While organic growth slows down, valuation multiples remain at historic highs…
“Soft p-c pricing certainly contributed to the disappointing performance, but the primary reason appears to be an unusually weak U.S. economy, which showed its worst quarterly performance in three years,” said Kevin Stipe, president of Reagan Consulting, a management consulting and merger-and-acquisition advisory firm for the insurance distribution system. “It’s encouraging, however, that brokers participating in Reagan Consulting’s Organic Growth and Profitability (OGP) Survey are projecting faster growth in 2017 than last year.”
And so starts the first quarter of 2017 says the latest data from the 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, agencies and brokers reporting to Reagan Consulting noted that their organic growth fell to just 3.9% in the first quarter. This is the weakest first quarter growth rate since 2011. Even with this lackluster growth, however, Reagan consulting says that overall brokers remain optimistic and are projecting an estimated 5% organic growth for the year in total.
A look at the EBITDA: Earnings Before Interest, Taxes, Depreciation & Amortization
More insight on the EBITDA Numbers
The following are more insights from Reagan Consulting on the above chart:
- Profitability, defined as agent-broker earnings before interest, taxes, depreciation and amortization (EBITDA), has continued to recede, with EBITDA margins hitting 27.6% in the first quarter.
- First quarter EBITDA margins for OGP survey participants peaked in 2014 at 29.9% and have been sliding each year since, according to Reagan Consulting.
- Reagan notes that EBITDA margins tend to be highest in the first quarter due to cash-basis reporting of contingent income, and then slide throughout the year.
“That is the lowest first quarter EBITDA margin we have seen among OGP brokers since 2012. Although most brokers forecast their full-year EBITDA margins will again hit the 20% level achieved in 2016, only one-fifth of survey participants believe their profit margins will improve in 2017,” Stipe said. “With the slow start to 2017, matching last year’s performance may prove to be difficult.”
The widening gap is a cause for concern
The widening gap between broker performance and valuations should also be a growing cause of concern for investors says Mr. Stipe. “The publicly traded brokers’ average organic growth in the first quarter was 3.8%, yet they traded at 12.7 times EBITDA as of March 31. That is extremely high compared with the historical multiple of 9 to 11 times EBITDA.”
In the quarterly report, Mr. Stipe also highlighted the fact that the only time in the recent past 20 years where publicly traded broker valuations reached an EBITDA multiple of 12.7 or higher was during the hard market following the 9/11 terrorist attacks in 2001, a time when organic growth rates also spiked upward.
“The public broker valuations serve as a useful proxy for the rest of the brokerage industry and affect agencies and brokerage firms of all sizes. Private equity-backed brokers typically determine their own value by applying a slight discount to the multiples of the public brokers,” Mr. Stipe added.
And while the quarterly agency and growth profitability survey does not track mergers and acquisitions, the consulting firm notes that M&A activity is still strong with announced transactions keeping pace with the volume level of 2016. For those interested in reviewing M&A transactions in Massachusetts during 2016, please refer to Agency Checklists February 7, 2017 article entitled “Thirty-two Independent Insurance Agencies Were Acquired or Merged In Mass. During 2016; See The List Of Them Here.”
