2007 Best Practices Study

2007 Best Practices Study

Copyright©2007 by the Independent Insurance Agents & Brokers of America and Reagan Consulting, Inc. All rights reserved.

2007 Best Practices Study

2007 Best Practices Study

Special Acknowledgement

We wish to thank the following companies for their sponsorship which has funded the development of the 2007 Best Practices Study and the Best Practices Gateway website.

®

2007 Best Practices Study

2007 Best Practices Study

TABLE OF CONTENTS

Introduction Analysis of Agencies with Revenues Under $1,250,000

Executive Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Revenues/Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Employee Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Producer Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Service Staff Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Insurance Carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Analysis of Agencies with Revenues Between $1,250,000 and $2,500,000 Executive Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Revenues/Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Employee Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Producer Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Service Staff Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Insurance Carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Analysis of Agencies with Revenues Between $2,500,000 and $5,000,000 Executive Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Revenues/Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Employee Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 Producer Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Service Staff Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Insurance Carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Analysis of Agencies with Revenues Between $5,000,000 and $10,000,000 Executive Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Revenues/Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Employee Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 Producer Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 Service Staff Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Insurance Carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

2007 Best Practices Study

2007 Best Practices Study

Analysis of Agencies with Revenues Between $10,000,000 and $25,000,000 Executive Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117 Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .119 Revenues/Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131 Employee Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .132 Producer Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133 Service Staff Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .137 Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139 Insurance Carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .142 Analysis of Agencies with Revenues Over $25,000,000 Executive Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .145 Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149 Revenues/Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .151 Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .161 Employee Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .162 Producer Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .163 Service Staff Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .167 Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .169 Insurance Carriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .172 Appendix Population Density Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .175 Regional Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .177 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .179

2007 Best Practices Study

2007 Best Practices Study

INTRODUCTION

expenses into fairly broad categories making some comparisons difficult. Factors such as corporate structure (e.g., C corporation versus S corporation) further complicated expense comparisons because of what was or was not reflected on the income statement. This year the study provides greater detail for both revenues and expenses which provides more meaningful benchmarks for better “apples-to-apples” comparisons. The new breakdowns include: Source of Revenues – Bond revenues have been separated from Commercial P&C commissions & fees for a more accurate look at P&C sources of revenues. A new line, Value Added Services, has been added under both P&C and L&H to show fees derived from the delivery of such services. Compensation Expense – Both Payroll and Benefits have been broken down to provide a better understanding of the participating agencies’ costs – what costs are somewhat fixed (payroll taxes) versus discretionary costs (retirement benefits, insurance, etc.). Selling & Operating Expense –These expense categories now include greater detail, including any depreciation and amortization expense associated with the category. This allows for a more accurate picture of the total expenses incurred as both cash (e.g. monthly lease payment) and non-cash expenses (e.g. computer depreciation expense) are captured.

Since 1993 the annual Best Practices Study has served as a tool to help agency owners and managers understand how their business operations perform and measure up to the top performing firms across the country. It is a “must have” for those agencies that want to become the best they can be. The 2007 Best Practices Study provides critical performance benchmarks in six agency revenue categories ranging from Under $1,250,000 to Over $25,000,000. Agencies can measure, evaluate, and compare results for agency operations including:

> Income & Expense Distribution > Revenue & Profitability Growth > Production & Service Staff Compensation/Productivity > Technology Expenses > P&C and GL&H Carrier Representation > And much more

This year’s study offers a more comprehensive look at the 195 agencies selected as the 2007 Best Practices Agencies. In addition to their financial and operational results, the study also takes a look at a variety of management issues including: > Factors most critical to success > Top challenges > Keys for maximizing productivity > Keys for gaining a competitive advantage Several new performance benchmarks have been added including a more detailed breakdown of revenues and expenses, and the “Rule of 20” score that indicates whether shareholder value is being created. (For more details see below.)

