% 1.1% 0.3% 0.7% 3.3% 6.2%

Automobile

Advertising/Promotions

Total Selling

Operating Expenses Occupancy

Telephone

Postage

Supplies/Printing

Dues/Subscriptions/Contributions

Taxes/Licenses

Insurance

Professional Fees Equip Rental/Maint

Bad Debts

Outside Services Data Processing Education/Training

Miscellaneous

Total Operating

20.9%

17.4%

20.1%

Administrative Expenses Amortization

-0.5% 1.3% 0.4% 1.8% 1.2% 4.2% 81.9% 18.1%

-4.6% 0.6% 0.6% 0.3% 0.0% -3.0% 57.7% 42.3%

Depreciation Officer Life

Interest

Other

Total Administrative

Total Expenses Pre-Tax Profit

65.7% 34.3%

10.0% 20.0% 30.0% 40.0% 50.0% 60.0% % Net Revenue

-10.0% 0.0%

Compensation

Selling

Operating

Adminstrative

Average +25% Profit

+25% Growth

24