TABLE 2 – GROSS PROFITABILITY RELATIVITY
GROSS PROFIT RELATIVITY: How truly profitable is your agency? We have found over a long period of study of agencies that the owners comprise most of the Executive and Sales Compensation. Adding the Pre-Tax Profit to Executive/Sales Compensation establishes a measure of how much (as a percent of revenue) the ownership of the agency earns. The measurement of Gross Profit Relativity adds Executive/Sales Compensation to Pre-Tax Profits as a benchmark.
In 2023 we find Group 1 agencies generating a 37.12% GPR, Group 2 agencies a 40.21% GPR, Group 3 agencies a 43.78% GPR and the largest, Group 4 agencies enjoying a 43.13% GPR.
Measure your own GPR by adding the compensation of Executive and Sales staff to your Pre-Tax Profit to establish your agencies GPR. A more exacting method for calculating GPR is to add owners’ compensation (of any type) plus owners perks and benefits to Pre-Tax Profits to create your own Gross Profit Relativity and re-measure every year to determine if you are trending up, down or are stable. This is also a good way of determining if an offer is fair and sufficient to you as the owner. If the GPR is the amount of income each year that benefits the owners, how long would an offer sustain you in retirement and is that sufficient for your retirement needs?
TABLE 3 – AGENCY PRODUCTIVITY SCREENING
Productivity in an agency is measured first by Revenue per Employee. You want to grow the Rev/Empl each year to make your staff more productive. Remember, compensation is always your primary expense. The BEST measure of productivity, however, is SPREAD, the difference between Rev/Empl and Compensation per Employee. You also seek the spread to be both positive and growing in productive agencies.
TABLE 1 – ARE YOU A LOSS RATIO PROFITABLE AGENCY? CONTINGENCY RATIO
And are you earning a fair contingency income from the loss ratio quality of your book of business. We often hear that Contingency is a “crap shoot” reliant on weather and the whim of nature. For small agencies, this is true. One loss could wipe out an excellent loss ratio when you have under $1 Million Premium with any carrier. However, once you achieve $2 Million, $3 Million and certainly, at $5 Million Premium, your agency can withstand one or two shock losses and still bear a loss ratio that could and should earn you contingency income.
Your appropriate measure of Loss Ratio quality of your book of business is your Contingency Ratio, the ratio of contingency income paid to you in one year measured against the Commissions Earned on contingency-bearing business (mostly P&C, but can certainly include other lines) in the prior year. This is the Contingency Ratio that we collate and publish annually and that impacts (positively or negatively) the values of agencies. A 5-Year comparison of Contingency Ratio by Composite Group is included in each published Composite Group study.
This year the average Contingency Ratio for Group 1 agencies was 4.2% of prior year Commissions, Group 2 was 5.2%, Group 3 was 5.6% and Group 4 was 7.2%. This means that if you are under $1.5 Million Revenue, the average agency received 4.2% of last year’s contingency-earning commissions in contingency payments this year.
We also have a 5 year, 10 year, 15 year and 20 year study for each Composite Group.