Agency 2025: Forecasting the Future

Agency 2025: Forecasting the Future Bobby Reagan Reagan Consulting October 19-20, 2017 Agency 2025: Forecasting the Future

Agency 2025: Forecasting the Future Where have we come from? Where are we today? What can we expect in 2025? Agency 2025: Forecasting the Future 2

August 8, 1995 But even if the insurance agents prevail in Washington [in keeping banks out of insurance], they appear to face a bleak future. Their ranks are shrinking, squeezed by a tidal wave of change in technology and distribution. The familiar insurance agents, the classic salesman and small-business person may be headed the way of the milkman. Nancy Carini, an analyst Conning and Company (a market-research firm in Hartford, CT) Agency 2025: Forecasting the Future 3

Carriers will go direct they don t need independent agents. What happened? 1995 2015 Personal Lines through Agents 32%* 35%** Commercial Lines through Agents 72%* 80%** *A.M. Best **IIABA Liberty Mutual abandoned being a direct writer in 2009 and committed to the independent agency system. Agency 2025: Forecasting the Future 4

Consolidation will eliminate the majority of independent agents. What happened? 1995 2015 Total Number of Agencies 41,000 37,500* 100 th Largest Agency $8.5M $26.6M *Estimate based on 2013 data There has been a reduction of less than 10% in the number of agents, but the ones that remain are materially larger. Agency 2025: Forecasting the Future 5

Agents will be squeezed out of business. What happened? 1995 2015 Revenue per Employee $81,316 $164,362 Pro Forma Pre-tax Profits 12.0% 29.8% Value as Multiple of Revenue 1.4x 2.0x *Best Practices Study, Average Agencies with Revenues between $2.5M and $5.0M Agency 2025: Forecasting the Future 6

Quarterly Organic Growth Total Agency Median (Q2 2009 Present) 3.8%3.7% 3.3%3.3% 5.5%5.4% 5.0% 6.9%6.8% 6.2%6.1% 6.2%6.2% 5.8% 6.0% 6.2% 5.8%5.9% 4.4% 4.6% 5.1% 4.0% 3.6% 4.2% 3.9% 4.6% 0.2% 1.0% 1.9% -0.7% -1.4% -1.8% -1.4% II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Reagan Organic Growth & Profitability Survey Agency 2025: Forecasting the Future 7

Comparative Median Profitability (2 nd Quarter Numbers) 21.1% 21.8% 22.9% 22.1% 24.0% 24.5% 24.6% 23.1% 24.6% 10.0% 10.4% 13.9% 11.7% 13.3% 14.0% 12.9% 11.2% 11.3% 2009 2010 2011 2012 2013 2014 2015 2016 2017 EBITDA Margin Operating Margin Source: Reagan Organic Growth & Profitability Survey Agency 2025: Forecasting the Future 8

Recent Deal Activity by The Numbers Average annual deal total: 317 492 457 364 360 237 271 303 200 244 311 245 221 255 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD Jun-16 YTD Jun-17 Source: SNL Financial as of June 30, 2017 (based on Announcement Date). Includes whole company, franchise and asset sales. Agency 2025: Forecasting the Future 9

Who is Buying? 30% 26% 25% 26% 20% 24% 14% 13% 14% 17% 17% 15% 20% 10% 9% 6% 8% 5% 13% 15% 9% 10% 10% 14% 9% 10% 21% 15% 16% 13% 24% 28% 26% 28% 6% 5% 12% 11% 10% 11% 21% 24% 22% 28% 21% 29% 32% 21% 28% 55% 20% 42% 46% 16% 41% 20% 23% 27% 30% 12% 14% 15% 4% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Private Equity Private Brokers Other Public Brokers Banks 52% 49% YTD Jun-16 YTD Jun-17 Source: SNL Financial as of June 30, 2017 (based on Announcement Date). Includes whole company, franchise and asset sales. Agency 2025: Forecasting the Future 10

The Major Acquirers Buyer 2015 2016 YTD June 2017 Total Deals Acrisure (PE) 42 41 24 107 Hub (PE) 35 38 17 90 Broad Street (PE) 26 28 20 74 AssuredPartners (PE) 30 26 7 63 Arthur J. Gallagher 19 23 17 59 Confie Seguros (PE) 19 16 6 41 NFP (PE) 16 9 9 34 Hilb Group (PE) 8 15 6 29 Alera Group (PE) 0 22 3 25 USI (PE) 6 10 6 22 Risk Strategies (PE) 5 10 5 20 Brown & Brown 12 5 2 19 Marsh McLennan 7 5 4 17 Alliant (PE) 8 6 3 16 Source: SNL Financial as of June 30, 2017 (based on Announcement Date). Includes whole company, franchise and asset sales. Agency 2025: Forecasting the Future 11

