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2011 marked a strong year of deal activity in the insurance brokerage space.  Brokers continue to look to acquisitions as a way to supplement weak organic growth and with a more positive outlook in the economy, more buyers are willing and ready to buy.

For many independent agencies and brokers, contingent payments represent a substantial portion of top-line revenues and are integral in supporting pre-tax profits and owners’ compensation.  The reduction or elimination of contingent income would have a profound personal impact on the average agency owner and in some cases, deliver a crushing blow to the agency’s balance sheet.

It is no secret that the value agencies use for internal perpetuation is usually much lower than the value attainable in an external sale.  The difference is often chalked up to higher multiples that an external buyer will apply for strategic reasons.  Higher multiples do play into the stronger valuations in an external sale, but an equally important factor is that agencies that sell externally achieve higher profitability than is the case in an internal perpetuation.

Growing organizations concentrate on what they can control year in and year out.  Economics 101 says that if you need to reach your organic growth goal, the options are to increase price, add new products or sell more existing products.  In the insurance world, the best option is to sell more existing products.  The other two options are limited.

Within the insurance distribution industry, merger and acquisition activity is announced through press releases.  Public brokers, private equity firms and large regional agencies announce these transactions because they want their peers, competitors, clients and acquisition prospects to know that they are active in the marketplace and continuing to expand their operation.  These buyers use a combination of stock (public or private) and cash from operations or debt to acquire these organizations.

Based on year-to-date statistics, the average agency will lose 12% of its renewal book in 2011.  If this attrition rate is consistent into 2012, the organization will need to generate 17% of the prior year book in new business in order to grow organically by 5%.  Rather than throwing in a 5% organic growth goal for revenue budgeting purposes, consider using strategic producer plans to formulate the goal.

Last month’s For The Record illustrated the year-over-year change in agency valuations from 2001 through 2010. Even though independent agency valuations have been volatile in the past couple of years, the total investment return of an independent agency far exceeded other investment options during that time period.

The treatment of success fees continues to be the subject of contention between taxpayers and the IRS, particularly with regard to the extent of documentation required to support the deductible portion of the success fee. To eliminate this contention, the IRS published Revenue Procedure 2011-29 in April of 2011, providing a safe harbor for allocating success fees paid or incurred in transactions involving acquisitions or reorganizations.

Acquirers of a business such as an insurance agency, where the majority of value lies in intangible assets, must remain abreast of Financial Accounting Standards Board (FASB) rules to ensure financial statements are prepared properly.

As owners and drivers of independent insurance agencies, most of you are finding yourselves still struggling in an uncertain economy, with the forces of a soft market only making your job of running a growing and profitable organization more difficult.  Is all of your effort really making a difference in the true value of your business?

Over the past five long, soft-market-plagued years, agency executives have been forced to re-evaluate every aspect of their business in order maintain revenue. This re-evaluation process included several crucial, sometimes complex strategies such as compensation adjustments, staff reductions, expense cuts, producer accountability and rigorous new producer recruiting. When trying to redesign your sales culture, not every strategy or tactic needs to be complicated. Start simple. Build a competitive environment within your organization, specifically within your production staff.

Buyers can have a corporate structure that is centralized, decentralized or somewhere in-between. In a centralized corporate structure, after purchasing an agency, the buyer will take over many of the agency functions that are non-client related, such as accounting, HR and IT. These responsibilities are reallocated and handled at the corporate level rather than at the local agency level. The result is often the elimination of these departments and termination of employees at the local agency level.

Sellers are often consumed by the big ticket items involved in the determination of a sale price; revenue, EBITDA margin, new business generation and the like.  However, a deal also involves numerous intricacies that must be considered when formulating the final net proceeds of a transaction.  One often overlooked component is the working capital requirement.

Insurance carriers play a crucial part in the insurance distribution system and often times will work with agencies by helping them reach business objectives.

Analyzing, structuring and negotiating an offer are all crucial components to the acquisition process.  Effectively presenting and communicating the offer to a potential seller is no less important, as it represents the summation of a buyer’s efforts in carefully analyzing the opportunity, drafting models to analyze the investment returns that can be expected and creatively pricing and structuring an offer to address the issues important to the seller.  The culmination of these efforts is presented to the potential seller in a written document that clearly outlines the key terms and structure of the deal.

