Building on success Insurance Broking Benchmarking Report. Executive Summary 1

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1 Building on success -14 Insurance Broking Benchmarking Report Executive Summary 1

2 Introduction In this report, we analyse the characteristics that have helped the best performing brokerages succeed and reveal how you can put industry best practice to work in your own business. Welcome to Macquarie s 14 Insurance Broking Benchmarking Report. This report provides a unique insight into the latest industry trends and the financial performance of brokerages around the country. It also sets out best practice benchmarks you can use to compare and improve the performance of your own business. There have been some key influential events across the industry since our last report. One of the most significant has been the transformation of Steadfast from a network services provider to an acquirer of equity in a number of insurance broking and ancillary businesses, together with a successful listing on the Australian Stock Exchange (ASX). Similarly, we have seen continued strength in the trading of Austbrokers and our observations highlight a current marketplace where aggregators and other larger sized firms are the key drivers of acquisition activity. More generally, our results reflect an industry that continues to experience steady growth, with the majority of broking businesses increasing both revenues and profit margins, despite below trend growth in the economy as a whole. Further, this result has been achieved in an environment of increasing competition from direct online insurers, large international brokers looking to penetrate the small to medium business (SME) segment, and a higher prevalence of authorised representatives (typically operating on a lower cost base). More broadly, the subdued economic environment has continued to see areas of hardship across the SME segment together with low levels of corporate merger and acquisition activity. There has been limited advantage delivered by hardening insurance premiums, with only modest levels of commercial premium growth across the board. The success of most firms in maintaining their competitive position in this challenging environment is a testament to the resilience and professionalism of brokers across the country. We found that one of the drivers of that success is the proven ability of brokers to cultivate and nurture strong client relationships. Despite the growing importance of digital channels, insurance broking remains very much a relationship driven industry, especially in the commercial market. The best performing brokers have found opportunities to increase revenue and enhance profitability, both through targeted business development and improved business efficiencies. In this report, we highlight the characteristics that set them apart. Thank you to all who participated in Macquarie s Insurance Broking Benchmarking Survey. We trust you will find this report informative and useful in benchmarking your business against your peers and keeping you one step ahead. Rachael Lavars Head of Insurance Broking Segment Macquarie Business Banking 2-14 Insurance Broking Benchmarking Report

3 Contents 4 Executive summary Achieving growth in a time of change 6 About this report 8 Financial performance Driving new business, finding efficiencies 18 People The skills shortage continues 24 Mergers, acquisitions and valuations Focusing on profit 29 Case study Growth through acquisition 30 Industry outlook Seeking growth in a challenging environment 37 Case study Developing an effective online strategy 41 Case study Emerging trends in Australian insurance Contents 3

4 1 Executive summary Achieving growth in a time of change Despite ongoing consolidation and mounting competitive pressures, successful brokers have continued to find opportunities for growth Insurance Broking Benchmarking Report

5 Financial performance Revenues have grown steadily since our last report in, with 83 per cent of firms reporting increased revenue over the last financial year. However, scale appears to be increasingly important in achieving consistent growth, with the largest increases recorded by firms who already had relatively high levels of revenue. There is also a strong correlation between revenue and profitability, with larger firms proving significantly more successful in generating higher profits. However, most insurance broking businesses remain highly profitable, with median Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) increasing to 25 per cent of revenue in, up from 20 per cent in. 83% OF FIRMS REPORTED INCREASED REVENUE OVER THE LAST FINANCIAL YEAR People Median revenue per staff member has increased by more than five per cent since, highlighting a gradual improvement in productivity and efficiency. High profit earning brokers made the greatest productivity gains, increasing median revenue per staff member by almost 12 per cent from $187,933 in to $210,000 in. Despite this, 71 per cent of businesses say it s very difficult or relatively difficult to hire staff with the right skills. ALMOST 12% INCREASE IN MEDIAN REVENUE PER STAFF MEMBER FOR HIGH PROFIT BROKERAGES Mergers, acquisitions and valuations Our survey reveals a significant shift in the way brokers value their business, with a growing focus on profitability over revenue as a valuation tool. Forty-four per cent of brokers now value their business as a multiple of adjusted profit, up from 24 per cent in. Further, there is a notable shift in the attitude towards buying and selling, with an increasing number of brokers being either a willing buyer or seller. Twenty two per cent of responses revealed a buying or selling attitude (compared to 14 per cent in ), with medium and high profit firms revealing the highest level increase in this category. We consider these changes to be the result of the changing acquirer landscape. Wider structural options are now available for a full or partial sale with attractive price multiples being offered. Industry outlook Firms generally expect revenue and profit to expand over the next 12 months, although many foresee only modest growth. Forty-seven per cent forecast revenue growth between one and nine per cent. Eighty per cent of businesses across the country see client growth as an important driver of higher profits, along with improved efficiency (57 per cent) and improving economic conditions (32 per cent). Asked how they differentiate themselves from competitors, firms were most likely to nominate strong client relationships and quality of advice, which have eclipsed service quality as areas of competitive focus. Attitudes to new technology are overwhelmingly positive, with 96 per cent of firms agreeing or strongly agreeing that new technology is critical to improving efficiency. The web remains the number one priority for future capital investment, nominated by 59 per cent of businesses, followed by customer relationship management systems (33 per cent). 1 IN 5 AROUND ONE IN FIVE BUSINESSES HAVE MADE AN ACQUISITION RECENTLY 1-9% FORTY-SEVEN PER CENT FORECAST REVENUE GROWTH BETWEEN ONE AND NINE PER CENT Executive summary 5

