Agent and Broker Profitability Hits Milestone

Broker profitability due to contingent commissions reflects carrier profitability -- and P&C lines led the way.
By: | May 15, 2014

Major insurance brokers and independent insurance agents reached an earnings milestone during the first quarter of this year, according to Atlanta-based Reagan Consulting.

Profitability, as measured by earnings before interest, taxes, depreciation and amortization (EBITDA), jumped 200 basis points to reach 29.9 percent of revenue during the first quarter of 2014 — up from 27.9 percent during the same period last year, according to producers that were surveyed.

That is the highest margin reported in the six years since Reagan Consulting has been conducting its survey, said Kevin Stipe, president of the firm, which offers management consulting to independent agents and brokers.

The primary driver of the improvement was a 15.2 percent median jump in contingent income, Reagan reported.

The figures reflect the fact that “insurance carriers really made money last year,” which they shared with top producers in the form of contingent commission, Stipe told Risk & Insurance Magazine.

“Those contingency bonuses are also driven in part in part by agents and brokers meeting their sales goals as well as providing profitable business for the carriers,” he said.

The survey results are based on the responses of roughly 140 mid-size and large agencies and brokerage firms with median revenue of roughly $15 million. About half of the industry’s 100 largest producers participated, Reagan said.

Agents and brokers surveyed were more optimistic about the future as well, projecting that organic commission and fee growth — excluding the impact of merger and acquisition activity — will be 7 percent during 2014, up from 6.1 percent projected by respondents at year-end 2013.

Commercial property and casualty growth was a major driver of performance for the third year running, Reagan said.

Other significant survey findings included:

• Median organic growth — excluding M&As — was 6.2 percent, nearly identical to 6.1 percent in Q1 2013.

• Commercial property and casualty growth led the way for the third consecutive year, with a first quarter growth rate of 8.4 percent — up from last year’s 6.8 percent.

• Benefits growth, at 5 percent, was up significantly from a 3.7 percent growth rate during the first quarter of 2013.

• Privately held brokers continue to grow faster than public brokers, who reported organic growth of just 3.6 percent, on average.

“Private companies tend to grow a little bit faster organically than the public brokers who are inclined to do more acquisitions,” said Stipe.

Not every firm will necessarily see the reported levels of improvement, said Tim Cunningham, managing director with insurance M&A consulting specialist OPTIS Partners in Chicago.

Still, most agents and brokers are experiencing revenue and profit margin growth, he agreed, noting that P&C rates are “broadly up” and, that insurance broker clients have experienced better sales and increasing payrolls.

“The economic climate is markedly better than in the 2008 and 2009 recession years,” he said.

Workers compensation and commercial auto insurance rates are up reflecting deteriorating loss experience, for instance.

“Coastal property capacity and rate continues to be an issue,” he said.  The same is true for many property exposures in the heartland states prone to hail and tornados,” Cunningham observed.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at [email protected].

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