The bad news is that overall organic growth for independent insurance agencies is down.
The good news is that there continues to be growth in two areas: personal lines and group product sales.
The Independent Insurance Agents and Brokers of America (the Big “I”) released its latest annual study of Best Practices agencies.
Agencies are still feeling the effects of the soft market’s lower premiums in commercial lines, the study found. Agencies of all sizes are seeing lower overall returns in this marketplace.
But on the positive side, smaller agencies are holding onto employees and larger independent insurance agencies are actually increasing their employee headcounts, as opposed to contributing to the nation’s already high unemployment rate.
The “Rule of 20,” a benchmark introduced in 2007, is a way to calculate whether an agency is creating significant returns for its shareholders. The outcome is equal to the agency’s Pro Forma EBITDA X 50% + Organic Growth Rate. In general, an outcome of 20 or higher means an agency is generating a shareholder return that is equal to or greater than that typically expected of an insurance agency/brokerage. A score of less than 20 indicates room for improvement.
The average “Rule of 20” score fell significantly since 2007. For smaller agencies, it dropped from an average score of 25.6 to 14.4 and for larger agencies from 24.2 to 13.4. A score of 20 or more means an agency is generating a shareholder return of 15 percent-16 percent, which is viewed as the “expected” rate of return for a well-run agency.
“This year’s study indicates that the Best Practices agencies, overall, continue to perform well, despite facing some challenges in soft market conditions,” said Madelyn Flannagan, Big “I” vice president of agent development, education and research. “As expected, overall organic growth was down significantly again this year but was buoyed by positive growth in both personal property/casualty and group life/health.”
Flannagan said this is a continuation of a trend that started in 2007 when the Big “I” began to study the current group of Best Practices agencies.
Employee numbers or “headcounts” are an important factor in profitability and since its inception the study has reported a continuous drop in agency headcounts. Surprisingly, this year’s study shows that the total number of employees reported remained steady in agencies with revenues under $5 million and increased by an average of four people in agencies with revenue agencies over $5 million.
The soft market’s effects can be seen in commercial lines production. According to Flannagan, the new commissions produced per commercial lines producer was down across the board in all agency size categories. “Given the soft market, this was not a surprise and may be a factor in the increase of multi-line producers in the larger agencies,” she said.
Every three years, the Big “I” asks its insurance company partners, state association affiliates and other industry organizations to nominate agencies they believe to be among the most efficient and high performing agencies in the industry for each of the studies’ revenue categories. These agencies are asked to submit operational information in many areas. This information is evaluated and ranked, culminating in the choice of the top 30 agencies in each revenue category earning them the status of “Best Practices Agency” and inclusion in the study.
The Best Practices Study, which originated in 1993, compiles the year-end results of the participants’ most recently completed fiscal year end. Ninety-five percent of the 2009 Best Practices Agencies have Dec. 31, 2008 fiscal year ends.
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