Yes, these are difficult times. And yes, agents and brokers must respond aggressively to market conditions by doing everything possible to grow their business, even while streamlining their operations to maintain profitability.

With that said, be careful not to get too swept up in the pessimism. If you followed the advice of the Texas insurance commissioner and dumped your insurance agency holdings back in 1995, you missed a great run. During the 12.5 years since he made his famous proclamation, the buggy whip makers did pretty well, thank you.

Both the publicly traded insurance brokers and Reagan Consulting's index of private brokers outperformed the stock market by more than a 2-to-1 ratio, as shown in the accompanying chart. (The Reagan Value Index–or RVI–is a proprietary database of approximately 30 privately held agencies whose valuations are tracked annually by Reagan Consulting.)

But, one might object, that is the past. What about the future? Given how difficult the market is, what will happen to agency values if pricing remains soft not just for one or two more years, but for several?

Good question. History provides comfort here as well.

Consider this: Over the past 20 years, 16 of them (80 percent) have been soft pricing years, in which one would expect extremely modest growth in agency value.

Surprisingly, however, our review of our valuation clients over that 20-year period indicates that the average firm in the Reagan Value Index has increased in value by more than 10 percent per year–for 20 years!

As counterintuitive and surprising as this seems, the way these results have been accomplished is pretty simple: These firms have focused on building value by executing a handful of straightforward strategies. They are the very strategies that today's top performers are executing to grow their value even in this market.

What are these strategies?

In our consulting practice, we have the privilege of working in a variety of ways with many of the industry's top performers. Based on that exposure, here are five keys to value creation being deployed by today's most successful agencies.

o Sales culture enhancement.

In recent years, our industry has rightfully focused its attention on organic growth as perhaps the single most important measure of an agency's effectiveness (with profitability running a close second). Believe it or not, there are still firms out there, even in today's environment, that are growing organically by double-digits. How is this possible?

Developing a powerful sales culture certainly doesn't happen overnight. It comes through a combination of attracting and retaining motivated relationship-developers, and then equipping them with industry-leading sales and support resources to ensure they can continue to grow without upper limits.

Benchmarking and then creatively rewarding new business as well as growth in a producer's book of business are typically the two highest priorities of these firms.

o Productivity improvement.

Over the past decade, agency productivity (measured by revenue per employee) has nearly doubled for Best Practices agencies.

In the mid-1990s, revenue per employee of $100,000 was a stretch goal for many. Today, those same agencies are targeting a goal of $200,000 or more.

The leap in productivity over the past decade has been the key to driving higher agency profitability and, in turn, higher agency valuations–even during soft market years.

o Industry specialization.

The maturing U.S. economy is in the midst of a long-term trend toward specialization. Rather than trying to be generalists, businesses compete for customers based on a tailored approach to the needs and desires of a particular industry or customer type.

The move toward specialization has been especially pronounced in the insurance brokerage industry. When a generalist competes with an industry specialist, the playing field is rarely level!

Based on our research, agencies that specialize grow faster and are more profitable than generalists. This growth and profitability advantage equates to a significant valuation advantage. In one recent study we conducted, we found that specialty business can be 55 percent more valuable than general business.

o Consistent growth investment.

Reinvesting profits is relatively easy when insurance pricing is hard–or even flat. But when pricing is in the tank, the number of firms capable of–and willing to–invest significantly in new producers and resources declines significantly.

Is your firm investing heavily in your future? Today's double-digit growth agencies have been investing back in their business consistently year-in and year-out, and are now reaping the rewards of their discipline. And they are hiring in 2008.

o Culture is King.

The best agencies are those that recognize their real client is the insurance professional of tomorrow. These firms understand that the mission of their owners is to build an organization that delivers a compelling value proposition to the best and brightest talent in the market. Such talent will have no problem attracting customers!

Many agency principals accept this, but believe the key to attracting this talent is high compensation. It is not. Competitive pay levels are certainly important, but the defining issue in winning the battle for talent seems increasingly to be the quality of a firm's work environment.

Agency principals who foster an environment that is fun, honest, transparent, exciting, demanding, creative and competitive will continue to win the battle for talent.

Yes, these are challenging times for our industry, but the strength of the value proposition offered by the professional insurance adviser has never been stronger.

For agents and brokers who continue to adopt and implement industry best practices, we think the future remains very bright indeed!

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