The “Rule of 20” Score

In recent years, Reagan Consulting has developed a metric called the “Rule of 20” to provide a quick means of calculating whether or not an agency is creating significant value for its shareholders. It is the sum of an agency’s:

What’s New This Year

Pro forma EBITDA Margin times 50% PLUS Organic Revenue Growth Rate EQUALS Rule of 20 Outcome

Revenue and Expense Breakout

In the past the study has consolidated revenues and

2007 Best Practices Study

2007 Best Practices Study

About the Study

So, for example, an agency that generates an EBITDA margin (as a percent of revenue) of 20% and grows organically by 10% achieves a “Rule of 20” score of exactly 20%. (20% times 50% plus 10% = 20%.) The higher the score, the better. The secret to the Rule of 20 is the weighting of the relative importance of organic growth versus EBITDA when it comes to creating shareholder value (the weighting is 2 to 1). Generally speaking, an outcome of 20 means an agency is generating a shareholder return of approximately 15%-16%, which is commonly viewed as the “expected” rate of return for a well-run insurance agency. A score of less than 20 indicates room for improvement, while a score above 20 is outstanding. In 2006, only one public broker, Brown & Brown, achieved a Rule of 20 outcome of 20 or more, as is shown in the table below.

The History

The annual Best Practices Study originated in 1993 as an initiative by the Independent Insurance Agents & Brokers of America (IIABA) to help its members build and maintain the value of their most important assets, their agencies. By studying the leading agencies and brokers in the country, the association 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 Best Practices Study . Annual updates conducted by Reagan Consulting continue to provide important financial and operational benchmarks, and the study is recognized as one of the most thoughtful, effective and valuable resources ever made available to the industry. Once every three years, the IIABA asks insurance companies, state association affiliates, and other industry organizations to nominate for each of the studies’ revenue categories those agencies they believe to be among the better, more professional agencies in the industry. The nominated agencies are then invited to participate. They must be willing to share key business practices/philosophies and to complete an in- depth survey detailing their financial and operational year-end results. Those results are then scored and ranked objectively for inclusion on the basis of operational excellence. This year, the beginning of a new three-year study cycle, more than 800 independent agencies throughout the U.S. were nominated to take part in the annual study, but only 195 agencies qualified for the honor. To be chosen, the agency had to be The Process

Rule of 20 Outcome

Organic Growth

EBITDA Margin

Rule of 20 Outcome

Rank Public Brokers

1 Brown & Brown

4.5% 38.8% 23.9%

2 Willis Group

8.0% 21.3% 18.7%

3 Hub Group

5.0% 26.7% 18.4%

4 Hilb, Rogal & Hobbs

4.4% 27.0% 17.9%

5 Arthur J. Gallagher

6.0% 21.2% 16.6%

6 USI

1.8% 20.7% 12.2%

7 Marsh & McLennan 2.0% 14.2% 9.1%

8 Aon

2.0% 13.9% 9.0%

The comprehensive 2007 study can be purchased from the Independent Insurance Agents & Brokers of American (IIABA) Education Department. Order forms can be downloaded at http://bp.reaganconsulting.com/

or at www.independentagent.com. For more information please call 1-800-221-7917.

2007 Best Practices Study

2007 Best Practices Study

among the 25-35 top-performing agencies in one of six revenue categories. Their year-end results and business practices were compiled to create the 2007 Best Practices benchmarks. Taking part in the Best Practices Study has become a prestigious recognition of the superior accomplishments of the top insurance agencies in the country. Those agencies that believe they have the qualities of a Best Practices Agency and wish to be nominated should contact their state association. About the Best Practices Gateway Website The electronic Executive Update of this study can be accessed via the websites of IIABA (www.iiaba.com) and Reagan Consulting (www.reaganconsulting.com) or directly at (http://bp.reaganconsulting.com/).

Order forms can be downloaded from (http://bp.reaganconsulting.com/).

If You Have Questions

If you have questions about the information published in the 2007 Best Practices Study please contact the IIABA Education Department at 800-221-7917 or Reagan Consulting at 404-233-5545.