During the business planning process, many agencies build their growth budget reactively, based on a gut feeling, or with just the end result in mind.  While this may be the easy way, the likelihood of success is very low.  Success is limited because the growth budget has not been “validated” or reconciled to a business plan to ensure that it is achievable.  A proven practice used to develop an attainable growth budget is to use a “budget validation model”.

Relationships are at the heart of the insurance business. Or so every agency and broker executive says.  In taking a heightened vantage point from which to view the broader insurance distribution value-chain, we ask why the relationship between agencies and carriers has been neglected historically.

There have been over 2,000 publically announced insurance brokerage M&A deals in the United States over the past ten years.  While an impressive number, it pales compared to the number of deals that did not close.  Appreciating the reasons some deals do not close is key to understanding a buyer’s perspective in a potential transaction and how agency sellers can maximize desirability and value.

The best agencies in the country reinvest heavily for future sustainability.  At any given point in time, an agency’s EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) can be restricted as ownership chooses to make strategic reinvestments in their agency.  These investments are designed to carry the value of the firm far beyond the short term.  They construct a foundation for growth as opposed to running a skeleton operation.

It turns out that the crystal ball we used in 2006 to make our market projections had some defects, causing us to be a little overzealous when predicting the pace of consolidation in the marketplace.  Our crystal ball did not foresee the economic contraction caused by the recession.  Nor did it see the prolonged soft market, the precipitous drop in P&C premium growth, the declining agency valuations or the associated drop-off in M&A activity.

Potential sellers are being chased by innumerable suitors and valuations have rebounded.  Valuations in this market, however, vary dramatically based on seller quality.

After a disappointing 2010 for many insurance agencies, the first quarter of 2011 finds agency owners anxiously awaiting the annual flood of contingent revenue.  This first quarter revenue that helps many agencies survive another year will prove to be increasingly elusive in 2011.  Don’t sit on the edge of your seat, as this year’s results for most agencies will prove to be considerably lower than 2010.

Every transaction within the insurance brokerage space involves “conditions to closing” to which a seller must adhere for the transaction to be finalized.  One condition to closing that a seller is typically not readily aware of is the requirement to carry an extended coverage of their Errors and Omission policy.

Agency perpetuation is not a transaction, it is a process.  While many processes must be established to make perpetuation successful, very few go so far as to “create cash flow” for a pending stock purchase.  Cash flow can be created by several means, however, it often times requires sacrificing a resource.

2009 marked the lowest number of insurance brokerage deal closings in the last ten years.  The financial collapse, lack of capital and depressed valuations slowed transaction closings in most industries.

In a recent survey of insurance agency owners, MarshBerry asked, “How have the current economic conditions impacted your perpetuation plans?”  At first glance, it was surprising to find that only 22% of agencies had indicated that their plans were put on hold, slowed down, or cancelled altogether.  A significantly higher 78% indicated that the economic downturn had no impact on their perpetuation plans.

Some people need to experience a lifechanging event before they really “see” the world around them.  Or before they commit to change.  We know what we want to do or need to do, but we fail to execute.  We ultimately fail to find the time.  And thus, we fail to see the importance of change. 

MarshBerry Executive VP Patrick T. Linnert writes about his battle with cancer and the epiphanies resulting which invite us to take a fresh perspective on our personal and business personalities.

2010 began with M&A transactions closing at numbers consistent with the low levels seen in 2009.  Deal count remained low in the first half given uncertainties about the economy, healthcare legislation, and weak pricing offered by buyers.  Activity began to increase mid-year and now there is a firestorm of activity taking place.  If all of the deals currently under letters of intent are consummated this year, the number of publicly announced transactions in 2010 will show a healthy increase over 2009 results, although not back up to 1999 - 2008 levels.

Several obstacles exist relative to internal perpetuation.  The graph below outlines the primary reasons cited by agency owners: (see full article).

The utilization of a contractual agreement known as a collar can be a useful tool when dealing with a buyer who is using publicly traded equities as consideration within a transaction.  A collar can customize a transaction to limit buyer and seller risk due to fluctuations in the buyer’s per-share price as determined by the public exchange on which it trades.

