Best Practices Agencies Show Steady Profitability

Best Practices agencies have seen modest declines in organic growth but steady profitability, according to the 2015 Best Practices Study Update from the Big “I” and Reagan Consulting.

Thanks to a softening property-casualty market combined with stagnant economic recovery, this year’s update reports that Best Practices agencies posted 8% organic growth in 2014, down slightly from 2013’s 8.2% growth rate.

Marking the 23rd edition of the annual benchmarking analysis and the final year of the current three-year study cycle, the 2015 Best Practices Study Update reflects results from year-end 2012 to year-end 2014. While the findings reveal declines over the cycle period in both p-c and employee benefits growth, 7.5% commercial p-c organic growth far outweighed 1.7% employee benefits growth in 2014:

Organic Growth by Line of Business

Pro forma profitability remained strong over the cycle period at approximately 26%, with smaller firms—those with less than $5 million in revenue—outperforming their larger peers—those with more than $5 million in revenue—once again in 2014, posting results of 30% versus 22%.

Total Organic Growth and Pro Forma Profitability

 

Several productivity measures indicated continued improvements in overall operating efficiency. Revenue per employee, perhaps the best overall metric of productivity, increased approximately 5% over the two-year period. In similar positive trending, expenses as a percent of revenue have declined modestly over the cycle to a 2014 average level of 80.2%. Revenue per service staff member increased by approximately 6% in commercial p-c business and by approximately 1% in employee benefits. Overall, best practices firms continue to demonstrate their focus on operating excellence and the financial results it produces.

Also reflecting improvements in productivity, new business per validated producer increased across all size firms for both commercial p-c and multiline producers, growing by 5.5% and 5%, respectively, since 2012. Employee benefits producers saw an overall decline of 4.4% on the same measure for the period, likely due to the significant transformation that side of the business is currently experiencing.    

The net investment in un-validated producer payroll (NUPP)—a measure of commitment to future growth by way of new producer pipeline development—has remained steady and healthy throughout the period, with an average of 1.8% for all firms. This is particularly important as many agencies seek to maintain their independence and the outstanding investment private ownership continues to represent. The ability to both develop high performers who serve as the next generation of owners and maintain strong performance that drives meaningful ownership opportunities is critical to the goal of private ownership.

In an active market that continues to reflect a strong appetite for acquisition, planning for internal perpetuation is as important as ever. Focusing on the best practices that drive agency value remains one of the best tools available to firms of all sizes looking to achieve their long-term goals.

Order your 2015 Best Practices Study Update e-book online or email Best Practices for more information.

Susan Hughes is research director at Reagan Consulting.