All Revenue Lines Show ‘Significant Growth’ finds latest OGP Survey
It’s all good news for the independent insurance agency channel in Q2-2018 asserts Reagan Consulting in its latest quarterly Organic Growth and Profitability (OGP) survey. According to the firm, organic growth in 2018 continues on pace to reach levels not seen since 2014.
In particular, the survey notes that organic growth for the independent insurance channel rose to 6.1% from 5.6% through Q2. This is the first time since 2014 that growth in excess of 6% has occurred in two consecutive quarters.
Group benefits continues to outperform all other areas, with 6.3% growth in the second quarter of 2018. “That’s 1.4% higher than the 4.9% growth posted in Q2 2017,” observes Kevin Stipe, president of Reagan Consulting. Also in Q2 2018, commercial lines increased 5.2%, versus 3.9% in Q2 2017, and personal lines increased 4.6%, versus 2.3% in Q2 2017, representing “significantly high growth,” he says.
Sales Velocity also higher than historical levels as well
In addition, the industry’s Sales Velocity so far this year is “slightly above historical levels,” says Stipe, adding that Sales Velocity “is among the most important drivers of organic growth.” Reagan figures show median Sales Velocity was 13.9% for the industry through Q2 2018.
Sales Velocity is a proprietary metric developed by Reagan in order to benchmark an agency’s new business vis-a-vis other firms. It is derived by through a calculation which divides a firm’s new written business in the current year by the prior year’s commissions and fees. Stipe explains that a firm consistently posting Sales Velocity figures in the top 25% of the industry (18.5% or higher in Q2 2018) “likely will generate above-industry growth, assuming normal levels of client retention.”
Reagan has also developed another new metric to measure growth: the Rule of 20
Similar to the Sales Velocity metric, Reagan Consulting developed the Rule of 20 to benchmark trends in shareholder returns. This metric is calculated by adding half of an agency’s earnings before interest, taxes, depreciation and amortization (EBITDA) margin to its organic revenue growth rate. According to Reagan Consulting, an outcome of 20 or higher typically means a firm likely is generating a shareholder return of about 15% to 17%, which is generally considered a normal return under ordinary market conditions.
Independent agencies and brokers also project a solid increase in Rule of 20 scores for 2018, demonstrating “their positive outlook for organic growth,” says Stipe. At 17.8, the Rule of 20 score for all reporting firms is up from last year’s score of 14.3.
A further look at the Total Agency Median of Quarterly Organic Growth from Q2-2010 to Q2-2018
Despite the year-to-date increases in organic growth, Sales Velocity and Rule of 20 scores, agency EBITDA margins dropped by almost 2 points, from 24.6% in Q2 2017 to 22.7% in Q2 2018. The decrease appears to be related to contingent income. Stipe explains that “since contingent income is relatively flat year over year, profit margins are under pressure.” He adds that year-to-date profitability numbers “are inflated by cash-basis contingent income recorded during the first half of the year, so margins typically come down in the second half of the year.”
Firms project a 20.0% EBITDA margin for 2018, which is “in line with the 2017 full-year margin of 20.4%,” Stipe says, so any decrease for 2018 should be modest.
Source: Reagan Consulting Organic Growth and Profitability Survey (ReaganConsulting.com)
No mention of M&A deal volume in this latest quarterly report
Unlike the first quarterly report of the year, Reagan Consulting’s Q2 did not make any mention of M&A activity this time around.
With that said, for those interested in reviewing Agency Checklists’ own look at M&A Activity for Q2 as well as our proprietary list of the M&A transactions in Massachusetts for Q2-2018, please refer to our July 24, 2018 article entitled, “Insurance Agency Mergers & Acquisitions Continues At Slower Pace in Q2-2018.“