6 2 About this report Based on an in-depth survey of more than 200 insurance brokers across the country, this report provides wide-ranging insights into a rapidly changing industry. Our 14 report provides comprehensive insights into Australia s insurance broking industry, based on an in-depth national survey of 201 broking businesses across the country. They include firms of all sizes, from every state and territory, and from both regional and metropolitan areas. Our survey reveals that a typical Australian brokerage in had one or two principals employing around 10 staff. Almost half of broking staff are female, along with the vast majority of non-broking staff. [Figure 1] Median revenue per staff member across the industry was $166,710 compared to a median revenue per staff member of $158,068 in. Median gross written premiums (GWPs) were also slightly higher at $10.75m, up five per cent from $10.27m three years earlier. Meanwhile, median EBITDA increased from 20 per cent in to 25 per cent in, with almost two in three brokerages having EBITDA of 20 per cent or more Half of all brokerages use their website for quotes and claims, yet few of these brokerages say they are satisfied with their ability to sell online. More than 40 per cent use some form of social media to market their business. Measuring financial success small, medium and large firms As this report focuses on the financial performance of firms, we measure practice size and success in monetary terms, rather than by the number of principals. Throughout this report, we will describe firms using these definitions: High revenue (large) > $4m revenue annually High profit > 30% of revenue Medium revenue (medium) $1m - $4m revenue annually Medium profit 11% - 30% of revenue Low revenue (small) < $1m revenue annually Low profit 10% of revenue Throughout this report, revenue refers to gross revenue which includes all income lines Insurance Broking Benchmarking Report

7 Figure 1: A typical brokerage Two principals One or two principals 11 staff 10 staff Broking staff47% Non-broking staff 79% $158,068 Median revenue per staff member $10.27m Median GWP $166,710 Median revenue per staff member $10.75m Median GWP A 20% MEDIAN EBITDA A 25% MEDIAN EBITDA About this report 7

8 3 Financial performance Driving new business, finding efficiencies Despite a challenging and competitive environment, most brokerages have achieved steady revenue growth, although not all have been equally successful in creating higher profits. The best performers have combined growing revenues with new business efficiencies to drive profitability upwards, sometimes dramatically Insurance Broking Benchmarking Report

9 Revenue profile Median revenue growth has outperformed median GWP growth, increasing by 16 per cent since, up from $1.83m to $2.13m. Forty-three per cent of firms say revenue has increased by between one and nine per cent over the past financial year, while another 25 per cent have enjoyed increases of per cent, and a further 15 per cent enjoyed increases greater than 20%. Only eight per cent say revenue has fallen, with most attributing the fall to external factors, which is consistent with our survey results. [Figure 2] Revenue sources have remained largely unchanged since [Figure 3], with few differences between low and high revenue firms [Figure 4] further evidence that this is a stable industry providing attractively consistent returns to investors. Scale appears to be increasingly important in achieving consistent growth, with the largest increases recorded by firms who already had relatively high levels of revenue. Forty-eight per cent of high revenue firms achieved growth of more than 10 per cent over the last 12 months. In comparison, low revenue firms did not increase revenue as significantly, with only 32 per cent of firms reporting similar levels of growth. [Figure 5] This disparity in performance may indicate there is potential for some consolidation among smaller firms, as brokers seek to increase competitiveness by adding additional scale. Interestingly, low profit firms also recorded some of the largest revenue increases, with 54 per cent seeing revenues grow by more than 10 per cent. This raises the question of whether price competition is in play, or whether these firms are carrying a heavy cost base. For these firms, the challenge will be translating these increased sales to an improved bottom line. [Figure 5] Looking across the industry, the main driver of increased revenue is enhanced marketing and sales activity, cited by 58 per cent of firms, with successful businesses continuing to build stronger client relationships. Twenty-four per cent of Queensland firms also say they have generated higher revenues by offering new products and services, compared to just two per cent of New South Wales brokers. [Figure 6] Low profit firms seem to be expanding their usage of ARs, with 14 per cent of this group attributing increases in revenue to a higher number of ARs, compared to seven per cent of the average. Western Australian and Queensland brokers are more likely to have higher revenues than their peers in other states. [Figure 7] Our experience suggests that Western Australia is notable for a high proportion of larger accounts, especially in the mining and energy sectors. While those accounts may generate high-value policies, brokers may typically charge a lower percentage commission on these larger policies, something reflected in the lower levels of revenue as a proportion of GWP in Western Australia. [Figure 8] Best practice Achieving growth in a challenging market Growing a business is simple. You only need to get new clients and hold on to your current ones. The challenge is trying to do both at the same time. NEIL FLETT, MANAGING DIRECTOR, ROGEN SI Our survey underlines the importance of cultivating and nurturing strong client relationships for ongoing growth. Here are some questions to help you determine whether your business is achieving industry best practice: Insurance brokers are specialised risk managers and being able to demonstrate an understanding of a client s needs is vital. Are your staff asking the right questions and challenging your customers thinking? How effective are your staff in identifying opportunities and winning new business? Do you measure your rate of success? Do you have effective, efficient and well defined processes with supporting sales tools for pitcing new business? Have you been successful in recruiting business development managers (BDMs) with the right skills and expertise to generate growth, and justify their higher salary demands? Do you critically track and measure their rate of success? Financial performance 9

10 Figure 2. Change in revenue over the past financial year 43% 36% 33% 25% 1% 0% 0% 2% 7% 6% 6% 9% 8% 9% 9% 6% Decreased 20-29% Decreased 10-19% Decreased 1-9% Same Increased 1-9% Increased 10-19% Increased 20-29% Increased 30% or more Figure 3. Source of revenue 19% 81% 20% 80% Personal insurance premiums Commercial insurance premiums Insurance Broking Benchmarking Report

