Large, Mid-Sized Agencies Grew 5%, Maintained Strong Profit in Q1: Reagan

Organic revenue growth at privately-held large and mid-sized insurance agencies bounced to 5.1 percent for the first quarter of 2016, up from 4.6 percent for the full year 2015, according to the latest Reagan Consulting Organic Growth and Profitability (OGP) survey.

Profit margins were slightly lower at 28.5 percent in the first quarter of 2016, compared with 29.0 percent for the first quarter of 2015. That median profitability, measured by EBITDA (earnings before interest, taxes, depreciation and amortization), was still strong by historic standards. First-quarter profit margins are always inflated due to contingent income, but are expected to finish 2016 at approximately 20 percent, which would be another solid year, according to Reagan Consulting.

“Given the powerful headwinds of softening commercial property and casualty pricing and continued weakness in the U.S. economy, the upward movement in growth is a positive,” said Kevin Stipe, president of Reagan Consulting, a management consulting and merger-and-acquisition advisory firm for the insurance distribution system.

Reagan Consulting conducts its quarterly survey with approximately 140 mid-size and large agencies and brokerage firms. According to Reagan, about half of the industry’s 100 largest firms participated in the most recent survey. Median revenue of the firms completing the survey is approximately $17 million.

Line of Business

By line of business, Reagan Consulting’s study found strongest growth in the employee benefits sector (6.9 percent growth during Q1). A growth at that pace would yield the fastest yearly rate for employee benefits since 2011, according to the report. Commercial property/casualty grew at a 5.1 percent rate while personal lines grew at 1.6 percent.

Stipe cautioned that commercial rates and the sluggish growth rate are pressuring agencies. “If pricing continues to deteriorate and the economy doesn’t pick up, agency growth rates are likely to suffer later this year,” he said.

Reagan’s OGP study now measures sales velocity (new business written as a percentage of prior-year overall commissions and fees) — a figure that hit 12.1 percent during the first quarter of 2016. Sales velocity is the greatest differentiator of high-growth agencies, according to Stipe, who said that firms that achieved a 15 percent or higher sales velocity grew by 7.1 percent, while those that achieved less than 10 percent grew only 2.2 percent.

Merger-and-acquisition activity among agents and brokers continued at a “blistering pace,” said Stipe. Reported North American deals topped 107 for the quarter, compared with the all-time record of 124 in the first quarter of 2015.

“The outside world (represented by private equity) has fallen in love with the investment performance of insurance brokers,” driving agency valuations to “levels never before seen,” according to the merger consultant.

Source: Reagan Consulting

Topics Agencies Profit Loss Commercial Lines Business Insurance