From the Best Practices Gateway home page users can to do the following:

> View an HTML version of the current and past Executive Updates > Download a Best Practices comparison spreadsheet to compare their year-end results with the study’s results > Access other Best Practices studies, tools, and products > Download order forms

Other Best Practices Studies and Tools

In addition to the annual Best Practices Study , many other useful studies, resources, and tools are available to help agencies improve their performance and enhance the value of their businesses. Two of the most frequently used tools are The Agency Self- Diagnostic Tool and the Joint Agency Company Planner . These Best Practices tools are part of a complete line of Best Practices products and services.

2007 Best Practices Study

2007 Best Practices Study

Agencies with Revenues Under $1,250,000

$1,250,000

$2,500,000

$5,000,000

$10,000,000

$25,000,000

2007 Best Practices Study

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

Changing Agency Demographics

year, however, it is at the top of the list, and maintaining those relationships provides the key focus for much of what they do. Since the majority of the agencies are in communities of less than 50,000 people, many in rural areas with declining populations, it is increasingly difficult to keep good stable markets. As a result, the agencies are extremely good underwriters. As one principal said, “We inspect everything. It is not worth jeopardizing a carrier relationship for a poor risk.” A focus on “growing revenues” and “being a sales organization” was very clearly articulated by these agencies because they need to feed their markets in order to maintain them. The average organic growth rate for the group was 9%. The top 25% with the highest organic growth, however, achieved a growth rate of nearly 25%. Many have specialized and developed niche markets and program business that expands their geographical marketing area from local to regional, and in many cases, nationally. Like their larger counterparts in greater metro areas, many of these agencies rely on networking and strategic alliances within and outside of their communities to provide a regular source of referrals. Whether they are a “generalist” or “specialist”, all rely on their talented, hard-working staffs to provide exceptional service which results in strong retention rates and the ability to cross-sell and fully develop existing accounts effectively and efficiently.

In prior years the annual Best Practices Study has included an “Under $500,000” revenue category. This year the study combines the “Under $500,000” group with the “$500,000 - $1,250,000” revenue group. This change addresses the challenge of identifying and maintaining an adequate number of outstanding small agencies to study. Many of the agencies nominated to participate decline to do so because the time commitment is too great or, if they do participate, they quickly outgrow the category. Combining the two revenue categories also reflects what other industry research indicates – that the number of smaller revenue-sized agencies is declining while the typical agency is getting larger. This trend, however, does not mean the small agency is doomed. A majority of the top-performers in this new revenue category had total revenues under $725,000.

Keys to Their Success

Having access to good stable markets and maintaining those carrier relationships is always on the list of the smaller agencies’ Top 5 Critical Success Factors. This

Factors Most Critical to Agency’s Success (Top 5 Listed in Order of Frequency Mentioned)

1. Accessing and retaining good carriers

Challenges They Face

2. Having talented, dedicated staff

Not surprisingly, maintaining carrier relationships is the top challenge for the agencies in this group. Many reside in areas with declining populations and/or are enduring soft market pricing, both make it difficult to meet the premium volume commitments carriers need or want.

3. Providing exceptional client service

4. Focusing on revenue growth / selling 5. Utilizing technology / efficient workflows

1 2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Executive Perspectives

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

in other parts of the country, however, are living with soft market pricing which makes organic revenue growth even more difficult. In spite of the continuous struggle to acquire and retain markets, less than 30% of these agencies want to merge or sell to a third party. Most want to remain independent and perpetuate internally. Realistically, they acknowledge an uphill battle in finding and developing new employees that can facilitate this dream. With an average of 5.7 employees who must “do it all”, this group of agencies relies on technology to maximize productivity. 98% of the agencies utilize carrier interface, both interactive and download, to support their service and processing activities. Nearly 75% utilize scanning and document management to streamline workflows. The use of dual monitors at service workstations also supports a near paperless environment. “We touch a piece of paper once… period!” is a commonly expressed sentiment. Maximizing Productivity

Top Challenges (Top 5 Listed in Order of Frequency Mentioned) 1. Maintaining carrier relationships / meeting premium volume commitments