11 Figure 4. Composition of revenue by size Low revenue % 22% Low revenue 111 3% 4% 23% 68% 69% Medium revenue Medium revenue % 4% 24% 63% % 23% 65% High revenue High revenue % 4% 24% 62% % 4% 22% 64% Overall Overall % 4% % 4% 23% 65% 23% 65% Other Other financial services Authorised Rep Underwriter profit share Investment Premium Funding Fees Commissions Figure 5a. Revenue change by size Revenue Low revenue Low revenue 5% 8% 7% 35% 30% 5% 18% 13% 47% 19% 8% 5% Medium revenue Medium revenue 10% 5% 38% 31% 9% 7% 10% 11% 40% 26% 7% 6% High revenue High revenue 4% 6% 32% 4% 42% 10% 6% 4% 44% 30% 11% 7% Decrease Same Increase 1-9% Increase 10-19% Increase 20-29% Increase 30%+ Financial performance 11

12 Figure 5b. Revenue change by profit size Profit Low profit Low profit 6% 6% 11% 45% 20% 6% 12% 6% 34% 26% 14% 14% 51% Medium profit Medium profit 6% 8% 3% 36% 39% 8% 8% 12% 51% 18% 6% 5% High profit High profit 11% 8% 28% 9% 31% 11% 11% 9% 32% 39% 9% 2 Decrease Same Increase 1-9% Increase 10-19% Increase 20-29% Increase 30%+ Figure 6: Reasons for revenue increase 53% 58% QLD 24% NSW 2% 10% 8% 11% 8% 12% 13% HIGH REV 24% 13% 13% 15% 16% 16% 13% 18% 18% 22% 16% Appointment of ARs Enhanced remuneration with insurers No reason M & A Employment of new staff Other Improved market conditions Offering new products and services Increased marketing and sales activity Insurance Broking Benchmarking Report

13 Figure 7. Revenue profile by state WA 20% 50% 30% WA 14% 54% 32% SA 11% 67% 22% SA 33% 50% 17% QLD 27% 54% 19% QLD 18% 49% 33% VIC 24% 59% 17% VIC 18% 52% 30% NSW 31% 45% 24% NSW 18% 59% 23% Low revenue Medium revenue High revenue Figure 8. Revenue as a proportion of GWP by state 19% 23% 20% 22% 27% 18% 18% 27% 19% 23% 17% 15% Total NSW VIC QLD SA WA Expense profile Unsurprisingly, salaries remain the dominant expense for the vast majority of firms, accounting for an average of one third of revenue, almost identical to the survey figure. The overall proportion of revenue invested in IT and marketing has also remained largely static. [Figure 9] The most marked change is the proportion of revenue devoted to principal remuneration, which has fallen to an average of 16 per cent, down from 19 per cent two years ago. This trend is most evident in medium revenue businesses, which have seen principal remuneration fall from 17 per cent of revenue in to 14 per cent in. [Figure 10] We view this as a reflection of a growing focus on profit, especially as a valuation measure, with principals dialling down their own remuneration to enhance profit at a time of intensive merger and acquisition activity across the industry. Figure 9. Financial profile as a proportion of total revenue 15% 3% 3% 6% 32% 19% 22% 14% 3% 4% 6% 33% 16% 24% Other Salary, wages Marketing Principal remuneration IT Profit Occupancy Financial performance 13

14 Figure 10. Financial profile by size Low revenue Low revenue 15% 3% 4% 8% 26% 29% 15% 12% 4% 6% 8% 25% 30% 15% Medium revenue Medium revenue 16% 2 5% 3% 33% 17% 24% 15% 3% 3% 6% 33% 14% 26% High revenue High revenue 15% 4% 3% 6% 37% 12% 23% 15% 2 3% 5% 36% 11% 28% Other Marketing IT Occupancy Salaries Principal renumeration Profit Profit profile In a challenging and competitive environment, the vast majority of insurance broking businesses remain highly profitable. Ninety four per cent of businesses generated a profit last financial year, with median EBITDA increasing to 25 per cent of revenue in, up from 20 per cent in. Almost two in three brokerages now have EBITDA margins of 20 per cent or more. [Figure 11] However, profitability is far from uniform across the industry. Analysing profit growth by business size reveals a strong correlation between revenue and profitability, with larger firms proving significantly more successful in generating higher profits. Seventy-six per cent of high revenue firms now have net profit margins (NPMs) of 20 per cent or more, up from 48 per cent in. In contrast, just 31 per cent of low revenue firms have NPMs over 20 per cent, almost exactly the same proportion as two years ago. [Figure 12] Similarly, almost half of high revenue firms grew profits by 10 per cent or more last financial year, versus 30 per cent of medium revenue businesses. [Figure 12] Together, these Almost 2/3 figures suggest that smaller firms are finding it increasingly more difficult to achieve significant profit growth than their larger peers. While high profit firms have been more successful than others in growing profits, the rate of growth has slowed since. Overall, the picture is one of gradual organic growth in an economy that is itself expanding below trend rates. For many businesses, profit growth has come from efficiency gains and reduced costs as much as business growth. When asked why profits have increased, brokers were most likely to say that higher efficiency was the primary driver, followed by increased sales and marketing activity. [Figure 14] However, it s also apparent that high revenue and high profit businesses have more options available to help develop and grow the business. When asked what significant changes they had made to the business over the last 12 months, 20 per cent of high profit businesses said they have reduced staff, compared to 13 per cent across all firms [Figure 15]. brokerages now have EBITDA margins of 20 per cent or more Insurance Broking Benchmarking Report

15 Figure 11. EBITDA margins 32% 30% 23% 20% 14% 10% 2% 1% 1% 5% Loss Break even 1-9% 10-19% 20-29% 19%19% 30-39% 15% 9% 40%+ Best practice Our experience suggests that the best performing firms combine a range of initiatives to achieve greater efficiency and profitability, including: creating specialised roles within the business, particularly dedicated BDMs. Allowing staff to focus their skills in one area can result in improved productivity creating a standardised approach to client management, allowing the firm to maintain a high level of individualised support with less effort integrating software to minimise the time spent handling data and maximise the time available to service clients; for example, using an integrated payment and reconciliation solution, or an integrated document management and storage solution. Figure 12. EBITDA margin by size Low revenue Low revenue 4% 25% 41% 16% 12% 2 3% 13% 19% 34% 18% 8% 5% Medium revenue Medium revenue % 22% 27% 25% 11% 2 3% 9% 17% 31% 21% 17% High revenue High revenue 8% 44% 22% 14% 12% 2 4% 18% 37% 24% 15% Loss Break even 1-9% 10-19% 20-29% 30-39% 40%+ Financial performance 15

