Year-End 2013 OGP ID: 9999 Current Value Driver Comparison

Transcription

1 Year-End OGP ID: 9999 Current Value Driver Comparison Organic Growth & Survey Organic Growth 12.0% 1 8.0% 6.0% 4.0% 2.0% Total Agency Organic Growth Organic Growth by Product Line Reagan Consulting Observations 7.0% Median organic growth finished the year at 6.2%, up only slightly over the median 2012 growth rate of 6.1% Commercial lines was once again the fastest growing line of business, with an organic growth rate of 8.2% Over 25% of the firms responding to the OGP survey grew revenues organically at double- -digit rates in Total Agency EBITDA Margin EBITDA Margin by Product Line Reagan Consulting Observations Median EBITDA margin in was 19.3%, the highest annual EBITDA margin in the seven-year history of the OGP survey Contingent income performance was strong again in, with the median firm seeing contingent income increase by 13% 1 There was significant variability in profit margins between product lines, with personal Your Firm OGP Survey OGP 75th 2012 OGP lines margins almost doubling commercial Median Percentile Median Commercial Personal Lines Group Benefits Lines OGP Projected 2014 Margin: 2 While median margins are rising, less than Your profitability half of brokers are projecting a margin 50th - 60th percentile Your Firm OGP Median rank: increase in 2014 The Rule of 20 (see note below) About the Rule of % 10.3% 6.1% 9.0% 8.0% 7.0% 6.0% 4.0% 3.0% 2.0% 1.0% 8.5% 8.2% 3.3% 2.9% 4.6% Your Firm OGP Survey OGP 75th 2012 OGP Median Percentile Median Commercial Personal Lines Group Benefits Lines OGP Projected 2014 Growth: 6.1% Agents and brokers are projecting a third Your organic consecutive year of organic growth around 50th - 60th percentile Your Firm OGP Median growth rank: 6% in % 23.8% 18.4% % 16.6% 30.9% 29.0% 21.0% 20.2% Total Agency Rule of 20 Rule of 20 by Product Line Reagan Consulting Observations The median Rule of 20 score in was 16.5, very similar to the median score in The top quartile of firms all scored above 20 in, a first in OGP history Just over 2 points separated the Rule of 20 scores for personal, commercial and benefits business in - suggesting that returns to shareholders were similar across business lines Your Firm OGP Survey OGP 75th 2012 OGP Median Percentile Median Commercial Personal Lines Group Benefits OGP Projected 2014 Score: 17.2 Lines Agents and brokers are projecting a slight Your Rule of increase in shareholder returns in th - 60th percentile Your Firm OGP Median 20 rank: Reagan Consulting has developed a metric called the Rule of 20 to provide a quick means of benchmarking an agency's shareholder returns. The Rule of 20 is calculated by adding half of an agency's EBITDA margin to its organic revenue growth rate. An outcome of 20 or higher means an agency is likely generating, through profit distributions and / or share price appreciation, a shareholder return of approximately 15% - 17%, which is a typical agency / brokerage return under normal market conditions Note: If data for your firm reads "" or "0.0" it may mean that no data was submitted for that metric. 1

2 (EBITDA Margin) Year-End OGP ID: 9999 Agency Organic Growth & Scatter Plot Organic Growth & Survey Bottom 25% Growth Top 25% Growth 4 Rule of Top 25% 2 1 Bottom 25% 1 Rule of Organic Growth Surveyed firms with annual revenues less than $10 million Your Firm Surveyed firms with annual revenues between $10 and $25 million Top and Bottom 25% of all firms Surveyed firms with annual revenues greater than $25 million Rule of 20 line (All points on this line indicate a Rule of 20 score of 20) About the Scatter Plot In the chart above, we've plotted every firm in the survey that completed both the total agency organic growth section and th e total agency profitability section. Each firm's organic growth is plotted along the x-axis, and each firm's profitability is plotted along the y-axis. We've included a couple of guidelines on the graph to help in interpreting the data. The grey dotted lines show the top and bottom 25% of firms in organic growth and profitability. The solid blue line rep resents all combinations of organic growth and EBITDA margin that result in a Rule of 20 score of 20. Finally, we've broken the firms into groups based on revenue size, as distinguished by the different colored dots. The goal of this scatter plot is to show the wide range of organic growth and profitability results in the industry and to benchmark wher e your firm falls. 2

