By Cyril Tuohy
Insurance agents and brokers delivered a median organic profit growth rate increase of 6.2 percent in the first quarter, up a fraction compared to the year-ago period, and flat with the fourth quarter 2013, a new profitability survey has found.
The quarterly survey conducted by Reagan Consulting also found that commercial lines and benefits profitability growth contributed most to the profit growth of independent property-casualty agencies.
“In addition to their confidence in continued growth, brokers also believe profit levels will remain strong, or perhaps even stronger than those in recent years,” said Kevin Stipe, president of Reagan Consulting.
Median organic growth was 6.1 percent in the first quarter of 2013, and 6.2 percent in the fourth quarter of last year.
Organic growth, which is similar to same-store sales in the retail industry, measures the internal growth dynamics of an insurance agency. It excludes profits generated from a merger or an acquisition, which can mask a poorly performing company.
Many analysts consider the organic growth rate measure a more accurate picture of the state of the industry. The quarterly survey queried 140 midsize and large agencies.
Stipe said agents and brokers have been in a “nice place” for several consecutive quarters. Quarterly organic profitability growth rate increases broke through the 5-percent mark in the first quarter of 2012 and have remained above that ever since, Reagan data show.
Agent and broker quarterly organic profitability growth emerged from negative numbers in the second quarter of 2010.
In an interview with InsuranceNewsNet, Stipe said that for the largest commercial property-casualty accounts — those generating fees and commissions of more than $100,000 — prices are undergoing a “slight softening.” Prices for midsize and small accounts are “barely inching up.”
If prices continue to soften, pressure will mount on growth rates to dip below 6.2 percent, he added. A weak economy and a benign hurricane season could cause prices to soften further. The U.S. hurricane season begins June 1 and ends Nov. 30.
Commercial property-casualty prices soften when supply outstrips demand for coverage. That happens when many carriers compete for business and when there are few catastrophic losses that require the payout in the form of a claim. Small payouts mean carriers don’t have to raise prices.
Agents and brokers are projecting a strong 2014 with an overall organic growth rate of about 7 percent and profit margins of 20 percent, Stipe also said. “If agents and brokers are correct about their own companies, then it will be a solid year for the industry,” he said.
There were no big losses in the U.S. last year and total insured losses from natural disasters in 2013 were an estimated $12.7 billion, according to the Insurance Information Institute (III), a property-casualty industry information clearinghouse.
By contrast, Superstorm Sandy, which roared up the East Coast and suddenly barreled west into the New York metropolitan area in 2012, caused an estimated $19 billion in insured losses, according to III data. Insured losses in the U.S. from all natural catastrophes in 2012 were $35 billion.
“Last year, we didn’t have anyone hit with catastrophe losses like we had with Sandy in the Northeast the year before,” Stipe said.
Commercial lines generated organic growth of 8.4 percent, personal lines 2.8 percent and group benefits 5 percent, according to the survey. Profit margins among commercial lines and benefits are often higher than in personal lines.
Stipe said the “surprise” number in this year’s first quarter survey came from the higher amount of contingent income generated by agents.
Contingent commissions are bonuses paid by insurance carriers to brokers for hitting sales targets. In the first quarter, contingent income rose by double digits compared to the year-ago period, Stipe said.
With good underwriting performance on the part of carriers, fewer expensive natural disasters and the best agents hitting their sales goals and generating contingent income, organic profit growth rates at agencies and brokerages rise.
“That has driven agent/broker profitability to its highest level in a long time,” Stipe said.
Stipe also said changes to the way brokers are compensated with regard to selling group benefits in the past two years have “washed through” the system as agents move forward with selling benefits based on a fee.
Brokers previously received floating commissions based on premiums paid per employees, but brokers have moved to an arrangement where carriers pay the broker a fee based on the number of employees in an account.
For brokers to make more money, more employees need to be added to the account, Stipe said.
About half of the industry’s 100 largest agents and brokers participated in the survey, and median revenue of the agents and broker agencies completing the survey is about $15 million, Reagan Consulting said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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