16 Figure 13. Change in profit by size Low revenue Low revenue 4% 11% 8% 26% 20% 31% 3% 15% 12% 28% 15% 27% Medium revenue Medium revenue 3% 7% 5% 35% 19% 31% 4% 12% 18% 36% 12% 18% High revenue 2 12% 4% 30% 22% 30% High revenue 4% 11% 11% 25% 34% 15% Overall 3 10% 6% 30% 20% 31% Overall 4% 13% 13% 30% 20% 20% Decreased 20%+ Decreased 1-19% No change Increased 1-9% Increased 10-19% Increased 20%+ Figure 14. Reasons for profit increase 50% 52% 55% 30% 28% 10% 6% 13% 3% 14% 8% 16% 12% 18% 20% 14% 21% 19% No reason M & A Non-insurance broking activities exceeded expectations Other Employment of new staff New products and services Improved market conditions Cost cutting Increased marketing and sales activity Improved efficiency Insurance Broking Benchmarking Report

17 Figure 15. Significant changes over the last 12 months Acquired or merged 11% HP 21% Reduced staffing Improved corporate governance Negotiated improved terms with suppliers New products, services or schemes More time with clients Increase staffing Actively reduced costs Increased broker fees Improved staff selling 13% HP 20% 13% 20% HP 30% 22% HP 32% 27% 28% 29% 30% 33% Best practice Have you considered? For something to aspire to, consider the top five performers by NPM for each revenue band: Small brokers NPMs between 32% and 42% Medium brokers NPMs between 55% and 58% Large brokers NPMs between 45% and 59%. Improved financial management 37% Increased marketing and BD 48% Characteristics of a high profit brokerage Our analysis revealed a range of key differences between high and low profit insurance broking businesses both in what they do and what they choose not to do. 1-9% Expect profit to increase this year 10-19% Increased revenue last year Operate from one office Increased profits by improving efficiency and reducing staffing levels Believe acquisition will contribute to profit growth this year Financial performance 17

18 4 People The skills shortage continues Firms across the country have changed their staffing mix. Many have sought to increase efficiency by reducing support staff and junior brokers, while seeking business development specialists and experienced professionals. Figure 16. Staff profile STAFF TYPE AVERAGE % WHO HAVE % OF STAFF AVERAGE % WHO HAVE % OF STAFF BUSINESS OWNERS/ PRINCIPALS BUSINESS DEVELOPMENT CLIENT SERVICING BROKERS BROKER SUPPORT STAFF CLAIMS STAFF % 11% % 9% % 7% % 13% % 31% % 22% % 20% % 13% % 5% % 6% Insurance Broking Benchmarking Report

19 Although staffing levels have remained largely steady across the industry, the staffing mix in many firms has evolved. A key characteristic of high net profit businesses is that many have reduced client servicing staff in favour of BDMs, driving additional revenue and creating leaner and more efficient businesses. Client servicing brokers were down slightly to 29 per cent of all staff and the average per firm of client servicing brokers has dropped to 5.5 in from 6.1 in. Similarly, the average number of BDMs employed across the industry has increased from 1.27 in to 1.4 in and the proportion of businesses employing BDMs has increased from 46 per cent to 52 per cent. The average number of administration staff employed has decreased from 1.4 to 1.1 per brokerage. [Figure 16] Median revenue per staff member has increased by more than five per cent since, highlighting a gradual improvement in productivity and efficiency. Median revenue per staff member across the industry was $166,710 in, compared to $158,068 in. While medium and high revenue brokers achieved greater productivity gains than low revenue brokers, it was the high profit earning brokers who made the greatest productivity gains, increasing median revenue per staff member by almost 12 per cent from $187,933 in to $210,000 in. [Figure 17] The gender mix of staff across the industry has also continued to evolve, with almost half of all broking staff being female (47 per cent), along with the vast majority of non-broking staff (79 per cent). In contrast with other professional services firms, insurance brokers generally have been successful in hiring and leveraging specialist BDMs, with many looking to hire more in the future. Asked about their future hiring intentions, around one in four brokerages said they intended to hire more BDMs. Firms are also increasingly likely to seek experienced brokers, rather than younger professionals or graduates. [Figure 18] However, 69 per cent of businesses say it s very difficult or relatively difficult to hire staff with the right skills. It also remains significantly more difficult to hire people in regional areas 53 per cent of regional firms have problems because of their location, up from 35 per cent in. [Figure 19] Only one in four offer bonuses to all staff, although that figure climbs to 39 per cent in Queensland. While training and development remains the number one staff benefit, lower profit firms are typically much more likely to rely on ad-hoc bonuses another key differentiator between high and low net profit businesses. Many firms also use salary plus commissions or discretionary bonuses to incentivise key account brokers. [Figure 20] STAFF TYPE AVERAGE % WHO HAVE % OF STAFF AVERAGE % WHO HAVE % OF STAFF FINANCIAL ACCOUNTS AUTHORISED REPS COMPLIANCE ADMINISTRATION OTHER % 5% % 7% % 11% % 6% % 1% % 6% % 7% % 8% % 2% % 10% People 19