2. Surviving current market conditions

3. Finding and developing new staff, particularly new producers

4. Funding and fully utilizing available technology

5. Having time to do it all

Nevertheless, the agencies are remarkably effective at keeping an array of markets to meet their clients’ needs. They are constantly looking for carriers willing to work with small town agencies, finding ways to show that the agency and its employees has something different to offer, whether it is a specialized designation unique to a particular industry or a business plan for growth. Many have “clustered” with other small agencies to consolidate a portion of their business volume, thus giving them access to more carriers, especially top-notch regionals. While the agencies operating in larger communities typically have better access to markets, they are constantly reviewing their carriers to make sure each market continues to be a competitive and viable source for the agencies’ clients. As one top-performer said, “They (carriers) want more business so we are always making sure we have a good fit for the business we write. Retention goes hand in hand with increased business.” The market challenges don’t end with limited access. Surviving current market conditions has been hard for this group. Coastal agencies, while enjoying some benefit of hard market rates, are struggling against their carriers’ low appetites for property exposure and their clients’ needs for affordable insurance. Agencies

Keys to Maximizing Productivity

(Top 5 Listed in Order of Frequency Mentioned) 1. Heavy utilization of available technology

2. Focus on total account

development and referral business

3. Effective incentives and rewards for results 4. Ongoing employee training and education

5. Effective communications

2 2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Executive Perspectives

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

Revenue per Employee (total net revenues divided by number of employees) and Spread per Employee (revenues per employee minus compensation per employee) are important productivity measures. The average Revenue per Employee in this group is $130,529 with a Spread of $61,945. These results, which increased nearly 10% over last year’s results, have been achieved through a focus on total account development (cross selling, account rounding, and upgrading) and obtaining referral business, both of which have lower new business acquisition costs. To support this focus, a significant number of the agencies pay additional incentives and/or bonus compensation to their licensed employees. “Everyone has received a bonus every month for the past two years,” noted one agent. “The program has been very successful in motivating our staff to write new business.” Ongoing employee training and education is another key to productivity, but this is often accomplished through regular staff meetings where employees share ideas and information. One agent who uses weekly meetings to educate producers and discuss marketing efforts explains, “Each producer covers all accounts they are working on each week. The collective group discusses each prospect and how to best cover the risk exposed, market to carrier, place the business and present to prospect. This helps to place accountability with each producer and encourages learning and participation by the entire group. The group dynamic is a positive for all.” It is also an example of the effective communications that many in this group point to as another key to their productivity.

Keys to Achieving a Competitive Advantage

(Top 5 Listed in Order of Frequency Mentioned) 1. The technical competence and expertise of top-quality employees 2. Good relationships with carriers that offer competitive products 3. Niche markets / program business / target marketing

4. Superior service / customer advocacy 5. Strong name recognition and reputation in the community

understanding of their markets and of clients’ needs, especially in niche markets, these agencies are frequently identified as problem solvers. The fact that independent agents partner with a variety of companies and can offer products and services that can best fit the clients’ needs provides a competitive edge, especially in rural America where Allstate, State Farm, Nationwide and other captives are strong competitors. These agencies work hard to maintain strong carrier relationships through careful underwriting and aggressively marketing to prospects that meet the company’s appetite. Like most independent agents they are very involved in their communities. They enjoy strong name recognition and good reputations because of the service they provide. While they all provide the standards—annually review coverages, send out recommendation letters with every renewal, call back clients on the same day, remarket when needed, are available on evenings and weekends, etc.—the following quote sums up how these Best Practices Agencies regard their role in their communities and the service they provide… “Our agency has a competitive advantage because of our customer advocacy following a devastating hurricane which destroyed our community. We worked diligently with both our

Gaining a Competitive Edge

“Our staff! They get it.” “Our lean and qualified staff.” “Top quality employees!” “Fantastic staff.” The agencies in this group cannot praise their employees enough and quickly identify their staffs’ technical competence, expertise, integrity and work ethic as the key to their competitive advantage. Because of the depth of insurance knowledge and specialized

3 2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Executive Perspectives

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

carriers and customers to have claims settled so that our customers could begin to rebuild their lives. We believe that, as insurance agents, we sell a promise to help our customers in a time of loss, and we stood by our customers in fulfilling that promise.”

