CONTACT: Tom Doran, Reagan Consulting, 404.869.2534, [email protected]

 Independent Channel Growth Starts 2019 Strong

Group Benefits Shows Q1 Weakness, Reagan Reports

ATLANTA (May 17, 2019) — The new year is under way and organic growth remains solid among agents and brokers in the independent insurance channel.

However, “some interesting subplots” are emerging that could mitigate the optimism, especially in the employee benefits sector, according to Reagan Consulting’s Organic Growth and Profitability (OGP) survey for the first quarter (Q1) of 2019.

Overall, Q1 organic agency growth totaled 5.3%, down just slightly from the 5.6% organic growth in Q1 2018, Reagan reports. This quarter’s 5.3% organic growth result is the lowest quarterly result in the past five quarters.

Survey participants are projecting 6.0% organic growth for 2019, down slightly from the 7.0% growth prediction noted in the year-end 2018 OGP survey.

Commercial P&C commission and fee income (excluding contingent income) led the organic growth charge in the first quarter, “delivering an impressive 6.9% growth result, up nicely from last year’s 6.0% first quarter tally,” says Tom Doran, senior vice president and partner of Reagan. Even more notable: The Q1 result is the highest commercial lines quarterly growth posted by the industry for the last 17 quarters (Q4 2014 was 7.0%).

Commercial Lines Very Strong

Higher premiums and a growing U.S. economy appear to be the primary levers for Q1 growth in commercial lines, the Reagan survey found. The quarter’s 3.2% GDP growth result, which also exceeded expectations, “served as a welcome turn-around from the 2.2% GDP growth result posted in Q4 2018,” Doran says.

Here’s another encouraging trend, Doran adds: GDP for Q1 was the best start to a year since 2015. “If agents and brokers are not growing their commercial books of business in this environment, there’s no blaming markets or the economy.”

 Benefits Slowdown

Doran called the respondents’ responses on group benefits growth an “unexpected and unwelcome outlier” in an otherwise positive OGP report. Benefits grew by only 3.8% in the first quarter, roughly half the growth result posted in Q1 2018 (7.3%). “This disappointing first-quarter result was the lowest quarterly growth posted by benefits since early 2013,” he said. “It is too early to tell if this growth slowdown is anything more than a bump in the road.”

Doran speculated on some reasons for the slow growth in group benefits:

  • The ongoing siege by private-equity investors on middle-market companies continues to result in attrition challenges.
  • More competitive (and potentially loss-leading) fee-based compensation approaches from national brokers on large and middle-market group benefits business continue to create retention challenges for independent agents and brokers.
  • Larger middle-market insurance clients increasingly are seeking relief from rising health insurance costs by exploring the use of HSAs, self-funded plans, high-value/narrow network plans, and more – all of which put additional competitive pressures on premium growth and, in many cases, broker compensation.

“The cyclical nature of our business yet again demonstrates the value of a diversified insurance brokerage that can deliver strong overall growth, even amid a downturn by one of the other core business units,” Doran notes.

Personal Lines ‘Success Story’

Personal property/casualty has been a real success story lately, Doran noted. “Historically, the personal lines modus operandi has been slow growth (flat to 2.5%) with high profit margins (mid-20s and higher). If done well, personal lines is a slow-growth cash cow.”

This changed in 2018, Doran adds, when personal lines managed to grow organically by 3.9%, the highest annual growth ever recorded in the OGP for this sector.

“Deliberate growth investments and a continued focus on high-end business by agents and brokers, when combined with rate, delivered the goods in a big way in 2018,” Doran says. “The good times for personal lines continued into 2019, with a 3.0% growth rate in Q1, down a bit from last year’s Q1 result (3.9%), but still above historical norms. Rate remains positive overall and a strong U.S. economy should allow for continued above-average growth in 2019.”

Profitability Improving Across the Board

In terms of profitability, the independent agency channel looks solid.

“Profitability results for the IA channel through the first quarter are always somewhat misleading, as p/c contingent income, which falls straight to the bottom line as profit, is heavily weighted in the first half of the year,” Doran notes. “Agency profit margins are at their highest levels early in the year and then taper off as the year progresses. Even so, the year-over-year Q1 profitability data can illuminate some interesting trends.”

Through Q1, agency EBITDA profitability ticked up slightly, from 26.9% in Q1 2018 to 27.8%. This was likely driven in large part by much-improved supplemental income (i.e. contingencies and overrides) results year-to-date. In Q1 2018, supplemental income was down 2.5%.

Through the first quarter of 2019, supplemental income is up 6.2%. “Not to look a gift horse in the mouth, but these supplemental income results are somewhat surprising in light of the natural disasters and wildfires that plagued the nation in 2018,” Doran observes.

But the OGP study shows more good news on the profitability front. Marginal operating profitability (which excludes supplemental income) also was up nicely through the first quarter (11.6% versus 9.9% in Q1 2018). “If agents and brokers continue to drive these technological and operating efficiency improvements and year-to-date supplemental income results continue to trend positive, 2019 could be shaping up to be a very profitable year for the industry,” Doran says.

“The industry is as healthy it’s been in recent memory,” Doran concludes. “The massive M&A land grab and associated record valuations are nothing more than a confirmation of the incredible value of this distribution system. There may never have been a better time to be an independent insurance agent or broker.”

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.

For further information and commentary, contact Tom Doran at Reagan Consulting, 404.869.2532 or [email protected].

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 [email protected].

About Reagan Consulting: Reagan Consulting is a management consulting firm providing strategic consulting, valuation, 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.


[email protected]

Reagan Consulting: 3495 Piedmont Road, NE, Building 10, Suite 920, Atlanta, Georgia 30305


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