Insurance Agency Ownership Perpetuation

CONFIDENTIAL

Insurance Agency Ownership Perpetuation

Tom Doran

CONFIDENTIAL Insurance Agency Ownership Perpetuation

Reagan Perpetuation Studies2


Insurance Agency Ownership Perpetuation

• Two Excellent Options:

InternalPerpetuation

ExternalPerpetuation

or

3


The Four Pillars of Internal Perpetuation4

Healthy Operation

Reasonable Sellers

Able Buyers

Effective Transfer Mechanism


The Four Pillars of Perpetuation5

• Healthy Operation• Reasonable Sellers• Able Buyers• Effective Transfer Mechanism


Profitability6

EBITDA Margin (% of revenue) % of Industry

Value at 6.0x EBITDA (expressed as a

multiple of revenue)

Less than 10% 21% Less than 0.6 x

10% to 20% 35% 0.6 x – 1.2 x

20% to 30% 26% 1.2 x – 1.8 x

Greater than 30% 18% Greater than 1.8 x


Growth is Essential• Growth provides buyer purchasing power• Growth influences the EBITDA multiple, which impacts

value• Growth means viability

7


Accept Internal Valuations

Yes47%

No53%

9

Are Sellers in Your Firm Willing to Take a Discount to a Third-Party Valuation?


7 years

Finance the Deal

Receive 100%

cash at close32.2%

Finance the deal67.8%

10

Are Sellers receiving cash at close or are they financing

the deal?

MEDIAN DOWN

PAYMENT

12.5%

MEDIAN FINANCING

PERIOD


Time Share Sales Appropriately

< 25 25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75 +0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Current Ownership Distribution Ownership Distribution in 10 Years

Shareholder Age

Ow

ners

hip

% H

eld

by O

wne

rs in

Age

Gro

up11

Current WASA 53.8WASA in 10 Years 56.7

Assumes sales at age 65 and no sales to younger employees*


Assessing Financial Ability13

BUYER COVERAGE RATIO

Buyer Ownership Distributions or

Bonuses Buyer Principal &

Interest Payments • First-year metric: Does not contemplate growth in the business• Pre-tax metric: Taxes on ownership bonuses or distributions not

included• Down payment not factored into the calculation


The Buyer Coverage Ratio14

Yes55.0%

No45.0%

Is Your Firm’s Buyer Coverage Ratio 100% or Higher?


100% Buyer Coverage Ratio ≠ Free Ride15

• 5% of $5 million firm– $25,000 down – Annual out-of-pocket tax

expenses of $8,700

• 3% of $15 million firm– $45,000 down– Annual out-of-pocket tax

expenses of $15,700

Out of Pocket Costs (BCR = 100%) Typical Buyer Profile

• Age 37• Highly compensated

Producer• Risk tolerant• Plays well with others


What Does a Buyer Transaction Look Like?16

MEDIAN DOWN

PAYMENT

10%MEDIAN

FINANCING PERIOD

8 years MEDIAN

BUYER COVERAGE

RATIO

100%


The Biggest Challenges to Finding Buyers17

Financial Resources

Leadership

Potential Buyers

Willingness t

o Defer Gratification

Sophistication

Interest in Ownersh

ip

CohesionOther

64.8%

33.5% 31.9% 31.5% 31.1%

12.3%7.5% 4.8%


Industry Use of Transfer Mechanisms

Ownership Purchases

Stock Grants Gifting ESOPs Stock Op-tions / Phan-tom Equity

Other

65.4%

9.8% 9.8%3.8% 3.8% 7.5%

19

What is Your Firm’s Primary Transfer Mechanism?


How Do the Pieces Fit Together?20

Recruit Talent

Grow and Increase

Value

Reasonable Sellers

Buyer-Friendly

Purchases


Why remain independent?• Because this is an incredibly resilient industry • The future has never been brighter for creative and

innovative brokers• The best talent in the industry follows the equity

opportunities available at most independents• Unparalleled quality of life• Because the economic rewards are sizeable …

21


Reco

very

Agency values have increased during every economic period in past 2 decades

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00 S&P 500 RVI Public Brokers

HardMarket

The “Great Soft Market”

TheLeverageBubble 6.9%

Annual Growth Rate

9.4%Annual Growth Rate

10.6%Annual Growth Rate

TheGreat

Recession

22


Focus on operating results to support a robust internal valuation and distributable earnings

Hiring and developing of young professionals (aka buyers)