4 2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Executive Perspectives

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

PROFILE (of Agencies in this Study Group)

A. Average Total Revenues: $724,802 B. Population Density of Metropolitan Areas Where Home Office is Located Average

+25% Profit

+25% Growth

Less than 50,000

63.9%

62.2%

64.8%

50,000 – 250,000

13.9%

15.6%

13.0%

250,000 – 1,000,000

11.1%

11.1%

9.3%

More than 1,000,000

11.1%

11.1%

13.0%

C. Corporate Structure C

33.3%

33.3%

29.6%

S

55.6%

55.6%

59.3%

Partnership

2.8%

2.2%

1.9%

LLC

5.6%

6.7%

7.4%

Sole Proprietorship

2.8%

2.2%

1.9%

1.1

1.2

1.3

Total # Agency locations

0.0%

0.0%

0.0%

Agency has an ESOP

*

*

*

% of Stock Owned by ESOP

D. Shareholders Number of Shareholders (excluding ESOP)

1.8

2.8

2.8

High

6.0

Low

1.0

E. Ownership Percentage % Owned by Largest Shareholder

79.9%

77.1%

75.1%

High

100.0%

Low

46.0%

F. Shareholder Age Current Age of Largest Shareholder

50.5

46.8

46.8

*Insufficient Data

5 2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Profile

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

G. Parent Corporation

Average

0.0%

Agency is Owned by Another Corporation

Description of Parent Corporation

Financial Institution

0.0%

National Broker

0.0%

Other

0.0%

H. Plans for Future Ownership of Agency

Average

Sell to Employees/Family

61.1%

Sell to Third Party in 1 to 5 years

2.8%

Sell to Third Party in 6 to 10 years

11.1%

Sell to Third Party in 11+ years

8.3%

Merge with Privately-held Agency

5.6%

Uncertain at this Point

11.1%

“We are a Trusted Choice agency, and we live by that creed. Our reputation is that you don’t want to mess with our integrity. We always play the game fairly. We always do what we’re supposed to do and that’s what we live by. I think it’s paid us big rewards over the years because we have a very loyal client base!”

6

2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Profile

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

Revenues

(% by Source)

Average

+25% Profit

+25% Growth

Property & Casualty Commercial Commissions & Fees

48.5%

48.1%

54.9%

Bonds

0.6%

0.3%

0.2%

Personal P&C

35.9%

40.0%

30.7%

Value Added Services

0.1%

0.0%

0.0%

Contingent/Bonus

7.2%

3.7%

7.3%

92.3%

92.1%

93.1%

Total P&C

Life & Health/Financial Group Commissions & Fees

4.2%

3.8%

3.0%

Individual Commissions & Fees

1.7%

2.4%

2.9%

Value Added Services

0.6%

0.0%

0.0%

Bonus/Overrides

0.0%

0.0%

0.0%

6.5%

6.2%

5.9%

Total L&H/Financial

Investments

0.6%

0.3%

0.4%

Miscellaneous

0.6%

1.4%

0.6%

100.0%

100.0%

100.0%

Gross Revenues

Brokerage Commission Expense

0.5%

0.0%

0.1%

99.5%

100.0%

99.9%

Net Revenues

Future Revenue Sources % of Agencies Considering Line of Business as Very Important:

Personal Lines

86.1% 91.7% 19.4% 27.8% 16.7%

Small Commercial Lines Individual Life & Health Group Life & Health

Surety/Bonding

7 2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Revenues/Expenses

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

Revenues

60% Revenue by Source (as % of Total Revenues)

50%

40%

30%

20%

10%

0%

Commercial Comm & Fees

Bonds

Personal P&C

P&C - VAS

Contingent/ Bonus

Group Comm & Fees

Individual Comm & Fees

L&H - VAS

L&H - Bonus/ Overrides

Investments

Average verage

+25% Profit Profit

+25% Growth Growth

% of Revenues Derived from:

Average

+25% Profit

+25% Growth

Largest Account

4.6%

3.2%

4.8%

High

21.4%

Low

1.4%

10 Largest Accounts

18.5% 71.0%

14.9%

16.5%

High

Low

2.4%

Group Life & Health Revenue Breakdown (% from each source) Average

+25% Profit

+25% Growth

Health

59.0% 33.3%

81.9% 14.0%

58.6% 25.6%

Life

Disability

2.7% 1.3% 0.3% 0.2% 3.2%

1.4% 0.4% 1.4% 0.7% 0.1%

0.6% 1.4% 1.0% 0.0%

Dental

Retirement Products

Employee Benefits (TPA)

All Other

12.9%

See the Insurance Carriers section for the average number of GLH carriers represented.

8 2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Revenues/Expenses

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

Services/Other Products Provided (% of Agencies Providing) Average

+25% Profit

+25% Growth

Loss Control/Engineering

8.3% 0.0% 8.3% 8.3%

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

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

Worker’s Comp Claims Adjusting/Admin (TPA) Group Health Insurance Claims Adjusting/Admin (TPA)

Self Insurance Programs

Risk Management Consulting

25.0%

Premium Financing (in-house vs. 3rd party)

0.0%

Pension/Profit Sharing/401K Human Resource Consulting

58.3%

100.0%

100.0%

0.0% 8.3%

0.0% 0.0%

0.0%

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

20.0% 20.0%

25.0%

75.0%

Other*

0.0%

0.0%

0.0%

*Includes P&C loss adjusting, HR website, pool administration, paralegal and legal, MyWave, background checks, wellness, and management consulting

Acquired Revenues

Average Commissions Acquired

% of Agencies Acquiring

Percentage of Net Revenues

Acquisitions Made in Last 12 Months

2.8%

$338,671

33.1%

What the Typical Transactions Looked Like Revenues Acquired per Transaction

Multiples of Revenue Paid

Average

* * *

Average

* * *

High

High

Low

Low

*Insufficient Data

9 2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Revenues/Expenses

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

Revenue Growth by Source

Average

+25% Profit

+25% Growth

Commercial P&C Renewals 1

1 Renewal Revenues as a % of prior year’s total revenues for this 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 %, the more favorable the results. 2 New Revenues as a % of prior year’s total revenues for this line of business. The higher the %, the more favorable the results. 3 Acquired Revenues as a % of prior year’s total revenues for this line of business. The % 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.

95.1% 13.6%

96.0% 21.4%

107.8% 14.5%

New Business 2

Acquired Revenues 3

0.0% 8.7% 8.7%

0.0%

0.0%

Organic Growth 4

17.4% 17.4%

22.3% 22.3%

Total Growth 5

Bonds

Renewals 1

79.1% 20.3% 0.0% -0.6% -0.6%

49.9% 46.3% 0.0% -3.8% -3.8%

97.7% 13.1%

New Business 2

Acquired Revenues 3

0.0%

Organic Growth 4

10.8% 10.8%

Total Growth 5

Personal P&C

Renewals 1

91.7% 12.4%

86.4% 14.7%

94.1% 12.7%

New Business 2

Acquired Revenues 3

1.1% 4.1% 5.2%

0.0% 1.1% 1.1%

4.4% 6.8%

Organic Growth 4

Total Growth 5

11.2%

Value Added Services - P&C Renewals 1

* * * * *

* * * * *

* * * * *

New Business 2

Acquired Revenues 3

Organic Growth 4

Total Growth 5

Group L&H

Renewals 1

82.0% 20.2%

84.4% 12.1% 0.0% -3.5% -3.5%

96.4%

New Business 2

7.2% 6.9% 3.6%

Acquired Revenues 3

2.3% 2.2% 4.5%

Organic Growth 4

Total Growth 5

10.5%

Individual L&H

Renewals 1

52.0% 36.3%

60.3% 50.0%

38.3% 62.6%

New Business 2

Acquired Revenues 3

0.0%

0.0%

0.0% 0.9% 0.9%

Organic Growth 4

-11.6% -11.6%

10.3% 10.3%

Total Growth 5

*Insufficient Data

10

2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Revenues/Expenses

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

Revenue Growth by Source (continued)