As advisors and consultants to thousands of agencies for more than 30 years, we know that the majority of independent agents and brokers will NOT perpetuate ownership internally at a fair market value.

The role of women in insurance has drastically changed in the past few decades, which has opened new opportunities to our industry.  One of the biggest changes is an increase in the number of women in the production role.  The production role is the lifeline of the agency and has become even more vital with the soft market and other agency issues.

In deciding between a C-corporation and an S-corporation for your agency’s corporate tax structure, with only a few exceptions, we usually recommend that agency owners file for S-corporation status (limited liability corporations and general partnerships have the same tax affect).

The purpose of this paper is to provide specific definition as to the new laws and regulations that will affect the insurance brokers’ role in the procurement process for small group and individual health accounts.

High-growth insurance agencies have a select unit in both commercial lines and health insurance.  A select unit is comprised of accounts below a certain commission dollar amount (select unit threshold) that are handled by dedicated and segregated service staff.  Select unit accounts are not comingled with producer books of business and producers do not receive renewal commission on these accounts.

One of the most contentious areas of valuation and negotiation in a deal is revenue recognition.  Relevant points of view include how the buyer and seller recognize revenue, along with negotiating the post transaction accounting methodology for the acquired entity.

Prior to buying a new car, an informed consumer typically asks about the warranty associated with the purchase.
The automobile industry has dictated a standard package of 3 years or 36,000 miles of bumper-to-bumper coverage for any new car. This means that if something happens to the car (that is not the fault of the new owner), the Seller (dealership/manufacturer) has the responsibility to cover any costs associated with fixing the car.  Buying or selling an insurance agency is no different.

Account retention serves as the foundation for revenue growth. And when we analyze account retention, The Pareto Principle rules. The top 20% of your organization’s accounts most typically represent 80% of the firm’s revenues. The same percentages apply to departmental and individual producer books as well. Thus, your core institutional account retention focus should reside on the Top 20% of your accounts.

Why is agency growth important? Agents and brokers are faced with a continued economic downturn combined with sustained soft market conditions; insurance companies continue to tier agents based on future growth; acquisitions are costly; expense cuts are short-term profit enhancing Band-Aids; while top-line growth that translates into additional earnings drives all facets of the value equation.  Agents and brokers must focus on the revenues most in their direct control - commissions and fees.

Never in history has the insurance industry faced such a difficult environment. The prolonged soft market, limping economy and widespread exposure compression have wreaked havoc on organic growth metrics and morale. To add insult to injury, now agency owners must figure out how to navigate through health care reform and increases in taxes on both ordinary income and capital gains.  It is possible to grow through this challenging cycle, but not by accident.

With proper preparation by both sides, the pain associated with due diligence can be minimized.  The first step in this preparation is to gain an understanding, in advance, of both the overall process of due diligence and the key areas that will need to be reviewed.

One of the first questions we ask a seller is, “Are you a C-corporation, S-corporation, LLC, partnership or sole proprietor?”  Corporate structure is the primary element that steers a transaction toward a stock purchase or an asset purchase.

As producers seek to grow their book and maximize W-2 income, there are two fundamental issues.  Either there are not enough accounts in the book or the existing accounts are too small, therefore consuming capacity.

Driving organic growth is imperative for each agency given the sluggish economy and the soft rate environment.  Despite the economic challenges, the top producers are not letting outside conditions like the soft market control their destiny.

As discussed in previous editions, merger and acquisition transaction activity was down significantly in late 2008 and 2009. However, over the last several months we have seen buyer and seller activity increase dramatically.  This increase in activity, forces dealmakers who had been sitting on the sidelines to confront and understand the new accounting rules regarding accounting for acquisitions and the costs associated with doing a deal.

As cash became a scarce commodity that no one seemed willing to part with in 2009, total merger and acquisition deal flow in the insurance brokerage space decreased by almost half of the number of transactions finalized in 2008.

The updated table below illustrates the average annual new business production by producer for 2009. While the statistics are taken from over 2,000 producers in various geographic markets selling various insurance products, the statistics are more heavily weighted on commercial and group sales. The chart is broken down into four categories of producer type based on book size and experience.