20 Figure 17. Median staff and revenue per staff member LOW REVENUE MEDIUM REVENUE Median staff Median staff Median staff Median staff $129,472 Median revenue per staff member $131,666 Median revenue per staff member $158,826 Median revenue per staff member $163,888 Median revenue per staff member HIGH REVENUE ALL BUSINESSES Median staff Median staff Median staff Median staff $196,428 Median revenue per staff member $202,124 Median revenue per staff member $158,068 Median revenue per staff member $166,710 Median revenue per staff member Insurance Broking Benchmarking Report

21 Figure 18. Hiring intentions 49% 36% 37% 38% 24% 26% 15% 17% 21% 30% 2% 3% 3% 5% 8% 9% 10% 10% Compliance General management Other Claims Finance Admin Authorised Reps Business development staff Haven t hired and not planning to Client servicing brokers Broker support staff Graduates Older staff Men Women None in particular Young professionals Experienced brokers Figure 19. Challenges to finding new staff A A 32% 1 METRO 10% 13% 2 26% 5% METRO 24% 9% Right skills Right attitude 30% 40% 87% 84% 77% 70% 67% 71% 42% 36% Salary expectations 45% 47% 49% 45% A A 35% 6% REGIONAL 10% 49% 32% 7% REGIONAL 44% 17% Location Time to recruit 14% 11% 17% 10% 10% 31% 35% 53% Very easy Neither Relatively difficult Relatively easy Not sure Very difficult Incentives 4% 4% 6% 7% Regional Regional Metro Metro People 21

22 Best practice How can you attract and retain the right staff? Broaden your search and uncover hidden talent While many firms already up-skill administrative staff into broker roles, you may also be able to find potential employees with a comprehensive knowledge of insurance products already working in general insurance call centres and other back-office jobs. They may have limited opportunities in their current roles and are enthusiastic about growing their careers. Once you have acquired the right people, focus on retaining them Provide opportunities for training and development, consider assigning brokers niche specialisations, and support their development as subject matter experts. Remember, rewards don t have to be monetary; flexible working arrangements and benefits that support their interests, such as a gym membership, can also nurture abiding loyalty Insurance Broking Benchmarking Report

23 Figure 20. Staff incentives All staff 69% VIC 52% 53% 63% QLD 39% 26% 24% VIC 20% 29% 31% 39% QLD 15% 33% 31% 43% Defined bonus structure for all staff Discounted premiums Bonuses awarded ad hoc Defined bonus structure for specific staff Training and development Attendance at industry conventions Range of non-salary benefits to staff Key account brokers HIGH NPM 0% HIGH REV 0% 42% 49% LOW NPM 14% QLD 27% 4% LOW REV 21% 5% 12% 17% Other None Agreed commission structure only Salary only Salary plus commission Salary and discretionary bonus People 23

24 5 Mergers, acquisitions and valuations Focusing on profit Industry consolidation has continued, driven largely, but not exclusively, by a few key players. As a result, many brokers have changed the way they value their businesses, with profit eclipsing revenue as the valuation tool of choice Legal Insurance Best Practice Broking Benchmarking Report

25 The trend towards industry consolidation we observed in our last report has continued, with merger and acquisition activity far from over. Around one in five businesses have made an acquisition a similar level of activity to. [Figure 21] However, this statistic may not reflect the full extent of merger and acquisition activity, with acquisitions being significantly influenced by a few key players. We feel that our survey results reflect a median price multiple that may be lower than what we are currently observing in the market. Recent acquisitions have covered a wide range of multiples, based on both revenue and EBITDA. Our survey reported median multiples of two times revenue (with an upper range of 2.5 times revenue) and 5.5 times EBITDA (with an upper range of 7.5 times EBITDA). Attitudes to buying and selling vary significantly depending on the profitability of the firm. While some high profit businesses are looking to expand, most appear content to reap the rewards of success without diluting the quality of their businesses. Only 39 per cent of high profit firms describe themselves as willing buyers, compared to 59 per cent in. [Figure 22] Interestingly, however, there has been an increase in the number of firms open to either buying or selling particularly among high and medium profit firms. Businesses combining high revenues with relatively low profitability are most likely to be seeking to buy in an effort to enhance profitability through higher volumes. Meanwhile, price has become a key consideration for sellers, although high profit businesses continue to emphasise a good cultural fit. [Figure 23] Succession planning remains better than in most comparable industries, although low revenue businesses tend to neglect this area, with 42 per cent not having a formal succession plan in place. [Figure 24] Most plan to sell to staff or another business, although three per cent say they will simply close the doors and walk away. [Figure 25] Best practice If you are looking to buy or sell, our team are here to help. Having been involved with a high number of mergers and acquisitions over many years, our team have built expansive relationships and experience to: support your financial due diligence process share observations and experience around what factors contribute to a successful transaction test your assumptions assist with introductions and referrals assist with your financing requirements implement solutions to enhance efficiencies. businesses have made an acquisition 39% OF HIGH PROFIT FIRMS DESCRIBED AS WILLING BUYERS Mergers, acquisitions and valuations 25

26 Figure 21. Business acquisition 19% 81% IF YES, WHAT MULTIPLE DID YOU PAY? Revenue* Range Median 2.0x 0.8x 2.5x EBITDA* Range Median 5.5x 1.9x 7.5x 18% 82% * Small sample HAVE YOU ACQUIRED? Yes No Figure 22. Attitude to buying or selling by profit Low profit Low profit 39% 12% 12% 37% 26% 3% 14% 57% Medium profit Medium profit 23% 3% 18% 56% 23% 5% 24% 48% High profit High profit 22% 6% 13% 59% 25% 9% 27% 39% Overall Overall 28% 7% 14% 51% 24% 6% 22% 48% None of these A willing seller A willing buyer or seller A willing buyer Insurance Broking Benchmarking Report

