2012 Best Practices Study

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

Key Benchmarks Profile Revenues Expenses Profitability Employee Overview Producer Info Staff Service Info Technology Insurance Carriers Appendix

“Rule of 20” Score

The Rule of 20 is a simple growth and profitability balancing equation that provides a quick way to determine whether or not an agency is creating value for its shareholders. It states that an agency will drive industry-standard shareholder returns if the sum of (a) its organic growth rate and (b) 1/2 of its pro forma EBITDA margin equals or exceeds 20.

Rule of 20 Outcome

Organic Growth

EBITDA Margin

Rule of 20 Outcome

Public Brokers

Willis Group

2.0% 26.5% 15.3

Aon

2.0% 20.9% 12.5

Organic Growth Rate

1/2 of EBITDA Margin + =

Rule of 20 Score

Brown & Brown

-2.5% 34.1% 14.6

Arthur J. Gallagher 4.7% 19.0% 14.2 Marsh & McLennan 5.0% 17.4% 13.7 2011 was a year of continued soft pricing which prevented the public brokers from achieving an outcome of 20, as shown in the table above.

Generally speaking, an outcome of 20 or more, regardless of the different combinations of growth and profitability, indicates that the agency’s shareholders can expect to earn 15% -17% per year through stock price appreciation and/or shareholder distributions.

Because organic growth is such a key input into the Rule of 20, the persisting soft market and the current depressed economic environment have made it harder to achieve a score of 20. A good rule of thumb is that an agency, while always striving for as high a Rule of 20 score as possible, will combine solid organic growth with an EBITDA margin that is at least twice as high as its growth rate.

Average

+25% Profit Average +25% Growth Average

“Rule of 20” Score

16.1

28.8

25.2

Financial Stability

Average

Top 25%

Balance Sheet Current Ratio

1.42:1

2.80:1

Tangible Net Worth (% of Net Revenue)

4.3%

25.1% 20.4%

Receivables/Payable Ratio

58.1%

Aged Receivables

% Receivables Aged Past 60 Days % Receivables Aged Past 90 Days

37.1%

*

4.9%

-5.7%

* Insufficient Data

2012 Best Practices Study

Accounts Receivable

Average

+25% Profit

+25% Growth

Agencies with Revenues Under $1,250,000

Agency Billed vs. Direct Billed by Carrier % of P&C Revenues that are Agency Billed

9.8%

3.0%

11.4% 88.6%

% of P&C Revenues that are Direct Billed

90.2%

97.0%

13