Agent-broker profitability reached 21 percent for 2014, a new record for the Reagan Consulting Organic Growth and Profitability (OGP) survey that began tracking profitability for agencies in 2008.
That median profitability for EBITDA (earnings before interest, taxes, depreciation and amortization) for 2014 was up from 19.3 percent in 2013 and 18.4 percent in 2012, the survey revealed.
Brian McNeely, partner at Atlanta-based Reagan Consulting, a management consulting and merger-and-acquisition advisory firm for the insurance distribution system, attributes the climbing agent-broker profitability rates in recent years to three trends.
“First, agencies have become more and more efficient,” McNeely told Insurance Journal.
“Second, the industry is growing,” he said. Reagan Consulting’s study found that median organic growth for agents-brokers in 2014 was 6.2 percent, matching 2013 and 2012. “They [agents-brokers] are growing their revenues faster than their expenses,” McNeely said.
The survey showed that the fastest growing segment of business was once again commercial lines, with an organic growth rate of 7.0 percent. Group benefits grew at a 5.7 percent clip.
“Finally, there has been an increase in contingent income, which has a material impact on profitability,” McNeely added. “Contingent incomes were up about 14 percent in 2014.” That growth in stems from the lack of “material catastrophic events” in the United States last year, McNeely said, as well as the overall growth in the insurance market.
The survey also noted that the median Rule of 20 score was 16.9, up from 16.5 in the prior year.
The Rule of 20 is the sum of an agency’s organic growth rate and one-half of its EBITDA margin; if the sum equals or exceeds 20, an agency is driving strong shareholder returns. Reagan Consulting uses the Rule of 20 to measure agency value creation.
“The agent/broker world grew in profitability for the fifth straight year — while sustaining positive revenue growth for a third straight year,” said Kevin Stipe, president of Reagan Consulting, in a statement. “These two metrics drive valuation, largely determine operating health, and are imperative to a firm’s ability to successfully perpetuate.”
High agency valuation is one reason why the market is experiencing a surge in M&A activity recently, McNeely told Insurance Journal.
“The basic fundamentals of the business are good for everyone right now,” he said. However, there are other issues driving the M&A trend as well.
“The market is rewarding public brokers in the public markets; they are trading at all-time highs and they have an arbitrage opportunity when they do an acquisition,” McNeely said. There’s a lot of private equity money that has entered the space. “So at some level it’s simply a supply and demand issue — there is a lot of demand for quality agencies and brokers to be sellers and there’s just not enough supply to meet the demand.”
Reagan Consulting has conducted its quarterly survey of agency growth and profitability since 2008, using confidential submissions from approximately 140 mid-size and large agencies and brokerage firms. Roughly half of the industry’s 100 largest firms participated in the most recent survey. Median revenue of the firms completing the survey is more than $17 million.
Brokers surveyed forecast a median organic growth rate of 6.0 percent in 2015, the fourth consecutive year for a forecast in that range. Brokers are projecting a “pullback” in profitability for 2015 to 20.0 percent, Stipe reported.