All Articles

May, 2005 – Independent agency acquisitions drive much of the industry consolidation. As independent agencies often do not have the excess capital, resources or expertise in executing multiple transactions, you can not afford to fail. An educational foundation of acquisition considerations is presented herein.

In the business world, those who embrace opportunity thrive. Those who do not, often find themselves wondering what went wrong. Therefore, before we show you the annual update of investment options, we will discuss the challenges and opportunities that the current insurance marketplace presents. Only by understanding external market factors can agency owners continue to turn these external challenges into internal opportunities.

Is it better to have producers with a larger-than-average book of business or to have producers who focus on new business growth resulting in significantly higher than average internal growth?

March, 2004 – As agencies seek maximize agency value and capture their fullest business potential, the Agency Peak Performance Exchange (APPEX) association brings concrete disciplines, accountability, resources and results to agency owners.

Aggressive buy-side appetites relative to the limited supply of quality target agencies that are willing to sell have resulted in peak pricing for deals. The chart below illustrates historical pricing by banks and public broker buyers for specific types of targets. Please note that due to the supply and demand dynamics in the increasingly competitive merger and acquisition environment, the numbers below are reflective of premium pricing over and above fair market valuations. The multiples incorporate post-closing earn-out hurdles.

In today’s increasingly difficult growth environment, agencies and brokers must maximize staff productivity to help control expenses. Two areas of focus that merit attention are: 1) the number of accounts handled by Customer Service Representatives (CSRs); and 2) the total agency commission dollars serviced.

Our research shows that most successful, growing insurance agencies and brokerages share two common traits. First, they maintain a well-defined and institutionalized differentiation platform/pitch. Creating one entails an introspective look into key selling and servicing strengths, understanding the competitive landscape, achieving buy-in from employees throughout the agency, and consistently articulating the differentiation message externally.

Last month we showed how the ownership percentage of the largest shareholder typically decreases as agency size and value increases. This happens because owners share equity with those who are driving agency value. This month, we examine what happens to the total payroll of the largest shareholder as agency value increases and ownership is shared. Although it is often a fear, it is rare that personal income is negatively influenced by the act of sharing ownership.

September, 2004 – The purchase of an agency does not necessarily translate into an integrated insurance program that will satisfy the needs of the banks core customer base. This article takes a five year look at why banks entered the insurance market and performance to date.

April, 2006 – While leading banks are experiencing strong insurance performance, many others find themselves struggling with past insurance acquisitions and subsequently justifying insurance to the bank board. This column articulates insurance options for such bank-insurance operations.

March, 2006 – Understanding top line revenue performance is a must in today’s insurance environment. This article provides insight as to the need for revenue enhancement and metrics that agency executives can leverage to drive organic growth.

This article reviews concepts that should be embraced to build agency value and make perpetuation internally a reality. (reprinted with permission from Insurance Journal (Vol. 10, No. 1, Jan. 12, 2004)

June, 2005 – Does your agency have a strategic plan for growth AND profits? This article challenges agency executives to define a long term strategy while providing insight as to what the planning process should entail.

Consolidation continues to permeate the insurance distribution space due to both buy-side demand and sell-side necessity. Buyers need total growth enhancement and those who have to sell cannot realize growth.

This document defines each of the data input fields needed to calculate your agency's Performance Indicator Number (PIN).

April, 2005 – While many in our industry express value as a multiple of revenue, value is calculated based on past and projected earnings. This article helps agency owners understand agency value and sales price considerations in an effort to maximize owner return and agency sustainability.

A Perpetuation Stock Incentive Plan is a plan that could put an independent insurance agency on the right track. The plan is a checklist for ownership criteria, a mechanism to mold shareholder attributes, a process for producers to acquire stock, and a vesting schedule to glue producers to the agency.

This article takes a look at driving organic growth through service staff management. We break down service staff benchmarks with respects to total book, number of accounts and average account size. We then take a look at goal setting, productivity and profitability.

