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2003 Best Practices Study Executive Update
Conducted by: Independent Insurance Agents and Brokers of America and Reagan Consulting
The annual Best Practices Study originated in 1993 as an initiative to help independent agents build the value of their most important asset, their agencies. By studying the leading agencies and brokers in the country, the Independent Insurance Agents & Brokers of America (IIABA) hoped to provide member agents with meaningful performance benchmarks and business strategies that could be adopted or adapted for use in improving agency performance, thus enhancing agency value.
The IIABA retained the principals of Reagan Consulting to create and perform the first study of The Best Practices of the Leading Independent Insurance Agencies in the United States. Today, the annual updates continue to provide important financial and operational benchmarks, and the study is recognized as one of the most thoughtful, effective and valuable resources ever made available to the industry.
The leading agencies included in the annual study must be nominated for participation. Once every three years, the insurance companies participating in the IIABA?s Council for Best Practices and the Executive Directors of IIABA?s state association affiliates nominate the agencies they believe to be among the best. The 700-800 nominated agencies are then invited to participate and asked to complete an in-depth survey detailing their most recently completed fiscal year end results. From the 300+ agencies submitting data, the top 30 in each revenue category are included in the study for the next three years and earn the status of a ?Best Practices agency.? They are scored and ranked objectively for inclusion on the basis of Account Retention Rates, Revenue Growth, Productivity, Profitability, and Financial Stability. Participation in The Best Practices Study has become a prestigious recognition of the superior accomplishments of the top insurance agencies in each of the six size categories studied.
The 2003 Best Practices Study Executive Update continues to follow the performance of the 180 agencies selected as Best Practices agencies in the 2001 study. Since 2001, banks or national and regional brokers have acquired 5% of those agencies.
Over 90% of this year?s participants submitted data for the fiscal year ending 12/31/2002. The balance of the agencies reported on fiscal years ending within the first half of 2003.
As expected the hard market contributed to hefty, double-digit revenue growth rates in all but the two smaller revenue category groups ? ?Under $500,000? and ?Between $500,000 and $1.25 Million?. Both of these groups had single-digit growth rates below their previous year?s rates. While these lower growth rates reflect the fact that the agencies in these groups are less likely to write the larger commercial accounts most impacted by the hard market, the lower growth percentages point to the increasing competition with which these agencies are faced. For the smaller agencies, revenue growth remains difficult, even in the hard market.
The average growth rate for the four study groups with revenues over $1.25 Million ranged from percentages in the mid-teens to a whooping 20.1%. Since growth rates for the prior year hovered in the low teens, it appears that these agencies benefited from the significant rate increases brought on by the hard market.
Did the increased revenues mean bigger profits? Yes, but?.The strong revenue growth rates did translated into stronger profitability ratios than in the prior year, although not proportionately higher. The pre-tax profits averaged 12.1% of net revenues for the three study groups with revenues over $2.5 Million. This was just slightly better than last year?s average profits for this combined group. The ?Under $500,000? group?s pre-tax profits also improved, but by only half of a percentage point. The two groups with revenues between $500,000 and $2.5 Million had a combined average pre-tax profit of 13.4%, a strong figure, but a full 2.3 percentage points below the prior year results.
A major factor influencing this year?s profitability ratios was compensation expense. Since the 2001 Study results were published, compensation per employee increased an average of $9,990 in each of the six study groups. Employees, who had worked in soft market conditions for years with minimal or no salary increases, were finally rewarded. Agencies used their increased revenues to provide incentives and to retain and recognize employees who labored under heavier, market-induced workloads. At the same time many agencies made investments to support future growth, particularly the larger agencies that used the additional revenues to add new producers and support staff.
Acquisition activity was another factor in the revenue growth rate for the two larger revenue categories, although such activity was not limited to those groups as shown in the chart below. The average multiple paid was 1.32x the acquired revenues. This was up slightly from 1.29x in the previous year.
Although the immediate effect of the hard market was evident on this year?s results, the outcome is yet to be seen. It will be interesting to see how the Best Practices agencies perform as the market turns and margins shrink. Will they be able to maintain steady revenue growth and good profitability? We think so. These agencies have shown that they consistently are able to achieve good results by wisely controlling expenses, investing for future growth, and expecting the best from their employees and carrier partners.
The 2003 Best Practices Study is available in two formats ? hard copy and electronically. The hard copy can be purchased from the IIABA Education Department (800-221-7917). The electronic version can be accessed via the websites of IIABA (www.iiaba.com) and Reagan Consulting (www.reaganconsulting.com). From these sites, users can enter the Best Practices Gateway home page to view an HTML version of the study, download a Best Practices comparison spreadsheet to compare their year-end results with the study?s results, and access the complete family of Best Practices resources.
As in previous years, the update provides an analysis of agencies by revenue size, by region and by population density of the city in which they primarily operate. Also included is an analysis of agencies that indicated that Personal Lines is an important source of revenue.
In addition to providing benchmarks and documenting the business practices of leading agencies, the IIABA and Reagan Consulting periodically address specific business practices or focus on issues of critical importance to independent agencies. Such studies include The Best Practices of Leading Sales Organizations and The Best Practices for Perpetuation and Management Succession. Some of the tools designed to help agencies measure and improve their performance include the Agency Self-Diagnostic Tool and the Joint Agency Company Planner. These Best Practices studies and tools, which are part of a complete line of Best Practices products and services, can be ordered through the IIABA Education Department (800-221-7917).
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