Despite a significant downturn in the economy and a decline in deal activity, the average total potential transaction value as a multiple of Earnings Before Interest, Taxes, Depreciation and Amortization expense (“EBITDA”) has not changed dramatically over the last several years.  What has changed is the portion of the transaction price that is paid on a guaranteed basis and the transaction price that realistically can be expected to be paid based on reasonable projections of future performance.

For the average agency or brokerage, there exists a direct correlation between P&C Net Written Premium changes and agency value. Since the height of the hard market in 2002, average agency/brokerage value decreases mirror those of premium reductions.

In more than 80% of the C corporation deals that have closed, the seller received a discounted valuation and the buyer lost significant tax savings… either way, dollars evaporated.  It is a shame that more aspiring dealmakers don’t understand personal goodwill. 

For the twelve months ending 6/30/09, the average total return on prior year value of a bank-owned insurance agency was a negative 10.2%.  While total revenue slipped only 4.3%, the value of the intangible assets (“book-of-business value”) declined by 18.8% primarily due to a drop in earnings.  While a decline in the average EBITDA multiples had an impact on value, the average EBITDA itself declined by a sizable 14.8%.  A drop in value of 18.8% plus average earnings for the year as a percentage of last year’s value of 8.6% provides a total estimated return of negative 10.2%.

Most of us are keenly aware that the current capital gains tax rate will automatically sunset at the end of 2010 reverting back to the pre-2003 level of 20%.  Many believe it could be increased to as much as 35%.  Few business owners have taken the time to determine how this will impact the return on their investment.  Whether you are an active acquirer or an owner contemplating internal perpetuation or an external sale, it is important to understand the potential impact of such a change in the tax rate.

The books-of-business built by the nation’s leading agency and brokerage sales personnel look materially different than those of other sales people.  Fundamentally, insurance sales personnel with the largest books maintain fewer, but much larger accounts than others.  Individuals with the largest books historically sell the most new business commissions, drive organizational revenues and maximize personal W2 income.  The graph below illustrates the correlation between book size, the number of accounts in the book and the average account size.

We recently compared the results of a comprehensive agency study on employee satisfaction with the Performance Indicator Numbers (PIN) of the participating agencies and found that the two are directly related.  The PIN measures the profit, operational and equity perspectives of a given agency through the weighting of several ratios on a scale of 1-10.  Our Employee Satisfaction study measures how satisfied employees are in terms of their Job, Agency Leadership, Work Environment and Agency Polices & Practices, also on a scale of 1-10.  The Composite Score is the average of the four.

As agents and brokers continue to refine 2010 strategies and budgets, new business sales remains the coveted prize.  When dissecting budgeted revenue growth, agents and brokers can not directly control contingents, investment income or miscellaneous income.  Additionally, agents and brokers cannot control the premium rates associated with commission and fee retention.  High-growth agents and brokers focus acutely on that which they can control: New business sales and PIF retention.

In the September issue of For The Record, we showed that high-growth agencies have positioned themselves to be viable well into the future, by investing in and training young producer talent today.  This is critical to establish the next generation of agency leadership as well as facilitate agency perpetuation, drive organic growth, and maintain key agency relationships.

In last month’s issue, we covered the hiring and retention rates of producers for average and high-growth agencies.  The data showed that high-growth agencies hire at a higher rate and cut the cord quickly on unsuccessful hires.  Why are these agencies so focused on implementing a regimented producer hiring, training and retention program?

Hiring and retaining producers who continually drive new business production remains a hallmark of high-growth agents and brokers.  As annual leakage rates now exceed 15% of prior year’s commissions and fees and will continue to climb in the short term, high-growth organizations focus on writing enough new business not only to offset the revenue leakage, but to far surpass it.

Is your agency’s future planned or is it just luck that it remains in business? Most organizations do not have a formal strategic business plan that addresses how the organization will run in the future. However, the highest performing agencies, many of which are in MarshBerry’s APPEX organization, conduct formal annual and/or quarterly strategic business planning sessions. A formal written business plan unifies agency leader’s ideas and helps control the agency’s future.

