Organically Speaking, Independent Agencies Are Very Profitable

By | August 11, 2015

Independent agencies are enjoying a period of high profitability boosted by healthy organic growth despite continued soft pricing in commercial lines.

Independent insurance agents/brokers posted median organic growth of 5.9 percent for the second quarter of 2015, slightly higher than 5.8 percent recorded in the first quarter of 2015 and second quarter of 2014, as measured by the Reagan Consulting Organic Growth and Profitability (OGP) quarterly survey.

“Industry organic growth has now been in a relatively tight band of five percent to seven percent for 14 consecutive quarters,” said Kevin Stipe, president of Reagan Consulting, an Atlanta-based management consulting and merger-and-acquisition advisory firm for the insurance distribution system. “Times are good for insurance brokers.”

Continued strong organic growth boosted profitability to 24.6 percent in Q2 2015, the highest second-quarter performance since the survey launched in 2008. Reagan noted that margins typically are inflated by cash-basis recognition of contingent income during the first half of each calendar year.

The second quarter also marked the first time in four years that group benefits — with a 6.8 percent rate — “outgrew” commercial lines (5.4 percent). Softening pricing in commercial lines affected that line for the second straight year, Reagan reported.

Reagan expects “more and potentially deeper softening” in commercial property/casualty pricing going forward, signaled by P/C insurers’ historically strong net income during the first quarter of this year as recorded by the Insurance Services Office.

“If this happens, commercial lines growth will likely decelerate further and pull agency-wide organic growth down,” Stipe said. Commercial lines represents more than two-thirds of the revenue of the approximately 130 mid-size and large agencies and brokerage firms in the Organic Growth and Profitability survey group.

The quarterly survey also found:

  • The median “Rule of 20” score was 19.0, the highest second-quarter mark in the seven years of the survey. Reagan’s Rule of 20 is a benchmark that correlates with shareholder returns — a score of 20 or higher is indicative of outstanding shareholder returns. It is calculated by adding half of an agency’s EBITDA margin to its organic growth rate. Nearly one-third of OGP participants expect to reach a score of 20 or higher this year.
  • Personal lines growth slipped to 1.8 percent versus 2.2 percent in Q2 2014.
  • Agents and brokers project a 20.0 percent EBITDA margin and a 6.7 percent organic growth rate for the full year.

Transaction activity, while not measured by the OGP survey, is on a record pace in 2015, according to Reagan, driven by investors’ desire for investment return, low interest rates, and strength in market prices of publicly traded brokers. More than 200 deals were announced, and five of the top 100 insurance brokers were acquired in the first two quarters of the year.

Reagan Consulting has conducted its quarterly survey of agency growth and profitability since 2008, using confidential submissions from approximately 130 mid-size and large agencies and brokerage firms. Median revenue of the firms completing the survey is approximately $17 million, according to the firm.

Source: Reagan Consulting

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