Organic growth in employee benefit products was 4.9% in the second quarter of 2017, according to Reagan Consulting’s latest Organic Growth and Profitability (OGP) Survey — a consolidation for the second straight year from 6.2% midway through 2016 and 6.8% in 2015.
Despite a stronger-than-expected U.S. economy, employee benefit firms await to see a rise in performance, says Kevin Stipe, president of Reagan Consulting, a management consulting and merger-and-acquisition advisory firm for the insurance distribution system.
He says businesses are increasingly asking employees to “step up” and shoulder some of the responsibility for their healthcare coverages. “It’s a bit harder for firms to grow in benefits right now just given all of the difficulty of getting employers to pony up for healthcare costs,” he says.
The OGP survey suggested that “regulatory changes, especially on the healthcare side, could have a dramatic impact on the role of today’s insurance brokers.” Another factor, according to Stipe, is that health insurance carriers have taken healthcare inflation out of the pockets of brokers who no longer are riding high on per-employee pricing.
While scale certainly may help some agents and brokers grow, Stipe believes success hinges more on their dedication to benefits expertise than size, per se. He sees two groups of players emerging: those who are aggressively focused on growing their benefits business and those whose passive approach worked well until healthcare reform rattled the landscape. The latter often includes smaller agencies or brokerages.
“You can’t just be a passive dabbler and be on top of all the change that’s going on,” he says. The changing competitive balance favors firms that offer value-added resources such as assistance with compliance, data analytics or wellness programs that Stipe says employer customer pay little for or receive free of charge.
Small brokers who don’t have enough large accounts to support building these solutions internally must partner with an outside firm or find an off-the-shelf product to fill gaps in their offerings, he adds. In other cases, he notes that they’re part of a larger network such as Benefit Advisors Network or United Benefit Advisors, which he describes as affinity groups of professionals who collaborate and share resources, though they also maintain their independence.
Overall, the organic growth rate involving all insurance lines at agencies and brokerages was 4.6% in the second quarter of 2017, which was described as “a surprising reversal” from 3.9% reported in the first quarter. The latter figure was the weakest growth since 2011. Buoyed by greater confidence, OGP survey respondents are forecasting 5% growth for the remainder of 2017, which would mark the best full-year organic growth rate since 2014.
Profitability also reversed course. Defined as agent-broker earnings before interest, taxes, depreciation and amortization (EBITDA), margins surged to 24.6% in the second quarter after receding in previous quarters and hitting its lowest point in five years in the first quarter of 2017. Group benefits drove that margin, which was 20.9% in mid-2016. EBITDA margins tend to peak in first quarters from reporting of contingent income before declining over the course of the year, Reagan Consulting notes.
Merger and acquisition activity reflects a historically high deal volume since mid-2016 when 221 deals reported by SNL Financial climbed to 255 during the same period a year later, Reagan Consulting also noted. “The number of agencies has actually increased during the last 10 years,” according to Stipe, citing the 2016 Agency Universe Study by FutureOne, a collaboration between the Independent Insurance Agents & Brokers of America and various insurers.
The OGP survey is based on confidential submissions from more than 150 midsize and large agencies and brokerage firms. Nearly half the industry’s 100 largest players regularly participate in the survey.
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