2012 Best Practices Study

Analysis of Agencies with Revenues Over $25,000,000

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

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. 4.7% 19.0% 14.2 Marsh & McLennan 5.0% 17.4% 13.7 Arthur J. Gallagher

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

16.2

21.2

33.4

Financial Stability

Average

Top 25%

Balance Sheet Current Ratio

1.27:1

1.66:1

Tangible Net Worth (% of Net Revenue)

14.6% 50.2%

31.6% 22.7%

Receivables/Payable Ratio

Aged Receivables

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

2.8% 0.2%

0.6% -6.6%

* Insufficient Data

2012 Best Practices Study

Accounts Receivable

Average

+25% Profit

+25% Growth

Agencies with Revenues Over $25,000,000

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

51.2% 43.5%

37.0% 38.0%

42.0% 58.0%

% of P&C Revenues that are Direct Billed

133