2017 Best Practices Study

4.0

CAGR: 9.0%*

3.0

CAGR: 4.6%*

2.0

1.0

0.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 S&P RVI

*CAGR=Compound Annual Growth Rate

Reason number one to consider holding on to a privately-held broker equity is that it tends to grow much faster than most investment alternatives over time. At a 4.6% annual growth rate, $1 invested in the S&P 500 would take 16 years to double. At a 9.0% annual growth rate, $1 invested in a privately-held insurance broker would take only 8 years to double. Although the S&P has certainly outperformed privately-held brokers in certain years, Reagan Consulting’s research confirms that, over time, the growth of privately-held brokers has generally exceeded that of the public markets by a wide margin. A second economic argument for holding on to private broker equity involves the profit distributions that investment alternatives deliver to their owners. Over the past fifteen years, the S&P 500 generated annual dividend yields averaging roughly 2.0% (or 1.4% after-tax). This, when added to the typical 4.6% long-term annual appreciation rate of the S&P 500, results in a total investment return of roughly 6.0%. Reagan Consulting’s research shows that the typical insurance agency owner can expect profit distribution bonuses averaging about 6.0% after-tax, over four times the after-tax dividend yield delivered by the S&P 500. When added to the 9.0% equity appreciation rate for the average insurance agency, a private broker investment generates total investment returns in the neighborhood of 15.0%, 250% of the total investment returns delivered by the S&P 500.

When considering a hold-or-sell decision in light of other investment alternatives, it becomes apparent that a hold decision can make perfect sense economically if a longer time horizon is considered. For example, let’s assume you own an insurance agency that has an appraised value of $5.0M. You also have an offer from an outside buyer to purchase your agency for $7.5M, a 50% premium over the appraised value. Should you take the bait and sell? Assume you do sell and reinvest your sale proceeds in the S&P 500. Based on the investment norms discussed above, you might expect a 6.0% total investment return going forward.

15.0%

6.0%

6.0%

1.4%

9.0%

4.6%

S&P 500

Private Brokers

Stock Price Appreciation

Dividend/Bonus Yield

Source: Reagan Value Index, Public Filings, Yahoo! Finance