27 Figure 23. The important things as a seller 76% 65% 58% 59% 67% 53% 38% 44% 40% 17% 22% 28% My role with the company after the sale Cultural Fit Reputation of the purchaser Price My staff are looked after My clients are looked after Figure 24. Succession planning by size A 42% 3 LOW REVENUE 55% A 30% A 5% 12% 3 MEDIUM HIGH REVENUE REVENUE 65% 85% No Don t know Yes Mergers, acquisitions and valuations 27

28 Figure 25. Succession planning details NATURE OF SUCCESSION PLAN WHY NO SUCCESSION PLAN? 52% 25% 29% 30% 30% 13% 14% 16% 18% 3% 0% 7% Close doors Other Family succession Staff to acquire equity Sell to another firm No one wants to buy my firm Too hard Other No successors Too busy Not a priority Not a priority Valuing your business Our survey reveals a significant shift in the way broking businesses are being valued, with a renewed focus on profitability over revenue as a valuation tool. Forty-four per cent of brokers now value their business as a multiple of adjusted profit, up from 24 per cent in. [Figure 26] Figure 26. Valuing the business HOW IS IT VALUED? Multiplier of revenue Multiplier of EBITDA Median 2.0x 5.5x Range 0.8x 2.5x 1.9x 7.5x 69% 44% OF BROKERS NOW VALUE THEIR BUSINESS AS A MULTIPLE OF ADJUSTED PROFIT 51% A multiple of overall revenue 24% 44% A multiple of adjusted profit (EBITDA) 7% 5% Other Insurance Broking Benchmarking Report

29 [ CASE STUDY ] Growth through acquisition Since it was founded in 2006, PSC Insurance Group has grown to become an international organisation with offices across Australia, UK and a presence in New Zealand and Hong Kong. Founder and Managing Director, Paul Dwyer, says the group was opportunistic from the start and its advantage was experience. I came out of OAMPS, which had made more than 100 acquisitions over a relatively short period of time, he says. That gave me the opportunity to look at plenty of things that you would do again plus some things that you d prefer not to do again. The investment in Horsell International in 2009 tripled the size of the group with a single transaction. Since then, PSC has continued investing in everything from startups to mature businesses. The focus is to invest in assets that we think can be improved, turned around, or which we think are heavily undervalued at the time, says Dwyer. PSC has also drawn on the example of Austbrokers to create an owner driver model, with principals retaining an equity stake to create an alignment of interest, while PSC works with them to commercialise the business and help realise its potential. It s about teaching people to look at the business as an asset, says PSC Insurance Group CEO, Gary Seymour. We help them look at the key drivers of value and educate them on how to look at their business differently. Asked which valuation method they prefer, Dwyer and Seymour say both revenue and EBITDA have a role to play. I ve got to be careful here that I m not giving away the Colonel s recipe, says Dwyer. But every purchaser who knows what they re doing will look at both numbers. A business can be making no money because it s a lifestyle business, but the revenue can still have a significant amount of value if there s a lot of goodwill attached. Despite the recent round of industry consolidation, Seymour believes it remains a seller s market. There are a significant number of people who say they still want to grow, and for whom acquisition is a big part of that, I am yet to hear one of the new leaders suggest they plan to shrink their way to greatness and in that environment, I can t see values coming down, he says. Dwyer says valuation can differ significantly between purchasers, depending on their plans for the acquired business. What the seller wants for their business is, in my view, irrelevant, he says. The question is what we think we can achieve with this business and what we think it is worth to us. THE FOCUS IS TO INVEST IN ASSETS THAT WE THINK CAN BE IMPROVED, TURNED AROUND, OR WHICH WE THINK ARE HEAVILY UNDERVALUED AT THE TIME. PAUL DWYER, (left) Managing Director PSC Insurance Group GARY SEYMOUR, (right) CEO PSC Insurance Group Mergers, acquisitions and Section valuations Title 29

30 6 Industry outlook Seeking growth in a challenging environment In an increasingly competitive industry, strong client relationships remain the key to future growth Insurance Broking Benchmarking Report

31 Firms generally expect revenue and profit to continue to grow over the next 12 months. However, building revenue is a slow process in the current environment, and many firms foresee only modest growth, with 47 per cent forecasting revenue growth between one and nine per cent. [Figure 27] High revenue firms are the most optimistic about future revenue growth, with 45 per cent saying they expect growth of 10 per cent or more. Meanwhile, some smaller firms appear to be struggling to gain traction. Thirty per cent of low revenue businesses either say they expect profits to remain unchanged or decline, or can t say whether they will rise or fall. [Figure 28] There are also significant differences between states, with Victoria and Western Australia the most optimistic about revenue growth, but less positive about increasing profitability. Meanwhile, South Australian businesses are facing a particularly difficult environment, with only 17 per cent expecting revenue growth of more than 10 per cent, down from 39 per cent of businesses two years ago. [Figure 29] Figure 27. Expected change in revenue and profit next financial year Revenue 47% 40% 39% 31% 1% 1% 0% 1% 1% 1% 2% 6% 7% 7% 7% 5% 4% Not sure Decrease 20%+ Decrease 10-19% Decrease 1-9% Same Increase 1-9% Increase 10-19% Increase 20-29% Increase 30%+ Profit 3% 1% 1% 1% 0% 0% 1% 3% 2% 9% 13% 13% 13% 30% 25% 20% 20% 9% 8% 6% 7% 4% 1% 7% 3% Not sure Decrease 30%+ Decrease 20-29% Decrease 10-19% Decrease 1-9% Same Increase 0-4% Increase 5-9% Increase 10-14% Increase 15-19% Increase 20-24% Increase 25-29% Increase 30%+ Industry outlook 31