Never in history has the insurance business faced so much risk.  It is a challenge to stay out of the fire in the midst of a soft market, a stagnant economy and widespread exposure compression.  To add insult to injury, both P&C and group benefit lines now face the threat of significant government intervention.  If you are wondering whether it is possible to grow through this challenging cycle, it is, but it will not happen by accident.

We discussed the importance of maintaining a strong balance sheet in the May issue of For the Record. Data extracted from our proprietary database shows the dramatic decline of agency revenue and pre-tax profit (see charts below), suggesting that many agencies have had (or will have) to dip into their retained earnings. Those funds need to be replenished.

The importance of maintaining a strong balance sheet has never been greater than during these difficult economic times, which are filled with unforeseen challenges and hurdles. Agencies that have managed their balance sheets effectively are better prepared to weather this (and other) storms as well as to seize opportunities that may present themselves as a result of others not effectively managing their balance sheets. MarshBerry analyzed several key balance sheet ratios as of December 31, 2008 to determine how  gencies are positioned for this economic downturn.

As reprinted from Rough Notes Magazine, April 2009.  The number of firms for sale will not change much, but the sellers will be smaller.  Many agencies and brokerages continue to seek transactions with strategic partners in the hope of realizing long-term growth, profitability and, frankly, survival.  Merger and acquisition activity is alive and well, but the goals, dynamics and rationale for that activity are quickly changing.

For peak performing insurance agencies and brokerages, new business production continues to provide
the fuel to outpace the economy. Stagnant top-line growth for the masses has rapidly evolved from an
internal organizational problem into an external market excuse. Contingent income is falling. Investment
income has already disappeared. Reductions in risk exposure, returned premiums and soft rates all
exacerbate past growth obstacles.

For all, the current economy presents significant risk to health, wellness and financial stability. The landmines that lay on the horizon are immense and often seem insurmountable given a daily deluge of negative information.

Nothing looks like it did just less than a year ago. Insurance companies have low or negative investment returns, there is an acute shortage of capital, the macro-economic outlook is dismal, there is volatility in investment and underwriting performance, and the prospect of tougher regulation exists at all levels. This is the changing landscape our industry is traversing in as we move forward and look for ways to thrive and grow in a climate that for some is raining havoc.

The thread by which agency value was hanging has snapped for the masses.  Declining revenue and earnings, a limited agency buyer pool and a drastic reduction in insurable risk caused by the current recession have placed many in a valuation free fall.  The following chart illustrates the 2008 valuation and earn-out comparables for banks and public brokers.

From 1999 through 2006, banks outpaced every segment in overall number of publicly announced acquisitions, but this slowed dramatically over the last three years.  This deceleration will continue through 2009.  In 2008, independent agencies and national brokerages expanded their acquisition programs, filling some of the void left by the banking segment.

The Working Capital Defensive Interval measures the number of days expenses that an agency has in net working capital. Many agencies report having the bare minimum, which may not be sufficient to weather the loss of a major account or take advantage of unforeseen opportunities.

In the November issue of For The Record, we provided average new business production by various producer categories. We also encouraged agency and broker executives to use the data to help establish new business goals for producers during 2009. Selling is not easy and sales professionals are not motivated by mandates. In an effort to help producers manage prospects through the sales cycle while providing executives with the quantifiable metrics to help mentor and coach individuals, pipeline management is quickly becoming the tool of choice.

In the July 2007 Issue of For the Record, we showed 2006 new business comparables for various producer groups and talked about the importance of executive accountability in leading new business production.

Despite the recent turmoil in the stock market, public brokers now appear to have become a safe haven for the investment community. Insurance brokerage is a cash flow business and surplus is only stockpiled to fund for core stability, perpetuation and acquisition activities. This is a marked difference compared to industries such as insurance carriers, financial institutions and securities firms that require a significant concentration of capital to offset underwriting exposure or to satisfy regulatory requirements. These companies have a heavy concentration of assets that by their very nature are exposed to market turmoil and economic changes. Insurance brokerage has no such asset class exposure, just plain simple cash flow at an 85% retention rate in a bad year.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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).

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.

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.

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.

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’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.

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.

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

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

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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)

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.

Discusses setting up a small commercial lines department.

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

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

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

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?

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.