year-end 2012 organic growth & ogp id: 9999 profitability ... · 12.9 15.0-5.0 10.0 20.0 25.0...

Year-End 2012 OGP ID: 9999

Current Value Driver Comparison

Organic Growth

Total Agency Organic Growth Organic Growth by Product Line Reagan Consulting Observations

• Median organic growth finished the yearat 6.1%, up significantly over the median2011 growth rate of 3.7%

• Commercial lines was the fastest-growingline of business in 2012 with an annualorganic growth rate of 7.6%

• Group benefits grew at an organic growthrate of 4.8% in 2012, down from 7.1% in2011

• OGP Projected 2013 Growth: 6.0%Agents and brokers project that organic

Your organic growth in 2013 will be similar to the growth rank: level achieved in 2012

Profitability

Total Agency EBITDA Margin EBITDA Margin by Product Line Reagan Consulting Observations

• Median EBITDA margin in 2012 was 18.4%,the highest since 2008, when the medianwas 18.7%

• Contingent income performance was strongin 2012 - the typical firm saw contingentincome increase by approximately 5%

• Personal lines divisions drove the highestprofit margins, exceeding group benefits by5.5% and commercial lines by 8.9%

• OGP Projected 2013 Margin: 19.3%Agents and brokers are projecting an

Your profitability increase in profitability of almost a full rank: percentage point in 2013

The Rule of 20 (see note below)

Total Agency Rule of 20 Rule of 20 by Product Line Reagan Consulting Observations

• Based upon Rule of 20 scores, shareholderreturns in 2012 were the highest since 2007.

• Rule of 20 scores were fairly consistentbetween lines of business, with only 2.6points separating the highest score (16.0 incommercial lines) and the lowest score(13.4 in group benefits)

• Almost 25% of participating firmsachieved a Rule of 20 score of 20 or better

• OGP Projected 2013 Score: 16.3 Agents and brokers are projecting a slight

Your Rule of increase in shareholder returns in 2013, 20 rank: driven by improved profitability

About the Rule of 20

Note: If data for your firm reads "0.0%" or "0.0" it may mean that no data was submitted for that metric.

50th - 60th percentile



7.0% 6.1%

9.2%

3.7%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

10.0%

Your Firm OGP SurveyMedian

OGP 75thPercentile

2011 OGPMedian

8.0%

3.0%

6.0%

7.6%

2.1%

4.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

CommercialLines

Personal Lines Group Benefits

Your Firm OGP Median

20.0% 18.4%

24.1%

18.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%


OGP 75thPercentile

2011 OGPMedian

18.0%

30.0%

23.0%

16.9%

25.8%

20.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

CommercialLines



17.0 16.1

19.9

12.9

-

5.0

10.0

15.0

20.0

25.0


OGP 75thPercentile

2011 OGPMedian

17.0 18.0 17.5

16.0 15.1

13.4

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

CommercialLines



Organic Growth & Profitability

Survey

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.

1


Agency Organic Growth & Profitability Scatter Plot

Surveyed firms with annual revenues less than $10 million Your FirmSurveyed firms with annual revenues between $10 and $25 million Top and Bottom 25% of all firmsSurveyed 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

Bottom 25% Growth

Top 25% Growth

Rule o

f 20

Rule o

f 20

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.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

-10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%

Pro

fita

bili

ty (

EBIT

DA

Mar

gin

)

Organic Growth


Survey

Bottom 25% Profitability

Top 25% Profitability

2


Historical Trending

Quarterly Organic Growth - Total Agency Median (Q4 2008 - Present)

Comparative Median Organic Growth by Product Line (Q4 2008 - Present)

Comparative Median Profitability and Rule of 20 Analysis (Q4 2008 - Present)

About EBITDA Margin and Operating Margin


Survey

0.9%

1.7%

-0.6% -0.7%

-1.4% -1.8%

-1.4%

0.2%

1.0%

1.9%

3.3% 3.3%

3.8% 3.7%

5.0%

5.5% 5.4%

6.1%

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

-1.3%

-3.5%

0.0%

3.3%

7.6%

2008 2009 2010 2011 2012

Commercial Lines

0.6%

-0.9%

1.6% 1.3%

2.1%

2008 2009 2010 2011 2012

Personal Lines

10.6%

4.5% 4.4%

7.1%

4.8%

2008 2009 2010 2011 2012

Group Benefits

18.7%

16.6% 17.5% 18.2% 18.4%

10.3% 9.0%

9.9%

12.3% 12.6%

2008 2009 2010 2011 2012

EBITDA Margin and Operating Margin

EBITDA Margin Operating Margin

10.8

6.9

10.6

12.9

16.1

2008 2009 2010 2011 2012

Rule of 20

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

Organic Growth & Profitability Survey

Market Commentary (Q4 2012)