High performing, high growth agencies share one trait that can’t be overlooked. They are very good at recruiting and training new producers. In this article, I’ll outline a process for recruiting which should produce better results in your quest to hire new producers who, in turn, will help your agency grow.

In addition to aggressive buy-side demand, sell side issues are also spurring increasing deal activity. In last month’s issue, we noted that many agencies are failing with respects to perpetuation reinvestment capital, young talent and value enhancement.

The reward ratio measures how well an agency is satisfying the financial and growth requirements of its owners. The ratio is determined by adding executive payroll, production payroll and pre-tax profits, and then dividing this sum by gross revenues. The ratio gives a better view into the real rewards of independent agency ownership versus looking solely at pre-tax profits.

This document provides the formula and a description of the 15 ratios used in the calculation of the Performance Indicator Number (PIN).

September, 2005 – Many in the insurance market question the success of banks in insurance. The reality is that leading banks continue to expand their insurance distribution offering. This American Banker article outlines the insurance strategy of leading bank-insurance platforms, financial successes, and expectations for the road ahead.

September, 2004 - Sustainable top line growth has a profound impact on an agency’s earnings potential, reinvestment capacity, value and perpetuation ability. This article describes why growth is necessary in supporting agency performance and perpetuation.

There are certain words that somehow over time seem to develop a negative connotation. Accountability has become one of those words. It falls in the same cate-gory as the word audit. The mere mention of either word summons negative emotions if you happen to be the person referred to as being held accountable or the subject of the one whose work is being audited.

February, 2006 – Agency owners must first learn where they are before they can decide where to go and improve performance. Understanding how to properly benchmark your agency’s performance is a delicate and intricate process described in this article.

Since 1999, banks have led the way in the overall number of publicly announced agency/broker acquisitions. Over the last couple of years, however, public brokers are once again outpacing banks in deal activity.

Since 2001, MarshBerry has tracked various investment returns available to individuals within the insurance brokerage realm. We have tracked a public broker composite, a composite of ESOP agencies that we value on an annual basis, the Dow Jones Industrial Average (DJI), and the Standard & Poor’s 500 Index (SPX). The public brokers selected for comparison are representative of those who were trading at 12/31/01 and who remained active as of 12/31/07. They include Hilb Rogal & Hamilton (HRH), Arthur J. Gallagher (AJG), Brown & Brown (BRO) and Willis Group Holdings (WSH).

Last month’s issue showed how high-growth agents and brokers have consistently reinvested heavily in young producers. These high-growth organizations are also realizing peak performance from all producers.

Our research indicates that an agency owner must hire six producers to yield two viable perpetuation candidates. Additionally, it takes an average of two buyers to take out one seller. Thus, agencies large enough to hire six and maintain two new producers are infinitely more likely to achieve a transfer of ownership.

A focused investment in young producers is a hallmark of high organic-growth agents and brokers. Through a regimented process of recruiting, training and retaining young producers, high-growth organizations are replicating past hiring success to maximize predictable and sustainable future organic growth. These highgrowth agents and brokers are allocating capital and resources toward internal talent reinvestment versus external acquisitions.

Market share is the name of the game and competition is becoming fiercer. In 2008, total net written P&C premiums are projected to decrease for the first time since 1943. The rate environment is experiencing sustained rate softening. Growth initiatives are focused squarely on capturing profitable market share via new business production. Insurance carriers, agencies and brokers alike are broadening their target account size range.

Originally published through Insurance Journal, this articles analyzes four characteristics of successful agencies: average account size; producer book size; revenue per employee; and competitive differentiation.

As bank-owned insurance distributors seek enhanced commission income, differentiation is the name of the game. Organic growth rates continue to dip as both P&C and Benefit rate advancement slows, deal earn-outs are completed and cross-sell penetration lacks sustainable momentum.

High growth organizations share many similarities, one of which is a structured producer.

