Organic growth slips to 3.9% but there were still several bright spots…
While organic growth revenue stalled in the third quarter of 2017 for both agencies and brokerage firms, profitability continued to soar according to the latest Organic Growth and Profitability Survey. Overall, growth fell to 3.9% in the Third Quarter, down from the much more robust 4.6% which was logged in the Second Quarter of 2017.
“The OGP survey showed mixed growth by product line, with commercial lines continuing to struggle. Group benefits led the way at 6.3%. Personal lines growth, while lagging other lines, reached 3.0% — the second highest rate for the third quarter in the nine-year history of the OGP,” explained Jim Campbell, a partner at Reagan Consulting, a management consulting and merger-and-acquisition advisory firm for the insurance distribution system.
“Third-quarter organic growth declined from a recent Q3 high of 6.8% in 2013, but the slight increase from 3.6% in the third quarter last year suggests that agencies and brokerage firms may have bounced off the bottom and will see improved growth ahead,” he added.
Each quarter, the management consulting and merger-and-acquisition advisory firm analyzes the growth and profitability of agencies via confidential submissions submitted by over 150 mid-size and large agencies as well as brokerage firms.
Even though pricing still presents a challenge within many P&C lines, the survey noted that pricing trends do appear to be moving in a favorable direction. In addition, economic growth indicators are also showing signs of strengthening after back-to-back quarters of GDP growth of at least 3%.
As for profitability, this quarter’s survey results were an average of 22.7% in the third quarter. “Not only is profitability up from 21.4% in Q3 2016, but this year’s EBITDA margin is the highest Q3 margin in the OGP survey’s history,” Campbell said.
Such profit margins may be difficult to sustain, Campbell cautioned. “EBITDA margins typically decline in the second half of the year since contingent income is generally received in the first half,” he said. “Margins nevertheless are poised to finish strong in 2017, with OGP participants forecasting a full-year EBITDA margin of 20.0%.”
A look at the EBITDA: Earnings Before Interest, Taxes, Depreciation & Amortization
Agents and brokers should be “cautiously optimistic”
On a final note, the OGP survey warned both agencies and brokerage firms to be “cautiously optimistic” with respect to the improving conditions for growth. “Sustaining current profitability, however, will take some work to improve structural profitability and not over-rely on contingent income,” Campbell said.