Optimism also remains high during the first half of 2019
Optimism amongst agents and brokers remains high four months into 2019. One of the main reasons for this continued optimism stems from the closing of the books on one of the best years for the independent insurance channel since 2014 based on the latest survey results from Reagan Consulting’s Organic Growth & Profitability Survey.
The survey for the Fourth Quarter of 2018, Q4-2018, shows “a convergence of impressive upward trends in each major line of business,” says Kevin Stipe, president of the firm.
Buyer optimism of agent and broker performance and seller concerns of scale and internal perpetuation planning have fueled what Stipe characterizes as a “frenzy” of mergers and acquisitions (M&A). He says many brokers and agents wondered whether M&A activity could exceed its record-setting pace of 2017 but, “incredibly, deal activity increased by another 7%, reaching 597 announced transactions” in 2018. Two drivers were all-time high valuations and a heavy influx of acquisition capital to private equity-backed brokers.
Actual growth surpassed all of the projections for 2018
According to the data compiled from OGP participants, actual growth total 6.1% in 2018. This number far surpasses 2017 which logged a 4.5% growth as well as surpassing the projections for 2018 which has estimated actual growth at approximately 5% for the year. Factors contributing to this increase include increases in both the U.S. GDP as well as in commercial pricing.
As a result, participants of the OGP are now forecasting potential 2019 growth at 7%, the highest rate since the start of the survey in 2008.
“Agency owners believe that size and scale ensure survival as competition intensifies in the industry,” Stipe observes. Small agencies whose owners are facing retirement without a succession plan are also contributing to the increase in transaction count. “Without a viable path to continued independence,” these agencies turn to an M&A transaction, Stipe says.
- Employee group benefits was the channel’s leading performer of 2018, growing organically at a rate of 7.3%. This growth rate was more than 2 percentage points higher than last year’s and represents the highest annual growth rate since the OGP survey began in 2008.
- Commercial lines’ growth rate also increased by more than 2 percentage points from 2017, as the median firm grew its commercial property and casualty business by 6.5% in 2018.
Personal lines business accelerated its growth rate for the third consecutive year to 3.9%, “which … is the fastest growth rate recorded for personal lines in the 11-year history of the OGP survey,” says Stipe.
While growth explodes, profitability remains stable
While the growth rate exceed expectations in 2018, the independent insurance channel’s profitability has remained relatively stable over the past four years, notes the survey.
In 2018, for example, the survey notes that earnings before interest, taxes, depreciation and amortization (EBITDA) margin dropped slightly to 20.2%, and contingent revenue, as a percentage of revenue, fell one percentage point. Despite the small drop in profitability, operating margin (which excludes contingent and bonus income) rose slightly in 2018, “implying that brokers and agents were successful in controlling their expenses,” says Stipe.
More about the quarterly Organic Growth & Profitability Survey
Reagan Consulting has conducted its quarterly survey of agency growth and profitability since 2008, using confidential submissions from nearly 200 midsize and large agencies and brokerage firms. Approximately half of the industry’s 100 largest firms participated in this quarter’s survey. The OGP survey is the industry’s preeminent survey of midsize and large privately held brokers.
