Brokerage

Unhappy Returns

Brokerages see slowing organic revenue growth.
By: | April 4, 2016

Organic growth at brokerage firms slowed and profit margins declined last year.

The soft market for commercial property and casualty premiums, continued modest growth in the U.S. economy, and a sharp decline in crude oil prices are contributing to the problem, according to Reagan Consulting’s “Organic Growth and Profitability” survey.

Agent-broker organic revenue growth slowed to 4.6 percent for 2015, from 6.2 percent each year since 2012. That’s according to a survey of roughly 140 mid-size and large agencies and brokerage firms conducted by the Atlanta consulting firm.

Kevin Stipe, president, Reagan Consulting

Kevin Stipe, president, Reagan Consulting

Profit margins declined to 20.1 percent, a year after reaching record profitability of 21 percent in 2014.

The single greatest driver was likely commercial P&C pricing, which has now entered “soft-market” territory, said Kevin Stipe, Reagan Consulting president.

According to the Council of Insurance Agents and Brokers, Q4 2015 pricing decreased by 2.8 percent, compared with a 0.1 percent increase in 2014.

“Carriers are competing to get insurance premium dollars,” Stipe said.

“The macro dynamics of their marketplace indicate they’ve made enough money in recent times being more aggressive in pricing trying to get market share, and that’s driving premiums down as they compete for customers.

“This makes it harder for insurance brokers to grow, as the majority of a broker’s revenue is commissions from placing insurance.”

The U.S. economy’s growth also contributed, as the U.S. gross domestic product grew by only 2.4 percent in 2015, and decelerated to 0.7 percent during the fourth quarter.

“The pricing on accounts is driven by insurable exposures, such as the revenue or the payroll of the account,” Stipe said. “When the economy stalls out, exposures tend to decrease, resulting in reduced premiums, which results in reduced broker commissions.”

Despite the setbacks, more than two-thirds (68 percent) of surveyed brokerages expect a rebound of growth in 2016.

Another factor slowing organic growth was the sharp decline in oil prices, he said.

After trading above $100 dollars per barrel in 2013, oil closed out 2015 at roughly $37 per barrel. During the “oil boom,” brokerages in the major oil producing states grew by 9.4 percent, a full 3.3 percentage points faster than the other firms in the survey.

Two years later, during the 2015 “oil bust,” the oil-state firms grew at only 2.5 percent, which was 2.3 percentage points slower than the other firms.

“Many boom towns in places like West Texas and South Dakota are now becoming ghost towns as projects in those towns have been scuttled,” Stipe said.

“Accounts in those towns that are oil-and-gas related are now rapidly shrinking, resulting in declining insurance costs. Brokers that rode the wave up on those geographies are now experiencing a dramatic reversal of fortune.”

Rebound of Growth

Despite the setbacks, more than two-thirds (68 percent) of surveyed brokerages expect a rebound of growth in 2016, with a median projection of 6 percent. Slightly more than half also expect profit margins to improve, although the improvement is projected to be nominal.

Still the future is “really uncertain,” Stipe said.

“I think there are some alarming trends with a relatively weak economy and with softening P&C pricing,” he said. “But there are also plenty of things that could ultimately serve to create a rebound.

“If P&C pricing stabilizes or rebounds slightly, that would be a good thing, and certainly if the economy picks up that would also help. For individual firms, it’s all about things they can control, such as building a sales culture.”

Robert Rusbuldt, president and chief executive of the Independent Insurance Agents & Brokers of America in Alexandria, Va., said that organic growth for independent agencies obviously varies by agency, by line of business, geographic region, and other factors.

“While the wholesale industry has experienced similar rates of organic growth as the retail side … I think our profit margins have overall improved over the past several years … .” — Bobby Owens, president, programs division, Risk Placement Services

“However, the dominant factor is the state of the economy in the country, and in the region or state where the agency is located,” Rusbuldt said.

He noted that independent agencies can increase organic growth by enhancing technology capabilities, implementing workflow efficiencies and increasing digital marketing.

Wholesale brokers are feeling the pinch on the retail side, said Bobby Owens, president of the programs division at wholesale broker Risk Placement Services Inc. in Lexington, Ky., who serves as the treasurer of the American Association of Managing General Agents.

On the specialty side in particular, organic growth is slowing mainly because the property market has been softening over the last two or three years and pricing has been going down, Owens said.

“While the wholesale industry has experienced similar rates of organic growth as the retail side, interestingly enough I think our profit margins have overall improved over the past several years because our industry has become much more efficient, mainly through expense control due to automation,” he said.

Looking forward, if the economy begins to slow, it will definitely affect the wholesale side as well, Owens said.

“We will see less business, and the market overall will become a lot more competitive due to more capacity in the industry,” he said. “I’m also worried that a slowing economy will dry up new ventures, which typically are written by the wholesale market.”

M&As will eventually slow down because of a shrinking pool of available larger agencies offering scale that have not already been involved in M&A activity.

While organic growing has slowed, merger and acquisition activity among agents and brokers was at an all-time high in 2015, Stipe said, noting that North American deals topped 400 for the first time ever, and “valuations hit record levels for firms of all sizes.”

M&A activity is at a current “frenzy” because of low interest rates, a volatile stock market, technology advances, and retiring baby boomers creating a ready pipeline for acquisitions. However, it is unrealistic to expect the pace to continue, Rusbuldt said.

M&As will eventually slow down because of a shrinking pool of available larger agencies offering scale that have not already been involved in M&A activity.

In addition, inexpensive capital will eventually end; ROI will increase in other sectors and vehicles; and the math of high multiples for agencies in many cases outpaced the possibilities for efficiencies and/or organic growth.

“While no one can predict an exact date when agency M&A will slow down, it is inevitable,” Rusbuldt said. &

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected].

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