A surprising reversal in Q2 says latest quarterly report from Regan Consulting…
“To coin a Mark Twain phrase, rumors of the industry’s demise are greatly exaggerated. Agency and brokerage firms have shown remarkable resiliency after a disappointing first quarter of 2017. Firms participating in Reagan Consulting’s Organic Growth and Profitability (OGP) Survey are reporting greater confidence, forecasting 5% growth for the remainder of the year.” So says Kevin Stipe, president of Reagan Consulting, in the issue of the Organic Growth and Profitability Survey.
Each quarter, this management consulting and merger-and-acquisition advisory firm 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.
Noting a marked reversal from the first quarter’s report, the OGP survey results show that agent-broker organic growth rebounded to 4.6%, up from 3.9% in the first quarter. In fact, the growth results reported in the first quarter of 2017 were the weakest growth rates in six years.
According to the latest numbers, several factors have contributed to the reversal in the second quarter of the year. In particular, Mr. Stipe highlighted the following factors:
- a “stronger-than-expected U.S. economy”,
- “more favorable property-casualty pricing”, and
- “organic growth gains in both commercial and personal lines.”
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), also reversed course, surging to 24.6% in the second quarter.
- First quarter EBITDA margins for brokers in the OGP survey were the lowest in five years.
- In the second quarter, however, brokers reported a turn-around with an EBITDA margin of 24.6%, up from 23.1% in the year-earlier quarter.
- Reagan Consulting cautioned that EBITDA margins tend to hit their highest level in the first quarter, due to the reporting of contingent income, and decline over the course of the year.
Q2 is a “pleasant surprise” after the concern the first quarter caused
“Pleasant surprises in the second quarter were robust organic growth in commercial lines, which rose to 3.9% from 3.1% a year earlier, and in personal lines (2.3% from 1.7%). The 2.3% organic growth in personal lines was the fastest growth rate since 2013,” Stipe noted in the report results. “What makes the personal lines result even more encouraging for agencies and brokerages is the fact that many observers suggest this business is vulnerable to technology-driven disruption and potential disintermediation,” he said.
Nationwide mergers & Acquisitions are still strong two years in a row
While the quarterly OGP survey does not track mergers and acquisitions, the consulting firm notes that M&A activity continues to be strong, with the high volume still strong with announced transactions keeping pace with the volume level of 2016.
“In the most active era of consolidation witnessed so far, the number of agencies has actually increased during the last 10 years, according to the 2016 Agency Universe Study by FutureOne, a collaboration between the Independent Insurance Agents and Brokers of America and various insurers. What happened during that time is agencies have regenerated at a rate greater than consolidation,” Stipe explained. “Simply put, don’t count out agency and brokerage firms. They are showing great resilience and growth, and they continue to attract capital. The distribution channel has its challenges, but it’s as good a time to be in this business as it ever has been.”
For those interested in reviewing our list of the M&A transactions in Massachusetts so far in 2017, please refer to Agency Checklists February 7, 2017 article entitled “Insurance Agency Mergers & Acquisitions In Massachusetts Still Strong in Q2 of 2017.”