Average +25% Profit +25% Growth

**Organic growth rates for the most recently completed fiscal year varied widely by region due in part to the effect of Hurricane Katrina on coastal exposure pricing. As a result, the AVERAGE organic growth rates achieved by the Best Practices Agencies were skewed upward. As such, readers of this study might prefer to benchmark off of the MEDIAN organic growth rate, which is the mid- point of the data when the results are ranked in descending order. MEDIAN Organic Growth Rate: 6.0%

Value Added Services - L&H Renewals

* * * * *

* * * * *

* * * * *

New Business

Acquired Revenues

Organic Growth

Total Growth

Total Commissions & Fees Renewals

93.0% 92.4% 103.0% 14.0% 17.9% 16.2%

New Business

Acquired Revenues

2.0% 7.3% 9.2%

0.0%

7.9%

Organic Growth

10.2% 19.3% 10.2% 27.2%

Total Growth

P&C Contingent Income Growth L&H Bonus Income Growth Investment Income Growth

16.6% 54.3% 26.5%

*

* *

* *

16.3%

Total Revenue Growth

8.1%

11.6% 23.0%

Brokerage Commission Expense Growth Net Revenue Growth (Organic)**

*

*

*

9.2%

12.0% 24.6%

10.9% 12.0% 32.1%

Net Revenue Growth (Total)

*Insufficient Data

Future Revenue Growth Strategies

% of Total Responses

Study participants were asked to indicate their three most important strategies for enhancing or achieving future revenue growth.

1

2

3

Access to Better Carriers

0.0% 8.6% 5.7%

Advertising/Promotions

5.7% 2.9% 14.3% 0.0% 5.7% 20.0% 28.6% 14.3% 14.3% 14.3% 11.4% 11.4%

Agency/Book of Business Acquisitions

Cross-Selling/Total Account Development

Producer Recruitment/Development

With: 1 —Critically Important 2 —Very Important 3 —Important

New Business Initiatives—Prog Dev/Niche Marketing 11.4% 11.4% 5.7% New Business Initiatives—Referrals/Centers of Influence 34.3% 22.9% 17.1% New Business Initiatives—Strategic Alliances 5.7% 17.1% 11.4% Other* 0.0% 5.7% 0.0%

*Includes website marketing/sales, expanded geographic footprint, higher retention, creating a captive, better support/CSR training & recruiting, value added services

11 2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Revenues/Expenses

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

Organic Growth by Line of Business

Commercial P&C

Bonds

30.0%

12.0%

15.0%

3.0%

0.0%

-6.0%

Average

+25% Profit

+25% Growth

Average

+25% Profit

+25% Growth

Personal P&C

Value Added Services – P&C

10.0%

5.0%

5.0%

2.5%

Insufficient Data

0.0%

0.0%

Average

+25% Profit

+25% Growth

Average

+25% Profit

+25% Growth

Group L&H

Individual L&H

5.0%

15.0%

0.0%

0.0%

-15.0%

-5.0%

Average

+25% Profit

+25% Growth

Average

+25% Profit

+25% Growth

Value Added Services – L&H

Total Commission & Fees

20.0%

6.0%

Insufficient Data

10.0%

3.0%

0.0%

0.0%

Average

+25% Profit

+25% Growth

Average

+25% Profit

+25% Growth

Revenue Growth by All Sources (including Total Comm & Fees, Contingent/Bonus and Investment Income)

40.0%

Net Revenue Growth (Organic) Net Revenue Growth - Organic Net Revenue rowth - Total Net Revenue Growth (Total)

20.0%

0.0%

Average

+25% Profit +25% Growth

12

2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Revenues/Expenses

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

New Breakdown of Expenses — What This Means to You

In the past the study has consolidated revenues and expenses into fairly broad categories making some comparisons difficult. Factors such as corporate structure (e.g., C corporation versus S corporation) further complicated expense comparisons because of what was or was not reflected on the income statement. This year the study provides greater detail for both revenues and expenses which has resulted in more meaningful benchmarks for better “apples-to-apples” comparisons. The new expense breakdowns include: Compensation Expense – Both Payroll and Benefits have been broken down to provide a better understanding of the participating agencies’ costs – what costs are somewhat fixed (payroll taxes) versus discretionary costs (retirement benefits, insurance, etc.). Selling & Operating Expense –These expense categories now include greater detail, including any depreciation and amortization expense associated with the category. This allows for a more accurate picture of the total expenses incurred as both cash (e.g. monthly lease payment) and non-cash expenses (e.g. computer depreciation expense) are captured.