32 Figure 28. Expected change in revenue and profit by size Revenue Low revenue Low revenue 2 2 9% 31% 37% 9% 10% 5% 8% 37% 37% 3% 10% Medium revenue Medium revenue 1 2 6% 45% 38% 5% 3% 2 7% 50% 27% 10% 4% High revenue High revenue % 44% 10% 4% 2 2 5% 46% 37% 6% 2 Not sure Decrease Same Increase 1-9% Increase 10-19% Increase 20-29% Increase 30%+ Profit Low revenue Low revenue 3% 5% 7% 39% 23% 23% 3% 12% 15% 40% 21% 9% Medium revenue Medium revenue 2 6% 10% 39% 32% 11% 2 14% 45% 26% 13% High revenue High revenue 6% 2 8% 30% 30% 24% 3% 8% 44% 36% 9% Not sure Decrease Same Increase 1-9% Increase 10-19% Increase 20-29% Increase 30% Insurance Broking Benchmarking Report

33 Figure 29. Expected change in revenue and profit by state Revenue and profit Queensland R 3% 3% 6% 61% 18% 9% 0% P 6% 7% 61% 13% 13% Western Australia R 0% 7% 3% 32% 43% 11% 4% P 7% 15% 33% 30% 15% New South Wales R 0% 0% 8% 49% 29% 10% 4% P 10% 42% 31% 17% Victoria South Australia R 0% 0% 11% 72% 17% 0% 0% P 12% 18% 41% 29% R 0% 3% 8% 31% 43% 7% 8% P 2% 3% 16% 39% 30% 10% Not sure Decrease Same Increase 1-9% Increase 10-19% Increase 20-29% Increase 30%+ VIC+WA MOST OPTIMISTIC ABOUT REVENUE GROWTH Industry outlook 33

34 Opportunities and challenges Looking to the future, many see improving economic conditions as an important driver of higher profits, along with growth among key clients. Only 23 per cent now see hardening of premiums as a likely source of improved profitability, down from 68 per cent in. [Figure 30] Client economic hardship is seen as a key risk, particularly in Victoria, while declining interest income continues to affect many businesses, especially higher revenue firms. [Figure 31] Online insurers were nominated as a significant competitive threat by 59 per cent of brokers nationally and 73 per cent in Queensland, where a dispersed population may make online channels more effective than elsewhere. [Figure 32] When asked how they differentiate themselves from competitors, firms were most likely to nominate strong client relationships and quality of advice, which have eclipsed service quality as areas of competitive focus. [Figure 33] Many also see the benefits of differentiating themselves as niche specialists, especially high revenue firms. Have you considered How will you increase client numbers? 80% of respondents are looking for new client growth to positively impact profit but with increasing competition and pressure to differentiate, some brokerages may struggle to maintain, let alone, increase their client base. Figure 30. Factors expected to positively impact profit 80% 68% 55% 57% 58% VIC 20% QLD 55% 30% 31% 32% 17% 16% 18% 18% 23% 25% 19% 10% Business/ client base acquisitions Negotiating improved terms with insurers Hardening of premiums Cost reduction Increased premium funding revenue Improved economic conditions Improved efficiency New client growth Insurance Broking Benchmarking Report

35 Figure 31. Factors that may hinder profit growth HIGH REV 59% VIC 43% LOW NPM 11% NSW 53% 7% 73% 55% MEDIUM NPM 31% 4% 37% 38% 42% 25% 25% 25% Loss of key clients Staff resourcing issues Softening of premiums Cost increases Increased competition Declining interest/ investment income Client economic hardship Figure 32. Biggest threats to business HIGH NPM 12% 7% Other NSW 20% 9% None 28% Increased regulation HIGH REV 50% 33% Losing key staff to competitors 33% Industry consolidation QLD 73% NSW 47% 59% Direct online sales from insurance companies 59% SIGNIFICANT COMPETITIVE THREAT Online insurers were nominated as a significant competitive threat by 59 per cent of brokers nationally Industry outlook 35

36 Figure 33. Competitive differentiators 16% Size 1% 12% Price 3% 25% Networks 5% 49% Brand Reputation 24% Specialist knowledge 29% LOW REV 8% HIGH REV 43% 58% Easy to deal with 36% 81% Service quality 40% 72% Quality of our people 43% 70% Quality of advice 50% 80% Quality of relationships with clients 61% Insurance Broking Benchmarking Report

37 [ CASE STUDY ] JOHN ELLIOTT CEO, Elliott Insurance Developing an effective online strategy John Elliot of Elliott Insurance says direct online sales are now a key part of his business strategy. However, success with online didn t come overnight. TIPS We ve been through a lot of products that haven t worked to get to a few products that have, Elliott says. In, we processed over 20,000 quotes in one year. In the end, we dropped a few of our product lines, purely because they were too much work for too little return. Last year we only did 5,000 6,000 quotes, but our success rate was much higher. The key is to use simple products products that are easy to rate. As soon as the question set gets too lengthy, it s hard to get an insurer to support you, and it s very hard to get the consumers to go through and self serve. According to Elliott, good reporting is also essential. The success of any online venture is only as good as the information you re getting back from the reports you create. If you don t set up your website to capture that data, you re operating purely on guesswork, he says. By harnessing Google Analytics to track user behaviour down to the individual page level, Elliott and his team can rapidly determine what s working and what isn t. For every dollar you spend you know exactly what you get back. The benefits can be significant. By offering online selfservice with full quote, bind and pay, Elliott has been able to tap into an SME and trades market that would otherwise be too expensive and time consuming to service. Additionally, his people spend less time on data processing and more time giving advice to high value clients. Elliott and his staff have also been actively using social media, particularly Facebook, to engage with their clients. It s a great way to stay in the forefront of clients minds and put a human face on the business, he says. Meanwhile, he has been actively sharing his hard-earned expertise with other firms. You hear brokers complaining how hard it is to compete on certain lines with direct insurers brokers have to stick together and be opportunistic. There s no reason why we can t win back these lines, he says FOR SUCCESS ONLINE Keep it current Find out what people are looking for online, and then target the most frequently searched keywords and insurance products. Keep it fresh Continually update your website with new content to improve search rankings and keep clients coming back. Keep it simple 3. The simpler the product and the system, the higher your chances of success. Industry outlook People 37

