While organic revenue fell, the year ended on a more positive note…
“The fourth-quarter uptick was among several factors that are making brokers optimistic that better days are ahead,” said Kevin Stipe, president of Reagan Consulting, a management consulting and merger-and-acquisition advisory firm for the insurance distribution system. “In fact, brokers participating in Reagan Consulting’s Organic Growth and Profitability (OGP) Survey are projecting 6.0% organic growth in 2017.”
This is the explanation Mr. Stipe gave upon issuing the latest Organic Growth and Profitability Survey. The quarterly survey analyzes the growth and profitability of agencies via confidential submissions submitted to the firm by over 150 mid-size and large agencies as well as brokerage firms.
According to the latest numbers, while organic revenue and growth among both agencies and brokerage firms actually fell to 4.2% in 2016. In fact, the 2016 numbers are the lowest annual rate since 2011. On the flip side, however, the year actually ended on a positive note. While overall numbers for the year were done, fourth-quarter organic growth actually outpaced the 3.6% recorded during the third quarter.
A look at the EBITDA: Earnings Before Interest, Taxes, Depreciation & Amortization
So what is driving Broker optimism?
Broker optimism with respect to 2017 seems to be deriving from the new administration, which has been viewed as more business-friendly and intent on spurring more rapid economic growth. “With property and casualty prices expected to remain soft for at least another year, faster economic growth will likely be necessary for brokers to achieve their expectations,” Stipe noted. “Since 2013, broker organic growth has been levitating above weak GDP growth and declining p-c pricing,” Stipe commented, adding. “Organic revenue growth can’t continue to defy gravity, so GDP will need to increase if brokers are going to achieve their growth goals.”
More on the numbers…
Reagan Consulting notes that a look at the trends by line of business reveals an interesting divergence – “with group benefits once again outpacing commercial p-c. Group benefits growth accelerated to 6.8%, versus 5.5% in 2015. On the other hand, commercial p-c declined again, falling to 3.3% from 5.3% the year before.”
As for agency profit margins, these numbers saw no change whatsoever in 2016. These profit margins, which are measured by earnings before interest, taxes, depreciation and amortization (EBITDA) remained at 20.0%. Continuing on its three-year decline, operating margins also fell to 12.2% in 2016. Operating margins, unlike EBITDA, do not include an agency or brokerage firm’s contingent income, which often represents a “growing percentage of revenue” for both agencies and brokerage firms. In discussing these numbers, Mr. Stipe cautioned, “…that profit margins could shrink if contingent income returns to historical levels in the 7.0%-7.5% range. In 2016, contingent income reported by participants in the OGP was 8.5% of revenue.”