Three industry measures were the best Q1 profitability results in the survey’s 13-year history. First, earnings before interest, taxes, depreciation and amortization (EBITDA) margin (or pre-tax profitability) was 31.2%, over 1.5 percentage points higher than Q1 2020. Second, median operating margin was 16.7%. Operating margin measures broker profitability excluding contingent and bonus income (equal to EBITDA less contingent and bonus income). Q1 2021 operating margin was almost 4 percentage points higher than Q1 2020 results. This increase signals that brokers continue to benefit from expense savings due to COVID-19. And third, commercial lines posted 6.3% organic growth, a high since COVID-19 began affecting businesses as well as a Q1 13-year best.
Those highs were offset by the first decline in personal lines income since 2010 (at negative 0.2%), and the lowest Q1 growth (2.1%) of group health benefits in 13 years.
As a reminder, Q1 profitability is inflated (when compared to calendar year results) due to the majority of contingent and bonus income being received from carriers during the first three months of the year.
What does it all mean?
The industry is still stabilizing amidst the pandemic. Mark Crites, Reagan partner, attributes the growth in commercial lines to a combination of the rebounding economy and rate increases. “Our agent and broker clients continue to see double-digit rate increases on major commercial renewals through the first three months of the year,” Crites says.
On the other hand, COVID’s damage to the entertainment, hospitality and retail industries caused massive employee furloughs and layoffs — which in turn affected group health benefits income for insurers. “With the majority of group policies now on a per-employee-per-month model, brokers felt the pressure immediately,” Crites says.
And the loss of personal lines growth? Crites lays it at the door of consumers’ need to preserve finances during the pandemic and “brokers’ inability to renew homeowners’ policies in the wildfire zones and other high-risk coastal areas through the traditional marketplace.”
Forward thinking
The GPS survey results point to two paths for post-pandemic growth.
First, agents and brokers must lead with what they can influence. “No one can control when a hard or soft market hits. Similarly, no one can control the economic cycle,” says Crites. “But you can control the third growth driver, sales velocity.” A proprietary metric devised by Reagan, sales velocity is a measure of new business production derived by dividing new business written in the current year by the prior year’s total commissions and fees, Crites explains.
He says firms with the highest sales velocity also show the greatest organic growth. The Q1 2021 increase in sales velocity shows that agents and brokers “are finding ways to get in front of prospective clients,” says Crites. “Continuing to do so will distance yourself from your competitors.”
Second, the cost savings realized from the pandemic should be reinvested. “We estimate that brokers saved 2% to 4% of total net revenue in 2020 due to the pandemic,” says Crites. “Firms that reinvest these dollars back into the business — instead of distributing extra profits to shareholders — will be the winners coming out of COVID-19.”
For further observations and commentary on the Q1 2021 results, contact Mark Crites at Reagan Consulting, 404.869.2625 or mark@ReaganConsulting.com.
The Reagan GPS was formerly known as the Organic Growth & Profitability (OGP) Survey. Each participating agency in the GPS 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 survey, contact Michelle Appelbaum at 404.869.2541 or michelle@ReaganConsulting.com.
About Reagan Consulting
Reagan Consulting is a management consulting firm providing strategic consulting, valuation, capital raising, 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 Growth & Profitability Survey.