M&A Deal Valuations Holding at All- Time Highs (Multiples of EBITDA) 3.5x 3.0x 3.0x 2.5x 2.5x 2.5x 3.0x 3.0x 3.0x 3.0x 3.0x 6.5x 6.0x 5.8x 6.0x 6.3x 6.5x 6.8x 7.0x 7.5x 8.0x 8.0x 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Typical Guaranteed Price Earn-Out Opportunity Good quality agents and brokers, $3-$10 million in revenue Agency 2025: Forecasting the Future 12

Profitability (EBITDA Margin) OGP Scatter Plot Q2 2017 50.0% 40.0% Surveyed firms with annual revenues <$10M Surveyed firms with annual revenues from $10M to $25M Surveyed firms with annual revenues >$25M Your Firm Top and Bottom 25% of all firms Rule of 20 line (All points on this line = a Rule of 20 score of 20) BRO 30.0% AON MMC AJG WLTW 20.0% 10.0% 0.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% Organic Growth Agency 2025: Forecasting the Future 13

Insight Into the 5 Tool Agency Sales culture Leadership Operational capabilities Specialization Geography Agency 2025: Forecasting the Future 14

Our Industry is Aging WASA and WAPA in the Last Eight Years 51.1 51.9 46.6 47 52.5 52.9 53.3 51.9 47.8 48 48.4 48.7 54.5 54.4 53.3 49.3 49.4 49.5 2008 2009 2010 2011 2012 2013 2014 2015 2016 WASA WAPA Source: Best Practices Study Agency 2025: Forecasting the Future 15

Generational Capacity Age Distribution of Production Force (Based on RVI Data) 28% 12% Up to Age 35 22% 18% Age 36-45 29% 22% Age 46-55 41% 28% Over Age 55 The Effects of Producer Age Distribution (Based on RVI Data) Metric Bottom 25% Top 25% WAPA 53.6 45.1 WASA 56.6 49.7 Organic Growth 1% - 2% 8% - 9% Sales Velocity 7% 15% Bottom 25% Top 25% Leaders under Age 46 1 5 Agency 2025: Forecasting the Future 16

Number of Producers by Age Band Healthier firms spread their producer count more evenly among different age bands. Number of Producers by Age Band Healthy 27.8% 22.2% 22.2% 27.8% ABC 8.0% 23.3% 33.0% 35.8% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% Up to age 35 36-45 46-55 Over 55 Source: Producer Recruiting & Development Study. Includes only validated producers. Agency 2025: Forecasting the Future 17

Technology Revolutions Agency 2025: Forecasting the Future 18

What about insurance? Agency 2025: Forecasting the Future 19

Understanding what is out there Technology Marketers People selling stuff over the internet Tools Everyone can Use Tech advancements that improve the process Carriers and Big Data Leveraging data to change underwriting Agency 2025: Forecasting the Future 20

The Successful Insurance Agency in 2025 1) Generationally healthy Great at recruiting, hiring and developing Creating culture where all can prosper 2) Embracing technology Customer service/ease of doing business Efficiency/productivity Agency 2025: Forecasting the Future 21

The Successful Insurance Agency in 2025 3) Finding / creating competitive advantage Specialization Better employees / better culture Technology 4) Operational Efficiency 5) Customer / Sales Focused Agency 2025: Forecasting the Future 22

Reagan Publications Organic Growth & Profitability Survey Quarterly Real-time Data Agency 2025: Forecasting the Future 23

Robert W. Reagan, CPCU CEO Bobby Reagan brings more than three decades of insurance industry experience to the company that bears his name. 404.233.5545 bobby@reaganconsulting.com www.reaganconsulting.com After graduating with high honors from the University of Tennessee, where he earned BS and MS degrees in Industrial Engineering, Bobby joined a Southeastern regional insurance brokerage firm as a commercial property and casualty producer. During his 10 years with the firm, he served in regularly ascending capacities, including COO. Bobby received his CPCU designation in 1980. In 1984, he joined the consulting firm of Hales & Associates and, the following year, opened its Atlanta office. Two years later, in 1987, he became CEO of the firm and, in 1992, was elected Chairman and CEO. In April 1995, Hales & Associates underwent reorganization, and Reagan Consulting was formed as a result. Bobby s expertise and integrity have ensured his reputation as a true authority within the insurance industry. He has consulted with many of the country s most successful insurance agents and brokers, and worked with many leading financial institutions on their insurance initiatives. He is also in consistent demand as a speaker and author, with speeches delivered to more than 150 insurance industry groups and associations, and articles published in the majority of the industry's trade publications. Agency 2025: Forecasting the Future 24