Optimism remains high in the independent insurance channel, despite a slight drop in year-end 2019 growth rates and profitability. Agents and brokers predict that 2020 will be a stronger year with 7.0% organic growth, according to the latest Organic Growth and Profitability (OGP) survey report from Reagan Consulting.
Median organic growth in the channel slowed slightly to 5.9% in the fourth quarter (Q4) of 2019, after having exceeded 6% in five of the previous six quarters. Also, the 2019 median year-end EBITDA (earnings before interest, taxes, depreciation and amortization) dropped slightly to 20.1% from the 2018 year-end EBITDA of 20.2%.
Those declines are insignificant unless they prove to be the beginning of a trend, says Bobby Reagan, CEO of Reagan Consulting.
A more significant change, says Reagan, 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.
Compounding Small Differences
Reagan also reports encouraging news: “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.”
Reagan Consulting has conducted its quarterly survey of agency growth and profitability since 2008, using confidential submissions from nearly 200 mid-size 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 mid-size and large privately held brokers.
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.