Continued growth for both brokers and agents is expected in 2018
“Factors fueling firms’ optimism about 2018 include the Tax Cuts and Jobs Act (TCJA), which President Trump signed in December, as well a record number of mergers and acquisitions,” said Brian Deitz, partner at Reagan Consulting, a management consulting and merger-and-acquisition advisory firm for the insurance distribution system.
‘A Reagan Consulting analysis suggests the TCJA will have a largely positive impact on the insurance industry, primarily through materially enhanced tax cash flows for C-corporations. In addition, for many firms, the tax act is likely to provide some lift to valuation…
So summarized Reagan Consulting in the first of its four quarterly surveys for 2018. For the initial installment of the Organic Growth and Profitability (OGP) Survey, there was an overall increase in optimism from both insurance agencies and brokerage firms in the outlook for 2018.
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.
In the latest survey, respondents noted that strong gains achieved at the end of 2017 fueled their optimism. For example, agency organic growth rose from 4.2.% to 4.5% in 2017, while the margin of earnings before interest, taxes, depreciation and amortization (EBITDA) went up to 20.4% from 20.0%.
“Reagan Consulting believes that the improving economy, beneficial impacts of the tax act and relatively flat property-casualty pricing are likely to continue improvements in organic growth and EBITDA,” Deitz noted.
A further look at the EBITDA: Earnings Before Interest, Taxes, Depreciation & Amortization
M&A is another major factor fueling growth
M&A deal volume “has been impressive in each of the last four years, hitting 492 transactions in 2015 and dipping slightly to 457 in 2016,” he said. “Transactions surged in 2017 to a record 558. With profitability on the upswing and growth opportunities appearing ahead, we expect that agencies and brokerage firms will continue to see motivated buyers competing for deals. This suggests to us that M&A pricing will not decline, and it might even increase for strategically valuable targets.”
Finally, in addition to the strong 2017 finish and continued pace of M&A deals, Reagan Consulting also noted that commercial lines property-casualty rates as well as the growth in the U.S. gross domestic product both finally began to reverse course in 2016. By the fourth quarter of 2017, Mr. Deitz noted in his survey comments, these increase in these two factors also have helped to drive organic growth for brokers in 2018. And while Group Benefits did decelerated modestly, it continued to remain the fastest-growing line of business for OGP participants, with the average growth rate circling 5.2%.
For those interested in reviewing Agency Checklists’ own list of the M&A transactions in Massachusetts in 2017, please refer to our January 23, 2018 article entitled, “2017 Has Broken All The Records For Insurance Agency M&A Activity.”