3 Year-End OGP ID: 9999 Historical Trending Organic Growth & Survey Quarterly Organic Growth - Total Agency Median (Q Present) 6.9% 6.8% 6.1% 6.1% 6.2% 5.5% 5.4% 3.3% 3.3% 3.8% 3.7% 1.7% 1.9% 0.9% 1.0% 0.2% -0.6% -0.7% -1.4% -1.8% -1.4% Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Comparative Median Organic Growth by Product Line (Annual Results Present) Commercial Lines Personal Lines Group Benefits 7.6% 8.2% 2.9% 10.6% 3.3% 1.6% 1.3% 2.1% 7.1% 0.6% 4.5% 4.4% 4.8% -1.3% -3.5% % Comparative Median and Rule of 20 Analysis (Annual Results Present) EBITDA Margin and Operating Margin Rule of % 16.6% 17.5% 18.2% 18.4% 19.3% % 9.0% 9.9% 12.3% 12.6% 13.7% EBITDA Margin Operating Margin About EBITDA Margin and Operating Margin EBITDA Margin is calculated by dividing a firm's pro-forma EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) by the firm's pro-forma net revenues. Operating Margin is calculated as EBITDA less contingent income, divided by pro-forma net revenues less contingent income. 3

4 Organic Growth & Survey Market Commentary (Q4 ) Broker Results Were the Best in the Seven-Year History of the OGP, But by Brian Deitz Agents and brokers continued to raise the bar in, posting new OGP highs in all three major value creation categories: Median organic growth for the year was 6.2%, beating last year s 6.1% EBITDA margins jumped almost a point from 18.4% in 2012 to 19.3% in Rule of 20 scores were 16.5 and the top 25% of brokers all exceeded 20 for the first time Before we continue, we should recognize the progress that has been made in broker performance in the last five years. It wasn t too long ago (2009) when brokers were shrinking organically (-1.9% median organic growth) and posting mid-single-digit Rule of 20 scores (6.9). Agents and brokers have capitalized on a firming market, a recovering economy and specialization to make large strides forward in performance and shareholder returns. But as we analyze the full-year results, we are cautious about continued improvement in broker performance. We do not necessarily think that brokers will go backwards, but we are wondering if brokers can maintain their impressive run of consistently improving results. The Fourth Quarter Miss The truth is, when the dust settled on, broker results were just slightly better than While profitability jumped almost a point (fueled in part by a median increase of 13% in contingent income), organic growth was up just 0.1% and Rule of 20 scores just 0.4 points. As recently as the third quarter, however, it looked like brokers were poised to continue making good-sized steps forward in. Year-to-date growth was 6.8%, brokers were projecting full-year growth of 7.0% and Rule of 20 scores were forecasted to come in at The table below compares broker forecasts made in October to actual results. Brokers Q3 Guidance Versus Actual Results 7.0% 6.2% % Organic Growth EBITDA Margin Rule of 20 Score Projection Made in October Actual A question naturally arises: What happened in Q4 that caused brokers to miss their projections? Not only did organic growth not meet broker projections, but it fell 0.6% from year-to-date third-quarter numbers. The combination of organic growth and EBITDA performance dropped Rule of 20 scores a full 1.5 points below projections made just three months ago. The full-year organic growth result was particularly surprising, but it was not only privately-held firms that performed below expectations in Q4. Powell Brown, CEO of Brown & Brown, noted that at the end of the day, we were surprised by the Company s difficulty in retail organic growth in Q4 Brown & Brown reported organic growth of just 0.2% in the company s retail operations