- 1 -

The Numbers Keep Improving In growth, profit and M&A activity, performance

metrics rose in 2012. Will 2013 provide an encore? by Kevin Stipe & Brian Deitz

The Organic Growth & Profitability Survey continues to expand. This quarter was a record for participation, with 140 firms providing their results – including 49 of the firms on the Business Insurance Top 100 list. As we complete the OGP’s fifth year-end survey, participants will note that we have added a new 3rd page to the report. With five years of data to draw from, we now provide a historical look at results going back to the survey’s beginning in 2008, giving participants a deeper understanding of the value creation trends within the industry. This is especially helpful when reviewing EBITDA margins and Rule of 20 scores. A multi-year comparison of 1st quarter EBITDA margins, for example, will be more helpful for most participants than simply a raw quarterly number. We are also introducing a new quarterly benchmark on the final page of the report: Operating Margin (EBITDA margin excluding contingents). Several participants requested this data, since they believe that managing Operating Profit is more effective than trying to manage EBITDA, which fluctuates widely with the ebbs and flows of contingent income.

Quarterly Organic Growth (Q3 2008 – Q4 2012)

Reagan is delighted to see that conditions within the industry continued to improve during the 4th quarter. 2012 was the best year for the industry since the OGP Survey was launched in 2008. In fact, 2012 marked the high point for two of the three OGP benchmarks: organic growth and Reagan’s proprietary value creation metric, the Rule of 20. EBITDA margin in 2012 was the second highest in OGP history. Revival in commercial P&C, hesitation in benefits A significant contributor to the strong 2012 results was the resurgence of commercial P&C. After years of struggling due to soft pricing, commercial lines rebounded on the back of a modest firming of the market. Per the CIAB, average commercial account pricing increased 4.4% in 2012. Coupled with a relatively stable economy, this pricing led to the fastest commercial lines growth rate – 7.6% – in several years. Since the commercial P&C division is the bell cow for most OGP participants, this turnaround produced a significant improvement in agency-wide results. The chart below tracks the cumulative growth of the typical broker by line of business since the end of 2007. At the end of 2011, the commercial lines division for the median firm was still smaller than it was at the end of 2007. Fortunately, the 7.6% jump in 2012 pushed the five year total growth into positive territory, making the median division 5.9% larger than it was five years ago. Contrast this with the median benefits division’s performance. Although the growth rate for benefits dipped to 4.8% in 2012, it was the 5th straight year of growth of more than 4%. As a result, today’s median benefits division is 35.4% larger than it was in 2007. Its five year growth was more than five times that of commercial lines.

0.9%

1.7%

-0.6%-0.7%

-1.4%-1.8%

-1.4%

0.2%

1.0%

1.9%

3.3% 3.3%3.8% 3.7%

5.0%5.5% 5.4%

6.1%

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



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Indexed Performance by Line of Business (2007 = 1.00)

The 2013 industry forecast It is unclear, though, whether recent trends will continue. Commercial growth surpassed benefits growth in 2012 and there exists a wide variety of views – some pessimistic, some optimistic – concerning the future of employee benefits brokerage. Agents have increasingly focused their attention on the upper end of the market (clients with over 100 lives) and are aggressively investing in knowledge and resources to help that segment of the market navigate the incredible complexity and confusion that exists today. Valuations of large group benefits books of business have risen while valuations of smaller group books have fallen. We expect that growth will be boosted by the large-account focus of OGP firms but will be held back by deterioration in small group business as healthcare reform takes hold. Many agents and brokers are forecasting declines among their under 50-life segment of 10%-20% of revenues beginning in 2014. While contemplating this benefits uncertainty, brokers are feeling cautiously optimistic as we head into 2013. Again expecting moderate price increases in commercial P&C, brokers are projecting total agency growth of 6%, basically matching the growth of 2012. Over half (55%) of OGP firms are expecting to grow faster in 2013 than they did in 2012.

And despite continued pressure to invest in benefits resources, EBITDA margins are projected to increase by nearly 100 basis points in 2013, from this year’s 18.4% margin to a new OGP Survey high of 19.3%. If these numbers prove accurate, 2013 will be a relatively solid year of value creation for the industry. M&A Activity As we projected in the Q4 2011 OGP Commentary, M&A activity increased in 2012 and valuation multiples rose for the 3rd consecutive year. A rare state of equilibrium occurred in 2012 as a large number of hungry buyers was met with an equally large group of potential sellers, many of whom were concerned about changing tax rates and continued economic uncertainty. As a result, the 296 announced deals fell just short of the all-time record of 301 set in 2008.