Plan for it, don’t assume it will simply happen

Keys to remaining Independent23


1998 Business Insurance Top 10024

As of 7/19/99

Rank Company1998 U. S. Brokerage

Revenue

1 Marsh & McLennan Cos. Inc. $3,350,460,0002 Aon Corp. $2,286,440,0003 Willis Corroon Group Ltd. $630,554,7804 Arthur J. Gallagher & Co. $471,991,8155 USI Insurance Services Corp. $327,000,0006 Acordia Inc. $306,869,2257 Hilb, Rogal & Hamilton Co. $172,163,3608 Norwest Insurance Inc. $161,090,0009 Brown & Brown, Inc. $150,443,00010 Jardine Lloyd Thompson Group P.L.C. $146,147,40011 Lockton Cos. Inc. $117,291,10412 BB&T Insurance Services, Inc. $80,726,48013 American Phoenix Corp. $71,247,72514 Near North Insurance Brokerage Inc. $70,785,00015 McGriff, Seibels & Williams Inc. $60,151,87216 Meadowbrook Insurance Group $56,966,40017 Talbot Financial Corp. $55,174,00018 ABD Insurance & Financial Services $55,040,00019 Lambert Fenchurch Group P.L.C. $52,969,35020 Frank Crystal & Co. Inc. $52,969,35021 Palmer & Cay Inc. $52,374,67022 Keenan & Associates $50,400,00023 The NIA Group $47,734,22624 Hobbs Group L.L.C. $47,728,09525 Summit Global Partners Inc. $47,410,87426 Riedman Corp. $47,373,00027 Kaye Group Inc. $44,983,99328 John L. Wortham & Son L.L.P. $40,288,00029 Healthcare Insurance Services Inc. $38,019,22930 Frenkel & Co. Inc. $34,422,30031 Robert F. Driver Co. Inc. $34,104,80032 The Sullivan Group $33,950,00033 Timberline Insurance Managers Inc. $32,206,39534 Commerce National Insurance Services Inc. $31,568,60035 The Leavitt Group $31,185,00036 J. Smith Lanier & Co. $30,584,00037 Bollinger Inc. $28,569,65138 Meeker Sharkey Financial Group Inc. $27,939,54339 Marshall & Sterling Enterprises Inc. $27,301,87240 Insurance Management Associates Inc.-an Assurex partner $26,920,43841 Holmes, Murphy & Associates $26,499,23642 Calco Insurance Brokers & Agents Inc. $26,397,60843 Rebsamen Insurance $24,513,87044 Mesirow Insurance Services Inc. $24,379,77245 Hylant-McLean Group $24,237,00046 Heath Group P.L.C. $23,672,82547 Tanenbaum-Harber Co. Inc. $22,799,70048 Van Beurden Insurance Services Inc. $22,690,00049 Cal-Surance Associates Inc. $21,949,00050 The Graham Co. $21,542,745


Revenue

51 The Treiber Group L.L.C. $21,204,59252 Andreini & Co. $20,875,00053 Mellon/Clair Odell Group $20,658,00054 Berwanger Overmyer Associates-an Assurex partner $20,288,37555 Cameron M. Harris & Co.-an Assurex partner $20,144,56156 Saldana & Associates Inc. $18,882,16757 Old Kent Insurance Group $18,746,64058 Sullivan & Curtis $18,288,77059 Daniel & Henry Co.-an Assurex partner $18,039,00060 Allied Coverage Corp. $18,000,00061 BWD Group Ltd. $17,820,00062 Van Gilder Insurance Corp.-an Assurex partner $17,578,64663 The Tribus Cos. $17,500,00064 InterWest Insurance Services Inc. $16,948,80065 Wm. Rigg Cos. $16,813,13366 Dodge, Warren & Peters Insurance Services Inc. $16,580,88667 Horton Insurance Agency Inc. $16,246,11768 Kelter-Thorner Inc. $16,166,15069 Lawley Service Inc. $15,737,19470 James B. Oswald Co.-an Assurex partner $15,601,00071 Hastings-Tapley Insurance Agency $15,161,79772 Van Meter Insurance Agency Inc. $15,084,00773 Bratrud Middleton Insurance Brokers $15,000,00074 Fringe Benefits Management Co. $14,834,54875 Davis Baldwin Inc.-an Assurex partner $14,722,25776 Anchor Pacific Underwriters Inc. $14,688,00077 Associates Agencies Inc. $14,553,00078 Bowen, Miclette & Britt Inc. $14,431,26879 Fred A. Moreton & Co.-an Assurex partner $14,368,25880 The Loomis Co. $14,215,04681 Silverstone Group Inc. $13,920,00082 Allied American Insurance Agency Inc. $13,880,18583 The Rutherfoord Cos.-an Assurex partner $13,770,10184 Hamilton Dorsey Alston Co.-an Assurex partner $13,103,89685 Parker, Smith & Feek Inc.-An Assurex partner $12,990,88086 Seitlin-an Assurex partner $12,500,00087 Charles J. Crane Agency Co. $12,426,35388 Insurance & Risk Management-an Assurex partner $12,396,78089 Hibbs-Hallmark Co. $12,384,19790 The Rosenthal Cos. $12,338,00091 Bolton & Co.-an Assurex partner $12,286,18492 Starkweather & Shelpley Insurance Brokerage Inc.-an Assurex partner $12,110,00093 Mack & Parker Inc.-an Assurex partner $11,760,00094 Lovitt & Touche Inc. $11,742,41495 R. C. Knox & Co. Inc. $11,557,00096 Posse Walsh Buckman Van Buren $11,302,00097 Hefferman Petersen Insurance Brokers $11,300,00098 Haas & Wilkerson Inc. $10,989,12099 The Hays Group Inc. $10,925,000