5 Organic Growth & Survey Market Commentary (Q4 ) Brokers Forecast 2014 Growth Below After Q4 s performance, brokers are forecasting a median organic growth rate of 6.1% in 2014, roughly equivalent to 2012 (6.1%) and very slightly below (6.2%). In fact, brokers are almost evenly split on whether they believe organic growth will increase or decrease for their firm in Broker Organic Growth Forecasts in 2014 Decrease 47.4% Stay the Same 2.2% The percentage of brokers projecting an increase in organic growth is at an OGP low. At the end of 2010, 75% of brokers projected increasing organic growth results. This percentage dropped to 67% at the end of 2011, 55% at the end of 2012 and just over 50% in. Full-year organic growth rose just 0.1% when 55% of firms forecasted an increase how will median organic growth fare in 2014 with only half of firms forecasting an increase? Understanding the Slowing Momentum Increase 50.4% Why are brokers suddenly less aggressive concerning organic growth estimates? We believe that three variables are in play: A primary factor influencing growth projections is broker perception of commercial P&C pricing. Commercial P&C rates were increasing by approximately 4% to 5% from 2012 through the first half of (as reported by the Council of Insurance Agents & Brokers). However, the rate of increase slowed to 3.4% in the third quarter (fourth quarter rates were unavailable at press time). Further, some industry leaders are projecting the market firming to continue to slow into So for 2014, as we look at the rates, noted Arthur J. Gallagher CEO Pat Gallagher in a recent earnings call, we expect the property/casualty market to remain stable with increases on most lines being somewhere in the order of 2% to 3%. The performance of the economy, on the other hand, should be a source of optimism for brokers. The Wall Street Journal s survey of economists projects 2014 GDP growth for the United States of 2.8%, up from a 1.9% increase in. Further, GDP growth in the second half of was strong third quarter growth was 4.1% and fourth quarter estimates are 3.2%. Given the traditional 6-9 month lag between economic growth and broker performance, the strong second half of could help brokers in The final variable, we believe, is employee benefits performance. Benefits divisions, which make up 20% - 25% of revenues for the typical firm, grew at a modest 5% in and have averaged 5.2% growth over the last five years. It appears unlikely that the healthcare environment will change dramatically in Mike Turpin, Executive VP at USI Insurance Services, explains in Leader s Edge Magazine that 2014 will produce low rates of participation in public exchanges and that the consumption of healthcare will continue to move sideways. It is possible that improvement in the economy could create a slight upside in 2014, however. In terms of the overall employee benefits outlook for organic growth in 2014, noted Hub International Limited CEO Marty Hughes, Hub expects its performance to be equal to or stronger than. As brokers look at 2014, they appear to believe that these three forces will largely balance out, creating results that look fairly similar to. Brokers may continue to improve performance, but the days of making large gains appear at least temporarily to have come to an end. Earnings Call excerpts courtesy of SeekingAlpha.com - 2 -

6 Reagan Consulting is the industry s leading ownership perpetuation advisor, having helped hundreds of high-performing firms achieve their perpetuation goals. Whether the goal is to build a successful strategy for long-term independence, to raise capital for expansion or to align with a strategic partner, Reagan Consulting provides unparalleled service for the industry s top performers. Marsh & McLennan Agency acquired Alliant Insurance Services acquired USI Insurance Services acquired Hub International Ltd. acquired Barney & Barney, LLC San Diego, CA Barney & Barney 2014 Sagewell Partners, Inc. Pittsburgh, PA Sagewell Van Gilder Insurance Corp. Denver, CO Van Gilder The Manual Lujan Agencies Albuquerque, NM Manuel Lujan BancorpSouth Insurance Services, Inc. acquired Stone Point Capital and Dowling Capital Partners invested in AmWINS Group, Inc. acquired Marsh & McLennan Agency acquired GEM Insurance Agencies, LP Houston, TX GEM Hodges-Mace Benefits Group, Inc. Atlanta, GA HMBG Gresham & Associates, Inc. Stockbridge, GA Gresham 2012 Brower Insurance Agency, LLC Dayton, OH Brower 2012 Securities transactions provided through Reagan Securities, Inc., member of FINRA and SIPC.