Expenses (as % of Net Revenues)

Average

+25% Profit

+25% Growth

Compensation Expenses Payroll Employee

40.5%

29.9%

38.5%

“Non-Employee” Producers

2.7% 0.1%

1.8% 0.0%

1.9% 0.0%

Temporary Help Total Payroll

43.3%

31.7%

40.4%

Benefits

Payroll Taxes Retirement

3.6% 2.3% 3.3% 0.1% 9.4% 1.2% 1.9% 0.5% 2.4% 2.1% 5.7% 52.7%

3.0% 1.7% 2.3% 0.0% 7.0% 0.7% 2.0% 0.2% 2.2% 2.1% 5.0% 38.7%

2.6% 1.5% 3.5% 0.1% 7.7% 1.1% 1.6% 0.8% 2.4% 2.7% 6.2% 48.1%

Insurance

Other

Total Benefits

Total Compensation

Selling Expenses T&E/Conventions Auto Expenditures Auto Depreciation

Total Auto

Advertising/Promotions

Total Selling

13 2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Revenues/Expenses

Agencies with Revenues Under $1,250,000

Executive Perspectives

Profile

Revenues/ Expenses

Financial Stability

Employee Overview

Producer Info

Service Staff Info

Technology

Insurance Carriers

Appendix

Expenses (continued)

Average

+25% Profit

+25% Growth

Operating Expenses Occupancy Expenditures

4.5% 0.0% 4.5% 0.6% 0.1% 0.7% 1.8% 0.2% 1.9% 1.3% 0.7% 1.3% 0.8% 0.4% 2.2% 0.7% 0.2% 0.2% 0.4% 0.5% 0.4% 0.2% 0.7% 0.0% 1.4%

3.1% -0.6% 2.5% 0.6% -1.0% -0.4% 1.0% 0.0% 1.0% 1.4% 0.5% 1.8% 1.0% 0.4% 1.8% 0.6% 0.1% 0.0% 0.4% 0.2% 11.2%

3.3% 0.1% 3.4% 0.3% 0.1% 0.3% 1.3% 0.1% 1.4% 1.2% 0.6% 1.3% 0.7% 0.2% 1.9% 0.3% 0.5% 0.2% 0.3% 0.2% 0.8% 0.2% 1.0% 0.0% 2.0%

Occupancy Depreciation/Amortization

Total Occupancy

Office Equipment Expenditures Office Equipment Depreciation

Total Office Equipment

IT (Information Technology) IT Depreciation/Amortization

Total IT

Telephone

Postage

Supplies/Printing

Dues/Subscriptions/Contributions

Taxes/Licenses

Insurance

Professional Fees

Bad Debts

Outside Services Education/Training

Miscellaneous

15.9%

12.6%

Total Operating

Administrative Expenses Amortization of Intangibles

0.0% 0.2% 0.0% 0.0% 0.3%

Officer Life

Interest

Other

Total Administrative

75.6% 24.4% 26.2%

55.1% 44.9% 43.5%

69.0% 31.0% 33.8%

Total Expenses

Pre-Tax Profit (Loss)

EBITDA

Average

+25% Profit

+25% Growth

Growth Over Prior Year Compensation Expense

5.2% 3.1% 5.0%

6.2% 4.7% 8.4%

20.6% 12.9%

Selling Expense

Operating Expense

8.9% 8.7%

Administrative Expense

11.8%

*

*Insufficient Data

14

2007 Best Practices Study | Agencies with Revenues Under $1,250,000 | Revenues/Expenses