The competitive landscape is changing. Private equity capital has silently permeated the insurance distribution space over the last ten years (Beecher-Carlson, Integro, Alliant, Genatt, Crump, Swett & Crawford, Stewart Smith, etc.) facilitating the creation of public brokers and backing several of the nation’s largest private brokers. Recently, the silence has turned into a roar with over $3.2 billion in announced transaction value invested in the first three months of 2007. First, Goldman Sachs Group, Inc. announced the purchase of USI Holdings Corporation for about $1.4 billion. Morgan Stanley and Apax recently announced the planned acquisition of HUB International for about $1.8 billion. Both deals are rich, seeing forward looking EBITDA multiples in the 10.0X range. And this is only the beginning of a new round of capital aggressively seeking deployment.

Since compensation expenses are the largest expense for insurance distributors, proper fiscal management is critical for ensuring earnings and reinvestment capacity. February’s issue of For The Record described the Reward Ratio, which measures the short-term return-to-owner of an insurance operation. Remember, the components of the Reward Ratio are the sum of executive payroll, producer payroll, and pre-tax profit as a percent of gross revenues.

While external market conditions influence an organization’s performance, the primary factors driving the value of agents and brokers are predicated upon internal mechanics.

In 2007, agency values reached an all-time high as increasing demand and limited supply inflated deal pricing, despite the softening of the market. We project that during the next three years, there will be a surge in supply coupled with a decrease in demand, resulting in lower deal multiples, especially for average-performing agencies.

As we approach 2008, strategic planning is critical to ensure future success. If nothing else, the private equity movement of the past twelve months illuminated two imperative factors that all agency and broker owners must implement. First, like any asset acquisition, individual owners must quantify the overall purpose and strategy of their investment by documenting the desired time horizon and the return expectations. Second, shareholders must clearly define annual success metrics relative to their investment strategy. Whether growth, earnings or efficiencies, owners need to quantify internal success in order to measure, monitor and improve performance.

Many insurance agents and brokers are dependent upon contingent income to help cover daily operating expenses. In such organizations, it is not uncommon to see contingent income exceed pre-tax profit. The following chart depicts the importance of contingents relative to agencies of various revenue sizes.

October, 2005 – New business production does not rest with producers alone. Proper service staff management is integral in creating a sales culture supporting agency growth initiatives.

August, 2005 – Perpetuation is a process, not a transaction. This article discusses why perpetuation should be continuous and mechanisms for transferring owner books of business, leadership and stock.

A detailed list of possible perpetuation options that explains each possibility.

While bidding high to beat rivals for a target can be an acquirer's undoing, some have developed valuation tools to help them safely offer more.

July, 2005 – Rough Notes profiles various APPEX Partners and their organizational success.

Maintaining a defi ned value-added service timeline process is essential to successfully delivering a proactive differentiation proposition. While many of the nation’s fastest growing agents and brokers maintain value-added service platforms, very few have a fully functional process in place.

Successful perpetuation is the result of a well-conceived and executed plan, not a single transaction. Agencies with the foresight to transfer ownership to the high-performing individuals who are driving agency value are more likely to perpetuate, and if they choose to sell instead, will realize a higher market value than agencies with narrowly-held ownership.

For the majority, agency value is hanging by a thread. The string is about to break. For the minority that are willing and able to execute a plan to combat sustained soft market conditions through organic growth and strong core operating profi tability, valuations will remain strong and in some cases increase. The widening spread between the many (average value) and the few (high value) will expand and look like the Grand Canyon during the next three years. Unheard of, unforeseen and inconceivable premium valuations have been sustained for so long that most agency owners have long since accepted this utopia as reality. But make no mistake, the confluence of factors that led to sustained high valuations for all agencies is rapidly passing over the industry and the value of the average agency is hanging by a thread. Some will hang on to high value while others will fi nd themselves in a valuation free fall.

September, 2005 – Everyone in the agency must be tuned into new business production and account retention. Learn how to take the first steps in transforming your agency from a service to a sales culture.

Discusses setting up a small commercial lines department.

Many agency principals have improved their agencies and overcome the natural resistance to broaden ownership. This article outlines a few critical issues that should be considered by an owner prepared to perpetuate but forced to consider a sale for lack of a committed buyer within the agency.