Total Announced Transactions (2006-2012)

Source: SNL. Includes completed North American deals.

As the lead advisor in 23 transactions in 2012, Reagan Consulting structured, negotiated and completed a variety of deals – adding to its deep database of proprietary M&A metrics. We believe that in many deals in 2012, valuations met – and in some cases even exceeded – the record valuation levels hit at the peak of the credit bubble in 2007. Below is a chart of deal valuations dating back to 2004 which shows just how strong the various components of pricing were for the “typical” $5-$10 million high quality acquisition

1.11 1.16

1.21

1.29

1.35

0.99 0.95 0.95

0.98

1.06

1.01 1.00 1.01 1.03 1.05

0.75

1.00

1.25

1.50

2007 2008 2009 2010 2011 2012

Commercial Personal Benefits

EB: 35.4% increase,

6.3% CAGR

CL: 5.9% increase,

1.1% CAGR

PL: 4.8% increase,

0.9% CAGR

235

260

301

192

231

285296

2006 2007 2008 2009 2010 2011 2012



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in 2012. We believe that guaranteed multiples were similar in 2012 to 2007 while earn-outs might have been slightly higher in 2007.

Deal Valuations for Typical, Non-Platform Agencies

In 2012, though, the market saw an increased bifurcation in deal pricing. Competition for large, high-quality platform acquisitions was intense, pushing valuations for these deals well above the levels presented in the chart above. For this segment of the market, deals in 2012 were valued at higher levels than in 2007. Buyers continue to place the strongest premiums on firms with a strong local brand, a dynamic sales culture, operational efficiency, industry specialization and effective leadership. In late 2012, the industry received more good M&A news as both USI and Alliant successfully replaced their private equity investors. USI replaced a fund owned by Goldman Sachs with Canadian private equity firm Onex Corp, while Alliant replaced Blackstone with KKR & Co. Both deals were aggressively priced – at north of 10 times EBITDA – an indication that outside investors are still attracted to insurance brokerage due to its ability to generate strong and stable cash flow for its owners. One of the more intriguing aspects of the private equity activity was the investment in USI, which was a large bet on the future of USI’s $350 million in revenue from employee benefits. Since the deal was priced in late November, after Obamacare was ratified by the November presidential election, it served as an

early indication of investor interest in the employee benefits sector. Onex’s aggressive pricing of USI should provide agency principals comfort regarding investor appetite for employee benefits business. What can we expect for industry deal activity in 2013? We are projecting that deal volume will decline by roughly 10-15%, since 2012 activity was inflated by sellers rushing to beat the tax-change deadline. The brief period of equilibrium we saw in 2012 will be replaced with the more common situation of too many buyers chasing too few sellers. As a result, valuations will remain high, although it is unlikely they’ll go higher than the levels of 2012. Invitation OGP Survey participants are invited to attend Reagan Consulting’s Biannual Mergers & Acquisitions and Perpetuation Workshop in May, 2013. It will be held at the St. Regis Hotel in Atlanta, GA. More information can be found in the attached flyer.

6.00 x6.50 x

6.00 x 5.75 x 6.00 x 6.25 x 6.50 x

8.00 x

8.50 x

7.50 x7.00 x

7.25 x7.50 x

7.75 x

9.00 x

10.00 x

9.00 x8.75 x 8.50 x

8.75 x9.00 x

2006 2007 2008 2009 2010 2011 2012

Typical Guaranteed Price Total Expected Pricing Earn-Out Maximum

Sponsored by:

Hub International, Chicago, IL,

Acquired

Carrión, Laffitte & Casellas, Inc. (CLC)

San Juan, Puerto Rico

Marsh & McLennan Agency, LLC,

White Plains, NY

Acquired

RJF Agencies, Minneapolis, MN

USI Insurance,Briarcliff Manor, NY,

Acquired

TD Insurance South Portland, ME

Arthur J. Gallagher & Co., Itasca, IL

Acquired

The Gleason Agency & Gleason Financial,

Johnstown, PA

Marsh & McLennan Agency, LLC,

White Plains, NY

Acquired

Brower Insurance,Dayton, OH

year-end 2012 organic growth & ogp id: 9999 profitability ... · 12.9 15.0-5.0 10.0 20.0 25.0...

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