38 Technology Attitudes towards new technology are overwhelmingly positive, with the vast majority of firms looking to new technology to improve efficiency. [Figure 34] However, few have seen significant returns from online product sales, with many lacking the data they need to analyse their digital performance. While 82 per cent use a website to generate leads and 42 per cent accept online quote requests, 41 per cent also say they are not sure whether they are satisfied with website performance when selling online. [Figure 35] Meanwhile, many have leveraged digital channels for marketing, with 28 per cent using Facebook and LinkedIn respectively, and 15 per cent using digital media generally. [Figure 36] Despite this, the web remains the number one priority for future capital investment, nominated by 59 per cent of broking firms, followed by customer relationship management systems (33 per cent). However, 39 per cent of high revenue businesses are also seeking to increase efficiency through software integration. [Figure 37] Best practice Despite the promise of digital technologies, it s important to be aware of the risks of pushing business online. By prioritising the online channel, you risk diminishing the value of the broker relationship and commoditising your service offering. So it s important to ensure your increased online presence compliments your role as a trusted personal adviser, rather than detracting from it. Figure 34. Attitudes towards technology Excited about the possibilities % 42% 44% Committed to ongoing investment 2 50% 48% Costs too much to keep up to date 12% 37% 23% 22% 6% Prefer to keep to more established, traditional methods 11% 53% 21% 13% 2 Believe new technology is critical to improving efficiency % 57% Strongly disagree Disagree Neither Agree Strongly agree 82% USE A WEBSITE TO GENERATE LEADS Insurance Broking Benchmarking Report

39 Figure 35. Satisfaction with selling online and use of the website Satisfaction level 5% 1 13% 82% 42% A 31% Use of the website 41% LOW REV 21% LOW NPM 26% LOW REV 3% 10% 12% 12% 13% Not sure Neutral Meeting expectations Not meeting expectations Way below expectations Exceeding expectations None of the above Instant quotes Claim lodgements Full quote, bind and pay Quote requests (processed offline) Brand promotion/ lead generation Figure 36. Channels used to market the business HIGH REV 89% 85% HIGH REV 69% 74% 2% 10% NSW 18% 10% HIGH REV 26% QLD 27% 15% 19% HIGH REV 39% 23% QLD 42% 28% LOW NPM 40% 28% 36% 52% None Twitter Other Digital media Paid search marketing Host own events Facebook LinkedIn Print media Industry associations Sponsorship Website Industry outlook 39

40 Figure 37. Intention to invest significant capital in the next three years 59% Website 33% VIC 69% HIGH REV 39% Customer relationship management system 30% Software integration 16% Practice management system 14% No investment planned 8% Other Insurance Broking Benchmarking Report

41 [ CASE STUDY ] Emerging trends in Australian insurance 30% Adrian Humphreys, Lloyd s General Representative in Australia, says the Australian insurance industry faces three key challenges in The first is affordability. It s a global issue, and it s extremely complex, Humphreys says. People are becoming increasingly urbanised, typically around the coast, in areas that are very much at risk. With many unable to afford the true, risk based cost of cover, Humphreys says mitigation is the only solution. The insurance industry, local governments, federal governments, and building standards bodies all have to work together this all takes time, he says. It s a problem everywhere, but it s one we have to fix. The second challenge is that both insurers and brokers are under pressure to achieve growth in a soft market. It s about managing the cycle, he says. Rates are cheap and they don t show any signs of recovery. However, businesses are under pressure to grow. So how do you grow in a soft market? One solution is to look to emerging economies overseas for growth. Another is to grow revenue through acquisitions. You see a flurry of merger and acquisition activity that s always the case in soft markets. Because your margins are smaller, you try to reduce your costs and increase turnover. That s where your profit growth is going to come from. Software As a result, Humphreys sees the recent trend integration towards industry consolidation continuing for another two or three years, particularly in the SME market. However, he cautions buyers to consider culture as well as financials. It s a relationship industry, he says. You re not just buying the business, you re buying the people that work there. So a massive part of it is getting the right cultural fit. He also believes the cycle will eventually come to a natural end, There are only so many things worth buying. Humphreys says that the third major issue facing the industry is a continuing shortage of skilled staff as businesses seek to rejuvinate an ageing workforce. At Lloyds, we ve put a lot of time and money into attracting and nurturing talent. We face stiff competition with other employees to get the best, and you ve really got to commit to this it doesn t just happen, says Humphreys. He believes it s also critical to cultivate gender and cultural diversity to create a range of perspectives within the business. Your staff mix should reflect your client mix, he says. So as we do more work in emerging economies, it s important that our workforce reflects that. While he believes social media can be very effective for some audiences and objectives, including recruitment, it also has risks. If you put yourself out there in the social media sphere, you have to expect to be judged out there, he says. Unless you re selling products online, in many cases I think the risks can outweigh the benefits. He also believes that for businesses focused on commercial insurance, the risk from direct insurers is limited. One of our key value propositions always will be that our risk assessments are done by real people, not algorithms. They really are the experts in risk and clients recognise that, he says. Our products are technical and tailored. You just don t do that online. As insurers become more sophisticated in their ability to manage and analyse client data, they will identify new opportunities to create bespoke products for niche markets. Brokers trying to differentiate themselves in an increasingly commoditised industry are going to need these bespoke products specifically designed for them, he says. ONE OF OUR KEY VALUE PROPOSITIONS ALWAYS WILL BE THAT OUR RISK ASSESSMENTS ARE DONE BY REAL PEOPLE, NOT ALGORITHMS. THEY REALLY ARE THE EXPERTS IN RISK AND CLIENTS RECOGNISE THAT. ADRIAN HUMPHREYS Lloyd s General Representative in Australia Industry outlook People 41