Organic revenue growth for P&C insurance agencies and brokerage firms stalled in the third quarter of 2017, falling to 3.9% from a surprisingly strong 4.6% reported in the second quarter. Even as growth fell, profitability continued to soar in the third quarter.
Firms participating in Reagan Consulting’s Organic Growth and Profitability (OGP) Survey, released Nov. 3, did report several bright spots regarding growth, however, noted Jim Campbell, a partner at Atlanta-based Reagan Consulting, a management consulting and merger-and-acquisition advisory firm for the insurance distribution system.
“The OGP survey showed mixed growth by product line, with commercial lines continuing to struggle. Group benefits led the way at 6.3%. Personal lines growth, while lagging other lines, reached 3.0% – the second highest rate for the third quarter in the nine-year history of the OGP,” Campbell said. “Third-quarter organic growth declined from a recent Q3 high of 6.8% in 2013, but the slight increase from 3.6% in the third quarter last year suggests that agencies and brokerage firms may have bounced off the bottom and will see improved growth ahead,” he said.
Pricing is still a challenge in many property-casualty lines, though trends appear to be moving in a favorable direction, Campbell said. Economic growth is also showing signs of strengthening, with the latest estimates from the U.S. Department of Commerce reporting back-to-back quarters of GDP growth of at least 3%.
Profitability, which Reagan Consulting defines as agent-broker earnings before interest, taxes, depreciation and amortization (EBITDA), hit a median of 22.7% in the third quarter. “Not only is profitability up from 21.4% in Q3 2016, but this year’s EBITDA margin is the highest Q3 margin in the OGP survey’s history,” Campbell said.
Such profit margins may be difficult to sustain, Campbell cautioned. “EBITDA margins typically decline in the second half of the year since contingent income is generally received in the first half,” he said. “Margins nevertheless are poised to finish strong in 2017, with OGP participants forecasting a full-year EBITDA margin of 20.0%.”
Agencies and brokerage firms can be “cautiously optimistic” that conditions for growth will continue to develop. “Sustaining current profitability, however, will take some work to improve structural profitability and not over-rely on contingent income,” Campbell said.
Reagan Consulting has conducted its quarterly survey of agency growth and profitability since 2008, using confidential submissions from more than 150 midsize and large agencies and brokerage firms. Nearly half of the industry’s 100 largest firms regularly participate in the survey. The OGP study is the industry’s preeminent survey of midsize and large privately held brokers.
Each participating agency receives a customized, confidential report of its performance compared with the overall survey results, along with Reagan’s quarterly commentary of industry trends affecting agents and brokers. For information on participating in the OGP survey, contact Michelle Appelbaum at 404.233.5545 or [email protected].
About Reagan Consulting: Reagan Consulting is a management consulting firm providing strategic consulting, valuation, and merger-and-acquisition (M&A) services to the independent insurance distribution system. The firm’s services for insurance agents and brokers, bank-owned agencies and other participants in the insurance distribution marketplace include: appraisals of fair market value, mergers and acquisitions advisory, ownership perpetuation planning, strategic planning facilitation, key employee compensation and equity plan design, and agency performance benchmarking. Reagan Consulting co-developed the well-known Best Practices Study and produces the quarterly Organic Growth & Profitability benchmark survey.