Organic growth for insurance agents and brokers serving the employee benefits market has risen in recent years, just as commercial P&C lines have declined, according to the latest Reagan Consulting Organic Growth and Profitability (OGP) survey.
“In a consultative world where there’s already been pretty significant compression of broker compensation, I think they’re coming out of this transition from commissions to a lot of fee-based services on especially larger accounts,” says Kevin Stipe, president of Reagan Consulting, a management consulting and merger-and-acquisition advisory firm for the insurance distribution system.
“Because it’s consultative,” he continues, “I think agents and brokers are finding ways to grow this line of business faster than any other line of business in their agency.”
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Following 2010, when organic growth for employee benefits was 4.4%, it spiked to 7.1% the following year and then fell to 4.8% in 2012. But since then, there has been a fairly steady uptick from 5.0% in 2013 to 5.7% in 2014, and in spite of a slight dip to 5.5% last year, it reached the 6.2% mark by the second quarter of this year.
The results stand in stark contrast to commercial P&C performance, which despite a steep increase to 8.2% in 2013 from no organic growth in 2010, has fallen steadily since then to 7.0% in 2014, 5.3% last year and 3.1% by the second quarter of this year.
But the tables turn slightly when factoring in the EBITDA (earnings before interest, taxes, depreciation and amortization) margin. For example, employee benefit growth is projected to decline from a height of 22.3% in 2010 to 19.0% by the end of this year, while the commercial P&C line rose from 13.5% in 2010 and peaked at 19.8% in 2014. It has dipped a bit since then and is projected to reach 17% by the end of this year.
Dragging down growth
Agent-broker organic revenue growth generally fell to 3.6% in the third quarter of 2016, which the OGP survey calls the lowest pace of growth in five years. It appears “poised to drop further in the fourth quarter,” according to Stipe, who blames sluggish pricing in commercial lines for declining agency revenue growth.
The third-quarter profit margins as measured by EBITDA, which declined to 21.4%, considered are higher than year-end margins because of contingent income received disproportionately early in the year. Full-year 2016 EBITDA margins are projected to fall below 20% for the first time since 2013.
Stipe also cites “weakened organic growth and heavy resource investments” for dragging down agency earnings, adding that 2016 could be the second straight year of profitability declines following years of improved margins.
One new component to the OGP survey is a “sales velocity” metric, which measures current-year written new business as a percentage of prior-year total commissions and fees. Considered the best marker of new business for agents and brokers, it’s typically just above 12%, but the OGP survey found that top-quartile firms posted nearly 20% sales velocity.
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“These same firms,” according to Reagan Consulting, “generated 10% organic growth for 2016 through the third quarter, showing the clear correlation between sales velocity and organic growth.”
About half of the industry’s 100 largest firms regularly participate in the agency growth and profitability survey, which has been conducted quarterly since 2008. Median revenue of the firms completing the third-quarter survey is roughly $20 million.
With Donald Trump’s victory over Hillary Clinton and an expected dismantling of the Affordable Care Act, Stipe believes there will be “a continued drive toward a consultative business model” that benefits brokers and consumers alike.
He suggests that agents and brokers continue to invest in their business in this climate by aggressively hiring additional resource and sales staffers on the benefits side of the business. This will come as a huge relief to what Stipe describes as the “fair number of firms that have not invested aggressively in talent and resources, not knowing whether there was going to be a long-term payback on that investment.”
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