Growth at its lowest pace of growth in five years…
Agent-broker organic revenue continued to fall in the third quarter of 2016 says the latest Organic Growth and Profitability Survey from Reagan Consulting.
“After beginning the year with a slight uptick, organic growth declined in both the second and third quarters and seems poised to drop further in the fourth quarter,” commented Kevin Stipe, president of Reagan Consulting, a management consulting and merger-and-acquisition advisory firm for the insurance distribution system.
According to the study growth fell to 3.6% percent, the lowest pace of growth in the past five years
According to the study, growth fell to 3.6% percent, the lowest pace of growth in the past five years. In particular, Mr. Stipe highlighted the sluggish pricing in commercial lines as the “primary culprit” in the continued slow pace of revenue growth. Commercial lines organic revenue growth decelerated to only 3.0% this third quarter. In 2013, the organic revenue growth rate was at its peak at 8.4% in the same quarter.
“Weakened organic growth and heavy resource investments have taken their toll” on agency earnings, said Stipe, who noted that 2016 is shaping up to be the second consecutive year of profitability declines after several years of improved margins.
Wikipedia explains organic growth as “…the process of business expansion by increased output, customer base expansion, or new product development, as opposed to mergers and acquisitions, which is inorganic growth.”
This is the second quarter in a row for a decreased growth rate. The second quarter of 2016, was also slower than had originally been hope for as well. There is still an opportunity, however, for agents and brokers to come out with a positive overall profitability in 2016.
As noted in the OGP report for the second quarter, most agents and brokers are projecting a year-end EBITDA margin of 20.0%. “If achieved, that would be generally consistent with the 20.1% margin achieved in 2015,” commented Campbell.
“Sales Velocity” now part of the quarterly survey
This quarter, Reagan consulting also announced a new component to the OGP report. The survey now includes a “Sales Velocity” metric which is defined as the “current-year written new business as a percentage of prior-year total commissions and fees.” As a result, concludes Mr. Stipe, “Sales Velocity is the best new measure of new business for agents and brokers.”
By way of example, Reagan consulting provided the following example:
A typical level of Sales Velocity is slightly above 12%, which means approximately $120,000 of new business per $1 million of prior-year commissions and fees. In the OGP survey, top-quartile firms posted nearly 20% Sales Velocity. These same firms generated 10% organic growth for 2016 through the third quarter, showing the clear correlation between Sales Velocity and organic growth.
More about the OGP quarterly survey
As it has done every quarter since 2008, the Reagan Consulting Group’s “Organic Growth and Profitability Survey” (“OGP”) measures the current growth and profitability of agents and brokers each quarter. The consulting group, also behind the Big “I”‘s Annual Best Practices Survey, uses confidential submissions from approximately 140 mid- and large-size agencies and brokerage firms. According to the firm, almost half of the insurance industry’s 100 largest agents and brokers participated in its most recent survey.