100 Scott Insurance $10,838,802

Who has not changed hands?


1998 Business Insurance Top 10025

As of 7/19/99


Revenue

1 Marsh & McLennan Cos. Inc. $3,350,460,0002 Aon Corp. $2,286,440,0003 Willis Corroon Group Ltd. $630,554,7804 Arthur J. Gallagher & Co. $471,991,8155 USI Insurance Services Corp. $327,000,0006 Acordia Inc. $306,869,2257 Hilb, Rogal & Hamilton Co. $172,163,3608 Norwest Insurance Inc. $161,090,0009 Brown & Brown, Inc. $150,443,00010 Jardine Lloyd Thompson Group P.L.C. $146,147,40011 Lockton Cos. Inc. $117,291,10412 BB&T Insurance Services, Inc. $80,726,48013 American Phoenix Corp. $71,247,72514 Near North Insurance Brokerage Inc. $70,785,00015 McGriff, Seibels & Williams Inc. $60,151,87216 Meadowbrook Insurance Group $56,966,40017 Talbot Financial Corp. $55,174,00018 ABD Insurance & Financial Services $55,040,00019 Lambert Fenchurch Group P.L.C. $52,969,35020 Frank Crystal & Co. Inc. $52,969,35021 Palmer & Cay Inc. $52,374,67022 Keenan & Associates $50,400,00023 The NIA Group $47,734,22624 Hobbs Group L.L.C. $47,728,09525 Summit Global Partners Inc. $47,410,87426 Riedman Corp. $47,373,00027 Kaye Group Inc. $44,983,99328 John L. Wortham & Son L.L.P. $40,288,00029 Healthcare Insurance Services Inc. $38,019,22930 Frenkel & Co. Inc. $34,422,30031 Robert F. Driver Co. Inc. $34,104,80032 The Sullivan Group $33,950,00033 Timberline Insurance Managers Inc. $32,206,39534 Commerce National Insurance Services Inc. $31,568,60035 The Leavitt Group $31,185,00036 J. Smith Lanier & Co. $30,584,00037 Bollinger Inc. $28,569,65138 Meeker Sharkey Financial Group Inc. $27,939,54339 Marshall & Sterling Enterprises Inc. $27,301,87240 Insurance Management Associates Inc.-an Assurex partner $26,920,43841 Holmes, Murphy & Associates $26,499,23642 Calco Insurance Brokers & Agents Inc. $26,397,60843 Rebsamen Insurance $24,513,87044 Mesirow Insurance Services Inc. $24,379,77245 Hylant-McLean Group $24,237,00046 Heath Group P.L.C. $23,672,82547 Tanenbaum-Harber Co. Inc. $22,799,70048 Van Beurden Insurance Services Inc. $22,690,00049 Cal-Surance Associates Inc. $21,949,00050 The Graham Co. $21,542,745


