Independent Agency Profitability, Organic Growth Dipped in Q3

Independent insurance agents and brokers posted median organic growth of 4.4 percent for the third quarter of 2015, compared with 6 percent in the third quarter of 2014, as measured by the Reagan Consulting Organic Growth and Profitability (OGP) quarterly survey.

Profitability is coming down too, according to Reagan Consulting: 21.9 percent in Q3 2015 compared with 22.4 percent in Q3 2014 as measured by EBITDA (earnings before interest, taxes, depreciation and amortization).

The third-quarter results marked the slowest growth rate since late 2011, said Reagan Consulting, a management consulting and merger-and-acquisition advisory firm for the insurance distribution system. It’s the first time in 14 quarters that broker growth rates dipped below 5 percent.

“Agent/broker organic growth is slowing – for privately owned and public brokers – because commercial property/casualty insurance rates are officially in a soft market,” said Kevin Stipe, president of Reagan Consulting.

“Profit margins tend to increase during times of strong organic growth and decrease when growth rates slow,” Stipe said.

Commercial Lines Rates

Commercial insurance rates typically make up 60 percent to 70 percent of revenue for the approximately 130 mid-size and large agencies and brokerage firms in the OGP survey group. Thus rates are substantial drivers of organic growth and, according to Stipe, brokers “may witness further deceleration of growth rates until P/C pricing stabilizes.”

Reagan Consulting’s survey has a new component: Sales velocity (total written new business as a percentage of the prior year’s total commissions and fees). Sales velocity is the single-biggest driver of organic growth, according to Reagan. The firms with the highest sales velocity more than doubled the organic growth rate of those with the lowest sales velocity in Q3 2015.

Transaction activity, while not measured by the OGP survey, continues on a record pace in 2015, despite declining rates, slowing growth rates and less robust profits. The 294 announced deals put 2015’s pace 28 percent ahead of 2014, likely leading to a record year for mergers and acquisitions.

Reagan Consulting has conducted its quarterly survey of agency growth and profitability since 2008, using submissions from approximately 130 mid-size and large agencies and brokerage firms. Median revenue of the firms completing the survey is approximately $18 million.

Topics Agencies