While the U.S. economy contracted in the second quarter of 2020 (Q2) at a rate not seen in 70 years, the insurance brokerage industry is a “shining star” with median organic growth of 4.4%, according to Reagan Consulting.
This is the rate of growth for the six-month period that ended on June 30, compared with the same six-month period in 2019, as noted in Reagan Consulting’s quarterly Organic Growth and Profitability (OGP) survey.
Although the result dropped from the strong Q1 rate of 6.6% and is the lowest organic growth rate recorded by the OGP Survey since Q3 2017, “it is an encouraging and perhaps surprising result given the COVID-related headwinds,” says Jim Campbell, Reagan Consulting partner.
Several factors contributed to this result, he says:
P-C Rate Increases
Rate increases appear to have continued and, for some markets and coverages, accelerated through Q2. These increases helped offset potential losses from cancellations and/or exposure reductions and enabled median commercial P-C organic growth of 4.7%.
Benefits Resilience
For many firms, the anticipated hit to employee benefits revenue from COVID-related layoffs has not yet materialized, Campbell says: “Although down from 5.5% for Q2 2019 and from 5.8% in Q1, median organic benefits growth was a respectable 4.2%.” Likely contributing to this result is a bit of recovery from the April peak unemployment rate of 14.7%, along with the decision by some companies to furlough employees in lieu of layoffs, he notes. Furloughed employees typically retain their benefits.
New Production
A spreading pandemic, global shutdowns and social distancing hardly seems a recipe for strong new business results, says Campbell. Yet new production rates for the OGP Survey participants remained solid through Q2. Sales velocity, measured as the current year’s written new business as a percentage of the prior year’s commissions and fees, reached a Q2 median of 11.5%, down only modestly from the 2019 (pre-COVID) rate of 11.9%.
Looking ahead, the median forecast for full-year 2020 organic growth of 5.0% is noteworthy on two fronts, Campbell says. “First, the 5.0% forecast exceeds the actual Q2 median of 4.4%, indicating strong expectations for the second half. Second, it represents a significant jump from the Q1 full-year forecast of 4.1%, suggesting optimism is increasing.”
Year-to-date profitability for brokers is strong, with both EBITDA margins and operating margins at their highest Q2 levels in the 12-year history of the OGP Survey. This is in part attributable to the reduced selling expenses — such as travel and entertainment — most firms are experiencing in the current environment. The median full-year forecast of a 20% EDITDA margin is unchanged from the Q1 forecast.
‘Cautious Optimism’
Campbell advises agents and brokers to focus on changes they can control amid the ongoing uncertainty of COVID-19, economic headwinds and a pending presidential election. “Successful navigation of the first half of 2020 challenges has led to cautious optimism for the second half,” he says. “While many businesses are in survival mode, agents and brokers may have a chance to be more strategic or opportunistic.”
Agents and brokers should answer some questions, Campbell concludes, including:
- Is now the time for you to embrace the remote work model, leveraging it to improve flexibility for your employees and reduce expenses?
- Does the sudden spike in displaced or furloughed employees create an opportunity for you to add to your talent base?
- Can you solidify your key client relationships by providing exceptional service and responsiveness as your clients work through this challenging environment?
For further observations and commentary on the first half of 2020, contact Campbell at Reagan Consulting, 404.869.2538 or jim@reaganconsulting.com. Each participating agency receives a customized, confidential report of its performance compared with the overall survey results, along with Reagan’s quarterly commentary of industry trends affecting agents and brokers. For information on participating in the OGP survey, contact Michelle Appelbaum at 404.233.5545 or michelle@ReaganConsulting.com.
About Reagan Consulting:
Reagan Consulting is a management consulting firm providing strategic consulting, valuation, capital raising and merger-and-acquisition (M&A) services to the independent insurance distribution system. The firm’s services for insurance agents and brokers, bank-owned agencies and other participants in the insurance distribution marketplace include:
appraisals of fair market value, capital-raise advisory, mergers-and-acquisitions advisory, ownership perpetuation planning, strategic planning facilitation, key employee compensation and equity plan design, and agency performance benchmarking. Reagan Consulting co-developed the well-known Best Practices Study and produces the quarterly Organic Growth & Profitability benchmark survey.