Revenue

51 The Treiber Group L.L.C. $21,204,59252 Andreini & Co. $20,875,00053 Mellon/Clair Odell Group $20,658,00054 Berwanger Overmyer Associates-an Assurex partner $20,288,37555 Cameron M. Harris & Co.-an Assurex partner $20,144,56156 Saldana & Associates Inc. $18,882,16757 Old Kent Insurance Group $18,746,64058 Sullivan & Curtis $18,288,77059 Daniel & Henry Co.-an Assurex partner $18,039,00060 Allied Coverage Corp. $18,000,00061 BWD Group Ltd. $17,820,00062 Van Gilder Insurance Corp.-an Assurex partner $17,578,64663 The Tribus Cos. $17,500,00064 InterWest Insurance Services Inc. $16,948,80065 Wm. Rigg Cos. $16,813,13366 Dodge, Warren & Peters Insurance Services Inc. $16,580,88667 Horton Insurance Agency Inc. $16,246,11768 Kelter-Thorner Inc. $16,166,15069 Lawley Service Inc. $15,737,19470 James B. Oswald Co.-an Assurex partner $15,601,00071 Hastings-Tapley Insurance Agency $15,161,79772 Van Meter Insurance Agency Inc. $15,084,00773 Bratrud Middleton Insurance Brokers $15,000,00074 Fringe Benefits Management Co. $14,834,54875 Davis Baldwin Inc.-an Assurex partner $14,722,25776 Anchor Pacific Underwriters Inc. $14,688,00077 Associates Agencies Inc. $14,553,00078 Bowen, Miclette & Britt Inc. $14,431,26879 Fred A. Moreton & Co.-an Assurex partner $14,368,25880 The Loomis Co. $14,215,04681 Silverstone Group Inc. $13,920,00082 Allied American Insurance Agency Inc. $13,880,18583 The Rutherfoord Cos.-an Assurex partner $13,770,10184 Hamilton Dorsey Alston Co.-an Assurex partner $13,103,89685 Parker, Smith & Feek Inc.-An Assurex partner $12,990,88086 Seitlin-an Assurex partner $12,500,00087 Charles J. Crane Agency Co. $12,426,35388 Insurance & Risk Management-an Assurex partner $12,396,78089 Hibbs-Hallmark Co. $12,384,19790 The Rosenthal Cos. $12,338,00091 Bolton & Co.-an Assurex partner $12,286,18492 Starkweather & Shelpley Insurance Brokerage Inc.-an Assurex partner $12,110,00093 Mack & Parker Inc.-an Assurex partner $11,760,00094 Lovitt & Touche Inc. $11,742,41495 R. C. Knox & Co. Inc. $11,557,00096 Posse Walsh Buckman Van Buren $11,302,00097 Hefferman Petersen Insurance Brokers $11,300,00098 Haas & Wilkerson Inc. $10,989,12099 The Hays Group Inc. $10,925,000

100 Scott Insurance $10,838,802

Who has not changed hands?

28%


Why Sell to a Third-Party Buyer?

FEAR

$No Plan

26


Valuation Realities

2007 2008 2009 2010 2011 2012 20131.0x

1.2x

1.4x

1.6x

1.8x

2.0x

2.2x

2.4x

2.6x

1.31x 1.27x1.2x 1.18x 1.21x

1.28x1.35x

2.1x 2.06x

1.79x1.9x

1.97x2.1x

2.2x

Internal External

*Reagan Value Index and Reagan Consulting analysis

27


Deal activity scorecard

Notes: 1Through 12/15/13Source: SNL Financial

Most active buyers list unchanged, but deals down by half

Buyer 2012 Deals 2013 Deals1

Hub 29 18

Confie Seguros 18 17

AssuredPartners 27 16

Arthur J. Gallagher 60 12

Fidelity National Financial 7 8

Brown & Brown 16 5

Marsh Agency 14 5

USI 12 5

Total 183 86

28


Acquisition market share by type of buyer

2008 2012

22.3%10.4%

14.3% 31.8%

19.9% 10.1%

19.6% 26.3%

23.9% 21.4%

Public Broker

Private Broker

Bank

Private Equity

Other

Source: SNL Financial, Includes North American Deals

Private Equity from last to first

29


Keys to successful perpetuation – internal or external

30


Maximizing Valuation and Marketability - Start with a solid foundation

Restrictive Agreements

Legal Structure

Ownership of Assets and Exit Strategies

Align Ownership Interests

People Investment

Sales Culture

31


Build carefully to achieve desired results

Concentration Risk

Minimize Long-Term Commitments

Market Compensation

Clean Financial Statements

Careful Long-Term Investments

Maximize Profitability

Advisory Team

Restrictive Agreements

Legal Structure

Ownership of Assets and Exit Strategies

Align Ownership Interests

People Investment

Sales Culture

32


To access Reagan’s Private Ownership Study,

visit our webpage atwww.reaganconsulting.com

33


Tom DoranSenior Vice President & PrincipalTom joined Reagan Consulting as a consultant in 1993 and became a principal in the firm in 1995. He holds an undergraduate degree in Computer Information Systems and a Masters of Business Administration from Georgia State University. Before joining Reagan Consulting, he worked in the computer industry, both as a software developer and as a management consultant. Tom’s areas of expertise include merger and acquisition representation, agency valuation, ownership perpetuation planning, agency valuation enhancement and strategic planning facilitation. Tom is a regular contributor to Reagan Consulting’s industry studies and is frequently published in various insurance industry publications. He also speaks on a regular basis to industry trade groups and associations on a wide variety of topics concerning the insurance distribution system.

[email protected]

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Insurance Agency Ownership Perpetuation

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