Even in the face of a slight drop in the year-end growth and profitability rates for 2019, independent agents and brokers’ optimism still remains high according to the latest Organic Growth and Profitability survey report from Reagan Consulting. In fact, agents and brokers surveyed for the final quarter of 2019 predicted that organic growth would be 7.0% in 2020.
An overview of the last eight years of Organic Growth & Profitability in the 4th Quarters
While optimism remains high, the latest results do show that the median organic growth in the IA channel slowed slightly in 2019. According to data provided by Reagan Consulting, the median organic growth for Q4-2019 was 5.9% down from the 6.1% seen in the same quarter in 2018. It was noted that the slight drop occurred after median growth had exceeded 6% in five of the previous six quarters.
In addition, median year-end EBITDA (earnings before interest, taxes, depreciation, and amortization) also “dropped slightly” from 20.2% in 2018 to 20.1% in 2019. The following chart from the survey takes a look at the organic growth during the Fourth Quarters of the past eight years.
Bobby Reagan, CEO of Reagan Consulting cautioned, however, about reading to much into the 2019 declines in both of these metrics. “Those declines are insignificant unless they prove to be the beginning of a trend. A more significant change,” he noted “is a shift in the biggest sources of revenues and earnings in the channel. As of year-end 2019, commercial lines surpassed group benefits in both organic growth and profitability.”
Mr. Reagan also saw some encouraging news in the latest survey results. “Operating income rose from 12.5% in Q4 2018 to 13.1% in Q4 2019, proving that brokers were more efficient in controlling their expenses.” Reagan Consulting has charted large variances in efficiency among agents and brokers across all revenue sizes. Reagan encourages agents and brokers to continue working to maximize their efficiency, and, using the Q4 2019 median and top quartile (75% percentile) firms to illustrate, he explains how small differences in organic growth and profitability compound over time.
“Although the difference in the organic growth and profitability performance of these two firms shown above may seem relatively small, the implications of the differences in the performance over a period of years is significant,” Reagan says. Assuming both firms begin with $10 million in revenue in 2019 and their levels of organic growth and EBITDA remain consistent, by 2029, “the top-quartile firm will have revenues that are 31% higher, cumulative 10-year profits that are 52% higher, and an estimated valuation that is 68% higher. The top-quartile firm will have generated $14.5 million more profit and have a value that is $18.4 million higher,” says Reagan. In other words, by 2029, the top-quartile firm will be “$33 million ahead of the median firm.”
