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

Profitability

60%

50%

40%

30%

20%

10%

0%

Pre-Tax Profit

Pro Forma Pre-Tax Profit

Operating Pre-Tax Profit

EBITDA

Pro Forma EBITDA

Average +25% Profit erage 25% Profit

+25% Growth 25% Growth

“Rule of 20” Score

A New Statistic for the 2007 Best Practices Study

Rule of 20 Outcome

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 EBITDA margin times 50% plus the organic revenue growth rate. 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. 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.

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

In 2006, only one public broker, Brown & Brown, achieved a Rule of 20 outcome of 20 or more, as is shown in the table above.

Median

+25% Profit Median +25% Growth Median

“Rule of 20” Score

22.8

33.1

29.8

16

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